Nu Holdings Ltd. (NYSE:NU) Q2 2023 Earnings Call Transcript

Nu Holdings Ltd. (NYSE:NU) Q2 2023 Earnings Call Transcript August 15, 2023

Nu Holdings Ltd. beats earnings expectations. Reported EPS is $0.05, expectations were $0.04.

Operator: Good afternoon, ladies and gentlemen. Welcome to Nu Holdings Conference Call to discuss the results for the Second Quarter of 2023. A slide presentation is accompanying today’s webcast, which is available in Nu’s Investors 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. To access, you can press the globe icon on the lower right side of your Zoom screen, and then choose to enter the Portuguese room. After that, select mute original audio. [Foreign Language] Please be advised that all participants will be in listen-only mode. You may submit online questions at any time today using the Q&A box on the webcast. 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: 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 intersection of our Investor Relations website. With me on today’s call are, David Vélez, our Founder, Chief Executive Officer and Chairman; Youssef Lahrech, our President and Chief Operating Officer; and Guilherme Lago, our Chief Financial Officer. Throughout this conference call we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the Company, but are not financial measures as defined by IFRS. Reconciliations of the Company’s 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 to 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 the Company’s expectations. Please refer to the forward-looking statements disclosure in the Company’s earnings press release. Today, our Founder, Chairman and CEO, David Vélez, will discuss the main highlights of our second quarter 2023 results and provide an overview of our operations. Subsequently, Guilherme Lago, our CFO, and Youssef Lahrech, our President and COO, will take you through our financial and operating performance for the quarter, after which time we’ll be happy to take your questions.

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

David Vélez: Thank you, Jorg. Good evening, everyone, and thank you for being with us today. Though the financial sector in Latin America has continued to face challenging condition over the past quarter, Nu has managed to maintain its positive trajectory with operating trends showing resilience and further decoupling from the broader markets. In Q2 ‘23 once again, we achieved strong growth and increased profitability while maintaining healthy asset quality. We continue to be extremely focused and committed to strong execution on our core priorities while also maintaining significant investment on future growth opportunities. Turning to the main highlights of the quarter. We continued to grow customers at a strong pace ending the quarter with 83.7 million clients.

Once again, net-adds were very robust in Brazil at approximately 1.5 million customers per month. We also resumed growth in Mexico and expect an acceleration in the coming quarters as Cuenta Nu continues to be rolled out. Most of the Cuenta Nu customers added this quarter still came via cross-selling from credit cards. Our business model continues to compound growth and profitability. Revenues reached $1.9 billion in the second quarter, expanding 60% year-over-year. Our gross profit amounted to $782 million, 113% year-over-year increase while our gross margin expanded again to 42% this quarter, consolidating the recovery initiated last year. Sequential gross margin expansion alongside ongoing efficiency improvements drove a substantial increase in net income, which reached $224.9 million or a 53% quarter-over-quarter growth rate.

Adjusted net income reached $262.7 million, reflecting a 39% quarter-over-quarter increase. These slides provides a high level of review of our recent financial performance trends over the past two years, demonstrating our capacity to consistently expand both our customer base and revenues while compounding profits. During this brief period, Nu accomplished a significant milestone by doubling the number of customers from 42 million in mid-2021 to 84 million at the end of the second quarter of 2023. In addition, we surpassed 80 million customers in Brazil in July, establishing ourselves as the fourth biggest financial institution in the country by number of customers. The strong growth for customer base linked to the increasing cross-sell and upsell opportunities, suggested by the high engagement of our platform, resulted in our quarterly revenues multiplying by more than 5x in only two years on a FX-neutral basis, a triple-digit revenue CAGR over this period.

The next chart of this slide illustrates our resilient underwriting capabilities, quarterly gross profit, defined by total revenues, deducted by funding costs, transactional expenses and credit loss allowances, increased by almost 5x in the period, with gross profit margins expanding accordingly, even though credit delinquency has increased over the past 12 months and despite our conservative expected credit loss provisioning. Lastly, all of the aforementioned drivers combined with the strong operating leverage of our platform and the initial maturation of our early products in Brazil has led to a substantial acceleration in net income growth, particularly evident in this chart on the right over the past three quarters. We expect this compounded effect to continue in the coming periods, offering a valuable combination of growth with enhanced profitability in our platform.

