Earnings Call Transcript
Nu Holdings Ltd. (NU)
Earnings Call Transcript - NU Q1 2024
Operator, Operator
Good evening, everyone. Welcome to Nu Holdings' conference call to discuss the first quarter of 2024 results. A slide presentation is available on Nu's Investor Relations website alongside today's webcast. 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. I would now 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 very much, operator. Thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the Results Center section of our Investor Relations website. With me on today's call are David Velez, our Founder, Chief Executive Officer and Chairman; Youssef Lahrech, our President and Chief Operating Officer; Guilherme Lago, our Chief Financial Officer; and Jag Duggal, our Chief Product Officer. Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu, but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies. Reconciliations of our non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on a year-over-year FX-neutral basis. I would also like to remind everyone that today's discussion might include forward-looking statements, which are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties and could cause actual results to differ materially from our expectations. Please refer to the forward-looking statements disclosure in our earnings release. Today, our Founder, Chairman and CEO, David Velez, will discuss the main highlights of our first quarter 2024. Subsequently, Guilherme Lago, our CFO; and Youssef Lahrech, our President and COO, will take you through our financial and operating performance for the quarter. After which time, we will be happy to take your questions. Now I'd like to turn the call over to David. David, please go ahead.
David Velez, CEO
Thank you, Jorg. Good evening, everyone, and thank you again for being with us today. In Q1 2024, we kickstarted the year with many ambitious goals aimed at propelling our platform to the next level. As we shared with you last quarter, we're targeting four key priorities for 2024, all aligned with our mission to simplify and empower our customers: First, establish strong momentum in Mexico, which means creating the basis for us to grow sustainably and profitably in the country; second, ramp up our secure lending initiatives in Brazil; third, enhance our strategies to further advance in the high-income segment in Brazil; and fourth, launch products and services to leverage technologies such as real-time payments, open banking, and AI that will transform the concept of our consumer technology-driven money platform into reality for our customers. Beginning this quarter, we will present data points to demonstrate the progress of select priorities. During Q1 2024, our business model, anchored by three fundamental principles: fast customer expansion; expanding revenue per customer; and efficient operating costs, showed its strength once again as we generated significant earnings. The growth of our customer base on a net add basis continues to exceed our expectations, surpassing 99 million customers at the end of the quarter, expanding 67% from the 59 million recorded just two years ago. In fact, we've recently announced surpassing the milestone of 100 million customers, becoming the first digital banking platform outside of Asia to cross this remarkable number while operating in only three countries in Latin America. The rate of customer net adds in Brazil continues to be impressive, averaging 1.3 million customers per month, resulting in a total of 91.8 million customers at the end of the first quarter of 2024. In parallel, our growth in Mexico has reaccelerated with a net add of almost 1.5 million new customers in the quarter, reaching a total of 6.6 million customers by the end of Q1. This growth underscores the success of our decision to increase the positive yields in Mexico, which has accelerated our flywheel and solidified Nu's position as the unrivaled leader in the digital banking category in Mexico. Finally, let me share some financial highlights with you. In the quarter, our revenues surged to $2.7 billion, accelerating sequentially to a 64% year-over-year increase. Our gross profit surpassed $1.2 billion, growing 76% year-over-year, while our gross margin reached 43.2% in the quarter. Despite expected contraction of our gross margins this quarter from a seasonal high in Q4, as flagged during our prior earnings call, our net income expanded again quarter-over-quarter to $379 million, while we achieved adjusted net income of $443 million, reflecting expansions of 160% and 136% year-over-year, respectively. This showcases the strength of our business model, capable of combining strong online growth with consistently solid levels of profitability. This slide encapsulates our financial performance trends over the past two years, underscoring our momentum and consistent success in expanding our customer base while simultaneously accelerating both revenues and profitability. The robust growth for our customer base, driven by the growing cross-selling and upselling opportunities enabled by our highly engaged platform, led to more than a threefold increase in quarterly revenues within just two years on an FX-neutral basis. This translated into a 75% annual compounded growth rate for this period. The third chart on this slide effectively illustrates our robust pricing and underwriting capabilities, where quarterly gross profit is calculated as total revenues minus funding costs, transactional expenses, and credit loss allowances that increased by almost 4x in the same period. Lastly, the combined impact of the aforementioned factors, coupled with the strong operating leverage of our platform and the maturation of our early products in Brazil, has led to a significant acceleration in net income growth. This upward trajectory is evident in the chart on the right, especially over the past two years. We anticipate this compounding effect to persist in the years ahead, driven by the combination of sustained growth and increased profitability within our platform. Now I'd like to highlight how our flywheel not only drives customer acquisition and data growth but also sustains strong momentum in our key financial metrics. As we continue to expand in our three markets, leveraging the inherent operating advantage of our model, our holding company has successfully transformed its potential into profits. In the first quarter of the year, Nu Holdings achieved an adjusted net income of $443 million, reflecting an adjusted annualized return on equity of 27%. We believe that this performance surpasses that of most peers in the region, despite maintaining a considerable excess capital of $2.4 billion at the holding level and with two subsidiaries in Mexico and Colombia that are still operating with negative profitability. If one were to look at our operations in Brazil alone, our return on equity remained well above 40%. As outlined at the outset of this call, we are committed to providing investors in the market with updates on our progress regarding our four key priorities for 2024. For this quarter, we have chosen to present KPIs specifically related to our first priority, Mexico. In this slide, we highlight the considerable momentum our strategy in Mexico has achieved, evidenced by the acceleration of our flywheel in the country. Notably, Mexico is already surpassing Brazil in terms of time to achieve different key KPIs for the business.
