Nu Holdings Ltd

NYSE:NU

Earnings Call Analysis

Nu Holdings shows strong growth with 60% increase in customers and significant revenue surge

During Q2 2024, Nu Holdings' business model focused on customer expansion, revenue per customer, and efficient costs proved effective. The company added 1.2 million new customers monthly in Brazil and 7.8 million in Mexico, reaching 105 million customers overall, up 60% from two years ago. Revenue rose 65% year-over-year to $2.8 billion, and net income grew 134% to $487 million. Adjusted net income hit $563 million, up 131%. Their gross margin was 47.7%, with outstanding profitability and operational leverage, evidenced by a record annualized return on equity of 33%.

Customer Growth and Expansion

During the second quarter of 2024, the company experienced substantial customer growth, a key cornerstone of its strategy. Net customer additions reached 105 million by the end of the quarter, which marks a 60% increase from two years ago. Brazil remains the primary growth driver with an average of 1.2 million new customers each month, totaling 95.5 million. Mexico also showed robust growth, adding 1.2 million customers to reach a total of 7.8 million. Colombia surpassed the 1 million customer milestone, ending the quarter at nearly 1.3 million due to the successful launch of the Cuenta product.

Revenue and Profitability

Despite the depreciation of Latin American currencies against the U.S. dollar, the company's revenue surged to $2.8 billion, representing a 65% year-over-year increase. Gross profit grew to $1.4 billion, an 88% increase, with a gross margin of 47.7%. Net income also saw significant growth, reaching $487 million, equating to an annualized return on equity of 28%. Adjusted net income was $563 million, showing quarter-over-quarter and year-over-year expansions of 36% and 131%, respectively. These figures highlight the strong financial health and profitability of the business model.

Operational Efficiency

The company continued to demonstrate its operational efficiency, boasting a cost to serve of $0.90 per active customer. On an FX-neutral basis, this figure grew 19% year-over-year. The company maintained a low customer acquisition cost of $7, which is notably lower than that of many global fintech and banking competitors. These operational efficiencies have allowed the company to deliver a significant competitive advantage.

Credit Portfolios and Risk Management

The company managed to significantly grow its lending business, with the consumer finance portfolio reaching $18.9 billion, a 49% increase year-over-year. Lending growth, which outpaced credit cards, accounted for 24% of the total portfolio. Despite an increase in the 90-plus days non-performing loan (NPL) ratio to 7%, the company attributed this to its strategic expansion within the credit spectrum. However, it kept revolving receivables stable at 6% of total credit card receivables. Provisions for credit losses decreased by 2% quarter-over-quarter, indicating better-than-expected early delinquency performance.

Expansion in Mexico and Colombia

Mexico and Colombia showed promising expansions, with total deposits in Mexico growing to more than $3 billion, marking a tripling over two quarters. Similarly, the newly launched checking account in Colombia attracted over $220 million in deposits. Both markets are crucial to the company’s long-term strategy, with a particular focus on obtaining a banking license in Mexico to further solidify its market presence.

Future Outlook and Strategic Investments

Going forward, the company aims to leverage its strong customer base, advanced data capabilities, and operational efficiencies to sustain long-term growth. Despite some short-term fluctuations in provisions and NPLs, the focus remains on maximizing the net present value of customer relationships. The company also made a notable acquisition of Hyperplane, an AI-powered financial solutions company, to further enhance its technological capabilities and differentiate itself in the market.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the second quarter of 2024. A slide presentation accompanies today's webcast which is available on Nu's Investor Relations website, www.investor.nu in English and www.investidores.nu in Portuguese. This conference is being recorded, and the replay can also be accessed on the company's IR website. This call is also available in Portuguese. [Operator Instructions]

I would now like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedemann, you may proceed.

[Jorg Friedemann, executive]

Thank you very much, operator, and thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the Results Center section of our Investor Relations website.

With me on today's call are David Velez, our Founder, Chief Executive Officer and Chairman; Youssef Lahrech, our President and Chief Operating Officer; Guilherme Lago, our Chief Financial Officer; and Jag Duggal, our Chief Product Officer.

Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu Holdings, but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies. Reconciliations of our non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on an year-over-year FX neutral basis.

I would also like to remind everyone that today's discussion might include forward-looking statements, which are not guarantees of future performance and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties and could cause actual results to differ materially from our expectations.

Please refer to the forward-looking statements disclosure in our earnings release. Today, our founder, Chairman and CEO, David Velez, will discuss the main highlights of our second quarter 2024. Subsequently, Guilherme Lago, our CFO; and Youssef Lahrech, our President and COO, will take you through our financial and operating performance for the quarter, after which time we will be happy to take your questions.

Now I would like to turn the call over to David. David, please go ahead.

[David Velez-Osomo, executive]

Thank you, Jorg. Good evening, everyone, and thank you again for being with us today.

During Q2 2024, our business model anchored in three fundamental principles: customer expansion, revenue per customer and efficient operating costs demonstrated its formidable strength by accelerating earnings power. Our net customer additions have consistently exceeded expectations, reaching 105 million customers by the end of the quarter, a 60% increase from the 65 million recorded just 2 years ago.

Customer growth in Brazil remains outstanding with an average of 1.2 million new customers monthly, bringing the total to 95.5 million at the end of the quarter. Meanwhile, Mexico also experienced strong growth with 1.2 million net adds in the quarter, culminating in 7.8 million customers. This success validates our strategy of increasing deposit yields in Mexico, boosting our momentum and solidifying Nu as the leading digital financial platform in Mexico.

Additionally, Colombia surpassed the 1 million customer mark, ending the quarter with almost 1.3 million customers, following the successful launch of the Cuenta product.

Now let's go to some financial highlights. Despite Lat Am currencies depreciating against the U.S. dollar during the quarter, our revenue surged to $2.8 billion as we continued to successfully cross-sell and upsell while introducing relevant new products, reflecting a 65% year-over-year increase. Our gross profit climbed to $1.4 billion, marking an 88% year-over-year growth with a gross margin of 47.7%. Net income also saw significant growth reaching $487 million, resulting in a record annualized return of equity of 28%, one of the highest in the industry.

