Nu Holdings Ltd. Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to the Nu Holdings Conference Call to discuss the results for the fourth quarter 2021. A slide presentation is accompanying today's webcast, which is available on Nu’s Investor Relations website www.investors.nu in English and 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 icon on the lower right side of the Zoom screen and then choose to enter the Portuguese room. After that, select “mute original audio.” Please be advised that all participants will be in listening-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 floor over to Mr. Federico Sandler, Investor Relations Officer at Nu Holdings. You may proceed.

Thank you very much, operator. Good afternoon, everyone, and thank you 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 Vélez, our Founder, Chief Executive Officer and Chairman; Guilherme Marques do Lago, our Chief Financial Officer; and Youssef Lahrech, our Chief Operating Officer. Additionally, Jag Duggal, our Chief Product Officer, will be joining us for the Q&A section of the call. Throughout this conference call the company will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the company, but are non-IFRS metrics as defined by the company. Reconciliations of the company's non-IFRS financial information to the IFRS financial information are available in our earnings press release. Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion may include forward-looking statements. These forward-looking statements 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 that 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. Now, I would like to turn the call over to David Vélez, our Founder and CEO.

Thank you, Federico, and thank you all of you for joining us today. This is our first earnings call as a public company and the first time we speak directly with a number of investors. We very much welcome this opportunity and look forward to transparent and constructive dialogue with all of you over many years to come. Well today, we will be discussing a strong quarter with important improvements across key metrics. Many of you on this call may be new to our story, so I would like to take this opportunity to talk a little bit more about Nu, including our values and mission, our growth strategy and our powerful ecosystem. Subsequently, Guilherme Marques do Lago, our CFO, and Youssef Lahrech, our COO, will take you through our performance in Q4 2021, after which time we’ll be happy to answer your questions. So let me start by telling you about our IPO process. Nu was born with a mission to fight complexity to empower people and we've been doing so relentlessly in Latin America since we were founded in 2013. However, how we accomplish our mission is just as important as accomplishing the mission itself, where our IPO was no exception. We certainly wanted to accomplish a very successful IPO offering, raising approximately $2.8 billion, but we wanted to do so in a way that was aligned with our core values, aligned with our values of always putting our customers first and working backwards from there, and aligned with our value of challenging the status quo. How have we accomplished these goals in our IPO? First, we decided that we needed to allow all of our customers to participate in it, irrespective of prevailing conventional wisdom that a public equity offering targeting our Brazilian retail investors was both unnecessary and incumbent. We structured our IPO as a dual listing in both Brazil and the U.S., allowing for all of our Brazilian retail customers to invest in Nu. It was the first such dual listing in the history of the country. Second, we decided to honor the trust placed in us since our earliest days by gifting a piece of the company in the form of one Brazilian Depositary Receipt, or BDR, each to millions of our customers in Brazil. More than 7.5 million customers joined this program, which will help multiply the number of Brazilians participating in the investment world. It was the largest Directed Share Program, DSP, ever made globally and the innovation in capital markets did not stop there. We also offered shares to our customers in Brazil, where over 800,000 made a paid reservation. These represented the largest number of retail investors to participate in a Brazilian IPO ever. The IPO marked the beginning of another chapter as we mature as a company, and most importantly it will enable us to expand, deepen and strengthen our relationship with our customers. We could not be more excited with the opportunities ahead of us. We will continue to pursue these opportunities relentlessly and we will continue to assess these opportunities based on their potential to accrue value to Nu and its shareholders in the long term. We are and will continue to be long-term focused, and if needed, will put the long-term interests of the company ahead of short-term results. Since the very beginning we have seen ourselves as a technology company that happens to be in financial services, and not a bank that has a better website or a better app. Our strategy is focused on four main differentiating pillars. We have a mission-driven culture; we are on a mission to drive much more inclusion, competition and efficiency into financial services in Latin America. Number two, we are a customer-obsessed company and spend a lot of time understanding customer pain points. Then we're working backwards to build phenomenal user experience. Number three, we are a technology company at heart. We build our own technology, including our proprietary core banking system using our own programming language and that ultimately gives us the ability to control our destiny, continuing to scale our platform with lower and lower costs and much more efficiency. And finally, since the beginning we have been an AI and machine learning-first company. We initially applied these technologies to a very large market, unsecured credit in Latin America. And now we have applied these capabilities to different areas of the company. We've always thought that strong competitive advantages in data science, machine learning and AI were going to be relevant competitive moats and we believe we maintain an edge on these fronts. These all translate into unique customer experiences that are simple, convenient, low cost and empowering. We have built one of the largest digital banking platforms in the world with nearly 54 million customers in Brazil, Colombia and Mexico and are still growing at a pace of about 2 million new customers per month. I would draw your attention to three things in the chart on this slide. First, Nu started with a credit-first approach, beginning with credit cards. Starting with credit is hard. It requires you to develop proprietary credit underwriting capabilities, a state-of-the-art data platform and local currency funding. But we believed it was a worthwhile path to take. Consumer credit is where 70% plus of the profit pool of the industry is. Since the launch of our company in 2013, we have navigated extremely difficult macroeconomic environments, including the largest recession in Brazil's history and our pandemic. All of this has forced us to develop robust risk systems and a generally conservative underwriting approach. Second, most of our customers come to Nu organically, through word of mouth, allowing us to scale very fast while having one of the lowest customer acquisition costs in the industry. This is a testament to the unique customer experiences we deliver. Our NPS is in the 90s, which we think is among the highest, if not the highest, in the global financial services industry. And third, over 5 million of our customers didn’t have a bank account or credit card when they became our customers. This shows that we’re helping grow the size of the market, and we're not simply gaining market share from incumbents. We think of our business model as a two-part ecosystem. On one end there are 52 million plus consumers in Brazil, Colombia and Mexico; and on the other end there is 1 million plus small businesses or SMEs. Our products are both parts of this ecosystem and are composed of proprietary solutions that we are building in-house, just for credit cards or personal loans or mobile payment platforms, and also third-party solutions provided by first-class product partners such as insurance, secured loans, e-commerce and default products and services. We expect that these solutions, both proprietary products and partner services, will expand fast while the two sides of the ecosystem continue to grow in both size and engagement. We are moving fast on this front. We enhanced our marketplace initiative and expanded our platform to strategic partnerships. We are pleased to report that we ended the year with over 20 partners across nine different verticals. During the fourth quarter we onboarded large financial services and non-financial services players, including Michael Liu and others. We are also reaching important milestones in our international expansion, where the Nu model has proven to be exportable as we continue to be optimistic about our markets in our Nu geographies. In Mexico we ended Q4 2021 with 1.4 million customers or over 7 million applicants, and a record-high NPS of over 90. We believe we have already become the largest new credit card issuer in Mexico at this time. In Colombia, the third country that is part of our international expansion today, results are equally encouraging, as we have learned to launch in a new country more effectively and efficiently over time. Nu has many different growth vectors to fuel its expansion over the coming decade. From continuing to grow our customer base, to offering new products, to geographic expansion, we are in the very early innings of this journey. There is also significant opportunity to further monetize our customer base. This will happen through both additional up-sell, as well as cross-sell initiatives, including proprietary and third-party products. And this monetization will be realized using a low-cost platform, highlighting the operating leverage of our business model. Now, I'd like to turn the call over to Guilherme Marques do Lago, our CFO, and Youssef Lahrech, our COO, who will review our performance in the fourth quarter of 2021 in more detail. Thank you.