Guilherme Lago, CFO
Thank you, David, and good evening, everyone. As David mentioned, we delivered a strong first quarter in both operating and financial KPIs. Those results were achieved by focusing on our simple yet powerful value-generating strategy, which can be summarized by three guiding pillars: First, a focus on growing our customer base in the three markets where we operate and rapidly converting our new customers into active customers; second, expanding average revenue per active customer (ARPAC) through both cross-selling and upselling; and third, continuing to deliver high growth while maintaining one of the lowest operating costs in the industry. Now let's delve further into our first quarter results to gain a deeper understanding of the progression of each one of these pillars. I will begin with the results of our customer acquisition. During the first quarter of 2024, our customer base continued to increase at a solid pace. We accelerated customer growth quarter-over-quarter, welcoming 5.5 million new customers in the first quarter of 2024 for a total of 99.3 million customers at quarter end, a 26% increase year-over-year. In Brazil alone, our customer growth pace is at approximately 1.3 million customers per month, with the vast majority still coming from referrals. This not only translates into lower acquisition costs, but also ensures faster activation, showcasing the trust and satisfaction our customers have in our services. Our client base in both Mexico and Colombia also experienced strong positive growth. In Mexico, we reached 6.6 million customers this quarter, marking a remarkable 106% year-over-year growth and surpassing last quarter's net additions. Additionally, we now serve more than 900,000 customers in Colombia. Once we add customers, our goal is to activate and retain them. Our active customer base has increased by 27% year-over-year, followed by another sequential quarterly increase in the monthly activity rate, which now stands at 83.2%, up from 82.1% just one year ago. This marks the tenth consecutive increase in this metric. We believe this is a testament to our proficiency in engaging customers effectively on our platform. Turning our attention to revenue expansion. The first chart highlights that Nu has established primary banking relationships with around 59% of our active customer base. The drop of 2 percentage points in comparison to the fourth quarter of 2023 is mainly associated with last quarter's seasonality, considering increased transactionality during the month of December. Nevertheless, the following charts show an increase in both the number of products per active customer and ARPAC. As you can see in the next chart, the number of products per active customer grew from an average of 4 last quarter to 4.1 this quarter, illustrating our successful cross-selling strategy achieved by introducing new products to our customers and establishing ourselves as their primary banking partner. The last chart shows the combined effect of these two dynamics. By having significant customer engagement, as demonstrated, together with our growing product cross-sell capabilities, it produces increasingly positive results. Our monthly ARPAC increased to $11.4 this quarter in comparison to $10.6 just one quarter ago. Our more mature cohorts are already generating a monthly ARPAC of $27. This reported increase in ARPAC results in another quarter of solid revenue growth as presented in the next slide. Our monthly ARPAC grew sequentially and accelerated its year-over-year expansion rate to 30%, reaching $11.4, up from $8.6 just one year ago. As discussed in prior earnings calls, we maintain confidence in further growing ARPAC going forward toward its full potential. In the second chart, we illustrate our revenues hit a new record high this quarter, reaching $2.7 billion, up 64% year-over-year. Just a year ago, our revenue was $1.6 billion. This growth was driven by the increase in active clients, combined with higher ARPAC levels. Now let's discuss our cards business in more detail. It's important to remember that for cards, the purchase volumes are seasonal, higher in the fourth quarter and lower in the first quarter of every year. Historical seasonality analysis shows a drop of 6.9% on average in total purchase volume for the industry. However, the sequential reduction in Nu's purchase volume this quarter was only 3.7%, with especially strong performance in credit cards, which contracted only 1.8% on an FX-neutral basis versus the historical industry seasonality drop of 5.9%. Compared to the first quarter of last year, our purchase volume was up 30% on an FX-neutral basis to $31.1 billion, sustaining its very strong growth path. On the right side, the chart shows how purchase volumes expand as cohorts of customers develop and mature. Older cohorts continue to increase purchase volumes. While an initial disparity does exist between newer and older cohorts, both tend to exhibit an upward trend in consumption over time. We expect that the compounding effect of adding millions of customers each month, along with the maturation of new customers into historically observed spending patterns, will strongly support the growth of future purchase volumes at Nubank. Talking about purchase volumes trends for the industry, we believe Nu ended the first quarter of 2024 with a market share of around 15%, including credit, debit, and prepaid cards. As we continue to attract millions of new customers every quarter and their spending matures over time, our confidence in our ability to capture additional market share in the future only grows. This quarter, our consumer finance portfolio, comprising credit cards and personal loans, posted another acceleration, growing 52% year-over-year and reaching $19.6 billion. This growth was boosted by expansions in both product categories. The credit card portfolio expanded sequentially, growing by 42% year-over-year to $15.1 billion. This growth was driven by the combined effect of onboarding new customers and increasing the share of wallet of existing customers across all segments. For yet another quarter, our personal loan portfolio was a highlight, increasing 88% year-over-year and reaching $4.5 billion. Following the consistent trends observed in previous quarters, our personal loan cohorts have continued to exhibit expected credit behaviors, which has enabled us to continue to scale originations.
