Nu Holdings Ltd

NYSE:NU

Earnings Call Analysis

Impressive Revenue and ARPAC Growth with Robust Consumer Finance Portfolio Expansion

The company witnessed a substantial acceleration in growth with its fourth-quarter revenue soaring to $2.4 billion, a 57% year-over-year increase, and gross profit hitting $1.1 billion, 87% higher than the previous year, alongside a bump in gross margin to 47.5%. Moreover, net income and adjusted net income stood at $361 million and $396 million, respectively, marking a 229% surge from the prior year. The monthly average revenue per active customer (ARPAC) grew steadily to $10.6, contributing to the revenue upsurge, with the figure for more established customers reaching $27. Importantly, the strong consumer finance portfolio, that includes credit cards and personal loans, expanded 49% over the year to $18.2 billion.

Broadening Horizons and Deepening Moats

In the past year, crucial strides were taken in the quest to scale the digital banking model beyond traditional confines, extending footprints into new markets and demographics. A notable breakthrough was securing financial licenses, particularly in Colombia, which has supercharged customer acquisition momentum. The launch of 'Cuenta' in Colombia emulates the success seen in Mexico, suggesting a robust growth trajectory hinged on a proven model. The adoption across various segments and geographies vouches for the digital banking model's universal appeal, promising one of the highest returns on equity in the industry.

Explosive Customer Growth and Engagement

Customer acquisition emerged as a tale of remarkable growth, with the customer base expanding by 26% year-on-year. Nearly 5 million new customers joined, leading to a staggering 93.9 million users worldwide. Activation and engagement success stories emerged across Brazil, Mexico, and Colombia, where active customer bases swelled and monthly activity rates soared to 83.1%. This phenomenon highlights a burgeoning digital banking empire with a knack for converting sign-ups to loyal users.

Revenue Expansion Through Deepening Relationships

The financial narrative is sweetened by a surge in the average revenue per active customer (ARPAC), rising to $10.6 monthly with a dazzling 61% of active customers forging primary banking relationships with the firm. The success in cross-selling led to customers holding an average of 4 products each, contributing to 23% year-over-year ARPAC growth. The fruits of these labors are seen in an impressive 57% year-over-year revenue spike, amounting to $2.4 billion.

Cards Business Amplification and Portfolio Diversification

The credit and personal loans segments experienced jaw-dropping growth, with the former seeing purchase volumes skyrocket 37% to over $111 billion annually. Growth in personal loans, particularly unsecured and secured portfolios, underscored a diversified approach, catering to an array of consumer needs, while adhering to calculated risk strategies promising attractive returns and robust credit resilience.

Interest-Earning Balances and Deposits as Propel Pads

A key strategic push was made to increase interest-earning balances, such as through PIX and boleto financing, which now constitute 23% of the total credit card loan portfolio, leveraging Brazil's adoption of PIX services. Deposits also saw a phenomenal 38% year-over-year uptick, showcasing an unyielding dedication to enhancing the retail deposit base, thereby reinforcing the consumer finance business across multiple geographies.

Robust Net Interest Performance Coupled with Operational Efficiency

The company’s financial muscle flexed with net interest income swelling 85% to $1.3 billion. Despite a slight dip in net interest margin (NIM) due to strategic collection initiatives, the future appears bright, banking on the loan-to-deposit ratio as a key lever for NIM improvement. Moreover, the company prides itself on a cost to serve per active customer of $0.90, a dynamic testament to its unshakeable operational efficiency that is over 80% more efficient than incumbent banks.

Sustainability and Profitability Through Innovative Customer Solutions

The recent period underscored a persistent commitment to profitability, innovation, and customer-oriented solutions. An example of such ingenuity is the company's household control feature catering to nuanced consumer pain points with high network effect potential. These strides resonate with a broader ambition to redefine banking through a winning cocktail of superior technology, consumer-centric products, and compelling direct-to-consumer distribution models.

Strategic Investments and Credit Quality Gains in Mexico

Mexico's consumer segment is a microcosm showcasing a strategic pivot towards higher yields on deposits, a move that has garnered a richer customer mix, inviting more high-income users. The strategies and operational nuances shaping Mexican endeavors are a testament to the company's adaptive approach, bolstering credit quality and laying groundwork for sustainable growth in a region with immense untapped potential.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the Nu Holdings conference call to discuss the results for the fourth quarter 2023. A slide presentation accompanies today's webcast, which is available in 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. This call is also available in Portuguese. [Operator Instructions] [Foreign Language] [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, 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 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 fourth quarter 2023 results and provide an overview of our company priorities for 2024. Subsequently, Guilherme Lago, our CFO; and Youssef Lahrech, our President and COO; we 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'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. Q4 2023 marks our second year as a publicly listed company in our 10th year since our foundation. Our mission, dedicated to fighting complexity and empowering people continues to gain strong momentum, now serving nearly 100 million people in Brazil, Mexico and Colombia. Meanwhile, our business model anchored in 3 fundamental principles: fast customer expansion, expanding revenue per customer and efficient operating costs is delivering onto the substantial earnings power we envisioned.

Our customer base growth has consistently outpaced our expectations, reaching approximately 94 million customers at the end of the quarter compared to 54 million just 3 years ago. We are on our way to cross 100 million customers in 2024, and we plan to continue marching along thereafter towards the development of the largest consumer platform in Latin America. The base of customer net adds in Brazil remains impressive, averaging 1.3 million customers per month, resulting in a total of 87.8 million customers by the end of 2023.

At the same time, our growth in Mexico has accelerated with a net add of almost 1 million new customers in the quarter, reaching a total of 5.2 million customers by the end of 2023. This underscores the success of our Q3 decision to increase deposit yield in Mexico, which has accelerated our company-wide flywheel in the country and consolidated Nu as the indisputable leader in the digital banking category in Mexico.

Finally, let me share some financial highlights with you. In the fourth quarter, our revenue surged to $2.4 billion, accelerating sequentially to a 57% year-over-year increase. or gross profit surpassed $1.1 billion, growing 87% year-over-year, while our gross margin expanded once again, reaching 47.5% in the quarter. The sequential gross margin expansion boosted our net income, which reached $361 million, while adjusted net income stood at $396 million, reflecting a 229% year-over-year increase. This demonstrates the strength of our business model, capable of combining strong top line growth with very solid levels of profitability.

This slide provides a high-level overview of our financial performance trends over the past 2 years. It underscores our consistent success in expanding the customer base while accelerating revenues and profitability. The robust growth of our customer base, driven by the growing cross-selling and upselling opportunities facilitated by our highly engaged platform resulted in a more than threefold increase in quarterly revenues in just 2 years, on an FX-neutral basis. This translated into an 82% annual compounded growth rate for this period. The third chart on this slide effectively illustrates our robust pricing and underwriting capabilities, where quarterly gross profit calculated as total revenues minus funding costs, transactional expenses and credit loss allowances increased by more than fourfold in the same period.

Lastly, we believe the combined impact of the aforementioned factors, coupled with the strong operating leverage of our platform and the maturation of our early products in Brazil has resulted in a significant acceleration in net income growth. This upward trend is evident in the chart on the right, particularly over the past 4 quarters. We anticipate this compounding effect continuing in the years ahead, driven by the combination of sustained growth and heightened profitability within our platform.

