PagSeguro Digital Ltd
NYSE:PAGS
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PagSeguro Digital Ltd
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Good evening. My name is [indiscernible], and I will be your conference operator today. Welcome to PagBank PagSeguro's webcast results for the second quarter 2022. [Operator Instructions]
This event is also being broadcast live via webcast and may be accessed through PagBank PagSeguro's website at investors.pagseguro.com. Participants may view the slides in any order they wish. Today's conference is being recorded and will be available after the event is concluded.
I would now like to turn the call over to your host, Éric Oliveira, Investor Relations and ESG Director. Please go ahead, sir.
Hi, everyone. Thanks for joining our second quarter 2022 earnings call. Today, we have with us Ricardo Dutra and Alexandre Magnani, our Co-CEOs; and Artur Schunck, our CFO. After the speakers' remarks, there will be a question-and-answer session.
Before proceeding, let me mention that any forward statements included in the presentation or mentioned on this conference call are based on currently available information and PagBank PagSeguro assumptions, expectations and projections about future events. While PagBank PagSeguro believes that the assumptions, expectations and projections are reasonable in view of currently available information, you are cautioned not to place undue reliance on these forward-looking statements. Actual results may differ materially from those included in PagBank PagSeguro's presentation or discussed on this conference call for a variety of reasons, including those described in the forward-looking statements and Risk Factors sections of PagBank PagSeguro's most recent annual report on Form 20-F and other filings with the Securities Exchange Commission, which are available on PagBank PagSeguro's Investor Relations website.
Finally, I would like to remind you that during this conference call, the company may discuss some non-GAAP measures, including those disclosed in the presentation. We present non-GAAP measures when we believe that the additional information is useful and meaningful to investors. The presentation of this non-GAAP financial information which is not prepared under any comprehensive set of accounting rules or principles is not intended to be considered separately from or as a subset for our financial information prepared and presented in accordance with IFRS as issued by IASB. For more details, the foregoing non-GAAP measures and the reconciliation of these non-GAAP financial measures to the most directly comparable IFRS measures are presented in the last page of this webcast presentation and earnings release.
With that, let me turn the call over to Ricardo. Thank you.
Hi, everyone. Good evening from Sao Paulo, and thank you, Éric.
I would like to begin our presentation with the main message for this quarter. Our successful repricing with the stable churn led to a negative rate 16 basis points higher than Q1 2022 or 8 basis points higher if we consider financial expenses. PagSeguro TPV again outpaced market growth despite pricing increases, growing more than 60% of the Brazilian payments industry. PagBank net adds accounted for 1.6 million new clients, consolidated by Bank as the second largest digital banking number of clients in Brazil. Total deposits reached more than BRL 15 billion, a 163% higher than the same period of 2021. CapEx per sales at 14.7%, lower 520 basis points when compared with Q1 2022 and trending down moving forward. Despite our moving up-market strategy combined with price increases, HUBs, TPV reached almost 30% of PagSeguro total TPV.
Going to Slide 4. Once again, we presented record numbers in all main KPIs, while our purpose remains the same, democratize the access of financial services and payment solutions in Brazil, providing a simple, safe, affordable and digitally ecosystem to merchants and consumers. In Payments Platform, TPV was BRL 89 billion, with revenues growing faster than TPV and TPV per merchant growing above 50%, leading to BRL 1.4 billion in gross profit. In Financial Services, TPV was BRL 86 billion with BRL 314 million in revenues and with a flattish gross profit when compared with Q2 2021, mainly driven by our cautious approach in credit products underwriting in such a challenging macroeconomic scenario. Overall, at the center of the slide, total revenue and income reached BRL 3.9 billion, 65% higher than Q2 2021, while net income in non-GAAP basis reached BRL 403 million, 17% higher than the same period of 2021. Our non-GAAP net income reached BRL 367 million, growing 35% year-over-year.
Moving to Slide 5, we compare our performance relatively to the whole market and conclude, we have been able to keep growing with profitability, which also reinforces our successful ongoing repricing initiatives. Chart on the left, we were again the TPV market share gain winner in this quarter. When compared with Q4 2021, we grew 80 basis points without [ buying ] market share. As you can see in the second chart, although every player has been increasing prices, our repricing initiatives were the most successful one, by focusing on clients' demands and having a stronger value proposition allow us to increase our net take rate much more than peers. Our net take rate grew 5x more than the peers.
Finally, in the chart on the right, to compare profitability in a fair, an easier way to understand when you look at how much profit each company can extract net income from each real transacted in its payment solutions, which means net income divided by TPV, we can see PAGS is 5x to 7x more profitable than peers. And if you compare the total profit pool of the industry, PAGS has almost 11% TPV share and capture the largest portion of the profit share around 45%.