Youssef Lahrech, President and COO
Thank you, Lago. Good evening, everyone. I will now take you through some of the highlights of asset quality and credit portfolio health for the first quarter of 2024. Let us start with NPL trends. First, let me remind you that seasonally, the first quarter represents a high point for early-stage delinquencies. Specifically, 15 to 90 NPLs rise on average by 80 basis points between Q4 and Q1 based on historical data, in line with the rest of the market. That being said, our leading indicator, NPL 15 to 90, increased to 5% in the first quarter of 2024, broadly in line with expectations. Second, our 90-plus NPL ratio increased slightly to 6.3%, also in line with expectations. This is a result of the normal flow through the delinquency buckets. Considering that, as we discussed in the past, 90-plus is a stock rather than flow metric, over time, we get a stacking dynamic. Since we haven't sold any delinquent loans, our NPL rates require no adjustment. As we've mentioned in previous calls, we continue to see meaningful opportunities to expand our credit portfolio, aiming for attractive returns and robust resilience. Part of that growth has been coming from expansions in the credit spectrum, which will continue to result in intentionally higher delinquency rates and will continue to be more than offset by additional revenues leading to increased risk-adjusted margins over time. To illustrate the impact of the credit expansion dynamic on our consumer finance portfolio, we're sharing here this analysis of NPLs as a ratio of interest-earning balances only as opposed to total balances in the previous slide. As you can appreciate, Nu's NPLs as a ratio of interest-earning balances have been trending significantly down on both 15 to 90 and 90-plus. In other words, as we've expanded our credit portfolio, we have increased interest-earning balances at a faster rate than NPLs, thus enhancing returns and resilience. Our provisions continue to grow, primarily driven by the growth in our portfolio, following the same dynamic as in prior quarters. This is due to the fact that we front-load provisions when we originate loans in accordance with IFRS 9's expected loss methodology. Our credit loss allowance expenses grew to $831 million this quarter, directly linked to the increased volumes of origination we generated in the quarter. As a reminder, last quarter, we incurred a lower credit loss allowance expense. That suppression was driven by higher credit card and personal loan recoveries as a result of the government-sponsored debt renegotiation program in Brazil, combined with other collections initiatives. Risk-adjusted NIM reached 9.5% in the quarter, up 3.2 percentage points from a year ago, although contracting 70 basis points quarter-on-quarter. The risk-adjusted NIM was directly impacted by the increase of provisions linked to the growth of our portfolio, particularly in Brazil, and by the growth of our deposits in Mexico. Excluding these two effects, our risk-adjusted NIM would have changed virtually versus the past quarter. With that, we're ready to address your questions. Thank you very much.
Operator, Operator
I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.
Jorg Friedemann, Investor Relations Officer
Our first question comes from the line of Tito Labarta at Goldman Sachs.
Tito Labarta, Analyst
My question is about the increase in provisions. I understand part of it relates to the impact of Desenrola in the fourth quarter, so I expect some increase there. However, could you provide more details on the significant increase this quarter? Is it related to the loan mix, considering that the interest-bearing credit card portfolio has increased and personal loans have risen significantly? Also, did Mexico have any influence on the provisioning? I would like to understand how we should approach this going forward as well.
Youssef Lahrech, President and COO
Tito, thanks for your question. So in terms of the provision dynamics and the provision build we saw in the quarter, you're definitely correct to point out that last quarter was a little bit abnormally low because of the Desenrola we had indicated about $60 million to $70 million additional recoveries during the quarter. So you have to think about over last quarter with that in mind. This quarter, we were back to what I would describe as more normal levels that reflect the dynamics of the portfolio. So we've experienced a lot of growth in both lending, secured and unsecured, as well as credit card. Some of that growth comes from credit expansions, and we've typically seen that play out per expectations, if not actually slightly better than our expectations in terms of the returns. So we're very happy with the NPV and the returns we're getting from those expansions, and you can see that reflected in the risk-adjusted NIM, growing 320 basis points year-on-year. With respect to Mexico, in fact, in Mexico, what we're seeing in the last couple of quarters is improvements in NPLs, partly because of the underwriting improvements we've made at our models, more data. There's more experience in the market and then partly because of a better mix of customers we've been getting over the last couple of quarters after repricing the Cuenta yield up. So Mexico has been probably a positive driver rather than not on that front.
Tito Labarta, Analyst
Great. That's helpful. And my follow-up, I guess, on the risk-adjusted NIM, you mentioned it would have been stable-ish sort of quarter-over-quarter adjusting for Desenrola. Is that sort of maybe what we should expect for the full year? Or do you think there can be some risk-adjusted NIM expansion throughout the year? I know you don't give guidance, but just how you think that should evolve, to some extent, would be helpful.
Youssef Lahrech, President and COO
Yes, you're right. The risk-adjusted net interest margin will reflect the dynamics of the credit portfolio moving forward. As we've observed in the past few quarters, we continue to see opportunities for expansion, which would lead to improved margins. However, as you mentioned, we do not provide guidance on this or attempt to forecast it with any accuracy.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Thiago Batista from UBS.
Thiago Batista, Analyst
I have a question about the SME business of Nu. We saw that Nu achieved more than 4 million clients in the SME business, something close to 2.4 active clients in this segment. When I look at Central Bank data, Nu is charging about 9%, 10% per month in these short-term working capital loans. This is probably a very small portfolio for Nu right now. But can you share with us Nu's strategy in this segment? And how big this can be in the future?
