Earnings Call Transcript
Nu Holdings Ltd. (NU)
Earnings Call Transcript - NU Q4 2024
Operator, Operator
Good evening, everyone. Welcome to Nu Holdings' conference call to discuss the results for the fourth quarter and full year 2024. A slide presentation is available on Nu's Investor Relations website in both English and Portuguese. This conference is being recorded, and a replay will also be accessible on the company's IR website. The call is available in Portuguese as well. Please note that all participants will be in listen-only mode. You can submit questions at any time using the Q&A box on the webcast. Now, I would like to hand the call over to Mr. Jorg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedemann, you may proceed.
Jorg Friedemann, Investor Relations Officer
Thank you, operator, and thank you, everyone, for joining our earnings call today. If you have not seen our earnings release already, a copy is posted in the Results Center section of our Investor Relations website. With me on today's call are David Velez, our Founder, Chief Executive Officer and Chairman; Youssef Lahrech, President and Chief Operating Officer; Guilherme Lago, Chief Financial Officer; and Jag Duggal, Chief Product Officer. Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu Holdings but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies. Reconciliations of our non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on a year-over-year FX-neutral basis. I would also like to remind everyone that today's discussions might include forward-looking statements, which are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties and could cause actual results to differ materially from our expectations. Please refer to the forward-looking statements disclosure in our earnings release. Today, David will discuss the main highlights of our fourth quarter and full year 2024 results. After that, Lago and Youssef will take you through our financial and operating results in more detail. We will then open the call for questions. I will now turn the call over to David. Please, David, go ahead. Thank you.
David Velez, CEO
Thank you, Jorg. Good evening, everyone, and thank you for joining us today. 2024 was another pivotal year in our strategy as we continue advancing in our mission to fight complexity and empower people. Our consistent execution and customer-centric approach drove significant growth across all three geographies. We now serve over 114 million customers with 20.4 million net additions this year alone. Our active customer base grew 22% year-over-year to nearly 95 million. In Brazil, we continued adding over 1 million customers per month, serving 58% of the population and further consolidating our position as the third-largest financial institution in the country in number of customers. In Mexico, we achieved a significant milestone by surpassing 10 million customers, underscoring our strong growth momentum in the country. Beyond customer growth, we strengthened our deposit franchise, particularly in Mexico and Colombia, a crucial step in reinforcing our long-term strategy, bolstering our liquidity position, and enabling prudent credit expansion. Total deposits grew 55%, FX Neutral to $28.9 billion, while our interest-earning portfolio expanded 75% to $11.2 billion, also on an FX Neutral basis. We have maintained our high-growth trajectory while significantly strengthening our financial results, demonstrating the efficiency and compounding power of our business model. Revenues grew 58% year-over-year on an FX Neutral basis to $11.5 billion in 2024, driven by sustained ARPAC growth, up 23% year-over-year in FX Neutral terms to $10.7. Our efficiency ratio in the fourth quarter dropped below the 30% mark to end the year at 29.9%, making Nu one of the most efficient global financial services platforms and with room for additional optimization. Notably, net income almost doubled from 2023 to close to $2 billion with an annualized return on equity of 28%. These results place us among the most profitable financial institutions globally, even while maintaining a significant excess capital position at the holding level. These achievements underscore the power of our low-cost financial model, our commitment to customer engagement, and our ability to deliver sustained profitability at scale. With a strong foundation in place, we remain focused on extending our market leadership, launching new products, and deepening financial inclusion across Latin America. Now let's move on to the next slide to take a closer look at how we advance on our strategic priorities in 2024. First, in Mexico, we reached an exciting milestone of 10 million customers, up 91% year-over-year, now serving 12% of the country's adult population. Deposits grew significantly, increasing 438% from 2023 to $4.5 billion, reflecting our position as a trusted financial institution. Our credit card customer base expanded by 70% to $5.6 million and almost half of these customers did not have any credit card before ours, demonstrating our ability to help increase financial inclusion in the region. Over the last three years, our first payment default rate has improved by approximately 50%, while credit approval rates in Mexico have increased by 10%, underscoring the significant enhancements in our risk models and their impact on both credit performance and accessibility. We also expanded cash-in and cash-out access to over 30,000 contact points, a critical component of our long-term strategy to digitize and democratize financial services. Now, moving to secured lending in Brazil. This portfolio grew an impressive 615% year-over-year to $1.4 billion, representing 23% of our total lending portfolio. We signed nine new agreements with collateral counterparties in the public sector, expanding our total addressable market for payroll loans to 70% of the segment. As a result, 12 million of our customers are now eligible for payroll loans, along with an additional 80 million for FGTS loans. We also enhanced our portability solution and features and as of December 2024, 16% of INSS originations came from customers who brought their loans to Nubank and refinanced them under better conditions. At the same time, we captured over 30% market share in FGTS originations, underscoring our strategy's success and product market fit as well as the power of our low-cost distribution model. Building on our success in Brazil, we made significant strides with our high-income strategy, expanding our reach with close to 700,000 Ultravioleta customers, a 132% year-over-year increase. Credit card performance was also remarkable with quarterly purchase volume from Ultravioleta credit cards increasing 106% year-over-year to $1.8 billion in Q4 and accounting for 10% of our Brazilian credit card purchase volume. Our NPS of 84 continues to set us apart as the most loved brand among high-income customers alongside a 16% increase in brand consideration. Finally, our Money Platform is becoming a bigger reality. NuMarketplace had over 1 million customers shopping on our platform throughout the year. We also launched NuTravel, enabling customers to plan their trip seamlessly and securely within the app with the guarantee of the best price bundled with a multi-currency account for even greater convenience. And in an exciting development, we introduced NuCel, or MVNO service in partnership with Claro, further diversifying our offerings, strengthening Nu's ecosystem, and expanding our addressable market. As we continue making progress in our three geos, we remain very excited about the opportunities we have ahead by expanding Nu's platform, increasing the market share of our core products, and further monetizing our existing customer base. Additionally, capturing growth in new verticals with our Money Platform strategy is gaining traction, significantly broadening our total addressable market. The strategic expansion of our ecosystem has continued with the launch of NuCel in Brazil's massive telecom services market and the build-out of NuMarketplace. What's particularly exciting is that these are entirely new and significant avenues of growth for us along with NuTravel and NuPay. Reflecting on 2024, we're very pleased with the progress we've made across our strategic priorities, and we see several early indicators confirming that we remain on the right path. Nevertheless, our perspective is that it's still just day one. We remain focused, ambitious, and excited about what's ahead. And with that, I'd like to pass the floor to our CFO, Guilherme Lago, who will walk us through the details of our financial results. Over to you, Lago.