As we have previously noted, Nu’s inception in 2013 revolved around the concept of unbundling financial services. However, today, our most significant business opportunities lie in the rebundling of financial services by building a diversified multi-product, multi-segment and multi-country portfolio of businesses. As shown in this slide, even our adjacent businesses have successfully garnered 1 million customers, demonstrating our remarkable cross-sell capacity. As we will discuss ahead in this presentation, we believe all our critical launches taking place this year will continue to help us earn the right to become primary banking providers of more and more customers, supporting our growth and profitability flywheel. Now, turning to our profitability, I would like to highlight the evolution of the key financial metrics we presented over the past quarters.

From this quarter on, we will focus only on the numbers of our holding company, as we understand that our Brazilian operations are already well understood. The momentum continued into the second quarter, as you can see by the numbers on this slide. As our three geos continued to scale and benefit from the interim operating leverage of our model, where holding company is now translating its potential into profits, Nu Holdings recorded an impressive adjusted net income of $263 million in the second quarter, representing an adjusted annualized ROE of 19%. These current levels of profitability already position us on par with many traditional incumbent banks in the Latin American region, even though Mexico and Colombia are still in the early investing stages.

Even more remarkable, we achieved these results while maintaining regulatory capital ratios of 20.2% in Brazil and 42.2% in Mexico, significantly above the minimum required of 10.5% in both countries. In addition to the capital in our subsidiaries, it’s important to note that our excess cash in the holding level of $2.4 billion means that we are extremely well capitalized to deliver on our expected growth ahead. Finally, it is important to emphasize that we are delivering the sound levels of profitability, despite significant investments in future products and geographies, as well as a robust 60% year-on-year revenue growth rate, which few financial institutions at scale are able to show. As seen, once more, we are very excited with the momentum of the business.

And now, I would like to pass it over to our CFO, Guilherme Lago, who will walk you through our numbers in detail. Go ahead, Lago. Thank you.

Guilherme Lago: Thank you, David and good evening everyone. As David noted, we delivered another set of strong operating and financial KPIs driven by our simple, powerful value-generating formula. First, consistently growing our customer base across our three geos and rapidly converting them into active ones. Second, increasing average revenue per active customer or ARPAC by leveraging our cross-selling and upselling capabilities. And third, delivering sustainable growth while maintaining one of the lowest operating costs in the industry. Now, let’s look at the second quarter results to see once more how well these three elements keep generating value. Starting with our customer base, which expanded by 28% year-on-year, as we added 4.6 million new customers, reaching a total of 83.7 million customers at quarter-end.

In Brazil, monthly net-adds continue at a level of about 1.5 million customers, achieved mainly through organic channels with very low customer acquisition costs. We are now the fourth largest financial institution in the country in number of customers according to the Brazilian Central Bank. As noted in our prior call, we have been achieving faster and sustained growth rates in Mexico since the launch of our digital savings account, Cuenta Nu. We have reached the mark of more than 1 million customers less than one month after its launch in May of this year. In Colombia, we already have 700,000 customers and we expect to grow even more after the launch of our savings account in the country planned for the end of this year. Active customers increased 32% year-over-year with the monthly activity rate posting another consecutive quarterly increase, reaching 82.2%, up from 80.2% a year ago.

We believe this positive outcome speaks to Nu’s ability to continue growing our ecosystem, while driving higher customer engagement. Moving to our second pillar, which is revenue expansion. As shown on the left chart, nearly 60% of our active customers are already primary banking relationship customers, which represents the percentage of our active customers who transfer out over 50% of their post-tax income on a monthly basis. In general, the more customers use Nu as their primary bank, the greater the number of products they use, driving successive increases in the monthly ARPAC they generate. The second chart is our product cross-sell chart, which shows how we have accelerated the pace at which our customers use our products. As we launch new products, we are successfully cross-selling them to our customer base and earning the rights to become their primary bank.