In Slide 6, we present the main highlights of PagBank. We reached 25 million clients in June with more than 15 million active clients, which reinforces our position as the second largest digital banking [indiscernible]. And 60% of the new consumer cohorts used by the bank as their main bank. Also, our deposits grew 163% year-over-year, reaching BRL 15.5 billion and growing faster than our credit portfolio which helps our funding diversification.
Moving to Slide 7. We are happy to announce our secured credit card for all our clients, consumers and merchants. We have been noticing that clients want to have higher credit card limits. And at the same time, we aim to manage the asset quality. Addressing both demands, our secured credit card empowers merchants and consumers, tying their credit card limits to PagBank CDs, which have the highest [indiscernible] in the market. This product has 0 NPLs and [indiscernible] deposits, which helps to manage our cost of funding and increases upselling and cross-selling opportunities for us to become more and more the primary bank for our clients. Also, following our mission to be simple and safe, our clients can manage their credit card limits through the app.
Finally, in Slide 8, we'd like to update the cash-in process in PagBank and how PIX has been [indiscernible] in boosting cash in [indiscernible] in ecommerce into electronic payments. Cash-in, excluding acquiring grew 149% year-over-year reaching almost BRL 32 billion. Also, PIX has been boosting our deposits while diversifying from these sources, leveraging monetizable cash out, consolidation by the bank as the final monetization of clients since our market share peaks transaction reached 10% this quarter and also helps to collect additional data from our clients.
We are not unaware about the evolution in this sector, and we see several opportunities to keep exploring not only card payments, but all types of payments, including wire transfers, PIX, online payments and cross-border, while providing business integration and management solutions and upselling and cross-selling PagBank financial services through a single interface, 1 app, 1 platform, online banking, 1 customer support and a complete and integrated solution.
Now I'll pass the word to Alexandre to share some views about our business units. Thank you.
Hello, everyone, and thank you, Ricardo, for the initial remarks.
Moving to Slide 9. I will start the segment highlights with PagSeguro's overview during the quarter. PagSeguro's total revenue and income grew 68% year-over-year, reaching BRL 3.6 billion, faster than TPV, which grew 58% year-over-year, totaling BRL 89 billion. As a result, our market share in payments reached almost 11%, growing 150 bps over 2Q '21 and 10 bps over 1Q '22.
In the next slide, we show how we have been working with our merchants to combine growth and profitability as we have the line of share of active merchants in the Brazilian market. We have been more selective in our acquisition strategy during 2022, reducing subsidies and focusing on the best sales channels to improve new merchants' acquisition quality. As a result, we grew the new merchants average TPV by 53% through our online channel, and we also increased it by 56% the overall average TPV per merchant on a year-over-year basis. Our numbers of active merchants, excluding MOIP, reached 7.4 million in June 2022.
In terms of MOIP, we have been prioritizing merchants with a strong online operation and cleaning up the base of [ nano-inactive ] resellers of some marketplace, positively affecting TPV, revenue and net income trends. When we exclude MOIP's merchants and nano- merchants from PAGS, we observe an 11% year-over-year growth in our active merchant base. This strategy results in a higher activation of POS device, higher TPV per merchant and higher upselling and cross-selling opportunities for PagBank as nano-merchants represent only 2% of PagSeguro TPV. Consequently, the positive results to be expected are lower CapEx per sale, lower POS depreciation per sale and higher LTV over CAC ratio for new merchants cohort, which will contribute to margins rebound and cash flow generation in the future.
Slide 12, I want to share some updates about PagBank operations. Total revenue grew 62% year-over-year, ending the quarter at BRL 314 million, representing 80% of PAGS' total revenue and income. Total payment volume reached BRL 86 billion, growing 87% year-over-year with engagement TPV gaining traction driven by cash-in, bill payments, card spending, among others.
Moving to Slide 12. I would like to recap our milestones in credit products. Total credit portfolio reached BRL 2.3 billion, up 104% year-over-year mainly driven by the increase of payroll loans and FGTS early prepayment, which are consumer-focused products. As asset quality remains the top priority for our company. We understood that for navigating such a challenging macroeconomic scenario, we had to increase our exposure to secured products, which went up from 5% to 23% in 2Q '22 versus 2Q '21.
Also, as Dutra mentioned, we just launched our secured credit card backed by PagBank CDs, which will contribute to an even faster share growth of collateralized products in our portfolio. Have this strategy on track, we expect to keep growing our portfolio gradually, but also doing important investments to develop our policies, models and the overall credit cycle fundamentals. We are preparing PagBank to scale and diversify credit offerings for most of our clients in the future with a proper balance between risk and return.