David Velez, CEO
Thank you for your question. You're correct that we haven't discussed our growth in the SME segment extensively, but it's a substantial opportunity for us. We've started cross-selling SME accounts to our large consumer base, and out of our approximately 93 million Brazilian customers, we estimate there are around 8 million to 9 million small businesses in our system. This represents a notable portion of the 15 million total businesses in Brazil. We have significant potential for expanding our operations with more businesses. Many of these SMEs are underserved, particularly those with one or two shareholders, presenting a notable opportunity that we are actively developing. Our current value proposition is quite straightforward; we began with a small business account, then introduced a debit card, and have recently started expanding our small business credit card offerings. We're excited about this product because it allows us to leverage the credit and rating data we have from the consumer side. The synergies between both sides enable us to understand customers more comprehensively. Additionally, when we provide banking services to both the consumer and small business, we see a noticeable increase in ARPAC, engagement, and activation, which not only enhances ARPAC but also brings significant synergies to our overall platform. We're in the initial stages of testing working capital loans; it's still a minor product in our portfolio, but we're gradually ramping it up and exploring various secured and unsecured options for small businesses without rolling out anything major at this time.
Guilherme Lago, CFO
The only thing, Thiago, that I would add to that is that similarly to the profit pool that we see in consumers, the profit pool that we estimate to exist in SME is still 65% to 70% driven by credit. And within credit, we started with a credit card for SMEs. The credit card business is performing extremely well. We are super encouraged by the early results, and then we are gradually expanding into working capital. What we expect, however, in SME is that differently, for example, from the public payroll market, is not necessarily a market in which our growth will hinge on someone else losing market share. We think there's a tremendous opportunity to increase the size of the pie within the credit penetration in the Brazilian SME space. It still has very low penetration, and we think we can expand the market quite strongly.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Geoffrey Elliott from Autonomous.
Geoffrey Elliott, Analyst
Can you hear me? Sorry, I think I had to click a couple of times to unmute. Can you hear me now?
Jorg Friedemann, Investor Relations Officer
Yes, we can hear you now.
Geoffrey Elliott, Analyst
Great. Share-based compensation was quite a bit higher this quarter than it has been. Can you just remind us of the dynamics that is the share price a driver? Is it about grants? What's going on? What drives that? And how should we think about it on a normalized level?
Guilherme Lago, CFO
Geoff, this is Lago. Thanks for the question. Yes, we had an increase in share-based compensation. And I think it is largely the result of three compounding effects. I think number one is there's a general head count growth in the company. Number two is the result of more aggressive performance recognition than we did in the first quarter of 2024, compared to the first quarter of 2023. And number three, the share appreciation, which negatively impacts our social tax contributions, primarily in Brazil, which can account for up to 36% of the grants. So as you will see in our explanatory notes for the financial statements, you will note the increase in share-based compensation, but also the corresponding increase in shared taxes and social contribution taxes, which are accounted together with share-based compensation. Now one of the things, Geoff, that we take very seriously is the net and gross dilution that we apply to our shareholders. And if you take a look at our gross and net burn rates, we have been operating below 100 basis points. In fact, over the past two years, we have been operating below 60 basis points. And we believe, the number one, that we are in the bottom quartile of the industry in terms of companies that apply the lowest levels of dilution to our shareholders. And number two, as we increase in size and value, we do expect operating leverage to continue to play its part here, so we expect that this number will actually go down over time.
Geoffrey Elliott, Analyst
And in terms of what to think about as a normalized figure there. I guess we would want to take out the share price appreciation. It's probably not going to be up 40% every quarter. So what can you point us to, to get to a more normal figure?
Guilherme Lago, CFO
So we don't provide guidance on that. But if you take a look at explanatory note #10 of our financial statements, you will notice how much of that increase came from share price appreciation more or less. So you can exclude the number from the total share-based compensation. We do, however, pay much closer attention, Geoff, to our net and gross burn rates. And we think, on that note, one should easily expect that this will be meaningfully below 100 basis points per year.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Gustavo Schroden from Bradesco BBI.
Gustavo Schroden, Analyst
I would like to discuss the net interest margin. It was quite impressive this quarter, but I want to better understand the trends and factors involved. While the cost of funding increased from 80% to 84%, the average interest rates for personal loans decreased from 6.4% to 6.2%. I am assuming that the positive difference comes from other products, like credit card installments, revolving credit, and perhaps some trading gains. My question is whether you could provide more details about these other products and if you are raising interest rates on them to counterbalance the pressure when comparing funding costs to personal loans. I've noticed that secured loans are increasing in your portfolio, so any additional information on this would be appreciated.
Guilherme Lago, CFO
Gustavo, this is Lago. Thanks so much for your question. I think you are referring to Slide #17 in our earnings presentation. And yes, we have experienced what we believe to be a relatively strong expansion in net interest margin. Over the past four quarters, it went from about 15% to 19.5%. And it is largely the result of two opposing forces. I think on one aspect, on one side, you do have the optimization of the balance sheet in Brazil. As you see the expansion of our loan-to-deposit ratio going from 30% to 35%, then to 40%, you should expect to see net interest margins going up. Even though you've mentioned that secured personal loans have lower yield levels than unsecured and also lower interest levels than credit cards, they do have materially higher yields than the treasury bonds in which we deploy most of our excess cash. So as we shift part of our treasury in treasuries to interest-earning assets of consumer finance, you should expect to see net interest margins expanding in Brazil. The offsetting force to which I alluded before is our operations in Mexico and Colombia, where we are paying, as of today, deposit rates that are slightly higher than the interbank deposit rates in those countries that bring the net interest margins down on one side. So I think going forward, those two offsetting forces will play out, and we do expect to see net interest margin to continue to expand on average in the coming quarters.