Guilherme Lago, CFO
Thank you, David. Good evening, everyone. As David noted, 2024 was an exceptional year marked by strong and consistent revenue growth, deeper customer engagement, combined with solid operating margins and profitability, all of which further validate the power and efficiency of our business model. Let's take a closer look at our fourth quarter results and how we have continued advancing across the key pillars of our strategy. Beginning with customer acquisition, we saw another quarter of strong growth, adding 4.5 million new customers to our platform and ending the year with 114.2 million customers, a 22% increase over 2023. As our customer base continues to expand, our focus shifts increasingly towards engagement and retention. Our active customer base also grew by 22% year-over-year with our monthly activity rate reaching 83.1%. Please note that activity dynamics in Mexico and Colombia differ from Brazil's as we refine our product offering in these two important markets. While customer growth in Mexico and Colombia outpaced Brazil this quarter, initially, lower activity levels in these two countries temporarily impacted our consolidated activity rate. Turning to revenue expansion. As shown on the first chart on Slide 10, Nu continued strengthening primary banking relationships, now representing approximately 61% of our active customer base. This strong performance underscores our ability to capture a larger share of wallet through effective cross-selling and upselling, further reinforcing our position as our customers' primary financial partner. We are also very pleased to see that recent cohorts are reaching this level of primary relationship at an accelerated pace. The chart in the center shows that the average number of products per active customer has now reached 4.1, also demonstrating the success of our cross-selling strategy even as we continue welcoming a growing number of new customers. By effectively introducing our products to these new customers, we deepen engagement and further strengthen our role as their main banking partner. The last chart illustrates the combined impact of these two powerful dynamics, best-in-class customer engagement, coupled with our growing cross-sell capabilities, enables increasingly positive results. While our average monthly ARPAC stands at approximately $10.7, our more mature cohorts are already reaching $25, demonstrating the strong long-term monetization potential of our model. Please note that the ARPAC dynamics shown in this slide also reflect the accelerated growth of our customer bases in Mexico and more recently, also in Colombia. While our deposit strategy in this market may initially attract more customers who engage primarily with the Cuenta product, one that generates relatively lower ARPAC levels, we are highly confident in the long-term value of this approach. As we have seen in Brazil for nearly a decade now, this strategy lays the foundation for deeper engagement and greater monetization down the road. As depicted in the left-hand chart, our monthly ARPAC experienced a slight decline of $0.03. However, on an FX-neutral basis, it expanded 5% sequentially and 23% compared to the prior year, despite rapid customer growth in the new geographies as I mentioned before. Again, we remain confident in our ability to continue increasing ARPAC to its full potential as our customer base matures with time. The chart on the right shows revenues hit another record-high this quarter of nearly $3 billion, up by 50% year-over-year. This remarkable growth was driven by the ongoing expansion of our active customer base and the strong ARPAC levels we continue to achieve. Our total credit portfolio also experienced robust growth in the fourth quarter of 2024, increasing 45% year-over-year and 13% quarter-over-quarter, both on an FX-neutral basis, reaching a total of $20.7 billion. This strong performance was driven by growth across both lending and cards. During the quarter, our credit card portfolio maintained its upward trajectory, supported by further expansion in the shares of wallets across all customer segments. This portfolio expanded 28% year-over-year and 9% sequentially on an FX-neutral basis to reach $14.6 billion. Meanwhile, our lending portfolio more than doubled during the year to $6.1 billion, a 22% sequential gain also on an FX-neutral basis. Lending continued outpacing credit cards, reaching 29% of our total portfolio. Consistent with previous quarters, our lending cohorts demonstrate strong credit performance, enabling us to further scale originations. This growth is driven not just by increasing customer eligibility but also by gradually expanding ticket sizes and long durations, which remain a fraction of industry averages. This approach underscores our significant growth potential but also reflects our ability to navigate challenging environments with agility and resilience as we have demonstrated during previous economic downturns in Latin America. Now, let's look at a breakdown of our credit card portfolio. Interest-earning installments continued growing quarter-over-quarter. However, this growth was overshadowed by strong seasonal expansion in non-interest earnings balance, bringing the share of interest-earning installments down to 27% of the overall credit card portfolio. Please note that this outcome aligns with the expectations that we shared last quarter following the intentional deceleration of financing for specific risk bands. Although demand for PIX financing products and their profitability remains very strong, we have deliberately tempered the pace of eligibility expansions during the second half of 2024 to carefully monitor the performance in the coming quarters and to assess what we call the second-order effects of this product on customer engagement and the long-term value of customer relationships. Now, at the beginning of 2025, after more extensive testing and adjustments, we began refining our PIX financing offer for different risk bands, taking into account customers' potential exposure to this product to mitigate any undesirable effects on asset quality or engagement across our platform. Given this approach and especially in a more challenging macroeconomic environment, we do not anticipate a significant expansion of PIX financing penetration, at least in the short term. Let's move to our lending business. Originations surged 84% year-over-year to BRL18.4 billion in the quarter. Unsecured lending remained the primary growth engine originating BRL15.6 billion and demonstrating our success in fostering financial inclusion for both individuals and SMEs in Brazil. Now, our secured lending originations