Earnings Call Transcript
Nu Holdings Ltd. (NU)
Earnings Call Transcript - NU Q3 2022
Operator, Operator
Good afternoon, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the Third Quarter 2022. A slide presentation accompanies today’s webcast, which is available on Nu’s Investors Relations website. This conference is being recorded, and the replay can also be accessed on the Company’s IR website. To access it, you can press the globe icon on the lower right side of your Zoom screen, and then choose to enter the 'Portuguese room'. After that, select 'mute original audio'. Please be advised that all participants will be in listen-only mode. You may submit online questions at any time today, using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer at Nu Holdings. You may proceed.
Jorg Friedemann, Investor Relations Officer
Thank you very much, operator. And thank you all for joining our earnings call today. If you have not seen our earnings release, a copy is posted in the Results Center section of our Investor Relations website. With me on today’s call are David Vélez, our Founder, Chief Executive Officer and Chairman, Youssef Lahrech, our President and Chief Operating Officer, and Guilherme Lago, our Chief Financial Officer. Additionally, Jag Duggal, our Chief Product Officer, will join us for the Q&A session of the call. Throughout this conference call, we will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the Company, but are not financial measures as defined by IFRS. Reconciliations of the Company’s non-IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on a year-on-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 the Company’s expectations. Please refer to the forward-looking statements disclosure in the Company’s earnings press release. Today, our Founder and CEO, David Vélez, will discuss the main highlights of our third quarter 2022 results and some of the opportunities ahead. 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 would like to turn the call over to David. David, please go ahead.
David Vélez, CEO
Thanks, Jorg. Hello everyone. Thank you for being with us today. I am happy to share that Nu turned in another strong quarter. In our nine-year history as a company, we have already seen a lot. We saw a GDP contraction of 7% during the years of 2015-2016, the largest recession in Brazilian history; we saw a presidential impeachment; we saw right-leaning governments and left-leaning governments coming and going across the three countries we operate. And today we see a slightly more volatile environment than we saw in 2021, which brings a bit more caution, but that also creates opportunities to continue capitalizing on our long-term thesis that remains intact: the future of financial services will be built by technology companies, and we are in the lead position in Latin America, one of the largest regions in the world. Today I’m happy to report that during the third quarter, Nu reported breakeven at the holding level, posting a net profit of $7.8 million and an adjusted net profit of $63.1 million while growing revenue at 171% year-over-year and welcoming more than 5 million new customers, becoming the sixth largest financial institution in Latin America by number of active customers. This mix of growth and profitability shows we are being able to balance appropriately the significant growth opportunity we have ahead while strengthening the earnings fundamentals of our business model. We will continue to reinvest our profits to fuel our growth and long-term value creation. During the third quarter, we continued to see progress among all our main business metrics. We passed 70.4 million total customers across our three countries while seeing our activity rate per customer increase to a new high of 82%. Our purchase volume grew 75% year-over-year to $21.2 billion, already reaching a market share of 12% in Brazil. And while we have increased the level of resilience of our credit underwriting to account for the more volatile macro environment, our credit portfolio was still able to grow 83% year-over-year to $9.7 billion while being fully funded by our own retail deposits that grew to $14 billion. While our business opportunity started by unbundling financial services through a fully digital strategy, our current imperative is to rebundle and build a diversified multi-product, multi-country, and multi-segment platform. Our customers actively tell us that they want to consolidate their entire financial lives with Nu, and so this rebundling continues to progress at an accelerated pace driven by significant existing demand from a base that now accounts for about 40% of the adult population of Brazil. Let me share with you our progress on each of these fronts. We have been able to develop and launch innovative products that are fundamentally better than what one could find in the markets in which we operate, always looking to have the highest Net Promoter Score metric in every category we choose. The velocity with which we develop and launch new products has accelerated recently as we invest significantly in our own technology platform and ways of working. As you can see on this chart, active users are growing in almost all of our products on a double- or triple-digit year-over-year basis. New products continue to post even more impressive figures. For instance, personal loans had a 279% increase in active customers over the past year. Our active SME accounts reached 1.3 million, an increase of 117% in a year. NuInvest customers expanded 148% year-over-year. And finally, our recently launched crypto product has grown to 1.3 million active customers, less than 6 months after launch. Notice that a lot of this growth is driven by the secular trends of digitalization of the economy and products that solve real customer pains and have little to do with the economic cycle. We are still at the early stages of strengthening our platform with products that will further support our product cross-sell strategy and our revenue accretion. We will continue to manufacture our own products when we believe we can be the best-in-class product manufacturer and like their unit economics. But we will also continue to leverage product partners to complement our skill sets and balance sheet whenever applicable. Our forthcoming launches include collateralized loans, savings accounts in Mexico, and financial planning tools, among others, that will make our platform have an even stronger value proposition for our customers.