Additionally, our adjusted net income hit $563 million with a sequential expansion of 36% quarter-over-quarter and 131% year-over-year. These achievements underscore the strength of our business model, which combines robust top line growth with solid profitability.

In this slide, we again demonstrate, however, flywheel effectively drives customer acquisition and data growth while sustaining strong momentum in our key financial metrics. Our models in our and -- operational strengths are driving significant profitability. In second quarter, Nu Holdings achieved an adjusted net income of $563 million, with an adjusted annualized return on equity of 33%, despite maintaining a robust level of excess capital of $2.4 billion at the holding level and with two subsidiaries in Mexico and Colombia, yet to be profitable.

Now I'd like to pass the floor to our CFO, Guilherme Lago, who will guide you through our financial numbers. Over to you, Lago.

[Guilherme Marques do Lago, executive]

Thank you, David, and good evening, everyone. As David mentioned, we delivered a robust second quarter as we continue to increase revenue growth, see enhanced customer engagement and deliver strong operating margins and profitability.

Now let's dig deeper into the second quarter results to gain a greater understanding of the progress against each one of these pillars. I will begin with the results of our customer acquisition. During the second quarter of 2024, our customer base grew at a strong pace with 5.2 million new customers joining our platform. By the end of the quarter, our total customer count reached 104.5 million, marking a 25% increase year-over-year.

Once we add more customers, engaging and retaining them becomes our focus. Our active base increased by 27% year-over-year followed by another sequential quarterly increase in the monthly activity rate, which now stands at 83.4%, up from 82.2% just 1 year ago. This marks the 11th consecutive increase in this metric, demonstrating our proficiency and consistently offer a compelling value proposition to our customers in Brazil, Mexico and Colombia.

Turning our attention to revenue expansion. The first chart highlights the Nu has established primary banking relationships with around 60% of our active customer base. This solid performance underscores our ability to increase the share of wallet in an agile manner within our customer base. Moreover, recent cohorts are achieving this level of principality at an increasingly rapid pace. As you can see in the second chart, the number of products per active customer is at 4.1 months, illustrating the success of our cross-selling strategy even as we continue to quickly onboard many new customers by effectively introducing our products to new customers, we solidify our role as their primary banking partner.

The last chart illustrates the combined effect of these two powerful dynamics by having significant customer engagement, as demonstrated in the first chart, coupled with our growing product cross-sell capabilities, shown in the second chart, we achieved increasingly positive results. While our monthly ARPAC contracted to $11.2 this quarter compared to $11.4 last quarter on an FX-neutral basis, ARPAC in fact, expanded by 6%.

On the next slide, we will present the growth rates on an FX-neutral basis, and you can also note that our more mature cohorts are already generating a monthly ARPAC of $25. Our monthly ARPAC reached $11.2. However, on an FX-neutral basis, it grew 6% sequentially and a robust 30% year-over-year, up from $9.3 just 1 year ago. We continue to see a clear path to further increase ARPAC towards its full potential. The second chart highlights that our revenues hit a new record high this quarter, reaching $2.8 billion, an increase of 65% year-over-year. Just a year ago, our revenues stood at $1.8 billion. This impressive growth was driven by two things: the increase in active customers, combined with higher ARPAC levels year-over-year.

This quarter, our consumer finance portfolio encompassing credit cards and lending showed strong growth, while the nominal dollar value of our book contracted, it achieved a 49% year-over-year and an 8% quarter-over-quarter expansion on an FX-neutral basis, reaching a total of $18.9 billion. This growth was driven by increases across both product categories. Credit cards expanded sequentially. Despite the same FX impact in nominal dollars, it grew by 39% year-over-year and 6% quarter-over-quarter, reaching $14.3 billion.

This growth was driven by the consistent increase in the share of wallet across all customer segments. Once again, our lending portfolio performed extremely well, growing 92% year-over-year and 15% quarter-over-quarter on an FX-neutral basis reaching $4.6 billion. Lending growth continues to outpace credit cards and now represents 24% of the total portfolio. Consistent with trends from the previous quarters, our lending cohorts continue to show strong credit performance, enabling us to scale originations effectively.

Now let's move to the breakdown of our credit card portfolio. Interest-earning installments balance now represents 28% of our total credit card portfolio up from 26% last quarter. Once again, this growth was fueled by the successful expansion of our PIX and boletos financing products. This type of financing offers an attractive risk-adjusted rate of return, enabling us to further expand the monetization of our credit card business while meeting important customer needs.

Our strategy is further validated by the stability of our revolving receivables, which remain at 6% of total credit card receivables this quarter. Going forward, we expect the percentage relevance of interest-earning installments balance to begin to stabilize.

Looking at our lending business, originations reached BRL 13 billion this quarter, a 78% year-over-year increase. Unsecured lending remains the primary driver of growth, reaching BRL 11.2 billion in originations this quarter. This highlights our ability to extend credit availability to those who previously lacked access to this product. Our secured lending originations reached BRL 1.8 billion during the second quarter of 2024 or 14% of total lending originations. During the second half of the year, we anticipate a gradual increase in the pace of originations of secured lending as new features such as portability top-ups and refinancings are introduced.

We have also signed six new collateral agreements to increase eligibility in TAM, including parts of the armed forces and some of the major Brazilian states and municipalities. The integrations of these new entities are ongoing. And once completed, we will release the product for newly eligible customers, thus helping us further grow originations. In fact, during the month of July 2024, total originations exceeded BRL 5.2 billion, of which BRL 750 million in secured lending alone.

Now let's review the progress on the funding front. Although deposits in our Brazilian business contracted in nominal dollars to $21.7 billion, they expanded 10% quarter-over-quarter on FX-neutral terms. Our total deposit base for the quarter increased to $25.2 billion, representing a 64% year-over-year growth primarily driven by significant expansion in Mexico through Cuenta Nu. By the end of the second quarter of 2024, we surpassed over $3 billion in deposits in Mexico, more than tripling in just two quarters. The strong growth in Mexico represents a significant milestone in building one of the strongest local currency retail deposit franchise in Latin America.