Now I'd like to highlight how our flywheel isn't just driving customer acquisition and data growth but also sustaining strong momentum in our key financial metrics. As our 3 geographic regions continue to expand, leveraging the inerrant operating advantage of our model, where holding company has effectively transformed its potential into profits. In the fourth quarter, Nu Holdings achieved an adjusted net income of $396 million, reflecting an adjusted annualized return on equity of 26%, surpassing the performance of most peers in the region and despite maintaining a considerable excess capital of $2.4 billion in the holding company. If one were to look at our operations in Brazil alone, our return on equity continued to increase and remains above 40%.

I'd like to briefly recap how we fared against our priorities in 2023. At the beginning of last year, we communicated our top 3 priorities for the year. The first was to scale our lending business in Brazil, both unsecured and secured. The second was to grow our share of wallet within the upmarket segment in Brazil. And the third was to ramp up local currency deposits in Mexico and Colombia. As you can see in the first part of this slide, we doubled our origination of personal loans over the past year from almost $1 billion in the fourth quarter of 2022 to $2 billion in the fourth quarter of 2023.

Currently, Nubank has an estimated market share of new originations in unsecured personal loans of approximately 22%, increasing from 12% from the end of last year. In addition, we launched our initial SIAPE, a public payroll loan product in April 2023, followed by FGTS in August 2023, and then INSS payroll in October 2023. As of Q4 '23, 10% of our personal loan origination was already derived from secured lending lines. Much more will come in 2024 and but we're overall very pleased with our development in scaling personal loans in Brazil over the past 4 quarters.

Let's delve into our second priority, gaining share of wallet within the upmarket segment in Brazil. It is an effort that will take time and pay off over the long haul. We believe we're well positioned to compete and win in this segment. 2023 served as the foundation for this long-term journey. We have observed a substantial progression in our segmentation effort with an accelerated growth in market share of principality. Additionally, we have rolled out numerous features and products across all dimensions of our platform tailored to the segment, such as in banking, credit and investments offer.

Notably, our UV credit card purchase volume expanding from $0.5 billion in Q4 '22 to $1.1 billion in Q4 '23, a 104% year-on-year growth, while UV customers doubled in the period and our brand perception improved materially in this segment. Finally, we have achieved the best industry Net Promoter Score among Brazilian high-income customers.

Finally, addressing our third priority for the past year, we successfully introduced our deposit account solution in Mexico, Cuenta Nu, in May. Following news announcement of increased remuneration of these deposits in November, we experienced a remarkable outcome. Within just 2 months, we quadrupled the level of deposits in the country to an impressive total of $1 billion at the end of 2023, achieving this milestone 3x faster than in Brazil.

With a segment of higher-income Mexicans that are attracted by the more aggressive value proposition. We are extremely pleased with the success of this strategy, even though it is a significant investment as we believe it unlocks the potential of our member-get-member referral program enriches our credit underwriting models with more data and enables our company to become self-sufficient in local currency retail deposits. This self-sufficiency is crucial for scaling a consumer finance business. We were also granted a financial license in Colombia at the end of December, allowing us to launch Cuenta in Colombia last month. Similarly to our experience in Mexico, we expect our flywheels in Colombia to be propelled by the Cuenta launch.

Overall, we believe 2023 was the year we were able to definitely prove to the market with strong numbers that the digital banking model we have been building for over a decade is the future of banking. This model is not only able to acquire and serve tens of millions of customers at scale and extremely low cost, but also generates the high satisfaction for consumers while producing one of the highest return on equity for shareholders. We achieved significant progress by getting banking licenses into new geographies and by launching successful deposit franchises in Mexico. We also grew within new segments such as high income. Those developments point in the direction that this is a model that goes beyond Brazil and goes beyond mass market consumers. We realize there is still lots to prove ahead, but we continue to be incredibly excited about how early we are in the development of this model.

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. Before starting the discussion around our year-end results and to better frame our operating and financial key performance indicators I would like to recap the 3 key elements of our simple and powerful value-generating strategy. First, we continue to expand our customer base in the 3 markets where we operate, quickly transforming new customers into active ones. Second, we are focused on increasing the average revenue per active customer, or ARPAC, through effective cross-selling and upselling initiatives. And third, delivering growth while maintaining one of the lowest cost operating platforms in the industry. Let's delve deeper into our fourth quarter results to understand the evolution of each one of these pillars.

Let's start with customer acquisition. During the fourth quarter, we once again experienced a noteworthy expansion of 26% of our customer base year-on-year as we welcome nearly 5 million new customers, bringing our total to 93.9 million customers at the year-end. Brazil continues to deliver a high monthly net addition of almost 1.3 million customers with a significant portion acquired through cost-effective organic channels.

In Mexico, our customer count increased by almost 1 million, crossing the 5.2 million mark. And in Colombia, we are now serving more than 800,000 customers. As mentioned earlier by Dave, back in December, we received the regulatory approvals to operate in Colombia as a financing company, allowing us to launch Cuenta in the country. With this milestone, we expect to onboard even more customers in Colombia, which will lead us to further growth.

Now more important than the process of onboarding customers is the ability to effectively activate and retain them. our active customer base increased by 27% year-over-year with the monthly activity rate, posting another sequential quarterly increase now reaching 83.1%, we believe that this outcome highlights our ability to effectively engage our customers on our platform.

Now turning our attention to revenue expansion. The first chart highlights the Nu has established primary banking relationships with around 61% of our active customer base, up nearly 2 percentage points in comparison to last quarter. As more customers choose Nu as their primary bank, the more products they tend to utilize, generating higher ARPAC. These 2 effects can be seen in the following charts. The second chart illustrates our successful cross-selling strategy, introducing new products to our customers and establishing ourselves as their primary banking partner. Our active customers are consuming on average, 4 products on our platforms versus an average of 3.8 products a year ago.

The third chart shows how our expanding customer engagement, as demonstrated in the first chart combined with our growing product cross-sell capabilities, as shown in the second chart, is compounding to produce increasingly positive results. Our monthly ARPAC increased to $10.6, while our more mature cohorts are already generating a monthly ARPAC of $27. The increase in ARPAC has resulted in another quarter of solid revenue growth, as presented in the next slide.

Our monthly ARPAC has continued to grow steadily, expanding by 23% year-over-year. We remain confident that we still have untapped potential for further ARPAC growth moving us closer to realizing what we believe is our full ARPAC potential. As shown in the second chart, our revenues reached a new record high of $2.4 billion, up 57% year-over-year as the increase in active clients combined with higher ARPAC continue to drive sustained top line growth.

Now turning our attention to our cards business. Purchase volumes increased 29% to $32.6 billion in the fourth quarter. For the full year, purchase volumes reached more than $111 billion, up 37% over 2022. This strong performance underscores the power of our product cross-sell, upsell and customer engagement capabilities. The chart on the right depicts the correlation between purchase volumes and the aging of customer cohorts. Most of our purchase volumes originated from our more established customer cohorts characterized by higher monthly spending compared to recent cohorts. While there is an initial disparity between newer and older cohorts, both show a clear upward trend in consumption over time.

Effectively, when we look into a constant initial risk basis, there is a clear uptrend in the spending patterns of our card's customers. We believe the compounding effect of integrating millions of new customers each quarter, coupled with the gradual shift to higher spending patterns will continue to fuel the future growth of purchase volumes. We believe we currently hold a 13.8% share of the credit card market in Brazil in terms of purchase volumes, up 150 basis points from a year ago as our market presence strengthens our confidence in capturing additional share in the future growth. This confidence is rooted in the steady pace of customer acquisition and their strengthening relationships with us.