Guilherme Lago, CFO
Many thanks, David. Good evening, everyone. Before reviewing our third quarter results, let’s recap on the key elements of our simple, powerful, and value-generating formula. First, is expanding our customer base across our chosen markets, Brazil, Mexico, and Colombia, and quickly converting acquired customers into active ones. The second is expanding average revenue per active customer, or ARPAC, through both cross-sell and up-sell. Third, is delivering growth while maintaining one of the lowest-cost operating platforms in the industry. With this in mind, let’s look at the third quarter results and see how well these three elements are generating value. With regards to customer acquisition, Nu continues to grow at a steady pace, adding 5.1 million customers during the third quarter. Importantly, we have been achieving this mainly through organic channels with very low customer acquisition cost, while maintaining the same level of net additions from the two previous quarters. This brought total customers to over 70 million by quarter-end, a 46% year-on-year increase. Further, we are seeing faster and sustained growth rates in Mexico and Colombia, which together accounted for approximately 500,000 new customers in this quarter. But we are not in the business of simply collecting customer accounts. We are succeeding in driving monthly activity rates higher. On average, they rose to 82%, up from 73% a year ago and 80% in the prior quarter. This marks the 10th consecutive quarter of higher customer activity, further evidence of our ability to continue expanding Nu’s ecosystem while driving customer engagement. We estimate that Nu is now the fifth largest financial institution in Brazil, in terms of number of active customers, and the sixth largest financial institution in Latin America using the same concept. On this slide, we show the compounding effect of our ability to drive engagement and to cross and upsell products. As we have stated in the past, these charts show the evolution of our customer cohorts, namely increasing engagement of our customer base and a higher number of products per active customer that are both driving ARPAC growth. While we reached a monthly ARPAC of $7.9 in the third quarter, mature cohorts are already at $22. We expect higher ARPACs as our customer cohorts continue to mature, and as we add both new products and features to Nu’s ecosystem. Higher engagement combined with more products sold per customer have been significant drivers of our ability to monetize Nu’s expanding customer base. This is reflected in ARPAC expansion that contributed to triple-digit year-on-year revenue growth, as you can see on the next slide. The compounding effect of a growing number of active customers and higher levels of product up-sell and cross-sell enabled us to grow monthly ARPAC 61% year-over-year on an FX-neutral basis, and to deliver another quarter of strong annual revenue growth. Revenue grew 171% year-over-year on an FX-neutral basis to over $1.3 billion, a record-high. While monthly ARPAC has expanded gradually, as you can see in the left chart, we believe there is still a long way to go to reach our full ARPAC potential. As David highlighted previously, we have a growing customer base that resembles the income distribution of clients from incumbent banks while running at a fraction of their ARPACs. We have the ability to increase our ARPAC with both credit and non-credit products, with both products manufactured by Nu and products offered by our product partners. Beyond the substantial upside we see in our ARPAC, keep in mind the significant advantages of our low-cost operating platform that enables us to serve customers with lower ARPAC levels and still produce very healthy unit economics.
