Nu Holdings Ltd

NYSE:NU

Earnings Call Analysis

Nu Holdings Achieves Significant Growth in Customers and Revenue

In the third quarter of 2024, Nu Holdings demonstrated robust growth, adding 5.2 million new customers, reaching a total of 110 million, a 56% increase year-over-year. Revenue surged to $2.9 billion, marking a 56% year-over-year increase, while net income rose to $553 million, achieving a 19% net income margin. The company reported a gross profit of $1.3 billion, with a gross margin of 45.8%. Looking ahead, the company anticipates sustained profitability and increased revenue as it capitalizes on cross-selling opportunities and expands its operations in Mexico and Colombia.

Impressive Customer Growth Reflects Strong Market Demand

Nu Holdings reported substantial growth in customer acquisition, reaching a total of 110 million customers by the end of the third quarter of 2024. This represents a remarkable 56% year-over-year increase from 70 million customers two years ago. Specifically, Brazil led this growth, contributing 1.1 million new customers per month, culminating in a total of nearly 100 million customers as of last quarter's end. Mexico and Colombia also showed strong performance, with 1.2 million and a significant milestone of 2 million customers respectively, reinforcing Nu’s position as a leading digital financial platform in Latin America.

Record Revenue Growth Amid Currency Depreciation

Despite the challenging economic backdrop and substantial depreciation of regional currencies against the US dollar, Nu reported a robust revenue growth of 56% year-over-year, amounting to $2.9 billion. This growth was primarily fueled by effective cross-selling and the introduction of new products, demonstrating the resilience of its business model. Notably, gross profit surged to $1.3 billion, showcasing a gross margin of 45.8%, marking a gain of 67% year-over-year.

Robust Profitability Metrics Highlighting Operational Efficiency

Nu’s net income hit an impressive $553 million, representing a 107% increase compared to the same quarter last year, thus achieving an all-time high net income margin of 19%. Additionally, adjusted net income reached $592 million, reflecting an 89% increase year-over-year when adjusted for foreign exchange fluctuations. These figures indicate the company’s strong operational efficiency and its ability to manage costs effectively, with a low cost to serve per active customer at $0.80.

Market Share Expansion Shows Strategic Leverage

In Brazil, Nubank continues to solidify its market position, demonstrating a 24% growth in purchase volumes year-over-year, which is approximately double the industry growth rate. The credit card receivables also increased by 32% in Brazil, reinforcing their growing market share by around 300 to 310 basis points over the past year. Although the total number of active credit cards stabilized around 38 million, the average purchase volume per card is expected to triple within the next two years, indicating a maturing customer base and increasing engagement.

Adjustments in Credit Portfolio and NIM Strategies

As Nubank continues to expand its credit portfolio, particularly in secured lending, the net interest margin (NIM) experienced a contraction of 140 basis points to 18.4% this quarter. However, leadership remains optimistic about future NIM improvements, with expectations that as credit originations grow and the balance sheet is further deployed, NIM will recover. Management emphasized that the focus is on deploying credit assets efficiently while maintaining a sustainable risk profile by optimizing credit offerings.

Future Outlook and Strategic Investments

Looking ahead, the company remains committed to long-term growth, which may necessitate short-term investments. Nubank’s entry into new verticals and the launching of services like NuCel, a telecom offering, are part of efforts to broaden the total addressable market. With plans to enhance customer relationships and cross-sell more products, Nubank aims to maintain its trajectory of growth and profitability across all operational regions, including Mexico and Colombia which are currently in their investment phases.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the third quarter of 2024.

A slide presentation accompanies today's webcast, which is available on Nu's Investor Relations website, www.investors.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. [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 a year-over-year FX-neutral basis.

I would also like to remind everyone that today's discussions 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 third quarter 2024. Subsequently, Guilherme Lago, our CFO; and Youssef Lahrech, our President and CEO, will take you through our financial operating performance for the quarter. After which time, we will be happy to take your questions.

Now I'd 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. In the last quarter, our business model anchored in 3 fundamental principles, customer growth, expanding revenue per customer, and efficient operating costs, has once again demonstrated its strength.

We have consistently surpassed expectations in net customers addition, achieving 110 million customers by the end of the quarter, reflecting a 56% increase from the 70 million recorded just 2 years ago.

Strong customer additions in Brazil continued to fuel our growth, with an average of 1.1 million new customers each month and bringing the total to 98.8 million at quarter end. As we announced over the past days, we already crossed the mark of 100 million customers in Brazil. Mexico also experienced strong growth with 1.2 million net adds in the quarter, resulting in a total of 8.9 million customers. This success reinforces our strategy of increasing deposit yields in the country, further enhancing our momentum and solidifying Nu as the leading digital financial platform in Mexico. Moreover, Colombia has reached a significant milestone of 2 million customers and sustaining the positive momentum from the launch of the Cuenta product.

Now let's review some key financial highlights. Despite the depreciation of Lat Am currencies against the U.S. dollar during the quarter, our revenue surged to $2.9 billion, driven by our successful cross-sell and up-sell efforts, along with our introduction of new products. This solid performance reflects a 56% year-over-year increase. Our gross profit stands now at $1.3 billion, marking a 67% year-over-year growth with a gross margin of 45.8%. Net income also saw a robust growth, reaching $553 million, leading to an annualized return on equity of 30%.

Additionally, our adjusted net income hit $592 million, expanding 10% sequentially and 89% year-over-year on an FX-neutral basis. These achievements underscore the power of our business model, which combines robust top line growth with solid profitability.

On this slide, we demonstrate how our flywheel effectively drives customer engagement, as evidenced by strong cohort of performance on revenues. This consistent compound growth across all cohorts underpins our ability to cross-sell and up-sell to our customers. Increased product adoption boosted by primary banking relationships, which we will further discuss in this presentation, drives increasing ARPACs as cohorts mature over time. This trend is evident across all cohorts in this chart, including the more mature ones, which continue to display robust revenue CAGR. Notably, revenue CAGR for all cohorts acquired this decade is in the triple digits.