reached BRL2.8 billion in the fourth quarter of 2024, representing 15% of our total lending originations. Notably, these originations are entirely in-house generated exclusively through our platform and do not include portfolios acquired from third parties. Equally exciting is the strong performance of FGTS-backed loans, which expanded to over 60% of our total secured lending originations. Nu's market share of new originations in this product has already surpassed 30%, reflecting the strong market feed of our fully digital distribution channel. This year, we also made significant progress toward achieving product parity and we are pleased with the early performance indicators of new features for public payroll loans in Brazil, such as portability, pop-ups, and refinancings. Additionally, we successfully integrated and launched operations with Brazil's armed forces, a very key milestone in expanding eligibility. To further grow our total addressable market or TAM, we have signed new collateral agreements now totaling 11, including partnerships with several major Brazilian states and municipalities. These agreements will allow us to reach over 70% of the TAM for public payroll loans in Brazil in the coming months, expanding access for newly eligible customers and supporting continued growth in originations. On the funding side, our total deposits for the quarter increased to $28.9 billion, up 55% year-over-year on an FX-neutral basis. This growth was supported by robust expansion across our three geographies. In Brazil, deposits reached $23.1 billion, an 11% sequential increase on an FX-neutral basis. Additionally, our deposit rate strategy in Mexico and Colombia continues to yield excellent results. It has significantly increased deposits in both countries, furthering our mission to empower our customers to take control of their financial lives, while also adding financial resilience and strong liquidity buffers to our operations in these countries. Even after reducing the spread over the Interbank rate, our operations in Mexico accumulated $4.5 billion in deposits, a fourfold increase from 2023, highlighting our ability to enhance cross-selling opportunities while still improving unit economics. Lastly, our performance in Colombia exceeded our expectations. Deposits reached $1.3 billion just two quarters after launching Nu Columbia's checking account and placing us among the country's top five financial institutions based on demand deposits for individuals. Net interest income rose significantly, increasing 57% year-over-year and 9% sequentially on an FX-neutral basis, reaching a record high of $1.7 billion. Conversely, our net interest margin contracted 70 basis points to 17.7% this quarter. This was primarily driven by the very same factors that we highlighted last quarter. First, lower credit yields reflecting ongoing shifts in both product mix due to the increasing share of secured loans and customer mix as we continue testing price elasticity in line with our improving risk profile. Second, funding costs also increased as a result of stronger deposit growth in Mexico and Colombia and consistent with our deposit rate strategy in these new geographies, which are still remunerating deposits at a premium to the benchmark rates. Additionally, FX movements once again negatively impacted our NIM as the FX rate used to translate the numerator depreciated more than the FX rate that applied to the average interest-earning assets of the denominator. Now, looking ahead to the mid and long-term profiles, we remain confident that the balance sheet optimization will be the primary driver of future NIMs, especially as deposits normalize in Mexico and Colombia take place. Regardless of interest-rate trends, we see significant opportunities to expand originations by shifting funds from cash to credit. With our loan-to-deposit ratio still at significantly low levels, we believe there is a lot of room to improve efficiency and further strengthen our profitability levels. Now, let's turn to the last pillar of our strategy, maintaining a low cost to serve. We continue to believe that our platform is one of the most cost-competitive in our markets and represents a significant competitive advantage. Accordingly, we remain committed to keeping our cost at or below $1 per active customer for the foreseeable future. Once again, we achieved this goal with a cost to serve per active customer of $0.80. On an FX Neutral basis, this represents an 11% year-over-year increase, largely due to seasonal spikes in data and processing usages. Simultaneously, our ARPAC grew by 23% over the same period, highlighting the strong operating leverage of our business model. Our gross profit reached $1.4 billion this quarter, an 8% sequential increase and a 44% increase from 2023, both on an FX Neutral basis. Gross profit margins stood at 45.6%, returning closer to 2023 levels despite higher funding costs we expected in our new geographies. This performance also reflects the strengthening of our business model, which continues to deliver significant profitability even as we expand and invest in new markets. Over the past quarter, we continued demonstrating our ability to drive operating leverage as our business scales. Our efficiency ratio improved significantly, closing the quarter at 29.9%, a 150 basis points improvement from the previous quarter and over 610 basis points better than last year. This progress underscores the strength of our low-cost operating model, which enables us to sustain strong growth and drive product innovation while maintaining efficiency. With ongoing investments in technology and automation, we remain confident in our ability to further optimize our platform as we continue to scale. Net income in the fourth quarter reached $553 million, up 7% sequentially and 85% year-over-year on an FX Neutral basis, while our net income margins expanded 300 basis points to 18%. Additionally, adjusted net income for the quarter increased by an impressive 87% from 2023 levels to $610 million. Our strong bottom-line results further demonstrate the effectiveness of our strategy and the resilience of our business model. While we are pleased with our fourth-quarter performance, our focus remains on maximizing the long-term value of both our customer relationships and our company. This approach entails making deliberate short-term investments to unlock future growth opportunities, enhance customer engagement, and reinforce our leadership positions in the markets where we serve. Now, I'll hand the call over to Youssef, our President and Chief Operating Officer, to discuss asset quality and the overall health of our credit portfolio.