Thank you, David. In the fourth quarter and the full year of 2021 we delivered a very strong set of operating and financial KPIs. We did so by leveraging our simple yet powerful value generation formula. First, continuing to grow our base of active customers in Brazil, Mexico and Colombia. Second, continuing to increase the monetization of our customer base by expanding the average revenue per active customer, or RPAC, as we introduce more products and features and our customer cohorts mature. And third, delivering all that growth while maintaining one of the lowest-cost operating platforms in the industry. We believe Nu has very high operating leverage potential, driven by deep cost advantages across the four traditional cost fields of financial services: low customer acquisition cost, low cost to serve, low cost of risk, and low cost of funding. These cost advantages are expected to deepen as our ecosystem expands. Now, let's take a deep dive into the quarterly results of our business. During the fourth quarter of 2021, we added almost 6 million customers, mostly coming through organic channels and representing over 60% year-over-year growth. More importantly, this growth has not come at the expense of customer engagement. On the contrary, our monthly activity rate grew from 66% in the fourth quarter of 2020 to 76% in the fourth quarter of 2021, all this while we added over 20 million customers to our base in the period. We are not in the business of just collecting social security numbers. We are in the business of becoming the primary banking relationship of our customers, both consumers and SMEs. As you can see from the three charts on this slide, the compounding effect of higher engagement in our customer base, with more products and features in our ecosystem has proven very powerful. It has driven the monetization of our customer base, as reflected in the expansion of the average revenue per active customer, or RPAC. During the fourth quarter we continued to achieve RPAC expansion. Our average RPAC reached $5.6 per month in the period, up from about $4.9 last quarter, but the RPAC of our more mature cohorts already exceeded $15 per month. We expect this trend to continue as customer cohorts continue to mature and we add new products and features to our ecosystem. The combination of more customers, more active customers, and higher RPAC enables us to grow revenues at triple-digit rates. In the fourth quarter of 2021, our revenue reached $636 million, increasing year-over-year by 224% on an FX-neutral basis, mainly driven by the increase in transaction volumes and strong growth in our interest-earning portfolio. Let's move on to purchase volume, a key KPI to track and understand the progress of our cards business over time. During the fourth quarter of 2021, purchase volume reached $14 billion, growing almost 100% year-over-year on an FX-neutral basis. This strong evolution in purchase volumes during the quarter is a result of a growing and engaged user base, the continued maturation of our cohorts and increased usage across our product portfolio, which includes credit cards, prepaid cards, secured cards and premium virtual cards. Let's have a look at our credit portfolio, another key driver of our revenue growth. During the fourth quarter of 2021 we continued to post above-market growth rates in our core consumer finance products, credit cards and personal loans. In the three months ended December 2021, our credit card receivables portfolio grew by 21% quarter-over-quarter and 78% year-over-year, both on an FX-neutral basis. We estimate we outpaced the market in Brazil by 2x. Also during the fourth quarter, our personal loan portfolio grew by 58% quarter-over-quarter and 7x year-over-year, both on an FX-neutral basis. We estimate our market share in terms of personal loan portfolio expanded from less than 1% in December 2020 to approximately 4% in December 2021. But I would like to point out that we are still in the very early days in personal loans. Now, let's take a look at our deposits base, which continues to attract very strong net inflows. One of the key pillars of our business model is that we continue to fund our operations primarily with local currency retail deposits. We believe that having local currency retail deposits at competitive rates is key to funding our consumer credit business at scale, and superior to other sources of funding such as wholesale funding or securitization. As we continue to witness this strong trend in people and SMEs shifting from branch-based banking to digital-based banking, our deposits franchise continues to grow at a very steady pace. As of the fourth quarter of 2021, our deposits were almost $10 billion, representing a year-over-year growth rate of 87% on an FX-neutral basis, with an average funding cost that is lower than that of the risk-free rate in Brazilian CDI. Additionally, given the growth in our deposit franchise, we can comfortably cover our interest-earning portfolio with retail deposits. Moving on, let's take a look at our cost to serve per active customer, a key pillar to appreciate the operating leverage of our business model. This metric has decreased over 20% year-on-year as we gain operational efficiency resulting from our increasing customer base. It is a guidepost that gives us the confidence that we are on the right track in the pursuit of strong operating leverage as we continue to see our RPAC outpacing cost to serve per active customer. In the fourth quarter of 2021 and in the full year of 2021 we posted record gross profits of $227 million and $733 million respectively. While gross profit margins remain stable for the full year, we saw lower gross margins in the last quarters of 2021, as a result of the very strong growth in our interest-earning portfolio in this period and our loan loss provisioning methodology that front-loads the recognition of provisioning under IFRS. Moving on to adjusted net income, let me quickly walk you through the adjustments we made to GAAP net income to arrive at this metric, in order to give you a better sense of the recurring profitability of our business. As we define, adjusted net income has profit allocated to our shareholders adjusted for expenses related to share-based compensation in our IPO, as well as the tax effects applicable to those items. As you can see, and as a result of our growing scale, we are beginning to reap the benefits of operating leverage on an adjusted net income basis. This is an important data point as it gives us the confidence that we are on the right trajectory with our earnings formula. For a detailed reconciliation between our net income and our adjusted net income, please refer to the appendix of this presentation. Now, I’d like to turn the call over to Youssef, our Chief Operating Officer, who will walk you through our credit and lending.