Another noteworthy achievement was the launch of new Colombia's checking account product in the second quarter of 2024, which attracted over $220 million in consumer deposits, more than 80% in the month of June. Net interest income, or NII, increased by 77% year-over-year reaching another record high of $1.7 billion. This consistent growth was driven by our expanding credit card and lending products collectively boosting our NII and net interest margins or NIM to new record highs. For the second quarter of 2024, we delivered a net interest margin of 19.8%, an increase of 30 basis points from last quarter and 150 basis points from 1 year ago.

Looking ahead and regardless of the direction of interest rates, we are confident that the primary driver for future NIMs will be the continuous deployment of our balance sheet capacity in the form of credit originations growth. our excess deposits today invested primarily in public bonds yield much lower returns compared to the lowest yield loan products such as secured credits.

Let's now turn our attention to the very last pillar of our overall strategy, maintaining a low cost to serve. Our platform remains one of the most cost-effective in our markets. with its low cost to serve, providing a significant competitive advantage. We anticipate this cost at or below the $1 per active customer for the foreseeable future. And once again, we successfully achieved this goal with a cost to serve per active customer at $0.90. On an FX-neutral basis, this figure has grown 19% year-over-year when adjusted by one-offs related to network reimbursements in Mexico during the second quarter of 2023. In the same period, our ARPAC expanded by 30%. This showcases the strong operating leverage of our business model.

Our gross profit reached a new quarterly high of approximately $1.4 billion, an 88% year-over-year increase. Our annualized gross margin has rebounded to 2023 levels despite higher cost of funding in the new geos. Our investments in Mexico and Colombia have been effectively offset by the positive trends in Brazil, driving our gross margins to 47.7%. A core element of our strategy is achieving operational leverage. Our efficiency ratio stood at 32% during the second quarter of 2024, an improvement of 10 basis points from the first quarter of 2024 and more than 300 basis points better than a year ago. We are set to fully harness our platform's operational potential as we expand our customer base, upsell and cross-sell products, launch new features and achieve profitability in the new markets of Mexico and Colombia, which are essentially in their investment phases.

Let's now review the sustainable advantages across all four cost pillars. Number one, our cost to acquire was stable at $7. This figure continues to be one of the lowest among consumer fintechs and banks globally. Number two, as expected, our cost to serve remains exceptionally low below $1 and approximately 85% lower than those of incumbent banks.

This positions Nu as one of the most efficient financial services companies worldwide. Number three, on cost of risk, we have effectively managed credit risk, consistently outperforming competitors on an apples-to-apples basis with respect to delinquency rates. And finally, number four, on the cost of funding, we have significantly increased deposit volumes while maintaining our cost of funding at a competitive level of 87% of the blended interbank rates of the countries in which we operate. This has closed the gaps with incumbent banks and widened our advantage over consumer fintechs.

And finally, turning to net income. We delivered another quarter of strong profitability with net income reaching $487 million, representing an increase of 134% compared to the previous year. These results underscore the effectiveness of our strategy and business model.

Additionally, adjusted net income for this quarter reached $563 million, growing 131% versus 1 year ago. While we are very encouraged by the second quarter results, our focus remains steadfast on long-term value creation. This approach may involve making strategic short-term investments to optimize our long-term opportunities.

Now I'd like to hand over the call to Youssef, our President and Chief Operating Officer, who will walk you through the key highlights of our asset quality and credit portfolio health.

[Youssef Lahrech, executive]

Thank you, Lago, and good evening, everyone. Let's start by having a look at our NPL trends. First, following an anticipated seasonal rise in NPL 15 to 90 in the first quarter of 2024, which is typical for early-stage delinquencies, it has decreased to 4.5% this quarter, slightly more than historical seasonality. Second, our 90-plus NPL ratio increased to 7%, also in line with expectations. The 70 basis point increase in 90-plus NPL this quarter is simply a reflection of the 90 basis point mostly seasonal increase in 15 to 90 NPL we saw last quarter. As discussed in past earnings calls, we are intentionally and strategically growing our lending book and expanding down the credit spectrum, where we see relevant opportunities.

In line with our credit philosophy, we prioritized decisions that optimize the long-term net present value of our credit cohorts rather than focusing solely on short-term NPL metrics. When we identify asset classes or customer segments with compelling risk-adjusted returns that promote responsible customer behavior, we actually pursue growth in those areas.

As we will show in the next few slides, the strategy has yielded increased revenue and greater resilience that are more than offsetting the higher delinquency rates that come with it. To illustrate the impact of credit expansion on our consumer finance portfolio, we are presenting this analysis of normalized NPLs starting in December 2022 before the latest waves of credit expansions. This shows what our NPLs would have been if we hadn't undertaken these expansions.

In other words, you can see clearly that the increase in NPLs in the last several quarters is largely the product of these delivered expansions. In fact, the evolution of these NPL metrics continues to closely follow our expectations. Similarly to last quarter, we show on this slide, asset quality trends under a different basis. considering both 15 to 90 and 90-plus NPLs per interest-earning balances rather than total receivables on the previous slides.

On this basis, you can clearly see a stable to downward trend in the last few years aside from the normal seasonal ups and downs like the ones we saw in Q1 15 to 90 days and in Q2 with 90-plus days. This goes to show that we have been remunerated for additional risk we've taken. In the next slide, we further validate this conclusion looking directly at risk-adjusted returns.

To demonstrate the significant value generated by this expansion strategy, we show on this slide the risk-adjusted margins or RAMs for our Brazil consumer credit portfolio with and without the risk expansions we undertook since late 2022. This clearly indicates that the additional revenue stemming from this expansion strategy have more than offset the additional credit risk and delivered substantially increased returns.