Finally, before I turn it over to Artur, I would like to review our guidance for Q2 '22 and establish a ballpark for the Q3 '22. Total revenue in Q2 '22 was BRL 3.9 billion, BRL 300 million higher than guidance midpoint. For Q3 '22, we expect a ballpark between BRL 4 billion and BRL 4.1 billion. PagSeguro TPV in 2Q '22 reached BRL 89 billion, almost BRL 5 billion higher than the guidance midpoint. For the Q3, we expect something around BRL 91 million to BRL 92 billion. Net income, non-GAAP, was almost BRL 30 million higher than the guidance midpoint. For the Q3, we expect a ballpark between BRL 400 million and BRL 410 million, mainly due to the higher average interest rate of the period and higher marketing investments to promote the launch of new products.
Having said that, I pass the word to Artur, our CFO. Thank you.
Thanks, Alexandre, and hello, everyone.
I will continue the presentation in the Slide 14 with Q2 '22 financial results. In the left side, total revenue and income reached a record of BRL 3.9 billion, growing 65% year-over-year. Net take rate achieved a 2.75% this quarter, increasing 15 basis points versus Q1 '22 as shown in the bottom right side of the slide. Gross profit neutral of FX impact grew 28% year-over-year, impacted by financial expenses growth and higher chargebacks, despite being stable as a percentage of PagSeguro TPV quarter-over-quarter. The ongoing pricing strategy in acquiring [indiscernible] credit products has been helping to offset those impacts.
Adjusted EBITDA closed at BRL 831 million, up 32% in comparison to Q2 '21 and up 25% versus Q1 '22. Net income non-GAAP achieved a record of BRL 403 million for all second quarters in our history. Net income gap increased 35%, reaching BRL 367 million, versus the same period of last year. This represents an earnings per share of BRL 1.10 in the second quarter of 2022, BRL 0.28 or 35% better than Q2 '21. PAGS continues to better balance growth and profitability, focusing on improving shareholders' return.
Moving to Slide 15. In the left side, OpEx reached BRL 603 million in Q2 '22, up 22% year-over-year. This amount represents 15% of PAGS revenue versus 21% in the same period of last year. The improved efficiency has come from personnel and marketing expenses leverage as well as PagBank and HUBs revenue growth. In the right chart, financial expenses closed at BRL 756 million versus BRL 134 million in Q2 '21. Almost 87% of this increase is explained by the hike of SELIC and the remaining portion of 13% was related to higher TPV volume, prepayment of receivables to merchants and credit card mix. These effects were partially offset by ongoing repricing in acquiring, APRs increase on credit underwriting and lower cost of funding to deposits growth combined to better spreads negotiated with market. The focus is on improving funding processes, diversifying sources and extending terms to leverage our banking license and support the company growth.
In the next slide, CapEx per revenue reached 14.7% this quarter versus 16.8% in 2021 and 19.9% in Q1 '22. This decrease reflects PAGS strategy of being more selective on merchant acquisition to leverage PagBank. For this year, we expect to reduce CapEx per revenue ratio moving forward. In the second chart, adjusted EBITDA minus CapEx reached a positive amount of BRL 256 million, up 187% versus Q4 '21 with a better trend compared to previous quarters. It reflects PAGS strategy to focus on maximize LTV to CAC ratio by reducing POS subsidies and adding more valuable merchants.
Cash position on Slide 17 ended the second quarter at BRL 8.6 billion, improving BRL 300 million quarter-over-quarter. This was driven by TPV growth, higher share of credit card transactions and larger penetration of same-day prepayment to merchants. At the same time, we have been improving our capital structure, ending this quarter with 71% of financing position funded by third-party capital. On top of that, PAGS is diversifying funding sources to support volume growth. Additionally, in July '22, based on the good share price opportunity, the company bought back 1.7 million shares, increasing treasury's position to be distributed in the long-term incentive plan, not diluting shareholders.
To conclude our presentation, I will turn it back to Alexandre for the final remarks.
Thanks, Artur.
Before we move to the Q&A, I would like to remind our key milestones for our business. In the Slide 18, we have recapped our achievements. In terms of growth, our company continues to maintain the consistency in growing faster than the industry, but in a profitable way, which reviews that we do have a superior value proposition, and we do not rely on prices to grow our business. In terms of profitability, we continue to post 1 of the highest levels of EPS among acquirers and [indiscernible] in LatAm. In Brazil, we remain with 45% of the acquiring industry profitable and presenting profit margins over TPV that are 5x to 7x higher than competitors. Even without the macroeconomic headwind scenario, we were capable to grow our EPS by 35%.