Now turning to profitability. We have been presenting this table for several quarters now. In addition to the robust growth observed quarter-after-quarter, it is important to highlight that in the third quarter, for the first time, Nu Holdings return on equity surpassed 30%, demonstrating the success of our strategy. This achievement was accomplished while still maintaining a robust level of excess capital of $2.4 billion at the holding level with 2 subsidiaries in Mexico and Colombia, yet to reach profitability.

As we make progress in our 3 geos and execute against this strategy, we continue to be extremely excited with the huge opportunity we have ahead around expanding our platform, increasing market share in our core products, and better monetizing our existing customer base.

In addition, as we had stated earlier in the year, the growth into new verticals as part of our Money Platform strategy is starting to become a reality and broaden our total addressable market. Recent examples in this strategic path are the launches of NuCel, our debuting telecom services, as well as the developments of NuMarketplace, NuTravel and NuPay. And we're just getting started.

With that, I'd like to pass the floor to our CFO, Guilherme Lago, who will go into more details on our financial results. Over to you, Lago.

[Guilherme Marques do Lago, executive]

Thank you, David, and good evening, everyone. As David mentioned, we reported another robust quarter marked by sustained revenue growth, enhanced customer engagement and strong operating margins and profitability. Now let's take a closer look at our third quarter results to gain deeper insights into the progress we have achieved against each of our guiding pillars.

Starting with customer acquisition. We experienced strong growth during the quarter, welcoming 5.2 million new customers to our platform. We closed the quarter with 109.7 million customers, reflecting a 23% year-over-year increase.

As we continue to add more customers, our focus starts to shift to engaging and retaining them. Our active user base increased by 24% year-over-year, accompanied by another sequential increase in our monthly activity rate, which now stands at 83.6%, up from 82.8% a year ago. This represents the 12th consecutive quarterly increase in activity rate, underscoring our ability to consistently provide a compelling value proposition to our customers.

Moving on to revenue expansion. The first chart on Slide 10 shows that Nu has established primary banking accounts with approximately 60% of our active customer base. This strong performance highlights our ability to capture a larger share of wallet among our customer base. Additionally, we are very pleased to see how recent cohorts are reaching this level of principality at an accelerated rate.

As shown in the chart in the middle of this slide, the average number of products per active customer now stands at 4, highlighting the effectiveness of our cross-selling strategy, even as we rapidly onboard more and more new customers. By successfully introducing our products to these new customers, we reinforce our position as their primary banking partner.

The final chart shows the combined impact of these 2 powerful dynamics. Significant customer engagement, as depicted in the first chart, together with our expanding cross-sell capabilities, as shown in the second chart, allow us to deliver increasingly favorable performance. So while our average monthly ARPAC stands at around $11, our more mature cohorts are already achieving a monthly ARPAC of $25.

It is also worth remembering that the dynamics of ARPAC in this slide is affected by the acceleration of our customer base in Mexico and more recently in Colombia. While our deposit strategy in these new geos may attract customers who initially engage with the Cuenta product only, a product that generates relatively low ARPAC levels, we are very confident in the long-term results that this growth strategy is expected to yield for Nubank, as we have seen in Brazil for almost a decade now.

As shown on the left chart of this slide, while our monthly ARPAC declined $0.02 to $11, on an FX-neutral basis, it grew 2% sequentially and a strong 25% year-over-year, up from $10 just one year ago and in spite of the customer pickup of the new geos previously highlighted. We remain confident in our ability to increase ARPAC to its full potential over time.

The chart on the right side of this slide highlights that our revenues hit a new record high this quarter of $2.9 billion, up 56% year-over-year. This growth was driven by the increase in active customers, combined with higher ARPAC levels.

Our consumer finance portfolio, which comprises credit cards and lending, grew strongly during the third quarter of 2024, up 47% year-over-year and 8% quarter-over-quarter, both on an FX-neutral basis, and reached a total of $20.9 billion. This growth was fueled by increases across both product categories.

Our credit cards portfolio continued to grow during the quarter, fueled by further expansions in the shares of wallet across all customer segments, increasing 33% year-over-year and 4% quarter-over-quarter on an FX-neutral basis to $15.2 billion.

Now our lending portfolio posted especially strong performance, growing 97% year-over-year and 19% quarter-over-quarter on an FX-neutral basis to $5.7 billion. Lending continues to outpace credit cards and now accounts for 27% of the total portfolio. In line with trends from previous quarters, our lending cohorts demonstrated strong credit performance, allowing us to continue scaling originations.

Now let's turn to the breakdown of our credit card portfolio. Interest-earning installments remained steady at 28% of our total credit card portfolio, aligning with expectations shared last quarter. While demand for our PIX financing products remain strong, we have intentionally slowed the pace of eligibility expansions to more closely monitor performance over the coming quarters. If the portfolio continues to perform well, we may resume growth in the near term. Our focus is on gathering additional data to ensure our credit models remain resilient. The demand for this product is very clear, and we are strategically managing supply to safeguard credit quality and maintain portfolio resilience.

In terms of our lending business, originations increased by 79% year-over-year to BRL 15.9 billion in the quarter. Unsecured lending remains the main growth engine, which this quarter alone generated BRL 13.4 billion. This demonstrates our ability to continue fostering financial inclusion in Brazil, making credit available to people who previously didn't have access to this product.

Now our secured lending origination reached BRL 2.5 billion during the third quarter of 2024, accounting for 16% of total lending originations. We are pleased with the good performance we are seeing from the recent introductions of new features for public payroll loans, such as portability top-ups and refinances.

Now to expand eligibility and the total addressable market, or TAM, we have signed 9 new collateral agreements reaching a total of 11, including with the Armed Forces and several major Brazilian states and municipalities. The integration of these entities are ongoing. And once completed, we will tap into more than 70% of the overall TAM for public payroll loans in Brazil and release the product for the newly eligible customers, thus supporting continued growth in originations.