Lastly, the third chart is our ARPAC chart. The more we engage our customers and the faster we increase our cross-sell and upsell capabilities, the more sustainable the monetization of our expanding customer base becomes. This effect can be observed again this quarter as our monthly ARPAC reached a new high of $9.3. The monthly ARPAC of our more mature cohorts are already at $24. Higher ARPAC led to another quarter of solid revenue growth as shown in the next slide. Monthly ARPAC continued its steady sequential growth trend, expanding 18% year-over-year on an FX neutral basis. We are confident that there is still untapped potential for further ARPAC growth, bringing us closer to realizing our full ARPAC potential. ARPAC growth, along with sustained expansion of our customer base, resulted in a 60% year-over-year increase in revenue on an FX neutral basis, reaching a new record high of $1.9 billion.

Moving to our cards business, purchase volumes increased to $26.3 billion, up 30% year-over-year on an FX neutral basis. Growth was mainly driven by successful product upsell and cross-sell strategies along with higher customer engagement. The right hand chart displays how purchase volumes increase as cohorts age. Older cohorts consistently purchase higher volumes. It’s worth highlighting the newer cohorts appear to grow more slowly than more mature cohorts due to two factors. Number one, a disparity in scale as these newer cohorts account for almost 20 times more customers than older cohorts. Number two, newer cohorts have at least initially a lower credit card penetration using debit only, which usually implies lower ticket sizes. Our market share in terms of purchase volume is at approximately 13.9% of the industry’s total with debit cards at 14.5% and credit cards at 13.6%.

We are confident that we can further increase our shares in the future given our steady new customer acquisition and the maturation of their relationships with us. Our consumer finance portfolio, composed of credit cards and personal loans reached $14.8 billion, up 48% year-over-year. Total credit card loans maintained their growth trend, increasing 54% year-over-year to $12 billion as we continue to add new customers to our ecosystem while keeping our low and grow credit expansion approach. However, the highlight this quarter is the lending portfolio, which increased 33% year-over-year to $2.8 billion. Lending cohorts continued to perform better than expected, given the confidence to increase originations once again. Let’s now move on to the breakdown of interest earning loans in our credit card portfolio.

As we have previously discussed in our earnings calls, our focus remains on increasing the share of interest earning credit card loans. Our interest earning installment balance continued to expand and now makes up a record high 19% of our total credit card loan book. Conversely, revolving receivables was kept at 7% of total credit card receivables for the fourth consecutive quarter. We believe interest earning installments have attractive risk-adjusted rates of returns that allow us to further monetize our credit card business. As our lending portfolio continues to show strong resilience and a better than expected performance, we have once again increased our risk appetite and origination levels. This quarter, loan origination was up 53% year-over-year to BRL 7.3 billion.

The performance of our personal loans cohort improved over the last several months, giving us the conviction necessary to increase loan originations. As our portfolio continues to show with strong credit resilience, we progressively grow within our risk appetite, seeking to deploy capital profitably and consistently. The launch of public payroll lending complements this strategy and reinforces the opportunities for growth we have ahead. We are confident in our ability to continue to drive attractive growth in lending. This belief is supported by our large customer portfolio, our best-in-class underwriting platform, our strong capital base, and our ample liquidity position. Moving on to funding. Total deposits expanded 23% year-over-year to $18 billion this quarter, as we advance on our goal of building a robust local currency retail deposit franchise to fund the majority of our consumer finance operations.

Our loan-to-deposit ratio increased to 35%, up from 33% last quarter as we continue to optimize our balance sheet. In line with our expectations, our cost of funding in Brazil was at 80% of the interbank deposit rate in the country, demonstrating our progress and leveraging the value of our robust liability franchise. Just one month after the public launch of Cuenta Nu in Mexico, it hit an impressive milestone counted for 1 million customers. At the close of the second quarter of 2023, Cuenta Nu accounted for 1.3 million customers and received total deposits of more than 1.5 billion Mexican pesos, equivalent to $90 million with a cost of funding lower than 80% of TIIE, the local interbank rate and significantly below our current cost of funding in Mexico.