Finally, this is what we expect for the next quarters. We are focused on consolidating PagBank as the second largest digital bank in Brazil by providing a superior banking and payments experience through a multichannel single interface. One app, one [ banking ] and 1 customer support. Differently from incumbents that operate in banking and acquire through segregate platforms, we deliver both solutions in an integrated way to our customers. We also intend to increase exposure through secured credit products, which will continue to help us to explore a safety entry point in consumer lending, reinforcing our strategy of growing fast with profitability.
Now we ended our presentation, and we will open the Q&A session. Operator, please?
[Operator Instructions] Our first question comes from Mario Pierry, Bank of America.
Congratulations on the results. Let me ask you 2 questions. One is related to your ability to continue to reprice your product. How are you seeing the environment? Have we seen the full benefits of all the price increases that you have implemented?
And then the second question is related to your guidance. When we look at revenue growth and TPV growth, we're seeing a slowdown from the growth that you provided that you showed in the second quarter, right? In particular, here, we're talking about revenue growth of about 46% on your guidance. Can you explain this slowdown, is it just because of tougher comps, given that the first half of last year, we still saw the impact of COVID, and then it's just like you're seeing more difficult comps in the second half of the year?
Mario, this is Ricardo. Thank you for the question. Good to talk to you. First, talking about repricing. As we said before, repricing is an ongoing process. It's -- I will not say you that it's over because all the time, we are evaluating our net take rate after financial expenses, and if necessary, we will make adjustments, we will increase prices again. We never do that massively for all the clients. We always see some clusters that we believe we can increase prices here and there to always to manage the client relationship and the profitability that we have for this -- each cluster. So we did this repricing again in Q3 because we knew that SELIC would increase again. And if necessary, we will increase 1 more time. What I can say at this point is that the net take rate in Q3 so far is higher than Q2. So let's see how it's going to be the full Q3. But so far, the net take rate is a little bit better than Q2. When you put financial expenses, it's slightly stable. So that's why we -- I say to you that it never ends, we are always evaluating some opportunities that we can make a better profitability for specific clusters.
And regarding the growth, you're right, that is -- as our percentage is growing less. But in Q3, as you said in your question, we are seeing hard comps from 2021 because it was really when we had the opening of the economy in 2021. The economy started opening, let's say, in Q2 2021, but the full open was in Q3 2021. So it's just hard comps. We still see strong numbers, as you can see, more than BRL 90 billion. That's the guidance that we are giving. So I would say the main reason is a hard comps from previous year.
Perfect. Just kind of follow-up on the pricing. Can you talk about your pricing under different segments in the micro merchants and the SMB segment?
Well, for the micro merchants, we have the same price in the website. It's in the website, you can just take a look there. We didn't change the price for the longtail. We just made some adjustment of the promotions. We had some clients in the base with promotions and we put these clients as a regular price in the regular price. And for SMBs, we are always following what's going on with the margins, what's going on with the net take rate after financial expenses from specific clusters, SMBs. Because you have this merchant category codes, depending on the type of the merchant. We had different costs. So that's why we are always evaluating different clusters in terms of merchant category codes, the profile of these merchants. Some of them, they have more credit card with installments. Some of them, they have more debit card transactions. So we are always evaluating this type of profile to increase the prices. So that's what we do. We have [indiscernible] many clusters here. And that's what we do. And always, of course, looking at the churn and leveraging the client relationship and the profitability for a specific cluster.
Our next question comes from Pedro Leduc, Itaú BBA.
First, into the financial results/financial income. well, evidently, there's a repricing effect here, financial results starting to outpace financial expenses in nominal amount, a lot more. We're seeing deposits at the bank now, nearly BRL 15 billion. Can you elaborate a little bit on how this is helping you, if you can help us maybe quantify, and definitely, if this can help you going forward, even if TPV cools, as we're discussing before, we continue improving profitability, definitely on the financial results front?
Pedro, this is Ricardo again. I will start the question, and then Artur or Éric can help me here with more specific numbers. But conceptually, the -- of course, deposit helps us because as we have the banking license, we can use these deposits as a source for funding other operations that you have here in PagSeguro. TPV, I would not say that it's cooling off is just -- it's growing -- it's going to be higher than Q2. It's just a deceleration in the growth, but it's still very strong growth. We are talking about more than almost 50% year-over-year. And as we can see in the past quarters, we are growing between 60% to 70% more than the industry. So just to rephrase here, TPV is coming strong. We have this around BRL 16 billion in deposits that we can use and help us in our funding sources. And we -- the fact that we have PagBank growing steadily, it helps us in this front with this initiative because of course, we expect to have more and more deposits. So I don't know why [indiscernible] -- I guess, I don't know if it's clear?