Now equally exciting is the performance we have seen in the originations of FGTS-backed loans. This product currently accounts for over 50% of our total originations of secured loans, and our market share of new originations already exceeds 25%. This reinforces the strong product market fit of our fully digital distribution channel.

The reduction in credit yields you see in this slide is primarily a result of the increasing share of secured lending within our total originations, as secured lendings typically offer lower yields and lower risks than unsecured loans.

Now moving on to funding. Our total deposits for the quarter increased to $28.3 billion, up 60% year-over-year on an FX-neutral basis and supported by robust expansions across all of the 3 geos in which we operate. In Brazil alone, deposits reached $23.5 billion, up 6% sequentially on an FX-neutral basis.

In addition, we believe our depo rate strategy in Mexico and Colombia is delivering strong results, allowing us to increase deposits in both countries while expanding our mission to empower our customers to gain more control of their financial lives. This has also led to additional cross-sell opportunities and improved unit economics for Nubank. At the close of September, our operations in Mexico reached $3.9 billion in deposits, almost 4x more than 3 quarters ago.

Now lastly, we are very pleased with our recent performance in Colombia. Just one quarter after the launch of NuColombia's checking account product, consumer deposits reached $900 million, far exceeding our expectations.

Net interest income, or NII, increased 63% year-on-year. On a sequential basis, NII remained flat in nominal dollars at $1.7 billion and expanded 4% quarter-over-quarter on an FX-neutral basis. The slowdown in growth was mainly driven by the combination of 3 factors. First, yields on the credit card portfolio declined, reflecting improvements both in products and customer risk. Second, lending yields declined as previously mentioned in this presentation due to the increasing mix of secured lending. And third, funding costs were pressured by the deposits ramp-up in Mexico and Colombia and in line with our depo rate strategies in new geos. This also impacted net interest margin, or NIM, which compressed 140 basis points to 18.4% this quarter.

Now as we look ahead and irrespective of the direction of local interest rates, we are confident that the key driver for future NIM will be the ongoing deployment of our balance sheet capacity through growth in credit originations as well as the repricing of our liability franchises in the new geos.

Looking into Mexico, as an example, we launched liquid Cajitas at 15% per year back in November 2023, almost 400 basis points above the TIIE. By October 2024, this rate had already dropped to 12.5% per year, only 200 basis points above the TIIE.

Now let's shift our focus to the very last pillar of our strategy, maintaining a low cost to serve. We firmly believe that our platform is among one of the most cost-effective in serving customers within our markets. Its low cost to serve represents a significant competitive advantage, and we expect this cost to remain at or below $1 per active customer for the foreseeable future.

And for yet another quarter, we successfully achieved this goal with a cost to serve per active customer at $0.80. On an FX-neutral basis, this represents a 2% year-over-year increase when adjusted for the one-offs in the third quarter of 2024, mostly related to FX impacts on data and cloud costs that had been allocated under customer services and now were reallocated to G&A. During the same period, our ARPAC grew by 25%, and this highlights the strong operating leverage of our business model.

Our gross profit amounted to $1.3 billion, reflecting an increase of 3% quarter-over-quarter and 67% year-over-year, both on an FX-neutral basis. Now our annualized gross profit margin stood at 45.8%, closer to 2023 levels and in spite of the higher cost of funding in the new geos where we operate, as anticipated during this presentation.

Achieving operational leverage is a fundamental aspect of our strategy. During this quarter, our efficiency ratio improved by 60 basis points quarter-over-quarter, reaching 31.4% and more than 360 basis points better than a year ago. This was achieved even with costs for the third quarter increasing 2% sequentially on an FX-neutral basis, mainly reflecting a one-off in marketing expenses related to the repositioning of the Nucoin program and the impairment of capitalized intangible assets associated with it.

We are poised to capitalize on our platform's operating leverage as we continue to expand our customer base, up-sell and cross-sell products, introduce new features and achieve profitability in the new markets of Mexico and Colombia, which are currently in their investment phases.

Lastly, we delivered another quarter of robust profitability, with net income increasing 107% year-on-year to $553 million. This resulted in an all-time high net income margin of 19%. And these positive results emphasize the success of our strategy and of our business model. Also, adjusted net income reached $592 million for the quarter, up 89% compared to a year ago.

Now while we are pleased with our third quarter results, our commitment to long-term value remains unwavering. This long-term strategy may require short-term investments to maximize our future opportunities, even if they come at the expense of profitability for a few quarters. We do expect to continue to pursue a number of these strategic short-term investments over the coming quarters as we continue to see new growth avenues for the company.

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

[Youssef Lahrech, executive]

Thank you, Lago. Good evening, everybody. Starting with NPL trends. Our leading indicator to 15-90 NPL ratio declined once again during the third quarter, dropping 10 basis points from last quarter to 4.4%. 90+ NPLs increased by 20 basis points to 7.2%, also in line with expectations. Recall that 90+ behaves as a stock rather than flow metric in the sense that this quarter's 90+ houses inventory that was in 15-90 from one quarter ago all the way to 3 quarters ago. Thus, to understand the movement in 90+ from last quarter to this quarter, you have to trace it back to the change in 15-90 from 4 quarters ago all the way to 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 attractive opportunities. In line with our credit philosophy, we prioritize decisions that optimize the net present value of the lifetime of our customer relationships, 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 actively pursue growth in these areas, in line with our strategy of pursuing primary banking relationship status with increasing engagement and cross-selling and up-selling over time.

As we will show in the following slides, this strategy has yielded increased revenue and greater resilience, more than offsetting the higher delinquency rates that come with it, all within our risk appetite.

This slide shows asset quality trends, both 15-90 and 90+ NPLs, this time on the basis of interest-earning balances rather than total receivables. Here, you can see a stable to declining trend in the last few years. This demonstrates that we have been rewarded for the additional risk we've taken, reinforcing our strategic decision to focus on maximizing NPV, i.e., the lifetime value of customer relationships rather than solely optimizing delinquency metrics. Aligned with the growth pace of our credit portfolio and early delinquency performance, credit loss allowance expenses increased by 6% on an FX-neutral basis to $774 million this quarter.