Youssef Lahrech, President and COO
Thanks, Lago. Hi, everyone. Starting as usual with NPL trends. Our leading indicator, the 15-90 ratio, declined sequentially by 30 basis points to 4.1% in the quarter. Beyond the normal seasonal decrease we see in early delinquencies in the fourth quarter, this improvement was driven by mix shifts, one, towards lower-risk customers in credit card and two, towards lower-risk products given the growing mix of secured lending within our portfolio. 90 plus NPLs decreased by 20 basis points to 7.0% and as a result of past trends in 15-90, which have been decreasing for three quarters in a row now. Those decreases in 15-90 are now showing up in the 90-plus ratio, which as we've mentioned in past calls, behaves as a lagged stock indicator of long-dated delinquencies. This next slide highlights asset quality trends for both 15-90 and 90-plus NPLs, but this time on the basis of interest-earning balances rather than total receivables in the denominator. As you can see, the trends have remained stable to declining in recent years, reflecting the strength of our credit underwriting and portfolio management capabilities. This demonstrates that we are being rewarded for the additional risk we've taken, reinforcing our strategic focus on maximizing the lifetime value of customer relationships rather than solely optimizing delinquency metrics over the short term. Let's now turn to our renegotiated portfolio for an update on key trends. Renegotiations have remained relatively stable over the past year with the majority of their volume occurring before 15 days overdue as a result of our low friction proactive approach to this customer experience. This helps customers reorganize their finances early, lowering the risk of delinquency while minimizing the impact on NPLs. And as shown on the right-hand chart, we maintain a robust provision coverage level of more than 200% over 90-plus balances in our renegotiated portfolio, underscoring our prudent risk management and focus on resilience across our credit operations. In line with the growth of our credit portfolio, credit loss allowance expenses increased by 12% sequentially on an FX Neutral basis, reaching $804 million this quarter. In turn, risk-adjusted NIM compressed by 60 basis points in the quarter, driven by the 70 basis point decline in NIM explained by Lago earlier, partially offset by a 10 basis point improvement in cost-of-risk. To conclude this section, we are sharing an analysis conducted with one of our data providers, which compares the performance of our credit card portfolio to that of the Brazilian market. The six charts on this slide show 90 plus NPL time series segmented by risk band where the purple line represents our portfolio and the gray line represents the rest of the industry. As you can see across every segment, the portfolio consistently outperforms the industry, resulting in lower delinquency rates within each risk band. This reflects the strength of our credit underwriting capabilities, which are based on a more precise risk assessment of each customer and the sloping of credit limits to make them more appropriate to each individual customer alongside other factors, such as achieving a higher share of participation, meaning that more customers use Nu as their primary financial institution, which further enhances usage and repayment behavior and strengthens overall portfolio performance. With that, let me now turn the call back to David.
David Velez, CEO
Thanks, Youssef. As we look ahead, we remain in the early stages of leading a profound transformation in financial services, both in Latin America and globally. Although we have maintained a remarkable growth trajectory since founding Nu, today we only capture a fraction of financial services revenue worldwide, which reinforces our belief in the vast opportunity still ahead of us. Our strategy continues to prioritize responsible and ambitious growth over short-term earnings gains, and we see 2025 as another pivotal year of investment during which we will deepen our presence in Brazil, Mexico, and Colombia, expand our product portfolio, and lay the groundwork for our long-term ambitions. With this in mind, I'd like to outline our 2025 priorities to what we call our Three Act story. Starting with Act 1, building the largest and most loved retail banking franchise in Latin America. This is our focus today and where the majority of our resources, time, and focus remain allocated. While we have achieved significant scale, our market share still represents less than 4% in revenue terms, only a fraction of its full potential. In this growth phase, we will continue nurturing customer love, scaling our credit operations, and increasing participation in Brazil, Mexico, and Colombia, all while delivering a seamless, fast, and globally reliable app experience. Moving to Act 2, expand beyond financial services. We embarked on this journey a few years ago with our entry into the marketplace, travel, and more recently telecom verticals. With a large and highly engaged customer base, one of the most loved and trusted brands in Brazil, and significant data and cross-sell capabilities, we believe we have earned the right to go beyond traditional financial services. Our goal is to create an ecosystem that broadens our addressable market and empowers customers to optimize their spending. Building upon the engagement and needs of our customers, we believe this strategy will enable the launch of new verticals in the future. And finally, Act 3, a global AI-driven digital banking model. This is our long-term vision. We endeavor to evolve our regional digital banking platform into a global model, leveraging artificial intelligence to provide hundreds of millions of customers with access to financial products and services that have historically been reserved for a select few. In 2025, we will take critical steps to turn this vision into reality by building the necessary foundations to support our products and services at a global scale. As our three-act story unfolds, our unwavering focus remains on execution, customer-centric innovation, and sustainable growth. We have built a technology platform with the potential to truly redefine financial services across Latin America and beyond, and we're more excited than ever about what lies ahead as we develop our platform to thrive in this new asset class. Thank you for your continued support, and we look forward to another year of progress and positive impact. With that, we're now ready to address your questions.
Operator, Operator
I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.
Jorg Friedemann, Investor Relations Officer
Thank you, Operator. Could you please open the line for Jorge Kuri at Morgan Stanley?
Jorge Kuri, Analyst
Hi, everyone. Congrats on the numbers. Thanks for the opportunity to ask questions. I wanted to ask about a comment that Lago made earlier regarding PIX. Can you just clarify what not expanding PIX in the short-term means? Is this not expanding it as a percentage of the portfolio? Or is it actually not expanding it in absolute balances, so that it will shrink, I guess, as a percentage of your total credit card portfolio? Thank you.
Guilherme Lago, CFO
Hi, Jorge, this is Lago. Thanks for your question. So what I meant is that we should not grow PIX financing as a percentage of the overall portfolio, not in absolute terms. So yes, overall, financing should continue to expand, but more in line with the overall expansion of our credit card portfolio in Brazil in the very short term. So as we mentioned in the prior call, we basically reduced the eligibility growth of PIX financing for the lowest kind of credit bands of financing, primarily to address what we saw as some deteriorations in second-order impacts related primarily to NPS, churn, and engagement. And here, it's important to highlight that the overall profitability and resilience of the PIX financing portfolio continues to be remarkably positive, but we wanted to improve the way that the customer has been presented and the customer journey so as to minimize or even eliminate any potential negative second-order impact. We have been working with our teams over the course of the past months in such improvements. We now have about 12 tests in the market to improve the journey of the customers. We are seeing some encouraging results, and I'm encouraged to believe that we will be able to resume growth in percentage terms over the coming quarters, but I don't want to create any expectations that this resumption of growth will happen necessarily in the next one or two quarters.