No, that's clear. I do have one more, just a technical question on the POS write-off. That I much appreciate the disclosure and explanation around it. This value, the BRL 93 million. Just to understand if it's like a linear rate of the full amount that we reassessed on engagement, et cetera, or if it's just this 1 number and for the next quarter should be smaller depending on how you reassess those values?
Pedro, thank you for the question. It's Artur speaking. It's an evaluation that we had in this quarter and the impact of BRL 93 million is an adjustment at this level in just in Q2. But we will continue to evaluating our relationship with our clients, and the write-off of POS will be a recurrent process in the coming quarters. We are expecting something at a level of BRL 40 million to BRL 60 million per quarter related to those write-offs.
It's already -- it is contemplated in the guidance that we gave, Pedro, just to be clear, for the following quarter, right?
Our next question comes from Domingos Falavina, JPMorgan.
To us here more congrats, I guess, on the ability to pass through this is rising SELIC, it's good to see the all net take rate moving up. Two quick questions, actually adding to yours. So like you mentioned, it's evolving nicely, third Q versus second Q. So note of magnitude when we look at that take rate. Is it like a similar movement that we saw in the second Q or something more pronounced as far as margin improvement?
And second one. Any -- like if you could differentiate a little bit sort of like the owing net financial result evolution, was it predominantly driven by the acquirer? Or did you actually have some savings on the bank side like paying lower deposits and things like that? And is there more you can do on the bank side, too?
The net take rate for Q3 compared to Q2 as we've seen so far, and of course, we still have half of the quarter to be gone. But as we've seen so far, we see increase, but not at the same level that you saw in Q2. It is growing but not at the same level that is on Q2. But it's still growing. And as I said before, we are always evaluating and doing repricing.
In terms of funding, we use the funding for the bank. And when you use the bank funding, the cost for us is lower than 100% CDI. So it's -- I would not say that it's cheap, but it's lower than the CDI, which is good for us. It's an ability that we have by the fact that we have the banking license.
Looking forward, we just want to increase more and more of our deposits. We are all the time launching new products that [ incentivate ] clients to leave their money here. That PagBank to be defined a [ money destination ], but that's what we've been doing so far. I mean there is no silver bullet here. We just need to increase deposits more and more. And of course, deposits tend to be a cheaper source of funding when compared with other sources that we use in the company.
Our next question comes from Neha Agarwala, HSBC.
Congratulations on the results. Can you talk a little bit about PagBank? When we look at the revenues and the gross profit, there was only a small increase in revenues and monetization seems to be a bit more challenging in PagBank. But your gross profit increased much better than the revenues. So could you please help us understand the dynamics for PagBank that we can see going forward. How should we think about the revenue evolution at PagBank? And when do you foresee a breakeven at PagBank?
PagBank is based on 3 -- I would say, 3 sources of revenues. One is the transactional, the other 1 is related to interchange of the cards. And the third 1 is related to credit products that interest-bearing products. So what we've seen so far in Q2, the increase that we had was almost 100% in collateralized products more in these products relates to salary payroll. So what happens with this product is that it has longer duration when compared to other products that we have in the credit portfolio.
So we are seeing this changing or this mix shift from non-collateralized products with shorter duration to collateralize products with longer duration. So we are at the beginning of this process, as you could see in this slide, 1 year ago, we had 5% of our credit portfolio in collateralized products and today it is 23%. So it's going to take a while for these revenues to be stacked each cohort, each credit on the right for each month for us to see the impact of these cohorts in the following quarters. But we are fine with that because it's a cautious decision that we just need to change the mix to have a more balanced credit portfolio, but it takes a while for the revenues to come because they have a higher duration. Regarding breakeven, I don't have here in the top of my mind, I guess, Éric can help me here. Thank you, Neha.
I think PagBank breakeven is strictly correlated to the evolution of PagBank clients' engagement, more appetite on credit underwriting with things that we are getting a safe entry point rolling out the secured loans for both merchants and consumers. In terms of costs and expenses, we do not see much -- a lot of growth over the next quarters. But we do expect to see a stronger revenue growth, as Dutra mentioned, with this waterfall effect on the payroll loans given the newer cohorts cooperating for a positive outlook in terms of revenue growth to reach PagBank breakeven in the next quarters. We prefer at this time since the -- we have a lot of volatility in terms of the macroeconomics to not set exactly a date, but I think we are getting closer and closer as we scale the products, especially in the secured loans.