Finally, risk-adjusted NIM decreased by 90 basis points in the quarter as a result of the 140 basis point decrease in NIM, as explained by Lago earlier, which was partially offset by a 50 basis point improvement in cost of risk. On a year-on-year basis, risk-adjusted NIM increased by 110 basis points, underscoring once again the result of our focus on optimizing the lifetime value of our customer relationship cohorts.

With that, we're now ready to take 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 at Morgan Stanley.

[Jorge Kuri, analyst]

Congrats on the great numbers. I wanted to ask about NuCel. Can you maybe share with us what is the business model like? What is the revenue model? Are you charging a commission? Are you renting the network and then creating your own revenue? Or just basically passing on a fraction of the revenues to the carriers? What are the unit economics? How profitable this could be? And how do you see this impacting your financials over time? Is this something that could potentially be material? Should consensus be start thinking about it? Or is this sort of like an add-on that adds to the overall ecosystem without necessarily becoming a big part of your P&L?

[David Velez-Osomo, executive]

Jorge, here David. Thank you for your question. So listen, take a little step back. When I go back 10 years in time and I remember the industries that we were discussing around opportunity for disruption in Brazil and Latin America, there were 2 classes of industries that were in the companies that were disliked the most by Brazilians. The first ones were banks. The second ones were telecoms. That has changed over the past 10 years. We like to think maybe because we brought more competition in the industry.

But on the telecom side, there's still a lot of opportunity to improve consumer experience. The NPS is low. The general offering for consumers is very complex. 7 -- when we talk to customers, 7 out of the 10 things that customers talk the most about their plans is around the user experience. There is too many different plans, too many different bonuses, too many different footnotes, and just overall too much complexity.

So that combination of an industry that has hundreds of millions of lines in Brazil, combined with low consumer experience, creates a very obviously target for us as we, as a company, see our mission to be fighting complexity through empowering people. So we've been looking at the industry for a long time. I think the complexity of entering the telecom space, especially as an MVNO, is as many people have mentioned, generally, you have disincentives with your provider because if you're growing too much, you're cannibalizing the MNO that is giving you access to the network.

So it took us for a long time to try to find the right partner and the right contract to be able to negotiate a deal, in this case with Claro, that align fully incentives. And what this really means is instead of just simply passing a fixed fee, we have our revenue share contract. We're not able to disclose exactly what the revenue share is, but it's a situation where we're sharing revenue. We are providing -- we're using all of our infrastructure and our efficiency to serve consumers at a lower cost than they can. And so ultimately, they are able to serve customers through us, making revenue at a lower cost. So it's a win-win situation for both companies.

If we succeed in offering a product that tens of millions of consumers love, our partner is going to be making more money and is going to spending less money serving those customers. And obviously, there is a huge amount of synergies around the consumer base that we have. We are actually getting close to 60% of the Brazilian adult population, over 100 million Brazilian customers. So we have to spend very little money on customer acquisition and marketing. There is a huge amount of synergies on serving customers efficiently. We know how to do that for different subsegments. For us, specifically, there is a lot of value in creating a digital ecosystems. This is something we've been speaking about for several quarters now, where we think that there is a big opportunity to build -- to go beyond financial services in new verticals. That allows us to give more products and services to our customers and increasing -- increase the value propositions consistently to them. So we can do that by adding something that all of our 100% of our customers use every single day.

And there is a lot of synergies in cross-selling the products and adding rewards on top of that. So that's something that we are launching. I think this first value, this first announcement for the first plan, you should see that as a beachhead, as an entry path into this space. But there is a ton more to come in terms of how we're going to be tying all of these products together and how we're going to expect increased loyalty and the value proposition to customers as we add NuCel but also travel. We've announced travel, marketplace and a number of other verticals that are here to come.

In terms of financial benefit, I think it's early to tell. We are excited about this profit pool and also what this can bring to the financial services space and other segments. So I will withhold -- I won't get into a lot of details there, but I do think that the opportunity to go beyond financial services, once you start adding a number of different verticals, is pretty substantial and what's not only substantially in terms of revenues, but also in terms of diversifying the business model away from credit and having a much more robust, less cyclical type of revenue, much more fee revenue, much more subscription revenue. That adds a nice distribution and diversification to our overall business model. So it's the first -- we're just kind of taking the first baby steps in that direction. But I think the logic is very compelling, and we're very excited about what we can do there.

[Jorg Friedemann, executive]

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

[Mario Pierry, analyst]

Let me focus on the current business rather than the future business. When we look at your risk-adjusted net interest margin, right, it declined, when I look on nominal terms. When I look at the margin itself, also declined a few basis points. And I get that part of this has to do with a change in mix, right? You're doing more secure lending.

But like I was wondering, as this continues to happen, right, I think that's part of the strategy, how does that impact your profitability in the short term? Because it seems to me like you're moving away from a very profitable product, which is credit cards, to a product that is more secure but less profitable, right, especially when we look at the payroll loan market in Brazil, right, given that you have regulated prices there? So I'm just trying to understand, how do you see the evolution of risk-adjusted margins as you continue to shift your loan mix?

[Guilherme Marques do Lago, executive]

Mario, this is Lago. Thank you so much for your question. So look, when we look at our business portfolio, they are certainly composed by asset classes with a very different kind of risk returns, provided that none of those asset classes are expected to yield us returns on equity of less than 30%. And so yes, the first product that we had, credit card, has a phenomenal kind of set of unit economics, both in Brazil and Mexico and Colombia lending as well. And we are by no means moving away from those asset classes. We are actually adding additional asset classes to that portfolio without necessarily diluting the unit economics of the prior ones.

In my view, Mario, when you take a look at our balance sheet, we still have a loan-to-deposit ratio of about 30% to 35%, depending on how you cut it. So by and large, 2/3 of all of the deposits that we have are sitting idle in treasury bonds. So as we shift the allocations from treasury bonds into credit assets, both secured and unsecured, you should expect to see NIMs expanding going forward. You should expect to see risk-adjusted margins expanding going forward.