Thank you, Guilherme. Let me now walk you through a few key indicators that track asset quality and the overall health of our credit portfolio. In Q4 of 2021, credit performance remained strong, with delinquencies normalizing along expected lines, but still below pre-COVID levels when adjusted for portfolio mix between credit cards and lending. We expect the normalization to gradually continue and reach pre-COVID levels for both credit cards and for lending. We are underwriting based on these expected loss expectations as a baseline, and then requiring that every loan that we originate be resilient to risk worsening on top of that, resulting in cohorts that are able to withstand approximately a doubling of risk depending on the product and segment. Now before I go further, I would like to recap the impact that expected credit loss, or ECL, as a loan loss provisioning methodology has on the consumer finance business with high growth rates, as is the case of our credit card and personal loan businesses. Per IFRS 9, loan loss provisions have to be recognized when a loan is granted, even before any revenue associated with that loan is accrued. This results in an intentional timing mismatch between revenues and costs. For this reason, the higher our growth rate is, the higher the provisions we have to book are. And as Lago mentioned earlier, this negatively impacts gross profit and gross profit margins during periods of high growth. As growth rates normalize, gross profit margins are expected to converge over time towards those of mature cohorts. Moving from this basic concept to our actual experience, the charts on the slide show the average evolution of risk-adjusted margins, or RAM, for our credit card and personal loan cohorts. We define risk-adjusted margin simply as revenues minus funding costs and minus cost of risk, expressed as a percentage of revenues. As you can appreciate, in earlier months the risk-adjusted margin is negatively impacted by the accounting recognition of non-cash upfront loan loss provisions I spoke about a moment ago. Then as revenue begins to accrue, RAM quickly expands and converges towards a 60% level or more for both products, with a payback period that is around six months or less. We are very deliberate in terms of which credit products we manufacture ourselves versus distribute. We tend to prefer products that have shorter duration and are more data intensive, as this plays to our underwriting strengths. Having shared these perspectives on credit and asset quality, let me now turn the call back to David Vélez, our Founder and CEO, for his concluding remarks.

Thank you, Youssef. We have delivered another great year with effectively all of our metrics improving and accelerating, and our successful IPO has given us a strong footing to pursue our strategic milestones in 2022 and beyond. We believe the secular market trends that are accelerating our growth, such as significant migration towards digital financial products and growing financial inclusion across the region, remain as strong as ever and we remain focused on disciplined execution against our priorities and continuing to advance our business. We look forward, as always, to keeping you updated on our progress next quarter. And now, we’d like to take your questions. Thank you.