Credit loss allowance expenses declined to $760 million this quarter, a decrease of only 2% on a ForEx-neutral basis. This slight drop is the result of two drivers. The first is the relatively slower growth base in Q2 compared to Q1 as growth is the main driver of our ECL provisions, as you can see in the appendix of this presentation. The second driver is early delinquency which behaved slightly better than historical seasonality in the second quarter, as mentioned previously. Lastly, risk-adjusted NIM reached a record high of 11% this quarter, reflecting a 300-basis-point expansion from a year ago, and a 150 basis point increase quarter-over-quarter.

Now I would like to turn the call over to David. David, over to you.

[David Velez-Osomo, executive]

Over the past decade, we have cultivated unique attributes that position Nu to become the largest consumer technology platform in Latin America. These strengths include brand, by consistently simplifying complexity to empower people, we've built one of Brazil's most beloved and trusted brands with recognition rapidly growing in Mexico and Colombia.

Scale, where a significant presence in Brazil reaching now 56% of the adult population enables us to offer superior products and lower prices, creating a powerful flywheel effect, data or vast data supported by a cutting-edge infrastructure forms the foundation of our advanced customer segmentation and credit underwriting capabilities.

Talent, we boast one of the world's leading technology and product teams, a distinction unmatched by any other company in Latin America. Culture, news values, including customer centricity and operational excellence are deeply ingrained in every team member and driver of decision-making, ensuring our focus on long-term sustainable growth. While our success relies on a combination of these unique attributes, I'd like to double-click on some key factors that place us in an unmatched market position.

Our exceptional talent, our focus on technology as a driver of sustainable growth in our enduring brand that has galvanized and empower almost 105 million Latin Americas. Since our beginning, we have described ourselves as a technology company, not a financial institution. Therefore, through our 11 years of history, we have gone to great lengths to build what we think is the leading product engineering team in Latin America. Today, we have over 59 nationalities working at Nubank, and over 50% of our headcount is focused in technology and analytics.

This access to world-class technical talent has been a key reason for our historical performance, and will continue to be a great enabler of overperformance over the long run as competition increases.

Additionally, the ongoing AI revolution creates new opportunities for differentiation and we're very focused on building on this talent magnet asset. As an example, I wanted to highlight our recently announced acquisition of Hyperplane. Hyperplane is a Silicon Valley-based leader in AI power solutions for the financial services space. As we tested Hyperplane's platform on our vast amount of data, we were impressed by the opportunity to meaningfully improve performance of even our most advanced machine learning models by using a financial services focused foundation model that included our own unstructured data.

We're very excited to welcome the Hyperplane team on board and see them as a key part of our AI strategy in the foreseeable future. The powerful tree of trust, exceptional service and competitive pricing also underscores Nu's continued success. This winning combination is the foundation of our beloved brand, attracting customers who seek the most compelling value proposition in the market. We believe that in a world of choices, customers will naturally gravitate towards those who offer superior products and services, and that's exactly what we provide.

The growth of our deposit base in Mexico and now in Colombia is a testament to this principle. In Mexico, we've attracted $3.3 billion in retail deposits in just over a year since the launch of our checking account product. In Colombia, our Cuenta products launched this quarter has already garnered over $220 million in new deposits.

While other players are pursuing even more aggressive pricing strategies paying higher yields in their savings account, since launch, Nu has been able to capture over 70% of the deposits in both Mexico and Colombia across all Fintechs combined. This proves that consumers are going beyond whoever simply pays in the highest yield and are coming to Nubank because of our product, our brand and ultimately, the entire user experience that we are providing.

With that, we're now ready to address your questions. Thank you very much.

[Operator]

[Operator Instructions] I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.

[Jorg Friedemann, executive]

Thank you, operator. And our first question comes from the line of Jorge Kuri, Morgan Stanley.

[Jorge Kuri, analyst]

Congrats on the results. Thanks for the color on how originations are running in July. That's evidently an impressive number already annualizing very strong -- for the quarter, already showing very strong run rate. Can you provide some color on how the payroll loan, particularly is trending now that you have all the features that consumers look for mainly the top up.

What's the acceptance level that you're seeing with your customers what is the reaction from competitors? Are you taking share? Or is the growth coming from new customers? Just help us understand sort of like in these early days, how this is shaping up?

[Guilherme Marques do Lago, executive]

Jorge, this is Lago. Thanks so much for the question. So we are super pleased with the performance of what we call our secured lending product, which encompasses both public payroll loans as well as FGTS. And we are still in the very early part of this journey, right? So today, we are operating only with two collateral agreements, which are INSS and [ CIP ], INSS for the pensioners and the retirees and [ CIP ] for the federal public servants. The two collateral agreements combined, they account for approximately 50% of the target market that we have in Brazil.

We have already signed six additional collateral agreements with armed forces in some of the largest states and municipalities in Brazil, and we expect to continue to expand this so that by the end of the year, our target market can be expanded from today's 50% to somewhere around 70% to 75% and even more is expected to come in, in 2025. So that's one dimension of expansion.

However, the second dimension of expansion is the launch of new products and features, which are already -- which are still far from being complete. You did point out that we have already launched portability, and we did so progressively throughout the second quarter of the year. but it is still with some features that are very important missing, specifically related to refinancing and top-up.

And those two features, refinancing and top-up, when coupled with portability can for the online or digital players account for more than 50% of the [ portability ]. So we are seeing kind of a progressive ramp-up in public payer launch, we do believe that we have structural cost advantages to play in the segment. So as you know, we originated a 100% additionally. Therefore, we have low customer acquisition cost whatsoever, who don't operate with loan brokers or branches. And our existing customers account for nearly 40% of the total public payroll loan book in Brazil.

So again, we don't need to fish outside of our fish bowl to tap into more than 40% of the total market. So early days for us, encouraging signs so far on both public peer loans and also, if not primarily in FGTS, and we expect that growth will pick up in the coming quarters.

[Jorg Friedemann, executive]

And the second question comes from the line of Pedro Leduc from Itaú.

[Pedro Leduc, analyst]

I would like to pick on brains a little bit on the provision expense side for bad credit. Here, of course, we haven't seen it increase a lot during 1Q. And back then, we discussed how it was related for greater risk-taking well planned, a conscious move and that had brought up those provision expenses. And now in the second quarter, this on FX neutral, you're sort of flattish lowering your cost of risk effectively. So I want to get your thoughts around this, little bit probably go around how those recently originated portfolios have behaved, how we are seeing risk in the coming origination harvest just to get a sense on the provision side. So that's that.