Gustavo Schroden, Analyst
That's very clear, Lago. Just a follow-up here. What is the level of loan-to-deposit ratio we should use in our model? Based on your answer, it seems that this could be a good proxy or a useful variable to forecast and aim for the best net interest margin in the future. It would be great if you could share what a good level of loan-to-deposit ratio would be.
Guilherme Lago, CFO
Yes. So, I mean, a good reference more than a guidance is the loan-to-deposit ratio of the large retail banks in common banks in Latin America is between 100% to 110%. I don't expect that we will get to a loan-to-deposit ratio anywhere close to those levels, but it will be materially higher than the 40% that we presented in the last quarter.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Jorge Kuri of Morgan Stanley.
Jorge Kuri, Analyst
Congratulations on the impressive numbers. Can you provide more details about your loan-to-customer growth during the quarter? A 21% increase quarter-on-quarter in total balance is noteworthy. Additionally, you reported your originations increased from BRL 1 billion to BRL 1.7 billion. How much of this growth can be linked to the early success of your payroll loans? How much impact does FGTS have on developing the personal loans business? Any insights into this significant rise in personal loans would be greatly appreciated. The market is quite enthusiastic about the potential for payroll loans, so how much of that is reflected in these figures? What more can you share about this growth?
Guilherme Lago, CFO
Thank you for the question, Jorge. This is Lago. We are quite pleased with the growth of our overall portfolio. I would direct you to Slide 36 of our earnings presentation, where we provide further details on the growth in personal loans compared to credit cards. You will notice that despite seasonal fluctuations, our credit card growth has been strong. By the end of the first quarter of 2024, we estimate our market share in credit cards has reached approximately 15%, and we continue to gain market share each quarter. Interestingly, personal loans are surpassing credit cards in growth, having outpaced them for the last five quarters. In the first quarter of 2024, personal loans grew by 25% on an FX-neutral basis, while credit cards grew by 8%. Regarding personal loans, I would refer you to Slide 15 to see the growth in originations. Over the past four quarters, originations have increased from BRL 6 billion to over BRL 12 billion per quarter, almost doubling. The main contributor to this growth is unsecured personal loans, with eligibility expanding among our customers. In Brazil, our customers accounted for about 43% of the total unsecured personal loan market by the end of the fourth quarter, and we maintain at least an 8% market share, indicating significant potential for further growth. Now at the beginning of the second half of 2023, we expanded into secured personal loans, which encapsulates consignado or public payroll loans, FGTS, and investment-backed loans. Public payroll loans and FGTS account for about 90% of our total originations, with investment-backed loans accounting for 10%. We expect that the originations of secured personal loans will continue to outpace the originations of unsecured personal loans as we increase the collateral agreements that we have as of today. So today, we offer public payroll loans, Jorge, primarily to INSS and SIAPE, which are now federal public servants and pensioners and retirees, which account broadly for 50% of the target market of secured personal loan in Brazil. We will be increasing our scope to add armed forces in many states and municipalities, and we hope to reach about 75% of the target market by the end of 2024.
David Velez, CEO
And just to finalize that, Jorge, I think one, perhaps, easy way to understand really the significant opportunity we continue to have ahead is we have more or less 60% of the Brazilian adult population as a customer. That 60% owns something like 40% to 50% of the entire credit pool in the country. And if you just look, on an average basis, across the lines, we probably have something like 10% market share. So we could double, triple, or quadruple the size of our existing credit portfolio. And the bottleneck to growth is on the unsecured side, our own willingness to grow, our own willingness to take risk. And thus, in certain areas, we go very slowly, and we test our way into acceleration. And on the secured side, our bottleneck is signing up a bunch of contracts with a number of different entities. We have been signing up all those contracts. Whenever we go to the entities and we say we are going to be offering products for your associates that are 30% to 40% lower interest than everybody else, that is a very good value proposition for them. And so we haven't seen a lot of real resistance in signing up the contracts with us. There is some interconnection of systems. We have to integrate with a number of older systems, so that takes some time, and that's going to be taking some time over to next year. But so far, we feel very good about our ability to grow in the pool of addressable secured portfolio in the country.
Jorge Kuri, Analyst
If I may ask a follow-up. I'm looking at your Slide 19, where you have the last five quarters of gross profit margin. Given the particularities of what's happening with your asset mix and the deposit mix with Mexico, would it still be fair to assume a seasonal behavior like we see here in 2023, where, sequentially, every quarter was up in terms of gross profit margin in 2023? Would that be applicable for this year? Or are the dynamics going to be different because of these two items that I mentioned?