Youssef Lahrech, President and COO
Thank you, Lago. Let me now go over key indicators of asset quality and overall credit portfolio health for the third quarter of 2022. Let me begin with overall NPL trends. The lead indicator, NPL 15 to 90, increased by 50 basis points quarter-over-quarter to 4.2%. This was driven by two main factors: First, the deceleration in personal loan origination volumes, which increased NPL for this product due to the so-called denominator effect. In fact, this accounts for most of the NPL increase for personal loans this quarter. And second, a general macro-trend deterioration, which affected the broader market, as evidenced by other financial institutions that have already reported this quarter. 90+ NPL ratio increased from 4.1% to 4.7%, under the new write-off methodology for personal loans. For ease of comparison, we are providing additional analyses in the next few slides, showing the trends under our previous write-off methodology for our consumer finance book. I would also like to address potential misconceptions we have heard in the market related to the nexus between our delinquency metrics in Credit Cards and Personal Loans. First, the Personal Loan product is originated exclusively through cross-selling to existing Nubank customers, so only to customers about whom we have accumulated prior credit underwriting data. Customers who are delinquent on our Credit Card product are not eligible for our Personal Loan product. Again, if you are late with any payment obligations in Credit Cards, you cannot obtain a Personal Loan. Second, all renegotiations and refinancing which happen in Credit Cards remain and are accounted for as Credit Card receivables. The same applies to Personal Loans. There are no transfers of receivables or financing from Credit Cards to Personal Loans, or vice-versa. Third, we haven’t sold any receivables in any of our credit portfolios. Therefore, the NPL metrics presented here fully reflect the inherent individual performances of the Credit Card and Personal Loan products. This chart shows two important pieces of information about our credit card book. The six graphs showing the time-series of NPL by income band, where the purple line represents Nu and the gray line represents the industry. And on the right-hand side of the chart, the breakdown of credit card balances by income band, again comparing Nu to the industry. As you can see, Nu’s balances are more skewed towards lower income segments than the industry. This alone should cause our NPLs to be higher than the industry’s because of this different mix. However, as you see on the aforementioned six graphs, we have consistently outperformed the industry in each income band. And even more importantly, the lower the income band, the more pronounced our comparative advantage is. Furthermore, when you look at the trend over time, you see that the gap has been widening for each income band. In other words, our competitive advantage in underwriting is consistent and sustained, and in fact, increasing over time and across segments. When we compare our consolidated consumer finance portfolio, including both credit cards and personal loans, on the same set of metrics, we observe a consistent set of trends. This new chart was created by adjusting for the distortions caused by collateralized lines included in the personal loans category excluding payroll as reported by the Brazilian Central Bank, since we currently do not have any collateralized lines or loans in our book. We estimate that the mix of these collateralized lines has increased significantly over the two past years and currently represent more than 25% of the personal loans category excluding payroll. Without this adjustment, any comparison of our consumer finance portfolio against the industry would be significantly biased. And while our portfolio is obviously not immune to cyclical trends and deterioration, we are confident, as this analysis demonstrates, that we continue to outperform the industry on a like-for-like basis. In fact, even when you replicate this analysis we just showed on a lagged basis to adjust for growth, we still end up outperforming the industry by a factor of 30% on a like-for-like basis. So the conclusion holds, over time, across segments, and on a growth-adjusted basis. To conclude this section, let us now discuss provisions. Our provisions continue to grow, primarily driven by the growth of our portfolio. We front-load provisions when we originate loans, based on the expected losses for the life of the credit. This is the core principle of IFRS9’s expected credit loss methodology, on which we base our accounting practices. In addition, although NPLs have increased sequentially in the third quarter, it is important to note that the unit economics of all credit cards and personal loan cohorts have remained strong and resilient as we continue to adequately price the risk of our credit portfolio. In fact, this can be clearly seen in the improvement of our Risk-Adjusted net interest margin on this chart. Even with the increase in our credit-loss allowance expenses, we have managed to increase our risk-adjusted NIM to 3.2% this quarter, up from 2.3% in the prior quarter and 2.6% in the third quarter of 2021.