Our consumer finance portfolio comprising credit cards and personal loans posted another increase this quarter, up 49% year-over-year to $18.2 billion. This growth was boosted by expansions in both product categories. The credit card portfolio expanded by 44% year-over-year to $14.5 billion. We attribute this growth to the onboarding of new customers to our ecosystem and our low and grow focused approach. Our personal loan portfolio is a highlight this quarter, increasing 76% year-over-year and reaching $3.7 billion. Our personal loan cohorts have maintained expected credit behaviors following the same trends observed in the prior quarter, allowing us to increase originations for yet another quarter.

We believe there are significant opportunities to continue to expand our loan book, while we seek attractive returns and robust credit resilience. As we have previously mentioned, this may result in intentionally higher delinquency rates but our aim is to ensure that these can be more than offset by additional revenues resulting in higher risk-adjusted net interest margins.

Now let's take a deeper look at the breakdown of interest-earning loans within our credit card portfolio. We continue to pursue our strategy of increasing the share of credit card loans that earn interest with special emphasis on PIX and boleto financing. This has driven sustained growth of our interest-earning installment balance, which now accounts for 23% of our total credit card loan portfolio. Our goal is to capitalize on the increasing adoption of PIX in Brazil, where we remain the leading provider of PIX services in the country. As of December 2023, over 35% of our active credit card customers were active users of PIX financing feature.

We believe that this type of financing offers an attractive risk-adjusted rate of return, allowing us to expand the monetization of our credit card business beyond fee generations, while also unlocking substantial value as we fulfill an important customer need. However, we have intentionally not increased our share of revolving receivables, which even compress sequentially to 6% of our total receivables this quarter. In turn, our total IEP balance, including revolving, is at 29% of the portfolio this quarter compared to 23% of the market.

Our personal loan portfolio composed of both unsecured and secured loans remains resilient and aligned with our expectations for asset quality. Originations doubled year-over-year, reaching BRL 10 billion in the quarter. Secured personal loans are growing according to plan with originations in the quarter, reaching 10% of the total versus 3% in the previous quarter. Over the past year, we have made substantial progress in broadening our lending product portfolio, introducing new secured and unsecured loans to cater to a wider range of customer needs.

On the secure front, we now offer payroll loans for federal public servants and retirees and FGTS and investment-backed loans for the wider Brazilian population. While these new products may not have yet significantly impacted origination volumes or the credit portfolio, we believe they laid the groundwork for continued growth and contribute to the development of an even more resilient credit book in the years to come.

Note that our credit yield this quarter was affected by the loan mix. As secured personal loans by definition, have lower interest rates, an increase in originations of these loans will directly impact the average interest rates. The unsecured personal loan yields, however, increased marginally quarter-over-quarter as we continue to expand eligibility to riskier bands of customers.

Moving on to the progress achieved on the funding front. We continue to see a solid trend in the expansion of our deposit base, which increased 38% year-over-year, reaching $23.7 billion at the end of the year. This represents a significant step towards our goal of developing one of the strongest local currency retail deposit franchise in the region, bolstering our ability to support our consumer finance operations across the 3 geographies where we operate.

In Mexico, we are experiencing significant growth in NuConta. By the end of the fourth quarter, we had accrued over $1 billion in deposits. Given our growing presence in Mexico, we have decided that from now on, we will show our cost of deposits as a percentage determined by the ratio between the interest income paid to customers and the interbank rates of the countries, namely TIIE for Mexico and CDI for Brazil. Even taking into account this calculation, our cost of deposits for this quarter stood at 80% of the interbank rate in line with our expectations. This consistently low cost of deposits highlights our progress in harnessing the value of our liability franchise.

Our loan-to-deposit ratio or LDR stood at 34% versus 35% in the previous quarter with deposit growth showing sequential acceleration. We are very confident that there is still a lot of room for additional balance sheet optimization ahead of us.

Our net interest income, or NII, increased 85% year-on-year, reaching a new record high of $1.3 billion in the quarter. We believe that the continued growth of our credit card and personal loans portfolio was the key driver of this expansion. We delivered a net interest margin or NIM of 18.3% and representing a drop of 0.5 percentage points compared to last quarter, but an increase of 5 percentage points in comparison to 1 year ago. This decrease was mainly attributed to an impact of our collection strategies associated with but not limited to Desenrola, which affected 2 different lines of our P&L in opposite directions with virtually neutral effect on our gross margin and net income, but with a negative impact on our NIM.

Customer discounts on the renegotiated portfolios are booked into the other interest expenses line, so are captured in our NIM. This line was negatively impacted by $60 million to $70 million, representing a 90 basis points impact on our NIM. Without this, our NIM would have achieved 19.2%, an increase of 40 basis points quarter-over-quarter. The P&L line that was positively impacted in a similar amount was recoveries, which is booked deducting the credit loss allowance so captured in the risk-adjusted net interest margins, which, as Youssef will explain next continue to evolve favorably.

Looking ahead, irrespective of the direction of interest rates, the main lever for future NIMs should be the progression of the company's loan-to-deposit ratio, as our excess deposits are basically invested into public bonds, the remuneration of which is much lower than that of our credit products.

Moving to the third pillar of our strategy, maintaining a low cost to serve. We strongly believe that our main competitive advantage is maintaining a low cost to serve, which we aim to keep at or below the $1 level for the foreseeable future. In the fourth quarter of 2023, we successfully realized this goal with a cost to serve per active customer standing at $0.90. This figure currently remains unchanged on an FX-neutral basis when compared to a year ago, while our ARPAC increased by 23%, demonstrating the strong operating leverage of our business model.

Our gross profit reached a new quarterly record high, surpassing $1.1 billion, reflecting an 87% year-over-year increase. Moreover, our gross profit margin expanded nearly 5 percentage points to 47.5%, highlighting the margin expansion that began in the third quarter of 2022. Our gross profit margin continues to be positively impacted by ongoing improvements observed on our net interest margin and cost of risk. But the movement this quarter is also amplified by the positive seasonality relative to the purchase volumes of cards, which increased interchange revenues.

Looking ahead, we expect annualized gross margins in 2024 to normalize levels of 2023 as our investments in Mexico and Colombia are offset by the margin expansions in Brazil. After that, we expect the expansion trend to resume and gross margin to gradually grow towards 50%.

We are fully committed to maintaining operating leverage as a key element of our strategy. During the fourth quarter, our efficiency ratio stood at 36%, an increase in comparison to last quarter, due mostly to 2 factors. First, we invested more on branding efforts as we advance our strategy into the High Income segment in Brazil and as we progress in Mexico. Those efforts are linked to the company's priorities for 2023, and we are pleased with the solid developments achieved. Important to mention that marketing expenditures were below historical average during the first half of 2023. So in part, the rise in expenses this quarter were already expected and previously communicated.

Second, our cloud expenses rose driven by higher data usage from increased transactions and customers' activity, especially during the holiday season. We believe this course will be reversed in the subsequent quarters. Despite the higher efficiency ratio in the quarter, the efficiency ratio for the full year of 2023 remains strong, achieving 36% in an improvement of 19 percentage points when compared to the previous years. We believe that our level of efficiency positions Nu as one of the most efficient companies in Latin America. We are also confident that we can achieve more improvements in operating leverage as we continue to scale the business by expanding our customer base, increasing product upselling and cross-selling and introducing new products and features.