Guilherme Lago, CFO
Jorge, I think it will largely depend on the velocity with which we grow deposits in both Mexico and Colombia, by and large. If it was only for Brazil, one would expect that gross profit margins would continue to expand sequentially throughout the quarters, especially because the first quarter is usually a low seasonal quarter for us. But the expansion of gross profit margins in Brazil is partially or fully offset by headwinds coming from Mexico and Colombia. So those two things will be playing out. It depends on the speed with which they play out that we will see this resulting in our gross profit margin. I still believe that throughout 2024, one would expect to see gross profit margins for the full year very much in line with the gross profit margin that we had for the third quarter of 2023, so around 42% to 43%.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Eduardo Rosman from BTG Pactual.
Eduardo Rosman, Analyst
I have a question here. I want to delve deeper into your strategy of deposits in Mexico. You're having massive success, but that's naturally coming at a cost, right? So when we look to incumbents, we see that they pay very little, as a percentage of the reference rate. So what's the goal there in terms of remuneration, short and medium term? The goal is to reduce the remuneration? Or eventually pressure competition to move higher? And also, if you can also give an update as well on your recent partnership for cash-in and cash-out and the challenge naturally to grow deposits in the low income there?
David Velez, CEO
Mexico is an appealing market for several reasons. Recently, we have noticed that, unlike Brazil, the deposits are the primary profit source for traditional banks. Banks are paying consumers around 3% to 4% in interest, while sovereign interest rates are over 12% or 13%. This situation is unusual in a typical banking environment, enabling banks to generate substantial profits with minimal risk. In contrast, Brazil's market is largely driven by credit risk, which is expected in competitive markets, but that isn't the case in Mexico. Interest rates on products remain high, and even when we offer high yields, we can maintain positive unit economics due to the market's structure. The presence of these profits in the system highlights a significant disruption opportunity for the Mexican banking system. If deposits yield the majority of profits, entry barriers are lower. In the past, branches were necessary, but that's no longer the case. Brand reputation remains important, as consumers prefer to trust their savings with a reliable institution. However, a strong brand and an excellent product can attract deposits. Recently, we've seen impressive growth that has exceeded our expectations, and we are outpacing fintechs offering even higher yields. We are not just competing on yield; we have established a solid and trustworthy brand in Mexico, contributing significantly to our deposit growth. In the long term, we aim to optimize our costs based on the value proposition, striving to provide the best deposit offerings in the country, which involves balancing yield and features. Initially, our features were limited, prompting us to rely heavily on yield. However, we are enhancing our features, and consumers will see a transformed product by year’s end. Addressing the cash-in and cash-out challenges we encountered a few months ago is a priority, and we are currently resolving these issues. As we enhance features and strengthen our brand, we anticipate lowering our yield while still offering the best value proposition. Incumbent banks will likely need to raise their yields to retain consumers, as there are fewer barriers to entry in this new landscape, allowing consumers to choose the options that best meet their needs. We are on track to develop a leading product in this category.
Guilherme Lago, CFO
Rosman, if I may add one thing. What we have been seeing in Mexico, as we have seen in Brazil in the past, is that as we attract deposits from customers in the country, we are also benefiting from very relevant second-order impacts that allow us to increase our brand awareness. It allows us to increase credit card applications. Our credit card applications have more than doubled in Mexico since we repriced our deposit products. It allows us to acquire data to do better credit underwriting and customer segmentation. It gives us positive credit selection. So there is a tremendous amount of second-order impact that the deposit flows are bringing to our flywheel that are not necessarily captured only in the absolute nominal amounts of deposits that we see coming in.
Jorg Friedemann, Investor Relations Officer
And our next question comes from Yuri Fernandes at JPMorgan.
Yuri Fernandes, Analyst
I have just one on renegotiated loans. I see you don't have the slide anymore on your presentation. So if you may just provide some color on how the numbers are tracking in the first quarter, how this compares to the 9.6% that you had in the 4Q? So just trying to get some color on renegotiated loan strength.
Guilherme Lago, CFO
Thank you for your question, Yuri. Renegotiated loans still make up about 10% of our portfolio, and this figure has not changed significantly since our last update. We plan to disclose our renegotiation rates annually when we report our fourth quarter results. Additionally, you can find some data on renegotiations in the filings submitted to local regulators, particularly in Brazil, which we update every six months. However, as we move forward and adjust the mix of our credit products in Brazil, specifically personal loans and credit cards, as well as secured and unsecured loans, these changes will directly influence the rates of negotiations. But overall, there has been no significant change since our last presentation in the previous quarter.
Yuri Fernandes, Analyst
Super clear, Lago. And just for a better understanding on new NPL formation and asset quality trends, you mentioned renegotiations are not there. Is there any other factor that is helping your new NPL formation? Or is this really a mostly stable quarter for new NPL formation for the company?
Guilherme Lago, CFO
So, I think, there's no material nonrecurring item that would be distorting our NPL and Stage 3 formation. So, I think, they are pretty much business as usual.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Pedro Leduc of Itaú.
Pedro Leduc, Analyst
I'm looking at net interest income after the cost of risk, and it increased mid-single digits quarter-on-quarter, if I'm correct. I realize that your provisions consumed a significant portion of the NII growth. I'm very interested in understanding this combination of mid-single-digit growth. Historically, this is below your growth rates, and I don't notice much change in your loan book growth. I have some theories; perhaps the loan book at the end of the quarter doesn't reflect the average from last quarter, so it didn't generate much NII, or the losses incurred differ from the expected losses that you needed to account for. I'm eager to understand how you reconcile this nearly flat NII after the cost of risk and how we should view it moving forward.