David Velez, CEO
Jorge, I want to emphasize a key point related to this discussion, as it offers a valuable perspective on our culture. This situation illustrates a highly profitable product where, if we were solely focused on short-term gains, we would see significant growth. However, we face a choice: prioritize immediate profits or enhance the user experience. Our focus remains on long-term success and fostering consumer loyalty. We are not satisfied with potential negative impacts on our Net Promoter Score. Therefore, we prefer to proceed cautiously, improve the user experience and interface, and enhance long-term consumer satisfaction before accelerating growth. This example highlights the importance of improving long-term Net Promoter Scores, even if it might come at the expense of short-term earnings.
Jorge Kuri, Analyst
Thank you. That's very clear. If I may add a follow-on because I'm guessing PIX has had an impact on your NIM and risk-adjusted NIM. Is it possible for you guys to help us understand the different moving parts? On risk-adjusted NIM, for example, I mean, Lago, you talked about the funding cost increase in Mexico and Colombia. The temporary increase in funding costs in Mexico and Colombia because you're growing the business had a negative impact on your NIM and taking on more risk and type clients and then the FX portion. Can you sort of like walk us through the bridge of what each of these items has had the impact on say your risk-adjusted NIM, which is now 9.5% and it was 11% two quarters ago. So that 150 basis points more or less, how does it break-out between the different components?
Guilherme Lago, CFO
No, great question, Jorge. So in the fourth quarter of 2024, our NIM dropped by about 70 basis points and you can probably see this in one of the slides that we have presented in the earnings. Out of those 70 basis points drop that we saw, I would say that the most relevant factors were, number one, the FX, right? So the FX, we use different FX rates when we translate the local currency into dollars, the denominator and the numerator. So the numerator is usually employing kind of average FX. The denominator is typically translated employing end-of-period effects and the use of those different FX rates explains about 44%, 45% of the 70 basis points contraction. The remaining 55% of the contraction is largely equally explained by two things: number one, the drop in yields in the overall credit portfolio in Brazil as we grow secured lending more than we grow unsecured lending in terms of loan balance, and two, as a result of the growing deposits in Mexico and Colombia, which are still paying interest rates that are higher than the intrabank deposit rates. So those are the three things, Jorge, that I believe justify the contraction of the NIM. Now, if we move to risk-adjusted net interest margins, you do have the same kind of 70 basis points to which I alluded before. And then you have a positive 10 basis points on cost of risk performing is likely better-than-expected. Going forward, how do we see this? And so certainly, there are a lot of moving parts with respect to product mix with respect to Brazil versus our international geos, but we continue to believe that the most relevant outlook for NIMs and risk-adjusted NIMs is the optimization of the balance sheet. We continue to have a loan-to-deposit ratio that is below 40%. As our loan book grows and we shift part of our liquidity from treasury bonds to credit portfolio, we do expect to see NIMs expanding in the medium term.
Jorge Kuri, Analyst
Thank you, Lago. That was exactly what I was looking for and thank you, David, as well.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Eduardo Rosman from BTG Pactual.
Eduardo Rosman, Analyst
Hi, everyone. I have a question here regarding one of your slides. I think it's slide 26, I think Youssef, you show how Nubank has been performing, right, better than peers in credit card underwriting, right? So I think that the loan growth strategy, the principality kind of explains in all part of that. But what about unsecured personal loans, right, which is where you've been kind of accelerating at the margin, right? Do you believe you can achieve the same level of outperformance as you did in credit cards? Is that a different product? How we should think about? Should we think about them combined? So if you could help us understand, it would be helpful. Thanks.
Youssef Lahrech, President and COO
Hi, Rosman, this is Youssef here. Thanks for the question. You're right. So even though the analysis we presented here on Page 26 applies to credit cards, I expect the same dynamics to be playing out in unsecured loans as well. It's just in credit cards, it's a little bit cleaner as an analysis to do because you can identify those loans with a little bit more precision than unsecured loans. Typically, unsecured loans tend to be packaged with other types of partially secured or other types of collateral that would show up in various data sources that are hard to parse out. But I would say, the ability to do low and grow in unsecured lending would show up in the form of very small tickets in the beginning for new customers, or customers that don't have a proven track record of repayment then over time, we get repeat usage. When we get repeat usage and we have more performance data, we can actually increase the amount of loan exposure that we give out to a customer to be able to borrow. And likewise, the more data we have, the more precise our risk assessment can be. So like all those dynamics are applicable to unsecured lending as well, and we believe that credit underwriting expands to that product class equally.
Eduardo Rosman, Analyst
Great. Thanks.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Tito Labarta from Goldman Sachs.
Tito Labarta, Analyst
Hi, good evening. Thank you for the call and for taking my question. I'm interested in the secured lending. You mentioned you have $1.4 billion in secured loans, which is larger than we anticipated. I believe this is the first time you’ve disclosed this information, and I see that originations are continuing to grow. I want to understand your perspective on the ongoing growth from both FGTS and payroll loans. Now that you’ve signed several agreements on the payroll loan side and implemented portability, do you anticipate this growth will speed up even more? Given the current challenging macroeconomic environment in Brazil, do you see this as a significant driver of growth and profitability for the remainder of the year? Can you help us better understand the growth potential or opportunities within the secured lending portfolio?