What has been kind of the rationale behind the contraction in NIMs in the third quarter of 2024, I think it is the composition of 3 things. Number one, we have seen increasing kind of funding costs in our business in Mexico and Colombia, given our strategy to aggressively pay higher deposit rates in those countries. And as such, it has now shrunk the NIMs on a consolidated basis. Going forward, we do expect to bring some of those deposit rates in Mexico and Colombia down as we have been doing sequentially quarter-over-quarter. So that's the first thing.

The second thing within our credit portfolio in Brazil, you started to allude, yes, we are seeing the average yield go down, primarily because of mix, like secured lending gaining more weight. But also because of price elasticity, even within credit card, as we improve and optimize the price elasticity models, we have been able to play around with lower rates in order to maximize the NPV and the lifetime economics of the customers.

So in a nutshell, we do not expect the movement into new asset classes to contract NIMs or risk-adjusted NIMs. On the contrary, it should expand as we increase loan-to-deposit ratios.

[Mario Pierry, analyst]

Okay. That's clear. Let me follow up, then. Like when we look at your credit cards, when I look at TPV, it contracted quarter-over-quarter, and you are at a point, right, where you have been gaining market share. So I wanted to understand then when we look at this purchase volume, why did it decline quarter-on-quarter?

And my question also has to do -- like when I look at the number of cards outstanding in Brazil, it seems like it declined by 100,000, right, from 38.1 million to 38 million this quarter, even though you added 3.4 million clients in Brazil. So what is this data telling me? Are you at the point where you already are at a certain level of market share that will be hard for you to gain market share from where we are right now?

[Guilherme Marques do Lago, executive]

Yes. It's a good question, Mario. I think -- just let me try to address those 2 points that you've raised specifically, and then I'll try to provide a general overview on market share in credit cards. So first, I would draw your attention to Slides 27 and 28 of our earnings presentation. And you will see that our purchase volume in Brazil, Mexico and Colombia, but mostly in Brazil, have not contracted. They have actually expanded on an FX-neutral basis.

You should note that there has been a material FX devaluation in the third quarter of 2024. I think the devaluation in Brazil has been between 4% and 5%. The devaluation in Mexico has been between 10% and 11%. So if you do an FX-neutral adjustment, you will see that PV has actually gone up in the third quarter.

And then if you look at the PV for Brazil, which you highlighted, Mario, is over the past 12 months, PV in Brazil for Nubank has grown by about 24%, which is about twice the growth of the PV in the industry. That means that we have, of course, increased market share.

If you look at it in terms of receivables, the credit card receivables of Nubank Brazil increased by about 32%, which is almost 3 to 4x the increase in credit card receivables of the industry. So again, the market share continues to grow. So when you look at every single segment in which we play, the less affluent, the more affluent as well as the total market share, we continue to gain new market share at a fairly good pace. Our estimates that in terms of credit card receivables in Brazil, our market share has grown by about 300 to 310 basis points over the prior 12-month period. So we are super encouraged by the ability to continue to gain market share in the country.

Now to your second point, yes, indeed, the number of active credit cards has been slowing down. So the number of credit cards -- active credit cards denominated in terms of PV has been flat at around 38 million credit cards. In terms of revenues, it has gone up from 45.3 million to 45.8 million. But it certainly will grow in the coming kind of quarters and years in Brazil at a slower pace than it grew in the prior years.

However, if you take a look on slides -- here on Slide 28, you will note that notwithstanding the stabilization of the number of active credit cards, we do expect the purchase volume per active credit card to continue to go up quite strongly. And that's what we have seen, both from old cohorts as well as from new cohorts. On average, the purchase volume per active credit cards goes up by about 3x within 24 months. So I think when you combine the maturation of the cohorts and the increase of receivables, we do expect market share to continue to grow in Brazil, let alone the expansions that we're going to have in Mexico and Colombia.

[Mario Pierry, analyst]

Okay, Lago, that's clear. And when I was talking about the purchase volume of credit cards decelerating, right, I was looking on -- in BRL. And I saw a growth of 3% quarter-on-quarter and you were growing like 8% previous quarter. You're growing at a higher pace. But okay, no, yes, your answer is very clear.

[Jorg Friedemann, executive]

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

[Daer Labarta, analyst]

My question, following up a little bit on the decline in NIM. But Lago, you have mentioned that you're intentionally slowing the pace of eligibility for PIX financing and trying to get some more data there. Just want to understand, are you concerned about asset quality? Is it just the strong pace at which you've grown over the last year? Just kind of what's giving you a little bit more caution there? And will that be maybe a short-term headwind for your ability to expand NIM, let's say, at least for the next few quarters as you get some more comfort there?

[Guilherme Marques do Lago, executive]

Tito, thanks for the question. Look, so we are -- we continue to be super excited with the PIX and boleto financing products within the credit card family. The demand for this product is enormous, and the unit economics of this product is very strong. Now we do often pursue optimizations of the risk return strategies of every single asset class. They are not kind of a straight line, so there are times in which we accelerate. There are times in which we decelerate. So over the past now one or 2 quarters, we have slowed down intentionally the pace of eligibility expansion in PIX financing to kind of watch how those cohorts will continue to perform. And if they continue to perform well as they have, most likely, we will resume growth over the course of the coming quarters.

We do see kind of the PIX financing family of products as a strategic feature and product that we offer to our customers and something that actually leverage on many of the strengths of Nubank in Brazil. As you know, we have about one in every 4 PIX transactions in the country go through Nubank. So the flow of data is super strong and gives us and our customers the ability to develop and enjoy new financing products.

So now, we do expect to continue to grow this product in the coming quarters and years. We are just now taking a pause to see how the overall performance of the recent cohorts continue to perform.

[Daer Labarta, analyst]

Okay. That's helpful, Lago. And then I guess just another follow-up on the margin because I mean you had strong growth in deposits again. I know you're overpaying a bit in Mexico to kind of grow that deposit base. Would you consider maybe reducing the remuneration further either in Brazil or Mexico to help sort of on the funding side of things, particularly with higher rates in Brazil? And then conversely, in Mexico, I saw that there was some October data where your loans jumped like 10% in October. So it seems like maybe you're getting more comfort to grow the loan book in Mexico. How do you think about the outlook for loan growth in Mexico from here?