Finally, we delivered another quarter of profitability, with a net income for the fourth quarter of $361 million, increasing almost 5x on an FX-neutral basis compared to the previous year. There's a strong and positive results serve as evidence of the effectiveness of our strategy and business model. Adjusted net income in turn reached $396 million in the quarter. While we are satisfied with the results we have achieved to date, let me reinforce that we manage our business with a strong emphasis on long-term value creation. Therefore, our strategy may involve making additional short-term investments to further uncover long-term value creation opportunities.

This fourth quarter and 2023 as a whole serve as a clear evidence of our sustainable cost advantages. First, we successfully added around 5 million customers this quarter, while keeping what we believe to be one of the lowest cost to acquire among consumer fintechs and banks on a global scale. Second, we maintain our cost to serve consistently low, below the $1 threshold which we estimate to be approximately 85% lower than that of incumbents, making Nu one of the most efficient financial services companies in Latin America.

Third, regarding cost of risk, we have effectively managed credit risk outperforming competitors on an apples-to-apples basis in terms of delinquency rates even in the face of a more challenging backdrop. And lastly, on cost of funding, we maintained it at 80% of the blended interbank rates of Brazil and Mexico, while significantly increasing deposit volume, thus closing the negative gap against incumbent banks and widening the positive gap over consumer fintechs.

We are very pleased with the results achieved this quarter and for the full year of 2023. We remain confident in our capacity to innovate and scale top-notch products, expand internationally and continue to operate at low cost.

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

[Youssef Lahrech, executive]

Thank you, Lago. Good evening, everyone. I will now take you through some of the highlights of asset quality and credit portfolio health for the fourth quarter of 2023.

Let me begin with NPL trends. Our leading indicator NPL 15 to 90 declined slightly on a sequential basis to 4.1%, in line with our expectations. Our NPL 90-plus ratio remained stable sequentially at 6.1%, also in line with our expectations. Recall that this ratio exhibits a stock behavior as loans move through the delinquency buckets rather than a flow behavior. We maintained our strategy of not selling any credit receivables. Therefore, our NPL rates require no adjustment.

And as Lago mentioned earlier and we've shared last quarter, looking ahead, we see meaningful opportunities to continue to expand our credit portfolio while seeking attractive returns and robust resilience levels. We anticipate that part of that growth will come from expanding down the credit spectrum. And while this may result in intentionally higher delinquency rates, our goal is to ensure that this will be more than offset by additional revenues, leading to even higher risk-adjusted margins as we expand.

These 2 charts provide information about renegotiations in our Brazil credit portfolio. As you can see on the left-hand chart, around 9.6% of balances have been renegotiated by the end of Q4 2023, in comparison to 9.4% in the prior quarter. Following the trend of previous quarters, more than half of these were for loans that were current or less than 15 days late at the time of renegotiation. Moreover, 88% of renegotiations were for loans less than 90 days past due at the time of renegotiation. This goes to show that renegotiations have a limited impact on NPL rates. On the right-hand chart, you can see that we maintain a comfortable level of provision coverage above the 90-plus balances of our renegotiated portfolio at 243.5%.

As we mentioned on previous occasions, the growth of our portfolio is what has been driving the bulk of the increase in our credit provisions. This is because we front-load provisions at loan origination in accordance with IFRS 9 standards. This quarter, however, we have incurred a lower credit loss allowance expense than last quarter at $592 million. This was mainly driven by higher credit card and personal loan recoveries as a result of the Desenrola government-sponsored debt renegotiation program as well as collections initiatives we implemented to capitalize on it. We estimate the size of this impact to be around $60 million to $70 million in the fourth quarter credit loss allowance expense.

As Lago explained earlier, this is virtually neutral to earnings as these higher recoveries are offset by discounts that are captured in the other interest expense line item and which negatively impacted our net interest margin in the quarter. Risk-adjusted net interest margin was not impacted by these 2 offsetting dynamics and continue to expand, reaching 10.2% in the quarter, up 120 basis points sequentially. This again is a reflection of our pricing for risk and pursuit of resilient returns as we underwrite credit.

In conclusion, we are pleased to report another strong set of results this quarter, which reflect the progress we've made and the track record we've built over the years. Our healthy asset quality and robust returns reflect our effective risk-based pricing approach and superior credit underwriting capabilities. We are thrilled about the prospects for continued growth and are confident that we will maintain and expand the strong track record of delivering superior returns going forward.

Now having shared these data and perspectives on credit and asset quality, let me now turn the call back to our Founder and CEO, David Velez, for his concluding remarks. David, back to you.

[David Velez-Osomo, executive]

As mentioned earlier, we believe we're in the very early innings of a full transformation of financial services in Latin America and globally, with already close to 100 million customers in Latin America, but owning less than 5% of the financial services revenue in the continent. We think it's imperative we continue investing significantly and responsibly in growth and expansion versus trying to optimize short-term earnings.

To give two data points around how much we're currently investing. In 2023, our operations in Mexico and Colombia accounted for only 6% of our consolidated revenues, but represented nearly 21% of our headcount. As of the end of Q4 '23, approximately 42% of our operational personnel was allocated to growth and moonshot projects, which were not yet operating at scale or not operating at all. In 2024, we will double down on our investments in new products and features, and we will double down on our investments in Mexico and Colombia. While we believe we will continue to operate with healthy levels of profitability the opportunities we have ahead of us are so compelling that we believe it is time for planting, not for harvesting.

We find ourselves at a particularly exciting moment where the landscape of the Latin American financial services industry has undergone rapid transformation. The emergence of new players like Nu, coupled with technological advancements and evolving pro competition regulatory frameworks presents us with unprecedented opportunities. Moreover, Nu's distinctive position posting exceptional access to capital and talent in the Latin American region sets a stage for a potential success. This opportunity is ours to seize.

I would like to end outlining our priorities for 2024 as well as how we believe we should be graded by the market against these objectives. Our first priority is to scale Mexico. Building on the launch of Cuenta Nu and the initiation of deposit and customer scaling last year, success in 2024 entails substantial growth in our customer base in the country, continued expansion of our deposit base and accelerate credit growth, possibly with new products beyond credit card. Additionally, we plan to launch a number of new products and features, reinforcing cash-in and cash-out solutions along with ramp-up in primary banking customers.

Our second priority is to ramp up secured lending in Brazil. Following the successful launches of payroll lending for federal and public servants in April 2023 and for pensioners and retirees in October 2023, we are reaching approximately 50% of the total addressable market in Brazil today. Operating with interest rates at 20% to 30% discounts compared to the industry average, thanks to our fully digital direct-to-consumer distribution. We have recently introduced the portability functionality. These features enables us to bring credit from our banks and refinance those at lower rates.

Success for 2024 entails expanding our portability solution for all eligible customers, adding new contracts to adapt into more than 70% of the total addressable market by year-end, and rolling out the anticipation of FGTS product for the entire customer base. With these initiatives, we aim at secured lending representing a meaningful portion of our total personal loan origination by the end of 2024.

Priority #3 is to continue advancing into the higher income segment in Brazil. We have refined our segmentation effort by establishing two new thresholds, Supercore, encompassing customers with monthly income between BRL 5,000 and BRL 12,000 and High Income encompassing customers with monthly income above BRL 12,000. In Brazil, we already serve over 70% of Supercore customers and 60% of High Income customers existing in the market. Hence, our main opportunity is to increase our share of wallet among the customers we already have inside our customer base. Success for 2024 entails further expanding our base of Ultravioleta customers and increasing their usage of our products, launching more products and services tailored for these individuals and growing the number of our primary bank accounts within these segments.