Youssef Lahrech, President and COO
Thank you for your question, Pedro. I believe you're asking about the risk-adjusted NIM on Page 26, which outlines its progression over time. It's important to note that when comparing quarter-on-quarter, Q4 2023 was influenced by a suppression of the CLA due to recoveries being higher than usual, largely attributed to Desenrola and the collections programs we implemented in Brazil. Therefore, the 10.2% reported in Q4 was somewhat inflated and would have aligned more closely with our current quarter's 9.5%. Over a longer-term view, we've observed a significant increase in the risk-adjusted NIM of approximately 320 basis points year-on-year. In terms of cost-of-risk, it rose from 8.7% to 10%, reflecting an increase of about 130 basis points. This indicates a much greater margin expansion, about 2.5 times more than the growth in cost of risk.
Guilherme Lago, CFO
Pedro, I would like to add to what Youssef mentioned. If you examine the originations and the mix of new credits added in the first quarter of 2024, please refer to Page #15. You will see that unsecured personal loans in the fourth quarter of 2023 increased by about BRL 400 million, and they grew by approximately BRL 1.6 billion from the fourth quarter of 2023 to the first quarter of 2024. This indicates significant growth in the credit portfolio for unsecured personal loans, which currently generates more CLA than credit cards. The growth mix also impacts how we should evaluate risk-adjusted net interest margins. However, I'm not certain if we have completely addressed your question, Pedro.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Mario Pierry from Bank of America.
Mario Pierry, Analyst
I wanted to focus on asset quality. When we examine your non-performing loans, they are at the highest level we have seen. The non-performing loans over 90 days are at 6.3%. Additionally, your Stage 3 loan formation stands at 3.7%, which is also a historical high. You mentioned in your release that there has been an increase in expected losses due to the rising risk profile of your newer cohorts. The situation at Nubank appears to be quite different from other banks in Brazil, which have become very cautious in their lending practices, resulting in improving non-performing loans and asset quality. I would like to understand how you can be so confident in continuing to take on more risk. Why do you believe that consumers in Brazil are in good condition? You've already indicated that the interest on credit cards is at 26%, significantly higher than the industry average. This raises questions about consumers’ capacity to handle more credit and risk, particularly as you are increasing your return on loans. There may come a point where the rates become too high. It appears you are targeting a riskier segment of the population while others are moving in the opposite direction. That's my question.
Youssef Lahrech, President and COO
Thank you for the question. I’d like to provide some insight into our approach to credit underwriting and discuss the latest trends. When we underwrite credit, our goal is not simply to lower non-performing loans; instead, we aim to maximize the net present value of our credit portfolio and the customer relationships, while being mindful of resilience. We ensure that every credit granted is NPV positive, even during downturns. We don’t focus on timing within the economic cycle; we want each origination to perform well regardless of the environment. When we find opportunities to expand credit and take on additional risk, particularly with popular products that offer significant value to our customers, like the fixed financing options on credit cards and unsecured loans, we proceed cautiously with extensive testing for several months or quarters. We also monitor the associated risks and returns closely. Our results from these expansions, including personal loans and credit cards, have been positive, as reflected in the growth of our interest-earning portfolio. To illustrate the dynamics of our credit book, the data on Page 25 of our earnings presentation shows that we have increased interest-earning portfolio balances at a faster rate than non-performing loans, validating our approach as beneficial to returns in NPV. This outcome is not a result of taking a specific stance on the economic cycle but rather the result of careful testing of new products and features over time, observing the returns, and rolling out successful offerings when they demonstrate robust and resilient returns.
David Velez, CEO
One point I would add to Youssef's explanation is that most of the new financing products we are launching and growing are short-term in nature, typically lasting 30 to 60 days. This type of product tends to provide a wealth of information, allowing us to respond quickly to any unexpected developments. We are making underwriting decisions based on our assessment of an NPV model, supported by extensive foundational testing. The ability to offer these short-term products enables us to expand our financing portfolio while maintaining robust control over the associated risks.
Mario Pierry, Analyst
Let me ask a follow-up. When I look at your outstanding credit cards in Brazil, it increased by about 200,000 from 37.5 million to 37.7 million, even though your active clients in Brazil grew by 3.6 million. This represents the slowest growth rate in the number of cards. On average, you are adding about 1.8 million credit cards in Brazil each quarter in 2023, but now you've only added 200,000. What does this indicate? Does it suggest that you are being more conservative, or have you reached a point where a portion of your client base cannot take on a new credit card?
Guilherme Lago, CFO
Mario, one thing that I would point out, and I'd certainly let my other colleagues chime in is that, in Brazil, as we start to approach now 55%, 60%, 65% of the adult population, it's inevitable that the marginal growth will not necessarily come from adding more customers or more credit cards to the existing customer base. We still have a lot to go there, but it's only natural that at some point in time, the growth in the number of customers of the number of cards will diminish. But what we still have plenty of room ahead is what you can see on Page 34 of the earnings presentation. And you can see the evolution of the purchase volume and the evolution of ARPAC as the customers mature. So even at the customers that we have onboarded 24 months ago, they are tripling their purchase volume as they mature their usage with us. So what we will naturally see in Brazil is that a natural kind of a flattening of the curve of the number of customers and credit card customers, but the continuous evolution of the maturation of purchase volumes in ARPAC. And then conversely, Mexico and Colombia are in the very early days of the expansion of a number of customers and number of cards. So they are in a different point of the escrow cycle there.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Brian Flores of Citi.