[Youssef Lahrech, executive]

Pedro, this is Youssef. Thanks so much for the question. So look, I believe you're referring to Slide 24 of our presentation, which shows our CLA quarter-on-quarter. And you are correct that there is a slight contraction from Q1 to Q2 on an FX-neutral basis, about 2% down.

As I mentioned previously, you have to think about the fact that we provision when we grant loans or book credits on the basis of expected credit losses, right? For IFRS 9. And so what's happened this quarter is the credit quality, the actual performance has played out for our expectations. In fact, slightly better when you look at 50 to 90, as I pointed out, So that's what's in part, driving the slight decrease in CLA, coupled with the fact that on a relative basis to the size of the portfolio, the relative growth was less in Q2 than Q1.

Another way to look at it is, if you refer to the appendix of the presentation, I believe it's Slide 37, with the coverage ratios on both the basis of total loans and coverage of 90 plus, you see the coverage ratio of total loans has continued to go up as one would intuitively expect given that the net effect of all our growth is expanding credit and expanding credit risk. On the basis of 90-plus, it continues to be hovering around 200%. Again, the fact that it decreased a little bit is just based on the early delinquencies improving, as I mentioned.

[Jorg Friedemann, executive]

And the next question comes from the line of Mario Pierry at Bank of America.

[Mario Pierry, analyst]

Let me stay on this topic of the provisions because I think there was a big surprise this quarter. You show right on, I think, it's Slide 11 or 12 that your originations went up. So you are originating more credit and then you're provisioning less. Like you mentioned, your provision based on the expected losses. So does it mean that you expect lower losses on these new originations than you have before. And why would that be the case? Because we continue to see, right, the NPLs going up. So yes, that's my question. If you can give us a little bit more color online even if originations going up, provisions are going down.

[Youssef Lahrech, executive]

Thanks for the question, Youssef again. So it might be helpful to refer to Slide 38 in the appendix of the presentation, which looks at the ECL itself, right? Since the ECL increased by about $300 million or so. $400 million of that was growth. So the impact of growth is fully reflected there. And then we had a $110 million of other factors, mostly what I mentioned in terms of the slightly better-than-expected early delinquency performance. And so in fact, we're continuing to grow this line item, the ECL line item is just a little bit better than our expectations when we front loaded provisions in Q1.

[Mario Pierry, analyst]

Okay. And Youssef, you mentioned right, that the NPLs continue to behave according to your expectations. But what are your expectations going forward for NPLs.

[Youssef Lahrech, executive]

Yes. Good question. So in terms of what to expect going forward, it's very much along the lines of continuing to grow our credit book. There are several dynamics at play, first of all. We continue to increase the relevance and the mix of lending, personal loans, both secured and unsecured as a percentage of total receivables.

Personal loans have been growing faster than credit cards. We tend to have on-net a higher-risk content, so that tends to push NPLs up and provisions up. But also within credit card, what we've been seeing over the last several quarters, is a pickup in interest-bearing receivables because we have more interest-bearing receivables in the credit card book that gives us better unit economics, which allows us to then expand credit to more customers and more credit to existing and already eligible customers.

And then in both products, both personal loans and credit card as we improve our models as we get more data, more test results, we're able to serve more customers across the spectrum and expand our credit box. So all those dynamics points to increasing NPL and also increasing returns as we've illustrated earlier in this call. There's one offsetting factor, which is the growth of secured lending, which tends to come with lower NPLs. But on net I would expect to continue the trend that we've been seeing over the last several quarters.

And again, this is all related to our philosophy of what are we trying to optimize when we grow, we try to optimize the NPV of that full customer relationship over its lifetime, including future cross-sell opportunities, including principality, increases, et cetera, rather than trying to minimize NPLs over the short term. So again, when we see opportunities to grow in a way that's resilient that is suitable for those customers that is high NPS, high quality, we seize those opportunities.

And so we still see a lot of opportunity to grow going forward on that basis. You can also just think of it through the lens of -- in Brazil, for example, we have about 60% of total adult population. When you look at the proportion of customers who have Nubank as their primary banking account. It's about 1/3 of the total population of Brazil. In contrast, our market share in our most mature product like credit cards is about 13%, 14%. It's even lower when you look at loans, it's in the single digits, secured loans even lower in the small -- in the small single-digit range. And so we still see a lot of opportunity to grow those -- those market shares on the basis of the customer base we already have.

[Mario Pierry, analyst]

Okay. So then to summarize, basically, you're saying you expect NPLs to continue to go up. But we did see an acceleration in the deterioration this quarter, right? Like we saw 70 basis points deterioration, you're deteriorating 20 to 30 basis points before. Is that the 70 basis points that you were expecting? Or should we go back to the 20 to 30 basis points per quarter?

[Youssef Lahrech, executive]

Right. So in terms of what we saw this quarter, the 70 basis points on 90 plus that you point out. The way I would think about it is -- if you go back one quarter and you look at what happened to 15 to 90, there was a seasonal pickup in Q1 of about 90 basis points. But we're observing this quarter 90 plus is merely the impact of that rolling forward, into the next bucket of delinquency. So a 90 basis points increase in 15 to 90 and Q1 resulted in about 70 basis points increase in Q2 and 90 plus.

So that's just kind of the mechanics of it. And remember, Q1 tends to be the peak of delinquency in 15, 90, which then translates to a peak increase in the next quarter and 90 plus. So I think that's just more than anything seasonality.

[Jorg Friedemann, executive]

And our next question comes from the line of Geoff Elliott at Autonomous.

[Geoffrey Elliott, analyst]

We've spoken in the past about moving our market initiatives like Ultravioleta. But the message here feels almost one a moving down market, taking on more risk, if you look at the purchase volumes analysis by cohort that you show, it seems to point to maybe lower purchase volumes for newer customers. So what is the thinking on the shift up market? Is that still going to come? Is that pushback? What's happening there?