Finally, our fourth priority is making the concept of the money platform tangible and concrete for our customers. The Nubank of the future is a multi-country consumer technology platform that provides products and services in financial services and beyond. And we believe that the compounding effects of real-time payments, open banking and AI are accelerants for us in this strategic direction, and we won 2024 to market inflection point in the products and services we launched, leveraging these technologies. Success in 2024 entails launching several new products and features to our customers that will continue to increase our value proposition while using technology to increase even more our operating leverage.

With that, we invite your questions. Thank you for your attention and participation.

[Operator]

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

[Jorg Friedemann, executive]

Thank you very much, operator. And we are going to start the Q&A session with a question posed by Jorge Kuri from Morgan Stanley.

[Jorge Kuri, analyst]

Congrats on the great numbers for the quarter and the year. I wanted to ask about payroll loans. And if you can give us some flavor of how are you winning on payroll loans? Evidently, David said at the very end that you're offering prices that are well below what the incumbents are offering. Is this just across the board for all the clients? Are you seeing some sensitivity on prices where people are just switching their payroll loans to you because you have a better user experience or is every single client really coming at a much lower rate, and that seems to be the reason they're moving?

Is it payroll loans to people that didn't have a payroll loan or are you refinancing payroll loans? Are those refinancing mainly coming from government banks, which normally tend to have a lot of the government payrolls or you're also seeing some refinancings coming from the private sector banks? And on the payroll lending as well, are you seeing the payroll payment being deposited to you as well? That would be my first question.

And if you don't mind, I would like to add a second question about one of your priorities for 2024. David mentioned Nu products for the Supercore client base, meaning sort of like the high-net-worth individuals. What type of products are you talking about there?

[Jagpreet Duggal, executive]

Jorge, this is Jag Duggal, Chief Product Officer. Let me answer your first question and get into some of what you're asking around our secured loan business and strategy. A couple of key points that I would make. First of all, about equal volumes of our secured loan origination in Q4 came from FGTS, loans against the social security savings of customers and then from consignado, particularly the federal employees, SIAPE and the retirees.

The formula we are following in terms of why customers are coming to us is very specific and will be familiar to you as someone who has followed the company for a long time. We offer a dramatically simplified digital mobile experience, 100% mobile. Because we are able to offer that service direct to consumer, making our cost -- helping to make our costs very low, that allows us, as David talked about, to offer a significantly lower price than the market average. And that's a pretty powerful flywheel where customers come both for the simplicity of the experience and also for the superior price. And we have found this to be a market where consumers are very price sensitive.

Another aspect of your question was, are customers switching from other places. A couple of key points to make here. All of the customers to which we are offering these secured loans are current Nubank customers. So we are fishing in the -- in our own fishbowl, not out in the open sea.

And another key fact to keep in mind in terms of our Q4 results is our product and processes around portability of these loans, which is an important factor in this market are still in their very early stages. And so essentially, all of the loans that we that we originated in Q4 were new loans from customers. And so hopefully, that gives you a real sense of first of all, how relatively early in our road map and in our evolution of this business, we are. And what are the key drivers for the early success and therefore, the drivers of our optimism about how well we can grow this business in 2024, as David talked about.

[David Velez-Osomo, executive]

And I would just add one point, Jorge. I think ultimately, it's the same -- kind of the same recipe that we've been following in every single product. And it is the following: technology, distribution or direct-to-consumer distribution enables us to create a product that is better for consumers at lower cost. And ultimately, we measured that by NPS. In this specific category, we're already measuring NPS upwards of 80%, which would be by far the best rated product in the market today. So that tends to be the leading indicator for growth, and that's what we've seen over the past 6 months that we've been starting to roll out. It's traditionally a very off-line experience it takes several weeks. There is a lot of fraud associated sometimes with the offline processes, a lot of paperwork. And so by just offering that direct-to-consumer distribution, we're able to simply better product at lower price. And consumers tend to understand, obviously, that equation.

To your second question on additional products for Supercore, which is a segment or effectively a higher segment or lower income segment of the high income. We are preparing to invest significantly in software-related solutions. We think we don't necessarily compete well in the offline world where there are branches required. And we always said that if you need cash, if you need offline distribution. We're now well positioned there to compete. We are well positioned to compete when software becomes a differentiating factor. And there is a fair amount of differentiation we can do with software for this product.

One specific example is we're rolling out what we call your household controls where consumers are able to now enable their children, enable different people in your household to have a number of different cards to save jointly. And that type of product show a pretty significant pain for these households. We tend to see use cases where the main person in the household got a Nubank card, but then gave that car to their younger son or to the driver. So it's being used, but it's not being used as the primary card. By adding a number of software capabilities, which, by the way, are relatively hard to program, we think we're going to be able to solve a big pain point for consumers, and it happens to also have certain network effects that we tend to like along.

So just like that theme of social, there's a number of themes that we will be implementing this year that we think will significantly improve the value proposition and allow us to play in an environment of software and online where we think we can win versus necessarily competing with incumbents in areas or in regions where we don't really have a possibility of competing.

[Jorge Kuri, analyst]

Thanks for the detailed explanations and congrats again, David.

[David Velez-Osomo, executive]

Thank you, Jorge.

[Jorg Friedemann, executive]

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

[Daer Labarta, analyst]

Lago, you mentioned that you expect gross margin, I guess, to be relatively stable this year given the investments that you're making. Just hoping if you can clarify a little bit, is this some -- because you expect provisions to be higher as you grow the loan portfolio? Is it interest expenses as you're growing deposits in Mexico where you're remunerating at a higher rate? Is it transactional expenses? Just to understand what's going to keep that gross margin somewhat stable-ish this year? And then just one second point to clarify, the renegotiated discounts that impacted margin and provisions this quarter. Is that a onetime thing? Or should we expect that going forward as well? Or does that reverse next quarter?

[Guilherme Marques do Lago, executive]

Tito, let me try to address both of them. I think first on the gross margin, we will largely see 2 effects throughout 2024 in our expectations. Number one, our Brazilian operations are expected to continue to post expanding net interest margins and expanding risk-adjusted net interest margins primarily as we continue to grow the size of our credit book and optimize our balance sheet. On the other hand, we do expect to make additional investments, and as David mentioned, to double down our resource locations to Mexico and Colombia. And those are markets that are less mature than Brazil. And therefore, the faster we grow in those markets, especially given the expected credit loss provisioning, we will have to make additional investments in terms of our P&L. The combination of those 2 effects, expanding margins in Brazil and additional investments in Mexico and Colombia are largely to be offset. And therefore, we do not expect our gross profit margins to evolve materially away from the zip code where it was in 2023. So that's the first question.

The second question on the collections. We do have just to recap the explanation in which we had on one hand, additional discounts that we provided to our consumers, order of magnitude, $60 million to $70 million. On the other hand, additional recoveries that we had also in relatively similar amounts of [ $60 million to $70 million ], which were neutral to our P&L and neutral to gross profits. Although Desenrola has announced that it will continue throughout the first quarter of 2024. We do expect that most of these impacts would have been seen in the fourth quarter 2023. So we will likely see some additional impact of this, Tito, throughout the first quarter, but in a much less pronounced manner than in the fourth quarter of 2023.

[Daer Labarta, analyst]

Okay. That's very clear, Lago. If I can ask just one follow-up just to clarify. So on the additional investments, in Mexico and Colombia, will those come sort of below the gross margin or the gross profit line? So would that impact operating expenses? I guess how do you think about efficiency for 2024, if you can give some color on that?