We will now start the Q&A section for investors and analysts.

Thank you, operator. The first question is coming from an analyst. Can you please open the line?

Hi, good evening! Can you hear me okay? Hi, can you hear me?

Yes, sir.

Okay, great, thank you. I’m sorry, I was having trouble with my computer. But thank you for the call and the presentation and please take my question. I guess my question is in terms of your revenue per client. We saw some good evolution in the quarter. Clearly you have been able to grow the loan portfolio. Any guidance or color you can give on how that revenue per client can grow this year, particularly given some of the macro risk and your ability to continue to grow the loan portfolio? And behind that, how much of that comes from continued growth in the loan portfolio and also with fee income growing at a healthy pace? Do you expect any color on how the mix would evolve between loans and fees to benefit the revenue per client? Thank you.

Hi Tito, this is Lago. Thank you so much for your question. It's certainly a great one and the evolution of the average revenue per active customer is something that we are monitoring very closely. If you go to slide 13 of the earnings presentation, you will see the evolution of RPAC or Average Revenue Per Active Customer and you can see that it is going up across all of the cohorts. Our average RPAC has achieved about $5.6 per month per active customer, coming from about $4.9 last quarter, but more importantly the more mature cohorts are already operating at now over $15 per active customer per month. In fact, if you take a look at customers who have our three core products—credit card, bank account and personal loans—their RPAC is now above $30 per active customer per month. So we think RPAC will continue to go up over the course of 2022, and going forward as a result of two things. First, the maturation of the cohorts: as cohorts season, we become the primary banking relationship of more and more of those customers and we increase usage and engagement and purchase volumes with our core products. Second, cross-sell: as we launch new products and features, we increase the average revenue per active customer. In 2022 we do expect to continue to pursue very strong growth in both credit and non-credit products, and we believe that credit card and personal loans will continue to play a key role, but other products will start to contribute more aggressively to RPAC. We are not, however, providing guidance on RPAC levels for 2022 and going forward.

Great! Thank you, Lago. That’s very helpful. Maybe one follow-up: on slide 13, the past cohorts looked like about 57 months to get to that $15, but it seems newer cohorts might be getting there faster. Is it fair to assume that with time you can shorten the amount of time to reach that $15 RPAC per client as you continue to grow and maybe accelerate, perhaps moving from that five years to three or four years? Any color on the timing you can share to reach $15 RPAC?

Yeah, that's a great question, Tito. I think it is somehow an unfair comparison across cohorts, because the earlier cohorts only had bank accounts and credit cards, so they had a much more limited product portfolio. As we launch more products, features and cross-sell more of those products, the RPAC potential and the LTV of our customers go up. So yes, it is reasonable to assume that Nu customers in newer cohorts will be able to mature faster with more products than the earlier cohorts.

Okay, great, thank you Lago. That’s helpful and congratulations on the strong results.

Thank you, Tito.

Thank you, Tito. The next question is coming from Jorge Echevarria from Morgan Stanley. Can you open the line please?

Hi, it's Jore Kuri from Morgan Stanley. Hi, good afternoon everyone. Congrats on the great numbers. I have a question on your revenue outlook for this year. You beat market expectations on revenues this quarter by around 18% vis-à-vis consensus and revenue per active customer was around 15%, and your net adds were well above what the market was anticipating. So as we think about 2022, the current consensus on net revenue is around $2.9 billion. How do you feel vis-à-vis that number? Where do you think the potential upside risks to the number are—meaning what parts of your business are doing better and where you think you can actually outpace that? And on the other hand, what do you think are the risks to that number where it may prove to be optimistic? What are some of the things you are looking closely at? That would be incredibly helpful. Thank you.

Jore, this is Lago. Thank you so much for your question. Unfortunately, we do not provide financial guidance to the market. We appreciate the arguments in favor of guidance, but we believe that the costs outweigh the benefits for the company at this point in time. We are and will continue to be long-term focused and if needed will put the long-term interests of the company ahead of our short-term results. That's the reason why we have not provided guidance, in order to maintain the culture and the focus of the management team on the long term. Having said that, we do expect 2022 to be a strong year for us. We think that we are going to make good strides across many products, both credit and non-credit, and more importantly I think we’re going to make very good strides in our international deals. The operations that we have launched in Mexico and Colombia have been showing very encouraging signs of success. Mexico was the first country that we launched after Brazil. We now have, as you may have seen, over 1.4 million customers in Mexico as of December 2021. We believe that we have already become the largest issuer of new cards in Mexico in the fourth quarter. So we will be expanding products, we will be expanding dues and we will continue to expand the number of customers. Unfortunately I will not be able to provide much guidance on whether we think we will or will not beat market consensus and by how much. I hope you can understand, Jore.

No, I understand Lago, thank you. But, I guess just to focus, I mean, I think it's pretty evident to everyone what could be the sources of potential upside. Can you maybe talk about the risks to the 2022 revenue number? What do you say are the top three risks management is following closely and how do you expect those to play out during the year?