David Vélez, CEO
Thanks, Youssef. To summarize our efforts this quarter and the basics of our thesis, I would like to reinforce that Nu continues managing the Company for the long term while ensuring improvements in all of its business fundamentals. First, during the third quarter, we continued growing our revenue in excess of 170% and gross profit at 90% year-over-year, while achieving positive net income at the holding level. While the macro is a bit more volatile and we increased resilience in our lending products, we also expanded net interest and gross margin, which shows we are being able to price higher risk appropriately while also seeing continued operating leverage. Second, our relentless focus on products that really serve our customers’ needs and our excellence in user experience continue to show up in Net Promoter Scores that are virtually two times the average of incumbent players in the markets we serve. Our NPS is a statement that we are customer-centric by design. Across different markets, we have delivered a strong customer experience that engenders loyalty among our customers. We chose to make the overall customer experience our most important marketing investments, and this drove the word-of-mouth that translated into customer growth and empowerment of our brand. Third, all of this was achieved by maintaining our growth levers intact. In fact, we have already achieved leadership positions in the most relevant Latin markets through our multi-product, multi-country, and multi-segment business model. We have become the sixth largest financial institution in LatAm by number of active customers; achieved 12% of market share in cards’ purchase volume; and became the top issuer of new cards in the three countries we operate. We are very proud of what we achieved this past quarter and even more excited about what lies ahead of us in the coming quarters. We would like to take your questions now. Thank you very much.
Operator, Operator
We will now start the Q&A session for investors and analysts. I would like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.
Jorg Friedemann, Investor Relations Officer
Thank you, operator. Please wait while we collect the questions. And our first question comes from the line of Jorge Kuri from Morgan Stanley.
Jorge Kuri, Analyst
Congrats on the great results. My question is on the origination of the personal loan book. What visibility do you have on when that could accelerate? Is it fourth quarter, first quarter? Is it sort of like more of a second half of next year? How are you seeing that? And how can we, from the outside, monitor what are the KPIs that you are looking at to call that acceleration or that risk appetite increasing? Thank you.
Guilherme Lago, CFO
Hi Jorge, thank you so much for the question. So, we ended the third quarter with all of our cohorts performing very well, including those of personal loans with quite robust and resilient unit economics. So, if these metrics remain healthy, as we have seen in the past quarter and at the beginning of the fourth quarter 2022, we may potentially increase the origination of personal loans this quarter still. It’s also important to note, Jorge, that in 2023, we do expect to begin the ramp-up of our secured personal loans business composed of investment-backed loans, payroll loans, and FGTS loans. It is quite hard to foresee how fast this ramp-up will happen. But we are super excited about the prospects of complementing our unsecured consumer credit portfolio with secured credit portfolios starting in 2023.
Mario Pierry, Analyst
Congratulations on the results as well. My question is similar to Jorge’s. Like, when would you feel more comfortable in accelerating your growth? Because as you show, you have better asset quality than your peers. These Nu loans you’re originating are creating value. They’re not destroying value as you showed that on your risk-adjusted margins. So, I was wondering, are you being too conservative in slowing down now? Why not be more aggressive since you have all these advantages? It seems to me like your pricing is similar to your peers.
Guilherme Lago, CFO
Hey, Mario, thanks for the question. I think we are basically trying to be quite disciplined in the way that we develop and ramp up a new product. So, as you pointed out, we are not constrained by the demand. So our customers, which now account for about 39% of the adult population of Brazil, they equally account now for more than one-third of the personal loan market in the country. So, demand is not a constraint. Our product has one of the best NPSs that exist in the market, as David pointed out. The conversion seems to be quite healthy. So, our ability to deploy the best-in-class product and convert is not a constraint. Capital and liquidity are equally not constraining factors. So, the single largest constraining factor for us to grow in personal loans is really our comfort with our credit underwriting and the prospects of the Brazilian economy. So, we will watch it now quite carefully. We are very excited about the prospects, but we do believe that kind of it would serve us better to be more disciplined at this point in time and accelerate when the market sends better signals, and we are more comfortable with our ability to successfully deploy our models in this segment. It is, however, a slight different from the secured credit products, I think for secured, especially payroll loans, FGTS, and investment-backed loans. I think the credit underwriting is less of a concern. And our ability to ramp up those products will not be constrained by that dimension. So, just stepping back, Mario, for one second. So, we started to deploy the Nu remuneration strategy for NuConta in mid-July. We ramped up very carefully from mid-July until the end of September. And only by the end of September did we reach about 97% rollout. So, the impact of the lower funding costs to our financial results in the third quarter of 2022 are still relatively limited, so our funding cost decreased in the quarter to about 95% of CDI. I believe in September, it was down to about 91% of CDI. The full impact will only be felt in the fourth quarter of the year, most likely in the first quarter of 2023. Really hard for us to draw any high conviction, no direction on where this will end. It will largely depend on the behavior of the consumers going forward. So far, we have been tracking the implications of this move to three dimensions: asset inflows, NPS, and engagement. We have not seen any material impact on that. So, we are very confident that this was the right move for the company to do and also for our customers. But I’m really not in a position, Mario, to provide you with high conviction guidance on where this went.