We believe our value proposition has been well received, leading to a steady increase in new customers each month. This has contributed to further strengthen our deposit franchise in Latin America. We believe the combination of the continued growth of our credit card and lending portfolios together with the improvement of our funding cost, have contributed to the expansion of our net interest income or NII, and our net interest margins or NIM to new record high levels. Our NII gained another digit this quarter, reaching $1 billion, which represents yet another strong growth of a 133% year-over-year, resulting in an increase of 260 basis points in our net interest margin quarter-over-quarter. Now focusing on the last pillar of our strategy, maintaining a low cost to serve.

We strongly believe that one of our platform’s most relevant competitive advantages is low cost to serve. In the second quarter of 2023, our cost to serve per active customer remained unchanged year-over-year at $0.80, while ARPAC increased by 18%, underscoring the strong operating leverage of our business model. As we stated in prior quarters, our aim is to keep our cost to serve at or below the $1 level, as we believe our scale provides us with significant operating leverage and bargaining power with our suppliers. Moving down the P&L, gross profit reached a quarterly record high of $782 million, up 113% year-over-year. Our gross profit margin reached at 41.8%, more than 10 percentage points higher year-over-year. Consolidating the acceleration in the pace of expansion started in the third quarter of 2022.

We were able to achieve this result, despite the fact that we had a higher level of provisions in this quarter, resulting from the expansion of the originations of our lending portfolio as we upfront credit loss provisions. Operating leverage is a key element of our strategy. By further increasing revenues and maintaining a low cost operating platform, we have boosted profitability. As shown on this chart, we have improved our efficiency ratio over time. In the second quarter, it reached another all time low of 35.4% or 29.2%, excluding share-based compensation, improving for the sixth consecutive quarter. This level of efficiency already ranks Nu Holdings as one of the most efficient companies in Latin America. We expect to capture additional operating leverage as our scale increases through the continued expansion of our customer base, the upsell and cross-sell of our products and the launch of new features together with improved results in our new geos of Mexico and Colombia, which still operate with losses.

Lastly, we continue to drive increased profitability, delivering adjusted net income of $263 million and net income of $225 million. These positive results confirm the effectiveness of our strategy and business model. While we are very pleased with the results we have achieved so far, let me bring forth that we manage our business with a view towards long-term value-creation. This can require additional investments in the short-term aimed at unlocking long-term value-creation opportunities. To conclude the review of our performance this quarter, let me recap the sustainable advantages across our four cost pillars. Number one, on cost to acquire, we added almost 5 million customers in the quarter, while maintaining one of the lowest customer acquisition costs among consumer fintechs and banks globally.

Number two, on cost to serve. Our cost to serve remained below the $1 level, which we estimate as being 85% lower than those of incumbents. Number three, on cost of risk. We successfully manage the risk of our consumer finance portfolio, amid a very challenging backdrop, and continue to outperform competitors when comparing apples-to-apples. Youssef will provide more details on this topic shortly. And number four, on cost of funding. We maintain our cost of funding at the level of 80% of CDI as we began to unlock the potential of our retail deposits franchise, closing the negative gap we had against incumbent banks and widening the positive gap against consumer fintechs. We are very excited about what we achieved this quarter, and we are confident in our ability to develop and scale best-in-class products, expand internationally, and continue to operate at low cost.

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

Youssef Lahrech : Thank you, Lago, and good evening to you all. Once again, let me take you through some of the key indicators of asset quality and credit portfolio health for the second quarter of 2023. Let’s start with the NPL trends. Overall, our leading indicator NPL 15-90 improved slightly over the last quarter, decreasing by 10 basis points to 4.3%, in line with our expectations. Part of that drop was driven by the improvement in the performance of our personal loan cohorts, as mentioned earlier. The 90 plus NPL ratio increased as expected from 5.5% to 5.9%. As in past quarters, this continues to be driven by the stacking behavior of loans moving through the delinquency buckets as 90 plus is more of a stock rather than a flow metric.