That's very clear. Can I ask one more question on the SMB segment. Are you pretty much done with your HUB expansion and hiring of personnel? Or do you expect to add -- continue to add a bit more since you've got good traction in the SMB segment? And what percentage of global TPV is now coming from the SMB segment? And if you have any sort of number in mind where you would be by the end of this year or next year, if you can share that, that would be great?
This is Alexandre. Thank you for the question. Actually, we have been very successful in executing our expansion on the SMB segment. We have achieved already 20% of our TPV in this segment. We do not intend to grow our HUBs significantly moving forward. We are pretty well stable in terms of hiring of salespeople to work in the HUBs, but we still enjoy an increase in productivity of our team, given how the intelligent tools we are using to operate our sales team in the HUBs. And these tools enables our team to sell activate [indiscernible] and activate PagBank account instantly to merchants. And that makes a real difference for us in terms of productivity and generation of new revenues, not revenue coming from -- only from the operating side but also coming from the digital bank.
And regarding the number that you asked Neha about how much is going to be TPV? We don't have this, let's say, specific number to give to you at this time. But I can tell you that what are you seeing so far as you could see in Q1, Q2 and what we've seen so far in Q3, of course, TPV from HUBs is growing faster than the rest of the company because these clients, they have a higher average TPV when compared to the whole company. So they are 5, 6x larger than our micro-merchant clients. So TPV from HUBs will keep growing. And as Alexandre Magnani mentioned, we still are seeing improvements in productivity and optimization of the salesforce that we have on the street. So if you had some growth, it's going to be marginal.
So just to confirm, you mentioned 20% of your TPVs right now coming from the SMB segment?
It's in the slide -- 28% in Q2.
Our next question comes from James Friedman, Susquehanna.
It's Jamie at Susquehanna. So here's to a previous question, did you -- how are you thinking about the profitability of the bank, is it still consistent with what you had contemplated at the Analyst Day?
James, we -- quick recap here just for those who are not familiar with, but we launched PagBank in May 2019. We expected to start giving credit in 2020, mainly in the second half 2020. But we launched a PagBank in May 2019 and then in March 2020, all the world was impacted by COVID until last year. So of course, we kind of postponed the plans of -- in terms of credit for 2 years because there was a lot of noise and a lot of volatility was hard for the models to understand and to capture all the variables related to this COVID and lockdowns and so on. So we kind of postponed the credit for these 2 years. And we are fine with that.
We are now balance our credit portfolio in secured products and non-secured products. The breakeven is going to happen soon. I just -- we just don't want to set you to date, so it's going to be a specific Q because otherwise, someone will say, okay, it was not in a specific Q. It was a little bit later or a little bit earlier, but it's going to be soon and the bank is doing well, as you could see revenues growing. Even the gross profit -- with our cautious approach in credits on the writing, the gross profit was stable year-over-year. So breakeven is going to happen soon. And most of that happens, we can give you more color about the profitability, return on assets, return on equity and so on. But so far, we are more focused on creating these new products, collateralized products and balance our credit portfolio.
Okay. And then just one more about the bank. On Slide 6, will you -- it is 15 million active clients, 60% used as the primary bank. I'm just wondering, do you happen to know how many use it as their only bank? Like what percentage of that 15 is -- a 100%, 60% only have PagBank. Any data on whether they have a second bank?
James, we had this number, but I don't have it on top of my mind to give it to you here. But I would say you a huge part of the clients in Brazil, they have more than 1 bank. Even our clients, we get many clients from other banks, from incumbent banks. And of course, some of them came to us at the beginning just to test PagBank or to make an investment in our CD, and after time passes by, they see that it works very well. The experience is good, the UX is awesome and then they started using us more and more. Until the point to reach -- we reach the point that we are the main bank. But some of the clients, they do have more than 1 account. I don't have this number to give it to you right now.
What we are following is in this chart on the right that the new cohorts -- when you look at the lines, the new cohorts are using more PagBank as their main bank when we compare the older cohorts. So we are around this at 60%, which is a very good number, a very good index for us -- a percentage for us because, remember, we are not giving credit -- non-collateralized credit. So if you think that is kind of a transactional bank, transactional digital bank, and people are using it as a primary bank is because we are doing very well in terms of experience in the -- all the onboarding and so on.
Our next question comes from Sheriq Sumar, Evercore.
My main question is around the active merchants. I know we saw a decline in this quarter. I -- and I do understand that it's like a shift of the management towards more high-yielding clients. But I just want to get a sense as to how much more downside can we see it from here? Because I understand that these numbers are like 12-month rolling, and you increased price and you added your price changes in the beginning of the year. And then at the -- and then first quarter, you also shifted your focus towards high-yielding clients. So should the decline accelerate from here or would it stay stable in terms of the active merchants?