[Guilherme Marques do Lago, executive]

Yes. So just addressing some of your questions head on, in Brazil, we do not expect to lower the Cuenta yields or the depo rates. We believe we have a very good balance of value proposition for our consumers, and we are very pleased with the capital structure that we have in the country. So we do not foresee any material change in the short term.

In Mexico and Colombia, we have been very positively surprised with the evolution of our deposits strategy in both of those countries. Not only we have seen kind of deposits increasing by a substantially higher pace than we expected, but we have seen material second order impacts from the inflows of those deposits.

What do I mean by that? I see the deposits has brought in many more customers, but many more customers who also cross -- to whom we were able to cross-sell other products, such as credit cards and now personal loans in Mexico and then soon in Colombia. And we have also seen a marginal improvement in the mix of those customers that have allowed us to expand eligibility and approval rates.

And then secondly, as was the case in Brazil, the inflow of deposits also comes with an avalanche of additional credit underwriting data that is a super important raw material to feed our credit and customer segmentation model. So really pleased there. And as, Tito, we improve the value proposition of their experiences with Nubank, we will consider progressively optimizing the cost of our liability and, yes, potentially continue to low deeper rates in Mexico and Colombia.

In Mexico, just to have an illustration, I think we launched the deposits in Mexico back in the first quarter of 2024. We launched that paying 15% per year. At that point in time, it was around 400 basis points above the interbank deposit rates. Now we are now at 12.5% per year, which is only 200 basis points above the interbank deposit rates. And yes, we may bring this down going forward. But I think the most important benefit that we will have in NIMs is actually going to be on the expansion of the asset side of the balance sheet. And we are super pleased with the prospects that we have to increase the loan book in Mexico. It's performing now fairly well, and we have resumed growth as you have seen in the recent numbers, including the ones that we have posted with the regulators, I believe, yesterday or today.

[Daer Labarta, analyst]

Okay. Perfect. Great. So this seem like that could be a driver of growth going forward here.

[Guilherme Marques do Lago, executive]

Yes, absolutely.

[Jorg Friedemann, executive]

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

[Geoffrey Elliott, analyst]

The credit card Stage 3 has increased from 9.1% to 9.8%. Can you give us a bit more detail on what's happening there? And specifically, on PIX credit, how has the performance of that portfolio been evolving?

[Youssef Lahrech, executive]

Geoff, this is Youssef. Thanks for the question. So Stage 3, the kind of short hand for that, that I think about is it's very correlated to what's happening to 90+. It tends to evolve in a similar way and tends to behave like a stock metric. So what you're seeing is kind of consistent with the trend in 90+.

When you look at more of a flow metric on late-stage delinquencies, I would invite you to take a look on Page 30 at both the NPL formation and the Stage 3 formation. And both indicators, if you take a look, actually declined in the quarter, 40 and 60 basis points, respectively. So we see actually improvement from that standpoint on those 2 metrics.

And with respect to your question on PIX financing, as Lago mentioned just a minute ago, we continue to be very pleased with both the consumer demand for that product and the economics of that product. The returns are phenomenal. And so the recent deceleration is by no means an indication of concern on either. It's more of kind of technical adjustments we make on a business-as-usual basis that we've done in the past in a number of products and customer segments.

[Jorg Friedemann, executive]

And our next question comes from the line of John Coffey of Barclays.

[John Coffey, analyst]

One theme that I've noticed in a lot of your answers is when you're talking about your NIM, I think you've said that the NIM will improve when your loan-to-deposit rate improves, which makes a lot of sense. I was wondering if you could just maybe broadly just say, what's holding you back on having that rate more? Is it that you have capital and you're not -- these assets and you're not able to convert those into loans just yet because you're still testing the market, perhaps in Mexico or Colombia? Or are there any other reasons that might be sort of holding back that ratio from rising more?

[Guilherme Marques do Lago, executive]

John, thank you. Thanks for the question. So let me try to split the response into, I think, in between Brazil, on one hand, and Mexico and Colombia, on the other hand. So Brazil, we already have a fairly stable liability and deposit franchise. And we have been growing the asset side of the balance sheet at a relatively good pace. Depending on the assets that you look, the overall portfolio has grown at about 47%, 50% year-over-year. The lending side per se, which is the one that consumes more funding, more than credit card in Brazil, it has, in fact, grown by about 90% to 100% year-over-year. So Brazil's assets is in the fast cruise control speed there, and we expect loan-to-deposits to continue to go up.

In Mexico and Colombia, they are more recent markets. And therefore, we continue to develop our credit underwriting capabilities. When we entered those markets, we did see that differently from Brazil, our core product, which was credit card, was more funding intensive due to the credit card cycle. So the first thing that we wanted to do was to de-risk the funding part of the business. And therefore, we have been more aggressive on raising deposits from the local currency general public, mostly retail deposits.

Now that we have kind of very strong and healthy right side of the balance sheet, we are accelerating the left -- the growth of the left side of the balance sheet. And you have started to see a strong growth in the loan book of Mexico and Colombia. And I believe you will not only continue to see this in the next quarters. But most likely, it will even go up as we improve and sharpen our credit underwriting capabilities. But the main bottlenecks that we have to continue to grow the asset side in Mexico and Colombia and to a certain extent, also in Brazil, certainly not capital. We have plenty of capital to deploy. Certainly not funding. We have now plenty of funding to deploy against those opportunities. It's really our credit underwriting appetite to be able to cherry-pick the most compelling risk-adjusted returns for our company.

[John Coffey, analyst]

I just have one quick follow-up. This might be more for Youssef. On the 15- to 90-day NPLs, I know those decreased 10 bps quarter-over-quarter. Can you help us decrypt a little bit more how that breaks out from seasonality versus creating more exposure to riskier loans? Is it straightforward? Or are there too many moving pieces to really break that out?