Jore, I think the main risks that could move the needle in 2022 are the continuation of cohort maturation—we have seen cohorts maturing and purchase volume per active customer go up 5x to 6x over time, and while we believe this will continue, it's a risk going forward. The second risk, which is inevitable and we are hyper-focused on, is monitoring the asset quality of the portfolio. We are not blind to macroeconomic deterioration risks that exist. As of today we are optimistic that the market will be favorable to the expansion we plan, especially as we start with a much lower market share, but we will be watching this very carefully with hyper focus on short-term delinquency indicators.

Hi Jore, David here as well. Just following up on Lago: clearly macro is an uncertainty for us and as Lago says, we are taking a very close look into any potential tail for macro and we will adjust growth expectations if we start seeing signs that we are not comfortable with the risk we're taking. That being said, the credit products we pick are very data intensive, short-duration in nature, with very high returns on equity and capital. That gives us the opportunity to react very quickly if we see deterioration and there is buffer and cushion in the profitability of these products. At the same time, if macro does take a turn for the worse, we are entering this year extremely well capitalized with our IPO proceeds effectively untouched, and that should open up a number of opportunities. Customers tend to become even more sensitive to products that charge them less fees and interest in stress environments, which can create opportunities for differentiated customer-focused products. Net-net, we are observing both sides of the trade, aware of some risks over the next months, but ultimately comfortable with the strategy we are executing.

Thank you, David and Lago. Much appreciated and congrats again!

Thank you, Jore. The next question is coming from Thiago Batista from UBS. Can you open the line please?

Actually, Friedman from Citi and I appreciate the opportunity. My question is related to a bit of what we just mentioned. When you look into the evolution of revenues quarter-to-quarter, it expanded by more than 30% while gross profit grew low single digits, exactly because of the expected loss methodology you are using. I understand that you are comfortable with the strategy, but I also would like to understand how comfortable you are with your excess liquidity. Asset quality I think is well explained, but you have more than $9 billion of deposits and at this moment $2 billion of interest-earning assets. So to some extent, this could jeopardize your ability to continue expanding margins and you may need to be a bit more aggressive to capitalize on this difference. Thank you.

Thank you so much for your question. I think it’s a great provocation. To play in consumer credit underwriting in Latin America, you need both a state-of-the-art credit underwriting platform and access to local currency funding at competitive rates. We have a comfortable funding structure today. Our balance sheet is simple: about $9 billion of deposits to support about $2 billion of interest-earning assets, so we have lots of flexibility. Our loan-to-deposit ratio is one of the most conservative you can find. Going forward, we expect to fund the majority of our credit portfolio with our own local currency deposits. Regarding the cost of those deposits, the majority are consumer deposits where we pay 100% of CDI; for SME deposits we have started to pay 0% of CDI in some cases. Thirdly, the credit card working capital structure in Brazil is favorable for the issuer because it has a negative working capital dynamic. So as we grow in credit cards it increases the flows. Going forward, we expect to pursue the lowest possible cost of funding for us and we will watch carefully the composition and pricing of deposits in the coming quarters and years.

That's perfect. If I may just follow up on the point about expansion of revenues versus gross profit: you alluded to how we see the effects of IFRS on slide number 23. Using that as reference and also regarding cost of funding, when do you think we will see gross profit accelerating more aligned with revenue growth?

That's a great question. I suggest looking at slide 24 that Youssef highlighted: at maturity our products converge towards a 60% plus risk-adjusted margin. We expect to converge towards higher gross profit margins as growth rates in our interest-earning assets stabilize. As long as we have very high growth in interest-earning assets, expected credit loss provisioning will pressure gross profit margins due to the timing mismatch. Once cohorts mature and the back book gains relevance relative to the front book, gross profit margins should increase and converge towards the mature cohort levels.

That's perfect. Thank you very much for the explanations.

Thank you. The next question is coming from Thiago Batista from UBS. Can you open the line please?

Yes, hi guys! Thanks for the opportunity. I have two follow-ups. The first one is about the most recent cohorts at Nu. When you look at new clients, do they have the same potential as the old clients, or are the clients not as strong as in the past? I want to understand if new clients have the same potential as older ones. And the second follow-up is about asset quality: you mentioned that the ratios should return to pre-COVID levels. Nu is still well below those levels. Do you have a sense if this is expected to happen even this year, or will it take a couple of years to return to pre-COVID levels?

Thiago, thanks so much for your question. Let me address the revenue potential you mentioned and then I'll invite Youssef to discuss asset quality. On new customers, our marginal customers have proven to be not as profitable as older ones initially, especially if you look at slide 13. But as we launch more products, features and cross-sell, even earlier cohorts have shown growth curves that are at par if not better than the earlier ones. It's not only because of faster maturation; we also now have many more products and features and can offer a much more comprehensive value proposition. In terms of overall potential, if you look at RPAC of incumbents in Brazil, they are about $35 to $38 per active customer per month. We are still at about $5 per active customer per month on average; more mature cohorts are already at $15. We believe we still have a huge gap to close in both proprietary and third-party products. Regarding the marginal customers, we've made very good strides into younger middle-class segments and are converging toward Brazil's average demographics while also reaching up-market and deeper into the unbanked. The balance of those dynamics has been promising and cohort trajectories are encouraging. Youssef, would you like to comment on asset quality?