This is Alexandre. Well, we took the strategic and conscious decision to decelerate [indiscernible] by reducing POS subsidies and focusing on the best sales channels in order to improve our LTV over CAC ratio. Within that measure, we could see an improvement of 53% on the average TPV of our new merchants' acquisitions in the longtail segment. We believe that we have stabilized the level of sales. And we are also working in new projects, new channels to even increase our sales, but have in mind that the primary focus is to add new merchants with quality, with higher average TPV rather than put a lot of nano-merchants into our system. So what we can expect moving forward is to keep the stability and slightly grow on our merchants' active base.
Got it. And just 1 question on the financial expense. I heard previously in the first question that financial expense is expected to be stable. Is there a sense that you could provide as to the dollar amount, given that we are basically more than halfway through the quarter as to what that number would be, considering the fact the increase in the yield, increase in the rates and the level of volumes that you're seeing?
I don't know if I got your question correctly -- this is Ricardo, but financial expenses will not be stable. In Q3, financial expenses will be higher. We expect to be higher because, of course, more volumes. Second reason, SELIC in Brazil, when we have the average SELIC or CDI, base interest rate of the economy in Q2 compared to Q3 and Q3 is going to be something around 110 basis points higher than Q2. So also that an increase in the financial expenses.
And what we do on the other hand is to increase price to offset that increase. But financial expenses are expected to be higher in Q3 when compared to Q2 because of these 2 reasons: higher SELIC and higher volume.
Regarding the net adds, your previous questions, just Alexandre correct me here that it's not a slightly growth. But when you look at the -- in the Slide 10, then we look at the active merchants without nano-merchants, which is the merchants that are really, really bringing TPV, we grew 11% year-over-year. So that's the kind of the core of the merchants that are looking for growth and that's why Alexandre said it is slightly growth in this more specific segment.
If you look at the whole base, it could decrease a little bit. But at the end of the day, as you mentioned in your question, the net adds are measured in a last 12-months base and TPV, we are looking in a specific quarter. So there's this time mismatch between these 2 information and for us, more important things to look at, more important KPIs to look at are the TPV as a whole and TPV per merchant. That's important because that is at the end of the day as the TPV that brings the revenues and the profitability of the company.
Our next question comes from Josh Siegler, Cantor Fitzgerald.
Congratulations on the strong execution this quarter. I wanted to touch on the competitive environment. Have you seen any shift in terms of rationality of competitors over the last quarter?
Josh, thank you for the question. No, we didn't see any irrational movement so far. Maybe 1 player here and there in the nano-merchants already very, very small merchants. Some companies trying to bring net adds of the nano-merchant that at the end of the day, most of them don't have payback depending on the size of the TPV of this version. But overall, market is very, very rational. If you look at the numbers from -- mainly from the large companies from the banks, they all increased the prices that we could show you in the slide at the beginning of the presentation. We grew 16 bps, other players grew 3 bps, 4 bps. They don't have the same ability that we have to increase prices because we have this huge base. But at the end of the day, everyone is increasing prices and not only MDRs, but also in prepayment so rationality is the name of the industry, which is very good news for everyone.
That's very helpful. And then I'd love to dive a little bit deeper into your PagBank products. Which products are experiencing the most uptake from end users right now?
Well, we've seen some strong engagement in the credit card that we launched that I mentioned in the presentation because it addresses -- it's good for everyone. It's a win-win situation because our clients want to have more credit card limits. They want to increase their credit card limits. And we want to take care of the asset quality. So the way that we offer for this client to invest in a CD, and with that, they can have a higher credit card limit in a very simple and simple use through the app. That's something that has seen some engagement, and of course, it helps in our deposits. So it's a win-win situation. That's 1 of the products that we've seen engagement so far.
And as a whole, everyone is using the account more and more. So we see strong engagement in bill payments and other products that we have. So I mean the company as a whole is growing. If you look at the TPV for PagBank, you see that the activity is increasing there. And once we launch new products, as we have this strong, this large base if it's a good product, people stick with that. So we see some good engagement in the new products we've been launching so far.
Our next question comes from Alex Markgraff, KeyBanc.
Just 1 question around PIX and then 1 around the credit portfolio. First, on the PIX, historically, I think you referred to PIX largely as replacing wire transfers. I'm just curious, do you see this changing in the future and displacing more card activity, particularly when you think about PIX products that look more like credit or installment offerings?