[Youssef Lahrech, executive]

It's pretty straightforward, to be honest. The seasonality typically is in the range of 10 to 20 basis points, so what we see is largely along seasonal lines as opposed to indicative of any wholesale changes in the assets.

[John Coffey, analyst]

Okay. So it's normally 10 to 20 down from Q2 to Q3?

[Youssef Lahrech, executive]

That's about right.

[John Coffey, analyst]

But you're also having like more exposure to a riskier credit book. So I almost expect those would -- that would have maybe gone up or netted out to 0. It doesn't seem like that's happening.

[Youssef Lahrech, executive]

No, there are offsetting forces, as we've talked about before. So you have increased mix of secured loans within the lending book. You have continued expansions in credit card, and then you have some of the tactical adjustments we've executed through the last quarter. So those tend to kind offset each other. We've seen relative stability in the last quarter on that.

[Jorg Friedemann, executive]

And our next question comes from the line of Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

Just a quick one on the provisioning level. When we go back to the 1Q numbers, there was a strong pickup in originations, which was the explanation for the strong pickup in the provisioning level, nominally speaking. When we look at this quarter, there was a very strong pickup in -- especially in personal loans, which grew 20% quarter-on-quarter, but the provisions grew only 6% quarter-on-quarter.

So could you please explain what was different this quarter? And why did we not see a stronger pickup in provisioning, whereas the origination was quite strong? And also, the cost of risk sequentially remained largely stable. So there's probably some impact from shift in mix. But given the stronger growth in personal loans, I would expect cost of risk to go up. So if you could zoom in on that, that would be very helpful.

[Youssef Lahrech, executive]

Yes, Neha. This is Youssef. Thanks for the question. So again, I would point out to some of the offsetting forces that I just talked about. And in particular, when you look at lending, the fastest-growing element within that is secured lending, which carries very little risk and, hence, has lower coverage ratios. So that would explain in part what is going on. And even in unsecured lending, we've seen slightly better asset quality than expected. So you see a bit of an effect there, too.

[Jorg Friedemann, executive]

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

[Eduardo Rosman, analyst]

I wanted to get an update in Mexico. Maybe if, David, you could help us. I think you've been delivering better and faster KPIs, right, when compared to what you did in Brazil. But I wanted to know if you think that Mexico is ready for the same impact you had in Brazil, right? Do you think Mexico can be relevant within your results in the next 3 years? Or should we expect it to be more relevant further in the future?

[David Velez-Osomo, executive]

Sure. Rosman, thank you for the question. So I mean, listen, Mexico is an opportunity that net-net, I think, could be another Brazil for us. But there are some differences to Brazil, some positives and some harder to crack. The positives are it's a higher income per capita country than Brazil. And you also have a lower bank penetration, lower credit card penetration. And that's a challenge as well as an opportunity. With 12% credit card penetration, we could be -- if we crack the code of providing credit to the unbanked population, that would be a huge competitive advantage versus in Brazil, where we found a market that was much more saturated with many more competitors.

Now it's going to be -- it's probably going to take a little bit longer to really reach the levels of market share that we have in Brazil because cracking, giving credit to the under-banked or the unbanked, it's just harder. And we are here for the long run. We don't want to do anything unnatural or it -- learning how to do that requires a lot of discipline, a lot of methodology, a lot of data, a lot of foundational testing. And it's a quarter, we accelerate. A quarter, we pause. Another quarter, we accelerate or de-accelerate. So you'll see those zigzagging of growth rates consistently because it's us continuously being better every single day around how to underwrite that market opportunity.

Now as you say, we've been -- so far, it's been faster than Brazil, and we're very excited with getting to -- in about 5 years, we are now top 10 in Mexico in both credit cards and deposits, which is a huge victory, I think, in terms of our market positioning, having started from -- completely from 0. And there's been a huge amount -- there's a lot of huge amount of work around connecting to cash-in, cash-out infrastructure, which we're doing, connecting to new data infrastructure. So we're doing all the blocking and tackling.

To your question specifically, I think Mexico will move the needle or is on path to move the needle for us. There is an upside case here, where Mexico gets the PIX right and the digital payment systems right over the next 5 years. And that upside case is Mexico being as big as Brazil for us. There is a base case where it takes a longer time to get all these digital payment infrastructure in place. And it moves the needle, but it's not as big as Brazil. But net-net, I think it's definitely a business that will move the needle for us and it will be relevant for us.

[Jorg Friedemann, executive]

And our next question comes from Yuri Fernandes at JPMorgan.

[Yuri Fernandes, analyst]

Well, most of the strategic questions, they were already asked. So I'll go to the tax rate that was, I would say, a highlight this quarter. When we go to your financial statement, we see the other line, the other tax shield. And basically, it says that it's tax-exempt bonds and other things. So just trying to understand what happened with tax rate, if this is just the seasonality as we saw in third Q 2023. I think back in -- back last year, it was Lei do Bem. So just trying to understand if this is a level that is sustainable for tax rate or we should see rates returning back to 33%, 34% or 35%?

[Guilherme Marques do Lago, executive]

Yuri, thanks so much for the question. I think in this quarter, there were 2 things in our income statement that I believe are worth highlighting in the call. One is a nonrecurring event, and the other one is a seasonal event. So what is the nonrecurring event? So in the third quarter of 2024, we decided to reposition Nucoin, which is our loyalty program, in a way that we would discontinue the crypto liquidity pool that was allocated to this program initially. This now shift in the program require us to absorb a onetime nonrecurring charge of about $48 million that was fully absorbed in marketing and in G&A, in general. So that is completely nonrecurring. We should not expect this to have any additional impact to our performance. If it was not for this onetime event, our efficiency ratio would have been even below 30%. So that one is completely nonrecurring.

With respect to the second point, which I believe you've asked on corporate income tax or the effective tax rate, that is more of a seasonal thing than a nonrecurring thing. And you correctly pointed out, just like it happened in the third quarter of 2023, we have in the third quarter a concentration in the filings for Lei do Bem, which is an R&D tax incentive that exists in Brazil, that we also had in the third quarter of 2024. And that should be recurring and should continue with similar seasonalities in the coming quarters and years.