[Guilherme Marques do Lago, executive]

Yes. So I think most of the investments in Mexico and Colombia, Tito, will come above the gross profit line, namely in CLA and interest expenses as we basically increased the growth pace of our interest-earning assets and as we increase the volume of deposits in those countries. We do expect efficiency ratio not only for Brazil, but also on a consolidated basis to post continuous improvements throughout 2024 and beyond.

[Daer Labarta, analyst]

And congrats on the results.

[Guilherme Marques do Lago, executive]

Thanks, Tito.

[Jorg Friedemann, executive]

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

[Mario Pierry, analyst]

My question is related to Mexico. Can you give us a little bit more color, the profile of clients that you're attracting in the country? Clearly, right, like you're attracting clients by having a high remuneration on deposits. So I would imagine these are probably higher -- you're attracting more of the higher income segments. You disclosed that you have 5.2 million clients in Mexico. Can you tell us how many credit cards outstanding you have in Mexico?

And then finally, it's still related to Mexico, right? The choice of remunerating deposits of 15% when the traditional banks are probably remunerating clients around 70% of market rates, so your remuneration is probably twice as large as the traditional bank. So just wanted to get an understanding, how did you come up with this 15%? Is there room for the rate to increase? And then finally, on Mexico, if you can disclose any data on loan book there? Or what kind of NPLs you're seeing? That would be great.

[David Velez-Osomo, executive]

Mario, David here. Thank you for the question. So since we started Mexico about 3 years ago, I would say we've seen about a 50%-50% split between banked customers and unbanked customers. It's been fairly even. Remember that Mexico has only about 12% credit card penetration. So literally, the big majority of the country is completely wide open for us. We tend to begin as a strategy. This was similar in Brazil to target more high income at the beginning and then eventually, there is a bit of decrease toward mass market. And that shift just to happen faster in Mexico to the 50%-50% split that I've been mentioning.

Now when we decided to increase the yield in Mexico a couple of months ago, the reason why we did that is we saw an opportunity to reposition the deposit product, even more attractive to consumers and accelerate the flywheel growth that we were having there. And that decision, while it's definitely expensive, it's a big investment, it's paying for itself actually fairly quickly. We're seeing an improvement in the type of customer segmentation that we're having. We're now seeing many more Mexican -- high-income Mexicans coming in, that is having beneficial impacts to credit quality.

That's also adding a different type of customer that once you put deposit, it creates a pretty important data point for us, which allows us to take into account in terms of acceptance of the credit card application and even within limits. So we're able to increase limits a bit faster, driving unit economics faster.

Obviously, it brings the deposits that we need to be able to really fund the business. As you remember, we started as a monoliner where the biggest execution risk that we have is not having funding figured out and we had to depend on our banks to fund ourselves. That risk is gone. It literally went away in 3 months of this new yield. We surpassed significantly any projections that we had on deposits. So in a way, we have removed one of the big execution risk that we had for Mexico, and that's why it was one of our #3 priorities -- or top 3 priorities for 2023. So net-net, it is a big investment that we decided to do for customers. But it's paying off handsomely, and it has positioned -- puts us in a very different trajectory in terms of growth and momentum in a market that we think is very significant for us.

The last thing I'll say versus the banks. I think you've been very generous with competitors in Mexico. When you actually look at some of the biggest incumbents, they actually pay zero. Most customers, especially in mass markets, they get no money paid buybacks. In fact, they see deposits. Most mass market customers in Mexico are paying the banks to hold their money. They're not even used to the concept of banks paying them for their money. And it's amazing to see the reaction of customers once we start showing them that banks should pay them for their deposits because they're used to paying a lot of fees and pay zero.

So it is indeed a significantly higher and more attractive over position than incumbents. It would be extremely expensive for incumbents to match, and we haven't really seen them matching. So I think that positions us very well as an attractive position. It is important to say that even at 15% where we are, given the economics of the credit card business, it's a unit economic positive move. So it's not that we are making a crazy, irrational decision. It's a positive unit economics at 15%. And then as we scale and we get all these deposits, and we improve the value proposition of the account with a lot of the software that we're building and a lot of the cash-in and cash-out and a lot of the missing features then we will get to eventually rationalize a bit that expense.

And that's exactly what we did in Brazil 2 years ago when we went from 100% of CDI, to 80% of CDI and we saw the quality of the product improving, not decreasing. So that is sort of the strategy of the product is we want to make sure that the product quality continues to increase, continue to add additional deposits or balance sheet in Mexico will look a bit odd for a while as it looks odd -- or even still for us in Brazil with a lot of liabilities. But eventually, that's a great problem to have because then we're able to deploy all of that firepower in growing the credit card opportunity, which again, is huge, 12% credit card penetration. So we're very excited about tackling that.

[Mario Pierry, analyst]

Let me follow up then on these deposits. Are you seeing -- how sticky are they? Are you remunerating them from day 1? Or are you doing some of the type of remuneration like you did in Brazil that you don't remunerate for the first 30 days? And just the number of total cards standing that you have in Mexico now?

[David Velez-Osomo, executive]

So customers need to invest in what we have called [ cajita or caixinha ]. So customers deposit the account, and they do invest in a small box that we have. So far, the deposits have been very low churn, so significant engagement. It's up to us to make sure that, that engagement continues, and then we have a number of different capabilities to do that. First one obviously is giving a great critical product and then add a number of different software features to make sure that those deposits stay. So far, they're staying and so we feel very good on having the opportunity to make sure that, that continues to be the case. Unfortunately, in terms of number of just cards, we don't disclose that, that number. But yes, but they continue to accelerate, and we're very happy with those numbers.

[Jorg Friedemann, executive]

And our next question comes from the line of Thiago Batista from UBS.

[Thiago Bovolenta Batista, analyst]

Okay. My question is about the renegotiated loans. By the way, the slide that you provided is really very helpful. My question is, doing a very simple calculation, we got that the level of provisions over those loans achieved 44% in this 4Q. It was 33% in 4Q '21, 40% in 4Q 2022. So if you can comment your strategy over those renegotiated loans? And also if it's possible to assume that this level of 45%, is the amount that Nu believes it will become losses over those renegotiated loans?

[Youssef Lahrech, executive]

Thiago, this is Youssef. Thanks for the question. So you are correct in your calculation of the coverage ratio over total receivables outstanding of renegotiated loans, it's around 40%, 45%. The way I would think about it is it will mirror what happens to the total book in terms of coverage ratio. And you can see that evolution on Page 34 of the presentation where you see both the coverage ratio over total balance and coverage ratio over NPL 90-plus. The dynamic there is similar because as loans move through the delinquency buckets and more and more go 90-plus, your coverage ratio of total balance goes up, your coverage ratio of NPL 90-plus tends to be stable or else equal, right? So that same dynamic applies to renegotiated loans, albeit at a higher rate because renegotiated loans just exhibit a higher level of inherent risk, as you can see on the analysis we provided.

[Jorg Friedemann, executive]

And our next question comes from the line of Gustavo Schroden of Bradesco.

[Gustavo Schroden, analyst]

Well, my question is regarding your investments in the High Income segment in Brazil, more specifically regarding the investments that you made. I think that Lago mentioned during the presentation that a part of the, let's say, impact on the efficiency ratio was regarding the investments in High Income segment. So if you could, besides Mexico and Colombia, could you give us a little bit of more color on how we should think in terms of these investments in high-income segment? Because as you mentioned, it is a target and as you mentioned and as you know that especially high-income segments, usually, it costs higher than the, let's say, the low income segments because, I mean, more investments, different necessities or needs. So if you could give us -- these investments, this impact regarding High Income segment is specific on this quarter? Or should we expect that further, let's say, impacts on efficiency ratio regarding this strategy?