Alex, we don't see PIX cannibalizing cards transaction. PIX is replacing cash transactions, and PIX is also replacing bank slips in e-commerce. So those are the 2 products that PIX is really replacing at this time. So we don't see PIX replacing the cards because of many reasons, the way people use cards, all the chargebacks and all the warranties that you have when you use cards. And remember, PIX go straight to our balance. So even if you use PIX, it goes straight to your balance and is similar to a debit card. So when you think about credit that in Brazil, we have this grace period and people use it as a funding of source because they make a transaction today and they may pay the bill 30 days from now. So PIX don't have this kind of feature. So, so far, PIX is helping us in PagBank opening accounts. PIX is making the cash-in easily. PIX is making this movement of cash between different accounts easily and in a cheaper way also replacing wire transfers. So those are the, let's say, 3 things that PIX is cannibalizing, wire transfers, cash transactions and bank slips in e-commerce.
That's helpful. And then just on the credit portfolio, it sounds like a lot of the growth in the short term will come from secured products. I'm just curious what you see as kind of the appropriate mix of secured versus unsecured credit in the portfolio as you think about the kind of mid to long-term view?
Well, that's something that is going to be dynamic, Alex, as you can imagine, if you look at the bank's credit portfolio, it's -- it changes a little bit depending on the macroeconomic scenario, banks have more appetite for credit and increased non-collateralized products in a situation like today with all this macroeconomic scenario not only in Brazil, but all over the world, everyone is looking for more collateralized products. I would say you that 100% of the credit underwriting we are doing, we did in Q2 and we are doing in Q3, it's collateralized. So in the following quarter or the next conference call -- quarter conference call, you see how much you grew in collateralized products.
And that's something that we plan to keep doing more collateralized products [indiscernible] the macro scenario helps us and give us more confidence to have non-collateralized. So to be sincere with you, there is no specific goal to reach same percentage for each portfolio. It depends on the macro scenario. And as you can imagine, in collateralized products, we have a lower spread; in non-collateralized, we have a higher spread. So it's going to -- we're going to kind of balance these 2 portfolios based on the macro scenario and the profitability we are looking for PagBank. So I'm sorry, but I don't have a specific number to give it to you at this point.
Our next question comes from Jeff Cantwell, Wells Fargo.
Congrats on the results. I wanted to ask you specifically on your net margins. And you see that they are coming in at about 10% to 11% this year, and that includes next quarter. And so I wanted to ask if you can help us think a little bit beyond that. In terms of the motivation and ability to expand the margins from here, understanding that there's a lot of moving parts with TPV and pricing and operating leverage and so forth. [indiscernible] as best you can in terms of what you're thinking as far as expanding that margin?
Jeff, as you could see in Q3 with the guidance that we gave, margins will be flattish in Q3 when compared to Q2. But just to share with you our thoughts here and how we see the company and the situation that we have in the company at this point and all the growth opportunities and so on. Today, we have 45% of the profit of this industry -- of the payments industry, with only 11% market share in TPV. We are 5x to 7x more profitable than our peers. We did a repricing that is 5x more successful -- 5x higher than our competitors. We increased 16 bps, Cielo 4, Stone 3, and that even decrease in [indiscernible]. We were the market share winner in the first semester, 80 basis points. While others, almost all of them, they just lost market share.
And as important as all these points, we are seeing EPS accretion consistently quarter-over-quarter, year-over-year. So it's kind of -- I'm not saying you that we are not looking for margins, of course, we look for margin. But at this point, with all the accomplishments we've been having so far that I just said to you, now EPS accretion is a key metric for us. And we are still growing, getting market share, and it has a very low market share in TPV, we have almost 0.5% of the profit pool of the industry.
So the fact that we are having increasing SELIC and all this stuff. And even with that, margins stable with EPS accretion for us, it's a very, very good accomplishment. So I -- we don't pursue here -- don't look for margin expansion in this short term. We are growing the company with EPS accretion and building PagBank in parallel at the same time. So we always said, right, growth is profitability. That's what we think that we are trying to pursue a quarter after quarter.
And Jeff, this is Éric. Let me remind you that the interest rate in Brazil increased 7x in 12 to 15 months, which poised a challenge for every company in Brazil, not only us. So we understand the market, we take the decisions to preserve profitability. And naturally, as time passes by, interest rate finds an inflection point. All the OpEx leverage that we expect in personnel, marketing and also the revenues growth reaching the breakeven should contribute positively to margins in a natural way. But in the short term, given the higher interest rates, we are preserving and looking for the EPS growth.
Thank you. We now conclude the Q&A session. I pass the floor over to Mr. Dutra for his closing statements.
Hi, everyone. Thank you very much for the time. Thank you for listening to us and for those who made the questions. Look forward to talking to you in person in the following weeks and see you in the following conference call next quarter. Thank you very much.
Thank you. The PagBank PagSeguro conference call is now ended. We wish you a good night. Thank you.