Guilherme Lago, CFO
Thank you for your question. We are very enthusiastic about the growth of our secured lending portfolio and the benefits it brings to our financial performance as well as its strategic importance in an asset class that has shown a strong correlation with the needs of our customers. Let me break this down for you. Within our secured lending portfolio, we currently have three main asset classes: public payroll loans, FGTS, and investment-backed loans. Over the past year to 15 months, we have been enhancing our products and features, mainly focusing on the two key collateral lines: INSS and SIAPE. By the end of 2024, we anticipate achieving product parity with the market, enabling our customers to secure their first loans, refinancing, and top-ups with portability. We expect to see an uptick in our originations and loan portfolio in 2025, especially since these two collateral lines make up over 50% of the target market. Additionally, we have established over nine or ten new collateral agreements, including those with the Brazilian Armed Forces and several major states and municipalities, which will further contribute to our growth. In fact, we have already seen record-high originations for public payroll loans and secured lending in general in January 2025. Moving on to the second asset class, FGTS, we view our entry into this market as quite successful, estimating that we currently represent over 30% of FGTS loan originations in Brazil. This is promising for two reasons. Firstly, it is a highly profitable and resilient asset class, and secondly, it highlights the potential of a fully digital distribution model directly aimed at consumers, from which we aim to transfer the insights gained from FGTS into the public payroll sector. Lastly, regarding investment-backed loans, which constitute about 10% to 15% of our total originations, we plan to keep expanding in line with our growth in customer base. We believe these three asset classes will continue to grow throughout 2025. It's also worth mentioning the potential for private consignado, a new asset class emerging in Brazil. While this concept exists today, the expected changes and enhancements could drive significant growth in consumer credit in the country, expanding the market size and improving credit terms for consumers. We are working closely with the Brazilian government and other industry stakeholders, and we see this as an excellent opportunity for Nubank to grow its market share and support our customers.
Tito Labarta, Analyst
Great. That's very helpful. Lago, could you provide some insight on the profitability of payroll loans? Since it's a more secure product, the yields are slower, and we've been seeing risk-adjusted net interest margins decreasing. However, as you mentioned, you have substantial capital to leverage the balance sheet. How should we consider the profitability of payroll loans in comparison to credit cards and personal loans, given the current status of the bank?
Guilherme Lago, CFO
So, you are absolutely right, Tito. The profitability if you measure this on ROE, the ROE of the secured lending asset class is, in fact, lower than the ROE of unsecured lending and lower than the ROE of credit cards. However, I would not agree with the assertion that the growth in secured lending is expected to dilute our overall ROE. Why do I say so? Because we will not be growing secured lending at the expense of credit cards or at the expense of unsecured lending. We will basically be putting to work the excess of liquidity and excess of capital that we have in the balance sheet. So if I were to illustrate this more simply, we are basically now shifting part of our treasury bond portfolio in Brazil to fund our secured lending business, which in itself has much bigger NIMs and risk-adjusted NIMs for us. So it does have lower ROIs or lower ROEs, but it should not be dilutive to the overall level of profitability of the company. On the contrary, it should help us kind of optimize balance sheet deployment and overall profitability levels for the company. Not to mention, Tito, the fact that it is an important product to foster additional primary banking relationships and additional engagement, which in itself will bring a lot of long-term benefits to the relationship of Nubank with our now over 110 million customers in Brazil.
Tito Labarta, Analyst
That's very clear. Thank you, Lago.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Thiago Batista from UBS. Yeah, Thiago, your line is open.
Thiago Batista, Analyst
Hello, hear me?
Jorg Friedemann, Investor Relations Officer
Yes, we can.
Thiago Batista, Analyst
I have a question regarding the credit card business, particularly in Brazil. Given the market share data by segment and considering that Nu is nearing maturity in this product, do you think there is limited opportunity for growth in the credit card sector in Brazil? Additionally, we noticed a decrease in the net interest income for credit cards this quarter. Can you clarify if this is due to the Pix financing or if there is another reason for this decline in net interest income?
Guilherme Lago, CFO
Thank you for the question. I will address the reduction in the net interest income or yield of the credit card segment, and then I will allow Jorg or Youssef to discuss our credit card penetration across the segments and the growth opportunities we continue to see in this product in Brazil. Generally, you may have noticed that the credit card yield in Brazil has decreased over the past two or three quarters. This has primarily been due to two factors. First, as we increase our market share among more affluent customers, particularly those we refer to as UV or Ultraviolet, we operate with lower price points when targeting these customers. The growth of our affluent customer base has outpaced that of less affluent customers, contributing to a slight decline in the overall credit card yield. The second factor, relevant to the last two quarters since the start of the second half of 2024, involves the second-order impacts of PIX financing; we have slowed the expansion of eligibility for these customers, which has presented some challenges for credit card yield. However, this product continues to deliver very strong returns on equity and maintains robust levels of credit resilience, and we are pleased with our ongoing expansion efforts.
Jorg Friedemann, Investor Relations Officer
Lago, I’d like to add to Thiago's question. The short answer is that we still see considerable potential for growth in the credit card sector in Brazil. Let me break it down for you. Firstly, among our typical mass-market customers, we've made efforts to reconnect with those who had previously been inactive, and we've seen some progress in that area. This is an ongoing initiative, with a range of strategies implemented over last year and continuing into this year. We anticipate gradual improvements in customer engagement and purchase volume. Additionally, we see significant opportunities in other segments where we historically haven't had a strong presence. For instance, in the high-income segment, we plan to more than double our number of Ultravioleta customers in 2024 and also double the purchase volume from Ultravioleta credit cards as we enhance that product. Moreover, we are beginning to see good early results with our Nubank Business credit card aimed at small businesses. We firmly believe there is significant growth potential for our credit card offerings in Brazil, especially since we currently hold only about 14% market share based on purchase volume. We believe there is still much room for growth in the mass market, and there are various new segments where we've been laying the groundwork for several years, particularly as we move into 2024.
Thiago Batista, Analyst
Very clear, Lago and Jorg.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Gustavo Schroden from Citi.