Yeah, I'd be happy to, Thiago. With respect to asset quality and its trajectory, as I said before we expect the credit environment to normalize back to pre-COVID levels. Over the last two years, during the pandemic, we saw extraordinarily low delinquencies and NPLs, but they started to normalize in the last few quarters. Our expectation was that normalization would take place, and if anything it's been normalizing slower than we initially expected. We thought the process might take six to 12 months; we are 24 months into the pandemic and still slightly below pre-pandemic levels in terms of delinquencies. We expect the trend to continue normalizing going forward. As part of our underwriting philosophy, every loan and credit grant is designed to withstand a downturn—our cohorts on aggregate can absorb roughly a doubling of risk and still be NPV positive—so we feel very comfortable with the resilience inherent in our portfolio.

Very clear. Thanks Youssef and Lago.

Thank you. Next question is coming from Darrin Peller from Wolfe. Can you open the line please?

Hey guys! Thanks. When I look at the user growth numbers, obviously it continues to look strong. We've seen a lot of digital companies pull-forward adoption during the pandemic. Maybe you can walk through the main driving forces of that strength we're seeing, whether it's geographic expansion or new products. Also, could you underscore customer acquisition costs that seem to be industry-leading as you grow into new geographies and products? Anything we should expect to change in CAC?

Sure, thanks for the question. We think the market has gone through stages similar to other technology adoption curves: early adopters, then the mainstream market. We focused on early adopters—millennials eager to adopt digital solutions—and around 2017–2019 we started to break into the mainstream market, which I think is where we are today. Digital banking has been embraced by a significant percentage of Brazilians. The pandemic accelerated adoption among historically skeptical segments, such as those around age 60 who were branch-reliant. With branches closed, customers had no option but to use digital channels, and as category leader they tended to come to us. This has accelerated core growth and expanded our demographic reach beyond millennials. The ability to launch new products helped: three years ago we had one product, a credit card; then we launched a savings account; now we go to market with credit card, savings account, personal loan, insurance, a marketplace for consumers and small businesses. The value proposition is more robust and complete, which helps attract more customers. Customers come because it is a better experience at a lower cost: fully digital products, great customer service, simple interfaces, and fewer fees. That combination is compelling and drives growth. We expect this trend to continue and be reinforced by our product roadmap over the next few years.

I appreciate that. Do you think customer acquisition costs can remain stable? And a quick follow-up: on partnerships—progress on incremental partnerships in insurance, trading, and other verticals? Thanks and nice job!

So regarding partnerships, we launched the marketplace toward the end of Q4, so it's early, but we already have over 20 different partners across several verticals offering products to our customers via our app. We have secured lending products such as home equity and auto equity and a number of other partnerships. Now that we have the right product architecture and technology platform, it's easier to launch additional partnerships. We want to maintain simplicity for the customer and be deliberate about which products to offer. Ultimately we view the marketplace as a huge opportunity: we use our scale to bring better solutions and offers to customers, accelerate the flywheel, and maintain low CACs. On CAC specifically, our customer acquisition cost is about $5 per customer, of which paid marketing is only about $1. We expect CAC will increase somewhat going forward as we invest, particularly in Mexico and Colombia, but we do not expect a material deviation from attractive LTV-to-CAC economics. There may be opportunities to be more aggressive given the returns we see, and we will balance that carefully.

Thank you, guys.

Thank you. Next question is coming from Neha Agarwala from HSBC. Can you open the line please?

Hi Federico, can you hear me? Congratulations team on the inaugural quarter, very good results. My question is more on asset quality. It's good to see the asset quality trends. The NPA ratio for the consumer finance book is about 3.5% right now, but if you expect it to go to pre-COVID levels of say 4.3%–4.5% during this year, what does that mean for your cost of risk? The cost of risk for this year has been rising through the quarters and for 2021 was about 10%. Given that the ECL model requires you to provision up front, would it make sense for the cost of risk to go up to say 13%–15% in 2022, or what level do you think would make sense? Thank you.

Hi Neha, this is Youssef. Thank you for the question. We don't provide guidance around this metric, but qualitatively there are two main drivers affecting NPLs and cost of risk. One is continued normalization to pre-COVID levels, which we expect to put upward pressure on NPLs and cost of risk. The other is the mix of credit assets: our lending portfolio has been growing relatively faster than our credit card portfolio, and lending typically comes with both higher margins and higher risk levels, which should also put upward pressure on NPLs and cost of risk. Those are the main drivers to consider.

Thank you. If I could follow up: given the macro environment today, would your preference be more inclined toward growing the loan book faster or building out your platform and focusing more on fee income rather than interest income? And what level of growth should we expect in the personal loan book—similar to what you saw in 2021 or slower? No specific numbers, just directional. Do you expect to slow down growth, especially in personal loans this year?