And like in past quarters, we did not sell any credit receivables, which would have otherwise artificially decreased NPL rates by virtue of the purging effect of asset sales. Renegotiations for their part remained at around 9% of the book this quarter, and nearly half of those renegotiations came from loans that were current and not past due at the time of renegotiation. Turning to the performance of our credit card portfolio against the industry, this slide shows the time series of NPLs by income band with the purple lines representing Nu and the gray lines representing the industry. We continue to see our NPLs outperforming the industry on a like for like basis and for lower income bands, our competitive advantage remains even more pronounced.

Similar to prior quarters, our provisions increased primarily driven by the growth in our portfolio. Remember that we front load provisions when we originate loans based on the expected losses for the life of the credit, and in accordance with IFRS 9’s expected loss methodology. The increase in provisions therefore is directly linked to the higher loan origination volumes recorded in the quarter. Our risk-adjusted net interest margin reached another record high of 8% expanding by 140 basis points quarter-over-quarter, and 570 basis points higher than a year ago. Having shared these data and perspectives on credit and asset quality, let me now turn the call back to our Founder and CEO, David Vélez for his concluding remarks. David, back to you.

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Q&A Session

David Vélez: Thanks Youssef. As we wrap up, I would like to talk about two relevant product launches that took place during recent months, Secured Loans in Brazil and Cuenta Nu in Mexico. We consider these two products as essential additions to a roadmap for both countries, given the relevance for us to grow our business and earn the right to become the primary banking relationships of more and more customers. Regarding Secured Loans, we officially launched Payroll Loans for federal employees in April and started the testing phase of FGTS-backed loans a few weeks ago. Including Payroll Loans in our roadmap is going to be essential for several reasons. First and foremost, we believe it gives us access to a largest asset class for consumer lending in Brazil amounting to over BRL 600 billion.

Currently, more than 35% of this market is already taken by Nu Mex clients, but through our banks. Second, we believe that offering Payroll Loans and now also FGTS-backed loans is crucial for us to establish primary banking relationships with an increasing number of customers that tend to be high income. It serves as the ideal product for those that are eligible, enhancing our engagement with them. Importantly, in this new lines of products, we have decided to price aggressively given the advantages of our business model efficiency and the fact that we are not going through intermediaries. Lastly, incorporating Secured Loans into our portfolio is valuable to the remarkably low level of effective losses associated with this product. We believe these initiatives will help us complement, balance and fortify our unsecured credit portfolio with lower risk offers.

We’re already living with all of these secured credit products, but still in testing mode with relatively small sample sizes. While we are still in the early days, we are on-track with our expectations. The conversion rate is progressing nicely, which can be attributed to our differentiated UX and attractive pricing. By eliminating loan brokers from the process, we have passed on some of the associated benefits to our final borrowers. In addition, the current level of losses for Payroll Loans has been better than initial expectations. With a well-established positioning Payroll Loans in Brazil, we seek to underwrite to become primary banking providers of more and more customers in the future. Regarding Cuenta Nu, we officially launched it in May and within a month crossed 1 million customer milestone in this product in Mexico.

By the end of June, we reached 1.3 million accounts and collected more than 1.5 billion Mexican pesos in deposits. Just for the sake of comparison, the average deposit per customer in Mexico is more than 10x the average of Brazilian customers’ deposits when our or checking account was launched in the country in 2017. Cuenta Nu plays a pivotal role in our roadmap for Mexico based on three key factors: Diversifying funding sources and reducing costs. The LATAM markets are highly concentrated, making it challenging to rely solely on wholesale funding, as competitors may not be willing to fund our growth. Additionally, securitization products are usually shallow in Latin American markets and they often become inaccessible when needed the most.

We believe that, to grow our consumer finance business in LATAM, we need to develop local currency retail deposits to provide a stable and sustainable funding source, today with an effective yield lower than 80% of the risk free rate. And as mentioned before, significantly below our current cost of funding in Mexico of funding rates plus 100 bps, which means more than 12% per year. Accelerating customer growth. Cuenta Nu has the potential to unlock our referral flywheel, resulting in accelerated customer growth. Until the end of Q1 ‘23, we could only onboard customers who met our credit card threshold, leading to a high decline ratio of approximately 70% of applications. Now with Cuenta Nu in place, we have the opportunity to onboard 100% of applicants without necessarily incurring additional credit risk.