Tito Labarta, Analyst
Hi. Good evening, David, Lago, Jorg, and Youssef. Thank you for the call, taking my questions, and congratulations also on the strong results. My question is, a little bit of a follow-up on the personal loans but more just thinking from the asset quality perspective. I mean, your NPLs held up fairly well, considering we’ve seen in the market and some of the incumbent peers. But looking at the early NPLs, they were up 50 bps in the quarter. Last quarter, they were stable. You had mentioned that that was a good leading indicator for the outlook for asset quality and potential acceleration on your personal loan portfolio. Just to get a little bit more color on that. And I know part of the impact was because of the slower origination, you mentioned, and that impacted those early NPLs. But how do you think about that going forward? Was it simply due to the slowdown in the origination? I don’t know if you have color between like credit cards and personal loans with those early NPLs. How do you think about the early NPL sort of evolving from here?
Youssef Lahrech, President and COO
Thank you for your question. As I mentioned earlier, the early NPLs from 15 to 90 days increased by 50 basis points this quarter due to two main factors. One factor was the slowdown in personal loan originations, which had a denominator effect. The other factor was a general decline in performance similar to trends seen by other companies in the market. Moving forward, we are closely monitoring the performance of all our portfolios and the macroeconomic conditions in the three markets we operate in. Given the current uncertainties, it's challenging to provide a strong outlook for 2023. However, I can confidently say that we are equipped to monitor, act swiftly, and navigate this cycle as we have done in the past. We maintain a relatively short-duration credit portfolio in both credit cards and personal loans, which means any actions we implement will significantly influence the performance of those portfolios. In fact, we've seen an increase in the resilience of our origination over the past few quarters as a result of our actions, evident in the increase in risk-adjusted NIM presented in our results.
David Vélez, CEO
Tito, David here. Just to add here to Youssef. I think the big advantage of personal loan as a credit product is, as you say, very short-term duration, very high, very information-rich. So, we get to monitor the performance of this product and this portfolio really basically daily and are able to make decisions around acceleration or de-acceleration across pockets of the different portfolio depending on what we get to see. So, I think this quarter has there’s been much more volatility in this space as it’s expected. And so the prudence that we show is warranted. We’re absolutely in the lookout of seeing opportunities to accelerate in certain pockets of the portfolio, and we’re ready to do that once we certainly are more comfortable.
Thiago Batista, Analyst
Yes. So, congratulations on the results, a very strong bottom line. I have one question about the high-income segment or the affluent segment. As shown in the slides, Nubank has a very small presence in this segment. Do you believe that this should be a focus of the bank going forward? How big this should be for Nubank? And if you believe Nu needs to change the approach for the segment, for instance, maybe have advisory for investments or kind of manager for the banking business? So, if you believe this affluent segment should be more relevant for Nu or not?
David Vélez, CEO
Thank you for your question. We see a significant opportunity in this area. With about 8% of our business among approximately 66 million customers in Brazil, we have over 5 million high-income customers, which represents a notable portion of that market. Currently, we do not hold the top share of wallet for this demographic. Often, this is due to low limits or a lack of specific product features, whether in credit cards, investments, or insurance. Over the past year, we have concentrated on addressing these gaps and have made substantial investments to increase limits for the higher-income customers. This will be a key priority for us next year, as improving our share of wallet among these high-income customers could significantly impact our portfolio and enhance diversification. You raise an important point, and this will remain a major focus for us.