Great questions. On growth levels, our baseline scenario remains a continued normalization to pre-COVID levels. Under that scenario we would continue to grow at a healthy pace in both credit cards and lending and feel comfortable because there's a lot of resilience built into our cohorts. These products have very short paybacks, high margins and short duration—our paybacks are around six to seven months for loans—so we feel comfortable with that. If conditions materially deteriorate, we are prepared to act quickly to pull back or take resilience actions such as adjusting pricing or collections intensity. We're prepared to act if things deviate from our baseline.

Thank you so much.

Thank you, Neha. The next question is coming from Geoffrey Elliott from Autonomous. Can you open the line please?

Hello, thanks very much for taking the question. The fourth quarter is always a strong one for spending and card TPV in Brazil. Can you give us a flavor of how much seasonality there is in the numbers, how much of the strength in revenues persists versus being part of the fourth quarter seasonality, and likewise any seasonal impacts in expenses or elsewhere in the P&L we should be aware of?

Sure, Geoff. You can look at slide 15 for the evolution of purchase volume. Yes, Q4 is historically a strong quarter for purchase volume, but overall our growth in customers, purchase volumes and cards has outweighed seasonal volatility, and we don't expect 2022 behavior to be materially different than 2021. There is also seasonality in cost of risk throughout the year: delinquencies are usually lower in Q4 and higher in Q1—this is a normal seasonal trend in Brazil and elsewhere—and we expect 2022 to follow a relatively similar trend.

Okay. Could you remind us how seasonality in cost of risk plays through?

Historically, delinquencies are usually lower in Q4 and higher in Q1 each year; that is the normal seasonal trend we see in Brazil.

Thank you.

Thank you, Geoff. Next question is coming from Gustavo Schroden from Bradesco. Can you open the line please?

Hello, can you hear me? Thank you for taking my question and thanks for the presentation. It's a simple question. I would like to understand the impact from the higher cash position due to the proceeds from the IPO on your interest income, especially because trading gains were stronger this quarter. I want to understand the impact and what we should expect in terms of consumption of these proceeds.

Hi Gustavo, this is Lago. Thanks for the question. The contribution of IPO proceeds to our revenues in 2021, and the fourth quarter specifically, has been very small. The IPO settlement happened in mid-December and the exercise of the greenshoe occurred in the first week of January, so there has been little impact from proceeds in Q4. Regarding trading gains: our interest revenues are composed of three things—interest earned on credit cards, interest earned on personal loans, and interest earned on our cash. The financial statements describe this as gains and losses on financial instruments, but these represent the evolution of our conservative investments in treasury bonds. We have a very conservative cash and treasury policy and expect to remain conservative going forward. On the use of proceeds, we expect to use them for working capital and general corporate purposes, and importantly to expand and fuel our international growth in Mexico and Colombia. Brazil, Mexico and Colombia combined account for a large portion of regional GDP and population; Mexico and Colombia combined have a population almost the same size as Brazil. We have about 30% of the adult population in Brazil as active Nu customers, but less than 1% market share in Mexico and Colombia combined. So a relevant portion of IPO proceeds will be directed toward international expansion in those countries.

Okay, very clear Lago. Just a follow-up on interest income: you saw strong interest income—how have you seen the repricing process given high interest rates? Other banks say competition has made repricing more difficult in this cycle. How do you see repricing and your ability to pass higher rates through?

Great question. Historically in the asset classes we play—credit card and personal loans—repricing has been relatively fast compared to some other asset classes. Central Bank reports over the last six months show the market has been able to reprice relatively fast and not only defend net interest margins, but in some cases expand them. At Nu, we expect to be competitive in pricing, particularly in personal loans, and we have been quick and swift in repositioning and repricing our products accordingly. We have not experienced, nor do we expect, material challenges in repricing short-term credit products going forward.

Thank you, Lago. Very clear.

Next question is coming from Alexander Markgraff from KeyBanc. Can you open the line please?

Hi team, thanks for taking the question. A couple of questions on credit: in your baseline scenario do you anticipate taking a more conservative approach to underwriting in 2022 versus 2021? If so, are there certain retail segments that might be more affected by this change in underwriting stance? Alternatively, do you see opportunities to grow with customer segments if some peers pull back? Also, on marketing expense, it was a bit lower than anticipated this quarter—qualitatively, what are your priorities for marketing spend in 2022 and how will you balance top-of-funnel versus targeted spend to drive adoption of newer products?

Hi Alexander, this is Youssef. Our basic underwriting stance is always to underwrite to future risk worsening. We expect and underwrite every loan and credit grant assuming it will go through a downturn and it needs to be NPV positive in such a scenario. Given that, we feel comfortable continuing our growth trajectory. That said, we are closely monitoring segments and products with leading delinquency indicators and the macro environment. We are prepared to pull back where we see deterioration that's faster or more severe than assumed, or to take advantage of competitive windows where peers might pull back.

Thank you. And on marketing spend—any more detail on whether paid marketing will rise materially or remain modest?