[Guilherme Marques do Lago, executive]

Gustavo, this is Lago. Thanks for your question. I think in short, no, you should not expect to see any material change in the efficiency trends that we have seen over the past quarters. So as I mentioned in the opening remarks, in the fourth quarter of 2023, we saw 2 impact that drove kind of efficiency rate 100% -- 100 basis points up. It was a higher concentration of marketing expenses in the fourth quarter and additional investments in technology and data. Those 2 effects combined accounted for about 170 basis points, and we believe they will be reversed in the coming quarters.

So if you take into account those 170 basis points, you will continue to see additional improvements in efficiency ratio. In fact, we're already at midpoint of the first quarter of 2024, and we already seen efficiency ratios being driven to the places where we expect them to be, which is lower and better going forward. The main investments that we are doing to increase our share of wallet within the higher-income customers, I would say, are largely broken down in 2 stages.

I think in the first stage, which has started about 18 months ago, we invested a lot of time and energy in the development of new products and features to acquire high-income customers. And if you define a high-income customers as someone who has an expected monthly income above BRL 12,000, we already have at Nubank as of the end of the fourth quarter of 2023, over 60% of those are already customers of Nubank. So the first stage was customer acquisition with very low customer acquisition costs.

The second stage is customer principality. Building on what David and Jag mentioned earlier today, and we will do so through the development of our banking payments and investment products. They will be material investments in terms of human resources, but they would not necessarily drive any material change to the cost structure that we have had in Brazil over the past 2 years. But Jag, I'm not sure if you wanted to add anything about the types of investments and products that we will launch.

[Jagpreet Duggal, executive]

Yes, I'll quickly do so, Lago. So within the context of what Lago just said, which is that we expect our efficiency ratio to not show continued trends in the direction we saw this quarter. We are continuing to invest significantly in existing products and in new products, many of which are geared towards the Supercore segment as well as the High Income segment. As Lago mentioned, we have a majority of those customers, 70% for the Supercore, 60% for the High Income already. As customers of Nubank now how do we drive engagement and principality over time.

A few trends that we are very happy with show that our flagship product for the high income, our Ultravioleta credit card has, over the course of 2023, shown dramatic gains in the Net Promoter Score. We are now the highest Net Promoter Score bank according to Bain for this segment, and that mirrors some of the trends we were tracking internally. And with that growing customer love of the product, which offers them 1% cash back and 200% CDI returns on that cash back along with other features. We are seeing significant growth in their usage of the card and in their satisfaction with the credit lines that we are giving them, which is all building a flywheel together.

Another major investment we made in the course of 2023 was to extend a bundle around the flagship card, the Ultravioleta bundle, which has a series of features from a free toll tag, free Rappi Prime, special customer service lanes for these customers, et cetera. Around the card and the bundle, we are investing in features and products around banking, around investments around insurance that will gradually manifest themselves in our product, and we expect will drive an increasingly complete solution for this segment, although those are investments that will layer in through the year, all within the context of what Lago shared, which is these are accounted for even as we continue to have strong operating efficiency.

[Gustavo Schroden, analyst]

Very clear. Just a -- very, very clear. Just a follow-up on this last part of the answer. You mentioned some products that you have already offered to high-income clients, such as some credit products and the intention to, let's say, if I understood, to accelerate investments in insurance. But could you give us like -- are you thinking to invest or to offer like a mortgage or loans for these high income clients? Or that should be more related to these, let's say, personal loans and investments in insurance? Just if you could give us a more specific products that you could offer to high-income clients besides the credit and insurance and investments?

[Jagpreet Duggal, executive]

Yes, for sure. What I would say to you is, as David laid out in terms of our overall strategy, our ultimate aim is to serve these customers with a holistic and complete suite of solutions for them. And so the credit card was the place we started in terms of the Ultravioleta card but we are looking across our suite in looking at our lending products. Many of our secured lending products are actually disproportionately used, for example, by high-income customers. We are looking at investments, we are looking at insurance.

They are no doubt certain product lines that we probably won't offer for a while but we are looking across the entire suite of what we have offered in the mass market. And even beyond that, to start with this customer segment, understand their needs, understand where the highest leverage is for them and ultimately for us. And building products across the suite. So if you look across our product suite, you can rest assured that we are either building or investigating and in discovery for products and features that will serve this segment.

[Jorg Friedemann, executive]

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

[Eduardo Rosman, analyst]

Congrats on the numbers. I have a question on regulation in Mexico. Do you believe that there is room for the Mexican regulator to move faster and mimic some of the big changes the Brazilian Central Bank did here in Brazil? How important could be transforming CoDi into something like closer to PIX? How can you help the regulator to understand that, that could benefit penetration of credit in Mexico showing what it was done in Brazil? So it would be interesting to hear your thoughts here.

[David Velez-Osomo, executive]

Yes. No, thank you for the question. So listen, I think the trend is positive. We've been spending a lot of time with regulators. I think the Brazil case is -- has become an unbelievably clear example, really across Latin America and globally of what a regulator can do to accelerate financial inclusion and bring more competition to our market. And that example is just too hard to ignore for regulators. So when we went to Mexico about 3 years ago, nobody really understood that. Today, when we engage, that's very clear.

As you said, CoDi was launched a few years ago, there were a couple of design decisions that didn't really make it successful. I think regulatory is going back at it and trying to make it successful. There is real attention and goodwill to see free digital payment system in Mexico. Again, it's hard to oppose that because the benefit for society and for the country are so clear. So what I would say is I wish it would be a bit faster, but the trend is positive and accelerating. And it would be tough to take the opposite view that in 5 years from now, you'll see -- you'll continue to see 12% credit card penetration or that 5 years from now, people will continue to use just cash for everything.

The puck is going in the direction of full digitalization of the economy. That's one of those trends that you can count on really globally. Brazil was fast. Mexico, Colombia were a bit slower, but I think we see the momentum accelerating. And we're definitely trying to play a very active role on that future to come faster because in a world where finance is digital, in a world of digital payments, in a world of open finance where there is less inertia from consumers to move when consumers really own their data and they can transpose it to our institutions.

The consumer really wins and competition becomes very powerful because the -- really the possibility to see interest rate coming down, banking costs come down, inclusion goes up. So we are -- we think that's where the puck is going in Mexico. We think it's accelerating, and we are definitely an active part of trying to push that forward.

[Jorg Friedemann, executive]

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

[Pedro Leduc, analyst]

Congrats on the results. I would like to get your help a little bit more on the credit quality or provision expense side. We know this quarter, it looked down, right, from $630 million to $590 million, as you mentioned there, the recovery effects. But I would like to get your help a little bit on how much these recovery effects were and get your sense on the underlying credit trends that you're seeing? You did mention that gross margin should continue at this level, at least not for the next quarters. So just getting your sense there on how you're feeling on the credit quality side, making you choose where to grow and when.

[Youssef Lahrech, executive]

Pedro, so on the credit loss allowance expense itself. As like what I mentioned in our earlier remarks, the $590-or-so million number was impacted favorably by recoveries in the order of about $60 million to $70 million in the quarter, right? So you can do the math of what would have happened without that effect. It would have been around $650 million, $660 million. So it would have increased by an amount that's kind of similar in magnitude to the increase from Q3 to Q4, right? And most of that increase is from growth of the credit book.