Gustavo Schroden, Analyst
Hi, good evening, everybody. Thanks for the opportunity. My question is regarding the credit cycle. We've seen some signals of a potential deterioration in inflation, inflation for foods and we know that there is a high correlation between inflation and asset quality, also an environment of high interest rates, some questions about the macroeconomic environment, and we've seen other banks that we talk to adopting a more conservative approach to the credit concession. And I can see that according to this call and your awards, we can see that Nu is still, I would say, relatively positive in terms of credit growth. Of course, excluding the PIX finance, as explained, that you need to redesign the product. But on the other products, we can see you're still positive on the pace of growth. I'd like to understand what's the difference here, and if you do not have concerns about potential adverse selection in this environment. Thank you.
Youssef Lahrech, President and COO
Hi, Gustavo, this is Youssef. Thank you for your question. I wouldn’t say we’re not concerned about the macro environment. In fact, I want to remind you that in our credit underwriting process, whether times are good or bad, we always consider the potential negative impacts from macroeconomic factors and other unknown elements. This is why we operate under the assumption that the future will likely be worse than the past when we underwrite loans or credit cards. We incorporate significant stress into our models, and we have maintained this approach consistently. We have faced negative economic outlooks before, particularly concerning the Brazilian macroeconomic situation, and we've navigated through severe recessions during our decade-long history. This has given us both a resilient portfolio and a robust underwriting framework. We prefer not to try to time the market precisely because we don’t believe we can predict short-term macro trends or asset quality any better than others. Therefore, we adopt a conservative strategy by always assuming that future conditions may be more challenging than those we've experienced in the past. Our experiences have shown that the decisions we make during favorable macro conditions tend to influence our performance during downturns. Consequently, we believe we have built a portfolio that is resilient enough to handle significantly more risk than we've encountered while still being profitable from a net present value standpoint. We continue to uphold this cautious underwriting approach. Additionally, we are aware that the economic forecast has deteriorated in Brazil. Consequently, when we engage in underwriting as well as setting allowances and provisions, we account for this slightly more negative forecast in our provisioning strategy. These are some ways we approach the situation, and we remain confident in our ability to continue underwriting and growing through various economic cycles, as we have done successfully in the past.
Gustavo Schroden, Analyst
Okay. Very clear. Thank you, Youssef.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Mario Pierry from Bank of America.
Mario Pierry, Analyst
Hi, good evening, everybody. Thanks for taking my question. I wanted to ask a question to David. On your last slide, you talked about taking the critical steps to build a global franchise or global scale this year. I wanted to hear a little bit more what does this mean in terms of investments and costs. And exactly what is the plan? Are we talking about here then which markets are you looking to enter? Are you most excited about potential US franchise or expanding Southeast Asia, Africa, or other countries in Latin America? So again, if you can give us a little bit more about what you are thinking about becoming this global digital bank? And also what does this mean in terms of expenses in '25? Thank you.
David Velez, CEO
Sure, I'm happy to explain. Going back to where we started, Nubank's fundamental idea since 2013 has been that the digital banking model we are developing can effectively serve the majority of the global population. In the next few decades, we anticipate that fewer people will visit traditional bank branches, making it an exception rather than the norm. Over the past decade, we have demonstrated this concept, particularly in Brazil, where we can show that our model successfully reaches and includes more people in financial services. It operates with higher quality, evident by our strong net promoter scores, at a lower cost and with increased profitability. This model benefits everyone involved: consumers, investors, and employees alike. In Mexico and Colombia, we see similar progress; we're pleased with the results so far, even though these markets have their unique characteristics. Our first 10 to 11 years were focused on validating our approach in Latin America's core banking sector. Looking ahead, we aim to further test and implement this model in additional countries beyond Latin America. However, challenges exist in this international expansion, especially as we strive to be our customers' main bank account rather than merely a digital wallet. This strategic positioning is crucial because of the numerous advantages it provides. To achieve this goal, we need to deeply engage in each market, acquiring banking licenses and collaborating with local entities, which has made our expansion relatively gradual. A significant factor influencing this pace is our technology platform. No global consumer retail bank has managed to build an efficient multi-country framework with a single codebase capable of facilitating easier expansions, and that's what we've been developing for the past 18 months and will continue to do over the next 18 to 24 months. This proprietary core banking platform enables us to enter various markets with relatively low initial investments. Specifically addressing your question, we will keep enhancing our technology infrastructure through 2025, but this will not result in significant changes in our expenses compared to our existing investments. Last year, we mentioned that 30% to 40% of our workforce is engaged in product development that currently generates no revenue. We are actively investing in the evolution of our model, and this trend will continue into 2024 and 2025, without any notable alterations from what you observed in 2024. When we select a new country to enter, we adopt a cautious approach—investing the minimum at the beginning and scaling our investments as we gain confidence in the market's potential. This strategy worked well for both Brazil and Mexico, where we launched with similar initial investments. Therefore, you shouldn’t expect us to take a large-scale approach in new markets; instead, we will carefully test our hypothesis and leverage our technology to identify and capitalize on significant opportunities as they arise. In summary, do not anticipate any meaningful shifts in expenses, as these are already integrated into the investments we have been making for several years.
Mario Pierry, Analyst
Okay. No, that's clear. But when we think about it, right, like I think you mentioned that today you only have 4% market share of the profit pool or the revenue pool of the countries where you are operating. It feels like, right, you are still at a very, very early stage in the current countries. Like, wouldn't it be more, I guess, would it make more sense first to continue to grow in these countries and make sure right that you get the strategy right, especially in Mexico, this feels like you're going in the right direction, but it will probably take a few more years before you become profitable and it's a very competitive market, right. The Brazilian market is also evolving. We've seen competitors ever since you entered the market, they're adapting, right. So my main concern is, okay, I get 30% to 40% of employees are working on projects that don't generate revenues today. But what about senior management, like the distraction, right, like that you are going to have when you try to become like a global franchise? So again, sorry for the question, but it feels like maybe a little bit too early that maybe you should be bigger in your existing countries before you start thinking globally.