Brian Flores, Analyst
I wanted to make a follow-up on Mexico. We talked on the liability side, and, I think, that is ramping up very well. Wanted to ask you on the asset side, right? Because we have seen, as Lago mentioned, some room for optimization with the low LDR so far. So I wanted to pick your brain on what key differences have you found in client behavior, infrastructure? And also, how has your strategy affected this, right? And do you think the speed is going according to the plan? Or do you think it's maybe a bit slower? Or a bit ahead?
David Velez, CEO
Thank you for your question. We have stated before that when entering a new market, we adopt a very conservative underwriting strategy. The growth trajectory of our unsecured products has shown cycles of acceleration and pauses, as well as some tactical adjustments. For instance, our growth rate in unsecured lending and personal loans approximately 12 to 8 months ago experienced a pause followed by a resurgence. Mexico is following a similar trend; we launched our efforts gradually, then gained momentum while conducting extensive foundational testing. This is partly why delinquency rates were elevated, as we were exploring various credit lines and credit cards for consumers without ample data, which resulted in credit losses but essentially amounted to capital expenditures. Recently, in Mexico, we've seen a period of slow growth after an initial acceleration, as we focused on developing new models that incorporate fresh data sources and considered our funding situation. It's crucial for us to establish NuConta effectively, as it represents our top strategic priority; without it, our business lacks a solid foundation. We intentionally slowed growth to refine our products, and the launch of NuConta has been successful. Regulatory reports indicate that delinquency rates have significantly decreased, allowing us to increase our credit card offerings and new accounts in Mexico. Additionally, the influx of new customers has accelerated over the last quarter. This context illustrates that we are now poised to accelerate growth in Mexico once more. We have secured funding and feel confident in our ability to underwrite based on our methodologies and insights into consumer behavior. We will continue to be cautious, accelerating when opportunities arise and pausing when concerns emerge; this is the approach we take in new markets.
Guilherme Lago, CFO
The only thing, Brian, I would add is that if you take a look at the first quarter results of our operations in Mexico, the one that we filed with the local regulators, you will note that we're already growing our book in Mexico at about 7%, 8% on a quarter-over-quarter basis. We expect this growth rate, as David mentioned, will pick up in the coming quarters.
David Velez, CEO
Yes, sure. So it is not critical to ramp up growth. We can continue ramping growth with the SOFIPO license that we have. We are getting the deposits that we need, and that's the critical part. I think the banking license is really critical for the long term of Mexico. There are certain bottlenecks in the SOFIPO license that eventually will become real issues for our products. One specific example is deposit insurance. SOFIPO only gives us a deposit insurance of something like $18,000 to $19,000, and a bank license gives deposit insurance all the way to $180,000. So for Mexican high-income consumers, it will be critical to have a banking license. That's not our core target today. It also – a banking license will also expand the possibilities of cash-in, cash-out with certain banking correspondents. And so thinking ahead of where the business will be in five years from now, we definitely need the banking license. And that's why we already, last year, entered with the process of the banking license. The process is going well, and I think the regulators are doing all of their work around the due diligence. We've been very active working with the regulator, answering all the questions that they've received. And so far, it's going according to expectations. It's not necessarily an easy process. It's not a fast process, but we're taking the process very seriously. And so far, we've heard very goodwill from the regulator in enabling new players to get banking licenses to bring much more competition into the banking space in Mexico.
Jorg Friedemann, Investor Relations Officer
And our final question comes from Neha Agarwala from HSBC.
Neha Agarwala, Analyst
I wanted to zoom in on Mario's previous question in terms of asset quality. Originations, especially in personal loans, were extremely strong this quarter, but early delinquencies have inched up. I understand part of that is seasonality. But given the rate outlook and the softening of economic activity, would you be more concerned or more cautious in the coming quarters and try to step back a bit in terms of originations? Or should we see continued these levels of originations for personal loans? Or an acceleration?
Youssef Lahrech, President and COO
Thank you for your question, Neha. You are correct that the movement in NPL from Q4 to Q1, especially in the 15 to 90-day category, was primarily due to seasonal factors we typically see, resulting in an 80 basis points increase this quarter. This aligns with our expectations for this time of year and can also be attributed to credit expansion in both personal loans and secured loans, as well as our credit card portfolio. We remain agnostic to the cycle phase when we underwrite credit, ensuring that our credit performs well and remains NPV positive regardless of economic conditions. Our NPV model is designed to handle increased risk, ensuring resilience across our cohorts. As previously mentioned, we believe there will be continued opportunities to grow our credit portfolio. We are looking to expand in secured loans, as discussed by Lago and David, explore eligibility enhancements in unsecured personal loans, and capitalize on the continued growth in credit cards with new products and features. Our expectation is that we will find opportunities to extend our offerings. In line with our past strategies in Brazil, Mexico, and other markets, if we observe results that deviate from our expectations negatively, we will take the necessary steps to adjust our originations accordingly.
Jorg Friedemann, Investor Relations Officer
We are now concluding today's call. On behalf of Nu Holdings and our Investor Relations team, I want to thank you for your time and participation in our earnings call today. We are very excited about our developments as we continue strengthening our position in the markets we operate. Over the coming days, we will be following up with the questions received via our platform and with those who 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.