[Guilherme Marques do Lago, executive]

Geoff, I think I'll try to chime in and let my comments -- my colleagues add as well. But by no means, the growth that we have had in lending and credit cards suggests a deviation from our intention to grow very fast in high income on the opposite. I think the high income market provides us with tremendous opportunity in consumer credit in Brazil as it accounts for a fairly relevant share of all of the asset classes in which we play. I think over the past now 12 to 24 months, we believe that we have made fairly good enrolls into our pursuit of increasing our share of wallet within the high income population.

As we pointed out in prior calls, we have the opportunity now to increase share of wallet, largely as a result of our success in had acquired the high income customers over the past now 2 years. Today, if you define high income as a customer in Brazil who earns more than BRL 12,000, we estimate that we already have more than 60% of those high-income customers with us.

Over the past quarters, we have materially improved brand awareness, materially improve brand considerations for the high income segment as of December 2023, we have become the #1 player in NPS within the high income category, and high Income has become the fastest-growing segment within our work purchase volume. So as I referenced, the PV of Ultraviolet, which is our higher tier has increased by over 70% over the past 12 months. Even come in [ steel ] from a relatively low base, but we are fairly encouraged on our drive to go into high income. And we think that it is fairly compatible and addicted to what we are doing in [indiscernible].

[Geoffrey Elliott, analyst]

And the principality among high income, what would that look like?

[Guilherme Marques do Lago, executive]

So we -- our overall principle is about 60%. I don't have the figures for high income, middle income and low income here, nor do I think we disclosed them, but they are certainly higher within the bottom of the pyramid than they are within the top of the pyramid. The opportunity that we have now as we improve kind of our brand attributes as we launch new products and features is to gain principality and share of wallet within the higher income customers.

And we can -- as we track the primary banking relationship or PBR, has increased quarter after quarter within the high income segments in Brazil.

[Jorg Friedemann, executive]

And our next question comes from the line of Yuri Fernandes, JPMorgan.

[Yuri Fernandes, analyst]

Congrats everybody for the quarter. I have a question, of course, Lago mentioned in the beginning of the call that he expected interest in assets from the cards, the installments to start to stabilize. So I want to confirm I heard this correctly. And if that's correct, why? Because you continue to make good returns on fixed finance in [ boletos ] and credit cards, as you always mentioned, like this is a good risk-adjusted product. So basically confirming that we should see some stabilization on that year for credit cards. And if yes, why could we see the stabilization?

[Guilherme Marques do Lago, executive]

Yuri, thanks for the question. And I think you are referring to my remarks to Slide #10, in which we see the evolution of our interest-earning assets evolving from 19% a last year to about 28% this year. So it is, first, extremely hard to draw high condition outlooks for innovative products. So this is an innovation that we like to believe that we helped to introduce in Brazil. And you're absolutely right that we are very pleased with the unit economics of this product with the customer adoption.

We just view that the adoption curve that we have experienced over the past four quarters has been fairly steep. So it's hard for us to believe that we will continue to see the same adoption velocity over the coming quarters. So we are assuming that going forward, there's going to be a slight reduction in the growth, not a reduction in the overall percentage, but probably not going to grow at the same pace as it grew in the prior quarters.

[Yuri Fernandes, analyst]

No, super clear. So should still gain some penetration, but not maybe at the same pace as we are seeing currently, right? Basically, this is what you're trying to say.

[Guilherme Marques do Lago, executive]

That's correct.

[Jorg Friedemann, executive]

And our next question comes from the line of Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A bit of a follow-up on asset quality. Looking here at Slide 21 in the presentation. It does look like here that without the expansions, the NPLs will be doing even better. So just maybe help us think about the credit quality outlook that you see in Brazil versus ex Brazil, where it's still very early stages and maybe you're taking on more risk there? Like are you feeling more comfortable? I mean, you kind of alluded to this but that maybe the Brazil credit quality outlook is getting better? And can that help you maybe even accelerate growth in Brazil a bit?

[Youssef Lahrech, executive]

Tito, thanks for the question. So as a reminder, we -- thinking about macro and credit outlook, we try to refrain from having any -- meeting any bets on what's going to happen to macro on a going-forward basis. In fact, if you look at our history, starting in Brazil, it is marked by big peers of instability, downturns, et cetera. And so we feel like -- our philosophy continues to be one of demanding a lot of resilience from whatever growth we underwrite, right?

So we always kind of take the stance that the future will be worse than the past. And whatever we underwrite needs to be able to withstand a significant amount of deterioration. So typically, our cohorts as we've said in the past, what would withstand the doubling of risk and still be above hurdle. And so we continue to operate in this way where we tend to be fairly agnostic to any forecasts about the future. To your point, what we've seen when you back out the expansions and you look at it what NPLs would have been without the expenses, we see a period of relative stability over the last 1.5 years or so. But we're not banking on that or any improvement into going forward to be able to continue to grow.

[Daer Labarta, analyst]

Okay. No, that's fair. And maybe a follow-up. Just on the risk-adjusted NIM, right, Slide 24, a nice improvement there. As you continue to grow the loan book and monetize it, do you think there's still room for that to continue to increase further?

[Youssef Lahrech, executive]

Yes, a good question. So as I mentioned earlier, we see continued opportunities to grow, as I described the various categories of growth that are available to us across our personal loan and credit card products. That said, it's not a trend that I would expect to go on forever, right? Because we optimize NPV, as I said, over the lifetime of the customer relationship rather than minimizing NPL. But we are constraining that based on resilience, based on churn, based on quality of the product and the relationship in NPS.

And so those are all important guardrails and governance of how much we allow ourselves to grow down the credit spectrum. I think in the near term, we still see some opportunity. But I don't think these numbers are unbounded by any stretch of the imagination.