David Velez, CEO
That's a great question. You're right, and it aligns with what we're saying. The primary focus for management and the company remains on what we refer to as Act 1. Brazil, Mexico, and Colombia continue to account for over 90% of our attention. This is our top priority, and we see significant potential in Mexico, particularly in secured lending. As for Brazil, the 4% revenue market share you mentioned in Latin America is quite small, and there’s much we can do to increase our revenue shares in these three countries, which together make up 60% of Latin America's total revenue. While we're on the same page regarding internationalization, it's important to recognize that preparing for it is a multi-year endeavor. Therefore, it's wise to start allocating 1% to 2% of our resources to get ready for more significant investments in the future. We can't tackle this sequentially; some parallel execution is necessary. Over 90% of our efforts will focus on core operations, with the 40% of employees working on projects that don't generate revenue currently involved in Act 2, aimed at financial services in the markets we currently serve. For internationalization, only a small portion of our capacity is devoted to planning the next phase of growth ahead.
Mario Pierry, Analyst
All right. Now it's clear. Thank you very much.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of John Coffey from Barclays.
John Coffey, Analyst
Great. Well, thank you very much for taking my question. I saw that your principality is now at, I think, 61% of your active customers. So, up from 60% last quarter. I know this is probably going to be a challenging question to answer, but can you give me any kind of high-level way of thinking about what these 1-point increases in principality, what that could mean to the P&L and the model in general? Any like, again, views on what we should see if you went to 62%, all other things being equal, what that impact would be on revenue, margins, net income?
Guilherme Lago, CFO
Yeah, John, thanks so much for your question. Look, I think I wouldn't necessarily get too focused on principality going up by 1% or down 1%. There are some seasonality effects there, especially given how we measure principality, especially in the fourth quarter of the year. There is a higher concentration on purchase volumes and transactions that may kind of bring principality a little bit up and then eventually a little bit down. But I think if I step back and try to address your question, the primary banking relationship metric for us, which is a metric that we have been evolving over time, is one of the most important operational KPIs for the company because we do believe that primary banking relationships is one of the holy grails of digital banking globally. Why do we say so? Because the ARPAC of a primary banking relationship customer is now 3 times to 4 times higher than the ARPAC of a non-primary banking relationship customer. The delinquency of our primary banking relationship customer is 48% lower than the delinquency of a non-primary banking relationship customer on an apples-to-apples basis. And so this is the way that our model has been construed. As David mentioned, we are not envisioning to be kind of the secondary wallet or an FX play. We often mentioned that we are not in the business of collecting social security numbers. We are in the business of becoming the primary banking relationship of our customers. And in a world, especially in Brazil, in which open banking or open finance is expected to unfold positively over the coming quarters, we think it is going to even increase the relevance of becoming the primary banking relationship of our customers. So, it's not only a long-term strategic angle. It's also a very short-term kind of P&L boost, and this is one of our primary kind of North Stars.
John Coffey, Analyst
Thank you. I have a quick follow-up regarding your LDR, which decreased from 40% to 39%. Can you share your thoughts on the reasons for this decline and why it might not reach 45% in the near term? Would you attribute most of this to Mexico, where you have a significant deposit base but may still be cautious about fully implementing the credit model, or is there another factor at play?
Guilherme Lago, CFO
No, I think, look, let me address two points on this good question, John. So first, when you look at any financial institution with an LDR of 39%, I think the first question that one may ask is, look, why don't you drop the deposit rates that you're paying or why don't you increase the loan book that you have in order to optimize the balance sheet? I think the first approach is we do believe, as we mentioned before, that we want to be the primary banking relationship of most of our customers. And in order to achieve that, we do need to be the place where they make payments, receive payments, store value, and therefore, having a very relevant deposit franchise is very strategic for us, not only from a primary banking relationship perspective, not only from a funding perspective, but also from a data acquisition perspective. So we do not see necessarily having a low LDR as a sign of weakness of the model. On the contrary, it should be seen as a way that we are getting more and more customers' principal and engagement through our platform. Now, of course, we do aim and we will love to be able to grow our credit book faster and faster over time in order to optimize the balance sheet, but we also have to be fairly responsible that scaling credit books, specifically unsecured credit books, is something that you have to do with a very systematic credit underwriting discipline and you cannot necessarily double or triple your credit book just because you got more deposits. You need to do so carefully and with the right level of credit resilience and thoughtfulness that we believe we have been doing over the past years. So that's, I think, the disconnect that we have been seeing over the past quarters. The growth in deposits in Mexico and Colombia over the past two quarters have certainly contributed to lowering our loan-to-deposit ratio. But in both countries, mainly in Mexico, we are very confident that in 2025 we'll see a very pronounced ramp-up in the velocity with which we grow the loan book there. Now, every single credit metric that we observe in Mexico is performing as per our expectations or even slightly better than expected and that will kind of lay the groundwork for us to continue to improve the balance sheet in each of those geos.
John Coffey, Analyst
Thank you very much.
Jorg Friedemann, Investor Relations Officer
Thank you, everyone. We are approaching 90 minutes of the call. So, I will have to end the session. So we are now concluding today's call. On behalf of Nu Holdings and our Investor Relations team, I want to thank you very much for your time and participation in our earnings call today. We are very excited with our developments in 2024 and we continue sharpening our execution to build a new asset class that goes beyond traditional financial services in the years to come. Over the coming days, we will be following up with the questions received by our platform and with those that attempted, but were not able to ask questions tonight. So please do not hesitate to reach out to our team if you have any further questions. Thank you, and have a good night.
Operator, Operator
The Nu Holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.