It's a great question. We expect to continue to have strategic marketing spend, especially on paid marketing. Our CAC has been among the lowest in the market—about $5 per customer, with paid marketing accounting for only $1 of that. As we go forward, we expect CAC to increase and we will invest more in customer acquisition, particularly in Mexico and Colombia. However, we do not expect a material degradation in the LTV-to-CAC economics we've shown. Marketing will go up modestly, but not a step change; the LTV dynamics allow for some additional investment without breaking the economics.

We see opportunities to invest more in marketing in specific segments where we're less known—e.g., our product targeting high-income customers launched last year and we could build that brand. We also announced a sponsorship of the FIFA World Cup, so there will be some marketing investments there. We're asking whether we're spending too little; given the LTV-to-CAC economics, there could be opportunity to be more aggressive. We will balance that carefully, but there is room to invest more.

Great, thank you for the thoughtful response.

Thank you, Alex. Next question is coming from Pedro Leduc from Itaú.

Thank you for taking the question. A little bit back on NPLs: you've shown good behavior and you shrunk both credit card and personal loan NPLs on that chart. Could you dig in a little on how each of these lines behaved? Also, do you have a relevant renegotiated book and what is your strategy for recoveries—in terms of internal efforts or selling portfolios as a strategy to mitigate risk?

Hi Pedro, thanks for the questions. In terms of both credit card and lending, both products have generally performed as expected with a gradual return to pre-COVID levels; they are slightly below those levels but trending toward them. On renegotiation, we provide that option to customers and take a conservative approach following regulatory guidance, provisioning accordingly. Renegotiation volumes have been remarkably stable over the last 12 months or more, so there hasn't been a real change in our approach. On asset sales, we did not do any in the fourth quarter, but asset sales are a lever we might use in the future should conditions call for it.

Very useful, thank you. Especially that the book is stable—very good.

Thank you, Pedro. Next and last question is coming from Mario Pierry from Bank of America. Can you open the line please?

Hi guys, thanks for taking my question. Two follow-ups. First, when you mention that you have a very high NPS score on your retail loans, what exactly drives that high NPS? Are you charging lower interest rates, making more credit available, or what? Also, tying to a previous question on repricing: given deposits are linked to CDI which is rising, are you able to fully pass higher funding costs to your clients or are spreads compressing a bit? Then I'll ask the second follow-up.

Hi Mario, thanks for the question. On NPS for personal loans, it’s a combination of better product experience and lower cost. The product quality is driven by user experience: consumers can get a loan through an easy process, money deposited quickly, real-time underwriting and straightforward support if needed. That digital experience drives high satisfaction. We also price competitively—today we price about 30% below market average in some segments—and are aggressive on pricing to maintain the combination of better experience and lower cost, which drives high NPS. On CDI, we are effectively able to pass increases through: for most consumer deposits we pay close to 100% of CDI, but for SME deposits we often do not pay 100% of CDI and that benefits us. The credit card structure also provides favorable working capital dynamics when interest rates rise. Overall, rising interest rates tend to be neutral to net positive for consumer banking and for us.

Mario, to add on interest rates: usually a rise in interest rates is positive for consumer banking and for us. Our balance sheet is simple: roughly $9 billion of interest-bearing liabilities where we pay around 100% of CDI, $6 billion of non-interest-bearing liabilities and $4 billion of equity, totaling $19 billion. On the asset side we have $13 billion of cash and equivalents, $2 billion of interest-earning credit portfolio and $5 billion of non-earning credit portfolio (credit card receivables), totaling $19 billion. When interest rates go up, the cost on our interest-bearing liabilities rises but revenues on interest-earning assets also go up, so the overall effect is net positive given our structure.

Okay, helpful. Second question: about your client base in Mexico—at 1.4 million clients that's about 2.5% of your total base. What percentage should Mexico be of your total clients by the end of the next two years, and how should we think about profitability of a Mexican customer relative to a Brazilian customer? Any material differences in product economics between Mexico and Brazil?

Great question. In the long term, the share of our customers in Mexico could be similar to the relative population sizes of Brazil and Mexico; in the upside case Mexico penetration is lower than Brazil so the relative market share we can capture could be relatively large. In terms of profitability, we expect that in the shorter term RPAC for Mexican customers may be somewhat lower than Brazilian customers, perhaps 20%–30% lower in the long term due to stage of market development and product set. However, credit cards in Mexico can be more balance-heavy and therefore unit economics could be quite healthy. Over time, the ability to cross-sell should be comparable, but it will take time to build the full product portfolio in Mexico. In GDP per capita, Mexico is around 20%–25% higher than Brazil, suggesting in the very long term Mexican customers could be as profitable or more profitable than Brazilian customers, but over the next three to five years Brazil customers may generate higher RPAC given our stage of operation in each country.

Thanks, very clear.

Thank you. That takes care of the questions. I’m going to pass the floor back to David for closing remarks and we can wrap the call.

Everyone, thank you very much for your time. It was a pleasure to talk about our results. We are very excited about what's coming ahead for Nu and we look forward to continue delivering customer obsession and the financial results that come together with that. Thank you very much for your time.

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