[Guilherme Marques do Lago, executive]

The one thing, Tito, that I would add to what you Youssef mentioned is that I would also point out that we have a gigantic opportunity to continue to optimize our balance sheet, right? So our loan-to-deposit ratio, this is still below 40%, whereas most of the retail banks in the regions are above 100%. So as we increase loan-to-deposit ratios, our net interest margins are expected to continue to expand that will just be an additional tailwind to this trend that Youssef was -- alluded to.

[Jorg Friedemann, executive]

And our next question comes from the line of Eduardo Rosman at BTG Pactual.

[Eduardo Rosman, analyst]

I have a question regarding open banking. We have been seeing some important changes recently, such as the removal of the requirement for clients to get access for a limited period. As far as I understand as well, we've been seeing also important discussions about the granularity of the data that needs to be shared, whether Nu needs to keep requesting the data or if the other bank, let's say, must provide information whenever something important that client occurs.

We also have been seeing some new articles talking about potential discussions to eliminate the reimbursement costs in case of portability, I think that this has been an issue for you on payroll. So a lot of things happening and important discussion. So it would be great if you guys could give us an update, let us know if these changes could be material for Nu.

[Guilherme Marques do Lago, executive]

Rosman, thanks so much for your question. Look, open banking is probably one of the regulatory developments with which we are most excited in Brazil. If you step back for a moment and if you look at the regulatory framework of Open Banking, that has been adopted in the country. It is probably one of the most progressive open banking frameworks that we have seen globally, even if you compare this with the frameworks that have been now developed in India or in the U.K. It has a tremendous opportunity to lower the barriers for the exchange of information.to lower the attrition for the movement of data to lower attrition for the movements of both assets and liabilities.

So it is something that we have been investing quite a lot of time and energy and we are very excited with the prospects. Going a little bit more into the details. So there has been a lot of efforts for many players to first gain consent from consumers to gain access to their data over the past years. We are happy to say that we probably have a market share that approaches 1/3 of all of the consents in Brazil. We ended the second quarter of 2024 with about 50 million customers -- 50 million consents and that basically translates into additional data that feeds into our customer segmentation, credit in the writing models and translates into better products and features that we can offer to our consumers.

Going forward, there's a lot to be had to change in the next 6 to 18 months. And we're thinking that given the guidelines that have now been indicated by the Brazilian Central Bank, you will see lower there is to the exchange assets, so assets -- asset -- credit assets, both unsecured and secured, to also exchange liabilities, i.e., deposits and funds and also insurance and capital markets. So this can be really transformational to the Brazilian banking sector. We are monitoring this very hard, and we are very glad with the cooperation that the Brazilian Central Bank has been fostering among the industry.

[David Velez-Osomo, executive]

Rosman, David here. I would just add that the agenda is very ambitious and open finance as I was mentioning. The regulator's commitment is very, very focused in making it work. But the agenda has been so ambitious that the execution in the industry has been a bit challenging. So it's been -- there's been a couple of faces that have been hired for a lot of players to really integrate. So there's been a couple of bumps in the road, I think, in terms of the time and how it has been executed.

Now I think conceptually, the will that we see from the regulator is that it's going to happen, it's going to work out. And it's so clearly good for the consumer to be able to have access to that data and have an increase the competition in financial services that ultimately consumers, society, government, regulators are very much aligned in making it work. So -- while it's been a bit of a big bumpy road or bumper, I think than people expected, that there is very clear line of sight into creating pretty significant changes in the Brazilian market.

[Jorg Friedemann, executive]

And our next question coming from the line of Thiago Batista at UBS. I think Thiago is having difficulties to connect. So let's move to the...

[Thiago Bovolenta Batista, analyst]

Hear me?

[Jorg Friedemann, executive]

Yes.

[Thiago Bovolenta Batista, analyst]

I have one question about -- Nu do not have a banking license in Brazil. Do you believe it could make sense to ask CapEx license? And what would be the main positive and negative of the bank in Brazil right now? And finally, do you see any material change if Central Bank started to consider Nu as an S-1 and not S-3 as it is today?

[Guilherme Marques do Lago, executive]

Thiago, this is Lago. Those are great questions. So today, we don't see a need to acquire or apply for a banking license in Brazil. Our financial institution license called [ Financera ], coupled with our payment institutional license basically allows us to offer every single thing that we believe is necessary to provide a fairly compelling offer to consumers both individuals and SMEs. So i.e., we can take deposits, we can issue credit cards, we can extend loans. Over time, it may be natural then we will try to simplify and consolidate our legal structure in Brazil, and we may eventually apply or get a bank license at some point in time as the simplification of all of the legal entities that we have.

What would be the implications if we were to do that, in terms of no regulatory capital in terms of reporting requirements. The answer is 0 in terms of regulatory capital and very little in terms of additional disclosure requirements. So we don't see any material change if and when we were to pursue this path in Brazil.

Your second question is, we are an S-3 financial institution in the country. We think it is very likely that we will become an S-2 financial institution in the country, most likely by mid 2025, again, what are the implications to that from a regulatory capital perspective, it's 0, no implication whatsoever. We may have to do certain additional reports, analysis and disclosure requirements, that may increase marginally our compliance cost.

So those are completely immaterial given our overall regulation. Now more importantly than the name of the license or if it is an S-1, S-2 or S-3, we would like to believe that we have been able to collaborate very effectively and efficiently with the Brazilian Central Bank and try to know joint with them, address any challenge opportunities and concerns that our growth may generate in the countries where we operate.

[Jorg Friedemann, executive]

And our next question comes from the line of Brian Flores at Citigroup.

[Brian Flores, analyst]

Perfect. Can you hear me?

[Jorg Friedemann, executive]

Yes.

[Brian Flores, analyst]

Just wanted to ask a bit on Mexico, the information we saw from your -- information as of the second quarter maybe show a decrease in the loan-to-deposit ratio. Just wanted to pick up your brains and see how things are evolving there. You mentioned $3.3 billion in deposits, which is impressive. How is the credit part of the deployment going? Any news from the regulator? Any more color on Mexico would be really appreciated?