[Jorg Friedemann, executive]

And our next question comes from Henrique Navarro at Santander.

[Henrique Navarro, analyst]

I would like to do a follow-up on the question on the growth mismatch between provisions and loans. I understand the rationale. You're changing the credit mix, adding more secured personal loans. But my question is, if we look forward, the macro environment has been deteriorating. We have a higher SELIC estimates, et cetera. And under the expected credit loss provisioning model, we need to consider the macro environment to do our calculations. So my question is, what is the rationale for this behavior between provisions and loans? I mean, is there a risk that eventually, you may need to reinforce provisions ahead? That's it.

[Youssef Lahrech, executive]

Henrique, this is Youssef. Thanks for the question. So look, yes, we do take into account macro scenarios in our provision setting. They are one of many factors, as you know, that impact the provision model. But I would say the dominant effect is both the nature and the mix of assets and the performance of assets we put on book. And so I think what you see in the financial statements reflect our best estimate in terms of coverage ratio. And as I mentioned, when you look at loans specifically, probably the main driver this quarter has been the accelerated growth of secured, which tend to drive coverage down vis-a-vis unsecured.

[Jorg Friedemann, executive]

And our next question comes from the line of Pedro Leduc at Itaú.

[Pedro Leduc, analyst]

Sorry to go back to the NIM piece. First part of the question is easier, if you did have any of the credit card regulatory cap impact on the NII or gross interest accrual for credit cards? Other players mentioned it in this season. And also, if the renegotiated book took some part in the NII slowdown as well, okay?

And then the second piece to all this. In the call, you mentioned that you expect the NIM post cost of risk to improve going forward. On asset side, you mentioned funding, Mexico. But as I think about the main answer why it fell, now that the mix -- that the secured portfolio is usually more stickier. So I would expect with the compounding effect it to -- do have a more prolonged effect on the NIM post cost of risk. So really trying to get a little more color on how it -- and the shape of this recovery that you're imagining.

[Guilherme Marques do Lago, executive]

Yes, Pedro. Let me share some thoughts on this, and then maybe Youssef can chime in as well. So with respect to the NIM in this quarter, one thing I would highlight, which adds a little bit of complexity to the calculation, is also how FX has behaved throughout the third quarter of 2024.

If you take a look at the average FX, which is the FX that is used to translate the income statement, and the end-of-period FX, which is the FX that is used to translate balance sheet items, you will note that the average FX has depreciated and the end-of-period FX has appreciated. So you're actually translating now less dollars in the income statement divided by balance sheet items, which have kind of a higher amount of dollars. So you would see if you adjust the FX both ways, a much less pronounced deterioration in NIMs, as you say. So I think that is the first part to your question, Leduc.

The second part, which is where we see is all else equal, if we continue to have the same credit cards unsecured and we just increase the secured lending in our book, and that increase in secured lending leads to an increase in loan-to-deposit ratio, we would be basically shifting money that is currently sitting at [ no CDI ] in treasury bonds and placing it with secured lending. So all else equal, it should actually lead to an expansion of NIM and an expansion of risk-adjusted net interest margins as well. The problem is that the all else equal never happens, so you do see continuous growth in deposits in Mexico and Colombia so and so forth. But we do not agree with the notion that the growth of our secured portfolio per se will lead to a dilution in NIMs or even in returns on equity. It should lead to increasing loan-to-deposits and an expansion in both of those metrics.

[Jorg Friedemann, executive]

And our next question comes from the line of [ William Tang at SIG ].

[Unknown Analyst]

I just have one for you here. Can you talk about the competitive market you see around secured lending, particularly in Brazil? Nu has clearly done incredibly well on the unsecured front, but how do the operating dynamics change when you start to think about leaving your mark on the secured front? How sticky are customers when thinking about shifting away from existing providers to Nubank?

[Guilherme Marques do Lago, executive]

No. Thank you so much. This is a super important question for us, one that we debate and study at length. And the experience that we have had so far with the secured lending, which is a longer journey, seems to be quite encouraging. So within secured lending, there are basically 3 types of assets. You have the public payroll loans, you have FGTS, and you have investment-backed loans.

The first 2 account for about 90% of the loans that we originate and 90% of the book. So that is the lion's share of our operations there. And in fact, the FGTS-backed loans has accounted for the majority of the originations and the majority of our book today. In FGTS loans, which is the asset class for which we believe we already have reached product parity, our origination is estimated to account for about 25% of the origination of the market. So very strong, and it does support the view that you can have a very successful direct-to-consumer, digital-only distribution channel. And we continue -- and we expect to continue to increase our FGTS market share in the coming quarters as we leverage on our low-cost base to offer the product and the best user experience, best user interface and the lowest price points.

Now as we move into public payroll loans, we have been launching only 2 collateral agreements so far, which are the 2 largest ones, INSS and SIAPE. We have recently made fairly important improvements in those products. For INSS, we've launched refinancing in November '24. SIAPE, we are going to launch refinancing in December 2024. And then over the coming quarters, we're going to add 9 collateral agreements to the offer.

So we expect that by December 2024, we will be launching the collateral agreements with the Armed Forces. And throughout 2025, many new collateral agreements with some of the largest states and municipalities in Brazil. So as we have seen with the success that we have had with FGTS, so do we expect to see kind of the ramp-up of public payroll loans there.

And why do we think we are competitive out there? We think we are competitive because not only we have the best UX and UI, but the fact that we do direct to consumers, we have much lower customer acquisition costs, much lower cost to serve, which translates into much better prices to consumers in one of the industries in Brazil that offers the highest price elasticity points.

[Jorg Friedemann, executive]

Thank you, Lago. We have now surpassed 75 minutes of this session, 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 tonight. We are excited with our developments as we continue strengthening our position in the markets we operate. Over the coming days, we will be following up with the questions received via our platform and with those that attempted but 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 very good night.

[Operator]

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