Now from a going forward standpoint, I expect maybe a little bit of a residual impact of additional recoveries in Q1, as Lago mentioned a few minutes ago, but I don't think it will be the same order of magnitude. So I expect the trend to kind of resume looking like prior quarters as we continue to expand the credit book. Some of that expansion, as I said last quarter and earlier today, some of that expansion and growth will come from going further down the risk spectrum. So it might cause higher NPLs, but we think it'll be -- and therefore, higher provisions. But I think it will be more than paid for in the form of higher returns and robust resilience. So that's generally how I would think about it.

[Pedro Leduc, analyst]

That's great. If I may with a second and follow up on this. The -- of course, your NII post cost of risk and making up for it. You mentioned you hit 23% ROE this quarter, of course, reinvesting into growth. And I know it's hard to pick a part which business is doing what. But if you could help us maybe with a broad range on how much you're reinvesting at this point from this ROE figure? And if this ratio is going to grow or be maintained or fall a little bit, given the others funding it into 2024?

[Guilherme Marques do Lago, executive]

Pedro, I believe the best way to address your question is if you take a look at our cost structure in general, about 55% to 60% of our cost structure is largely payroll related. As David mentioned in his opening remarks, about 40% of our operational headcount is still in growth or moonshot business that are business that are not yet generating revenues at full capacity or not generating revenues at all. So this just gives you a sense of the allocation of our resources to business that are not considered to be our core profit-generating business. If we were to optimize for the long term.

For the short term, we would be able to post materially better results, but that's not the case. We are in the planting season, we are not in the harvesting season. So we do expect in the long term that ROEs in both Brazil and on a consolidated basis can expand further, and we are investing heavily for that. And by investing, we are investing primarily on human resources and technology.

[Jorg Friedemann, executive]

And our next question comes from the line of Rafael Frade from Citi.

[Rafael Berger Frade, analyst]

So my question is related to your capital position. You mentioned in the previous quarter that your capital position was around $4.5 billion. But in this quarter, it was $5.4 billion. So a big jump quarter-over-quarter, higher than earnings. So I'd like to understand if there's an adjustment here that explains this big increase in the capital position?

[Guilherme Marques do Lago, executive]

Frade, thanks for your questions. No, I think the best way for me to address your question is to draw your attention to our financial statements, more specifically to explanatory note #32, in which we basically break down our capital positions, regulatory capital positions for Brazil, Mexico, which are our 2 regulated entities. And I think in the in the slides, what you will see is that the first time we are basically adding both Brazil and Mexico, and there, you may see a slight increase in the numbers. But by and large, with the capital that we have allocated to our geos that are regulated, Brazil and Mexico.

We have about 2x the minimum capital that are required in these geos. And if above and beyond, you also take into account the $2.4 billion of excess capital that we have at the holding company, we would get to nearly 3x the minimum regulatory capital. So we believe we are fairly comfortably capitalized. We don't foresee any need to tap the equity capital markets in the near future for our 5-year plan nor do we foresee the need to make any material capitalization in Brazil in the foreseeable future. Brazil is expected to generate enough earnings to sustain the growth of the business going forward.

[Jorg Friedemann, executive]

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

[Yuri Fernandes, analyst]

I have a follow-up on Mexico. And on your deposit franchise, it's pretty impressive, $1 billion in Mexico. And again, it has been growing very fast since November. But David, I think he addressed at some point, like the wholesale cost and how the credit cards can make like this higher 50% yield is still profitable at some sense. But my question is that your deposits are now growing much faster than loans, right? We just have the regulatory data for November. And I think you had around $800 million of loans in Mexico. So now you have more deposits and loans. That basically implies that you kind of have a negative spread here, right? You're paying 15% actually, I think, 16%, right, because 15% is net of taxes.

So my point is about Mexican losses, right? Maybe I think Lago already addressed this, but I don't know. I think maybe it's the right strategy. But maybe we could see higher losses from Mexico in '24 or '25. So I would like you to address this if you keep the 15% yield even if you don't have the same counterpart in loans, basically buying a security from the government around 11.25%. And then I can do a follow-up on this question.

[David Velez-Osomo, executive]

No, great. No, this is the right question. So we absolutely see this as a way to accelerate credit as well. We always say that your right leg kind of go faster than your left leg. We started effectively only with the right leg just with credit when we launch deposits, we have a left leg. Now we have the challenge of coordinating ourselves. And it's a tough problem because you are not able to ex-ante price for perfection, the yield. In an ideal world, you would have perfect information and you have the absolute pricing so that it would build the product that you want. It optimizes -- it's an NPV maximization problem in ideal world you can get to that price immediately.

We prefer to start high because it's important to create the right impression for consumers, and there tends to be an advantage when you are positioned as the clear category king. That's what we are striving for in Mexico. Once you have that position versus consumers and you start getting significant percentage of the market, then a lot of the flywheels really start turning. And so in that sense, you're right that suddenly deposits are growing faster than credit. But as I said, now we'll start seeing the second order benefit. We're seeing higher income Mexicans coming in, which allows us to increase credit card acceptance rate for our customers.

It allows us to increase limits, which increases IBB for credit cards. It brings more customers in net-net, we have to spend less in marketing. And so overall, I think we are -- this is a big investment for us, as I said. We are looking at this investment decision very carefully, optimizing for the long term, as I said. But it will be a continuous recalibration of this exercise and as we go over the next few months and really over the year, we'll be trading off the different sizes of that bet. But so far, it's clearly paying off really quickly because of the higher credit card customers, the differentiated income profile, the higher acceptance rate, the higher credit limits, increase IBB. We are operating in a -- with a product in Mexico that we think is more profitable than Brazil, the credit card per se. It has a higher return on equity so far. So there's plenty of economics to be paying right now a bit higher on the funding cost.

[Yuri Fernandes, analyst]

No. Thank you, David. I was in Mexico last week and it's impressive the word-of-mouth of this deposit strategy. If I may, just a quick one here on the eligible unsecured credit customers for you. I think you have a slide on this, 15.5 million, one of the last slides of the presentation. I was checking the third quarter, and you had like around 18 million eligible unsecured credit customers in the previous quarter. So it basically implies that this number was down 3 million. So just checking if you are getting a little bit more risk averse on unsecured credit lending in Brazil or I don't know, anywhere else? Or if it's just a different accounting on this number because it was down again like from 18.1 million to 15.5 million eligible customers?

[Guilherme Marques do Lago, executive]

No, Yuri, I think we are certainly not getting no less optimistic with the expansion of unsecured personal loans. And it's just a different accounting of the eligibility of monthly accounting, monthly eligible customers. But in general, we are super pleased with the potential that we have in unsecured personal loans. If you take a look at the total unsecured personal market in Brazil, it's the second largest consumer asset class in the country after only payroll loans. And our customers already account for approximately 51% of this pool. We have less than 7%, 8% of this market.

So we will continue to grow and expand originations there threefold: number one, increasing the eligibility of personal loans to more customers; number two, progressively increasing the average ticket size, almost we're assembling the slow growth that we have in credit cards. And number 3 is to progressively increase also the duration. Our average duration today is about 1/3 of the average duration of the market. So by flexing those 3 levers, we believe we will continue to increase originations of unsecured personal loans going forward.

[Jorg Friedemann, executive]

As we already surpassed 90 minutes of the call, we are now concluding today's call. So 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 opportunities for the year of 2024 and to continue strengthening our position in Brazil, Mexico and Colombia. 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.