[David Velez-Osomo, executive]

Sure. Thank you for the question. So we're very excited with what we're seeing in Mexico. The deposits number that you mentioned really surpassed any expectations. I think that made us kind of realize that there is not a significant opportunity to really challenge the conventional wisdom in the Mexico market about how consumers see banks and their savings. The average cost of funding in banks in Mexico is something like 30% of the risk-free rate.

The majority of consumers are not paid any yield whatsoever. And so at the moment that we went to market with a very competitive yield, it began changing behavior and want to change that behavior and you change that idea in consumer behavior. We think it's very hard to go back. So we like to see the beginning here of an environment where consumers are going to be expecting to get higher remuneration for their deposits.

The $3.3 billion in deposits is way more than we need. And so as we've done in Brazil over the next forever, really, there's going to be an optimization of the balance sheet in how we allocate that -- those deposits but also the yield that we pay.

And the other good news in Mexico really for us has been -- we continue to see very good environment in terms of credit quality and opportunities to grow credit. We reaccelerated credit over the last quarter. And we think that, that continues to grow. We're close to 8 million customer in Mexico, which really positions us already as one of the leading financial institutions in Mexico. And as you know, we've asked for a banking license. We apply last year. We've received a couple of back and forth from the regulator, everything else so far is going as expected.

And we -- hopefully, that process continues to go well and we can get that bank license over the next month or so. So so far, we feel very good with the opportunity market, very large market, 120 million people, higher GDP per capita than Brazil, only 12% credit card penetration that hasn't really moved in over 3 decades. So it's a perfect configuration for full disruption with our business model and the kind of the branding that we built, the consumer base that we build all the different pieces are falling into place, and we are excited about continuing to investing heavily in growth in this market.

[Brian Flores, analyst]

And just as a follow-up. So in terms of your credit risk models, are you already comfortable in terms of increasing a bit more aggressively your credit portfolio going forward?

[David Velez-Osomo, executive]

So this -- the way we do credit is a dynamic decision. It literally it's a weekly decision. We look at data actively, really daily data. We look at the market, we see a performance of different cohorts, and we accelerate on one end or we deaccelerate on the other end. You'll see that the growth curve that we've had in basically all our products in Brazil and Mexico tend to be curves that are not straight lines. They tend to have phases of acceleration, phases of passes. That's because we launch a new model, we integrate a new data source, we are testing a new algorithm.

And so in Mexico, that's what happening. I think right now, we -- if you look at some of the numbers on Q2, we're going through a bit of an acceleration phase. We see good opportunities to growth. But if we might possibly -- if we see something that works in certain area or we might accelerate a little bit more if we get more comfortable. So these are very much dynamic decision.

But in general, we see a market that is really wide open. And the methodology that we've really perfected in -- or we're in the process of perfecting in Brazil around low growth, beginning with our bank population with low credit limits and know and grow it, get to know the customer for the first 15, 30 days, increase a little bit more, gets another customer a little bit more. That dynamic way to approach risk is something that lends itself very well so far in Mexico market that has little access to credit. So we're very optimistic about that opportunity.

[Youssef Lahrech, executive]

And just a little bit more color on the credit quality trends we've been seeing. When you look at the trajectory since we introduced Cuenta product with a very high yield -- attractively priced yield. What we've seen, in fact, is a nearly doubling of our credit card customer originations, right? So a number of customers come in to enjoy the high yield but also take a credit card at the same time. Those customers tend to be positively selected and much better credit quality.

And so you add that to the fact that the data we get on the Cuenta actually helps us underwrite better. You add that to the fact that we now have more experience in the market, more test results, more of returns from the foundational testing we've been doing since the early days. So that gives us a lot of confidence to continue to grow credit and underwrite better as we go. And if you look at credit quality indicators, either the ones we disclose it, so people or otherwise, in Mexico, there's significant improvement year-over-year, and I would say the credit quality has been lately behaving better than our own expectations. So as David said, we continue to be very optimistic or excited about prospects for growth in Mexico.

[Jorg Friedemann, executive]

And our next question comes from the line of Craig Motor from FT Partners.

[Craig Maurer, analyst]

I wanted to ask about the evolution of the credit card market in Brazil. Maybe if you were able to break down your growth in both spending and loans between customers who are taking their first credit card versus those where you're winning share away from other banks? And secondly, I wanted to ask about Mexico and how you're viewing the nontraditional competition say from like Mercado Libre, who's being aggressive in the consumer finance space.

[Guilherme Marques do Lago, executive]

So Craig, let me take you -- the first question. And if you don't mind, I'll try to combine that with the second because it's good to draw a parallel between the credit card markets in Brazil and the credit card markets in Mexico. So Brazil has a credit card market that is relatively mature in terms of penetration, so credit card penetration accounts for nearly 50% of the population in Brazil compared to about 12% in Mexico.

The people often use credit cards in Brazil as a means of payments, not as a means of financing. And therefore, historically, the IBB interest-bearing balance as a percentage of the total receivables of credit cards in Brazil has been below those of the auto lots in American markets and about 20% to 25%. In Mexico, conversely, consumers tend to use credit cards more as a means of financing then as a means of payment, and therefore, IBB over pulled on total credit card receivables tends to be much higher, more in the 60% to 65% of the total credit card receivables.

So very, very, very different markets. with very kind of different nuances, but both having fairly compelling unit economics for the product. Therefore, given the penetration of each country, the customers that we get in Brazil have been historically our customers that already have a banking relationship with another bank, but that we have groomed and upgraded that graduate to a healthier and higher credit life with us. Whereas in Mexico, the main opportunity that we have there is more related to financial inclusion is really to offer kind of a banking product and credit cards for the 85-plus-percent of the Mexican population who are currently unbanked or underbanked.

[Jorg Friedemann, executive]

Okay. So we are now concluding today's call. On behalf of Nu Holdings and of our Investor Relations team, I want to thank you very much for your time and participation in our earnings call today. We are very excited with our development as we continue strengthening our position in the markets we operate. Over the coming days, we will be following up with the questions received by our platform. and with those that were not able to ask questions tonight. So please do not hesitate to reach out to our team if you have any further questions. Thank you, and have a good night.

[Operator]

The Nu Holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.