Geoffrey Elliott, Analyst
First, just a quick clarification. The slides on NPLs by income band, I think they used the old write-off methodology, the 360 days for both personal loans and credit cards. But could you tell us what that NPL ratio, the 90-day past due ratio would have been under the prior methodology for the whole portfolio rather than by individual income band?
Youssef Lahrech, President and COO
Geoff, this is Youssef. So, thank you for the question. Yes, you are correct. Those slides that announced this was done on the basis of the old write-off methodology, and just as a reminder, the principal difference between the old and new write-off methodology is that for personal loans, we now write off at 121 days delinquent. We used to write off at 361, similar to credit cards. So, to your question, NPL 15 to 90 would have been substantially similar, up 50 basis points in the quarter because there’s relatively little impact of the change in methodology on early delinquencies, as I mentioned. 90+ NPLs would have increased 130 basis points in the quarter. Why the larger increase? You have to think about the fact that the difference between the two metrics in the old write-off methodology is basically made up of all the personal loans that were 121 all the way up to 360 days delinquent. That pool of loans is basically a reflection of the growth in the personal loan portfolio between two and four quarters ago, right? Because those were delinquents between 4 and 12 months. And between two and four quarters ago, our personal loan portfolio grew by about 50%, as you can appreciate in the results presentation. So, it’s merely a reflection of the increase in the size of the book that would explain that higher increase in 90+. It’s a great question, Geoff. I think there’s a number of puts and takes, and a lot has changed in the last year or so. There’s been normalization from very low levels of delinquency about a year or so ago. There’s been an increase in high levels of inflation, and there’s been changes in government assistance programs, right, which peaked in 2020, and dropped a fair bit in 2021. There’s some view that it might increase again under the new administration. So, there’s a lot of puts and takes that have moved things in different directions. So, it’s hard to pinpoint exactly what is the driver right now that we’re observing.
Marcelo Telles, Analyst
Congratulations on the strong results. I have a question regarding asset quality. It's interesting to see your asset quality performance diverging from the broader industry for those specific products. This is particularly noteworthy considering some players are withdrawing from the credit card segment, such as Banco do Brasil and Bradesco. Can you explain what you believe sets you apart from incumbent players? Is it the amount of data you have on your clients and how you utilize that data, or does it stem from having many clients who are not traditional account holders, meaning clients that have accounts with new banks and engage in more transactions? How should we interpret the reasons behind your better performance? Thank you.
Youssef Lahrech, President and COO
Yes. It’s Youssef again here. Great question. I’d say there are several factors that explain and are at the root of our underwriting capabilities. As you mentioned, there is data richness, which takes the form for the vast majority of our customer of not only external data we get from credit bureaus and the like but actual experience and transaction data with us. The vast, vast majority of credit card customers already have a deposit account where we can observe and gather data on their deposits, their activity. 100% of our personal loans customers come from cross-sells, so we already have not only deposit account and data but also credit card experience and data. So that gives us a lot of rich information on which to underwrite. That’s certainly a big driver of it. I would say we’ve also built, over the last several years, a lot of discipline in terms of process and methodology that we use to monitor our portfolios, all our cohorts, and take action in a very rapid cycle. We’ve built that process, that methodology but also the technology and the pipelines to be able to do that, to be able to deploy new models in rapid fashion and also a strong kind of governance and credit culture in the company. So, we focus a lot on maintaining discipline of resilience and returns. We have multiple lines and levels of reviews whenever we make credit decisions. So, it’s a combination of several factors that we think are at the root of that. And ongoing testing, I should say, to make sure we understand all of the causal drivers of credit performance and of overall returns.
David Vélez, CEO
I just wanted to highlight one point that open account mentioned. I think it’s important to highlight here, which is while, let’s say, 4, 5 years ago, we were really giving credit cards to customers that we did not know since we started just with a credit card product. Today, we really are cross-selling to a base of accountholders. We have over 50 million accountholders in Brazil and only about 32 million credit cards. So, we get to really understand the financial situation of these customers. About 55% of them, we become their primary bank account with their primary relationship. And once they’re starting their salary in their account, when they start paying, once they start using PIX, which, by the way, we’re one of the largest players in PIX in Brazil, then that gives you a lot of information to get comfortable with giving a credit card, which a lot of the time starts with a low limit, and that’s the way that we manage our downside risk. We begin with a low limit and grow strategy. Limits are low, and as we get to know this customer more over the next 6, 12 months, this limit goes dynamically up. And in situations with much more volatility like the one we’re facing today, we get to not increase limits or increase just a bit slowly. So, it really ends up being a different approach than we think of the fintechs in the market today that are really going after monoliners or they just have one credit product and that, by default, attracting at times, a lot of adverse selection.
Marcelo Telles, Analyst
Very clear. And if you allow me, just to follow up with one question kind of tied to this in terms of product cross-sell that you mentioned. When you think about your mature customers, it’s quite remarkable. Your mature customers, now, I think you have an ARPAC of around $22, which I think is actually an increase from the $21 you had in the previous quarter despite the currency depreciation quarter-over-quarter. So, what are the products that you have to cross-sell to get to that $22 of this mature client? Is it just, let’s say, more usage of the credit card or getting bigger credit card limits, or maybe it’s insurance or other types of products? How should we think about the path towards the $22 ARPAC?
Guilherme Lago, CFO
So, that is a super good question. I think when you look to the mature cohorts that we have today, the majority of those ARPACs is basically composed by interchange of Nu prepaid cards and credit cards and with a very small yet penetration of personal loans. Going forward, I think as we increase personal loans penetration in our base, both unsecured and secured, a substantial amount of ARPAC should actually be associated with this specific cross-sell. So, what we have seen is ARPAC expansion as of today has been primarily driven by the upsell of credit cards and prepaid accounts and prepaid cards and investments. Going forward, it will equally be driven by the cross-sell of new products, personal loans, secured, unsecured investments, insurance, marketplace, crypto, and SME accounts.
Pedro Leduc, Analyst
A little bit on credit cards, please. So, here on the personal loan, a deceleration and recall this being offered mostly to your credit card clients, the better piece of it. How is that making you think about credit cards, how you’re adapting? And as I think about coverage ratios and your expected loss model probably being fed with new data as is everybody's getting a little bit worse data, shouldn’t it be resulting in higher coverage ratios for credit cards? How should we think about coverage going forward and here this new probably a little bit worse scenario? Thank you.
Guilherme Lago, CFO
So, Pedro, thanks for your question. I think we have seen increases in individual coverage ratios of the balances that we have. They actually went from about 9.7% to 10.6%. And the coverage ratios of credit cards have also gone up a little bit, if you take a look at our explanatory notes in our financial statements. I think going forward, we are quite comfortable with the coverage ratios that we have for both Nu personal loans and credit cards. As the 90+ NPLs begins to stabilize, we think that the overall coverage ratios of the industry and ours will start to converge back to pre-COVID levels. But so far, I think credit card coverage has gone up. And overall, coverage ratios are above 200%, probably going below 200% once the 90+ NPLs stabilize.
Rafael Frade, Analyst
I have a question about slide 14. In slide 14, you show the breakdown of the transaction volume by prepaid cards and credit cards. I was a little surprised by the size of prepaid cards in the total transaction volume. I would like to understand how this translates to the credit card portfolio, if the credit card portfolio has more or less the same breakdown or not? And a second question would be related to the interest-bearing loans, that there were a significant increase in revolver lines on the total. I would like to understand if this is something that it’s by design, you are provoking this or it’s related to the need for the clients to use more revolving lines to understand a little bit about this. Thank you.
Guilherme Lago, CFO
Thanks for the question. Let me try to split them in two. So first, I think on slide 14 and I think your second question is probably more related to slide 16. But I think to the first question, what you have seen here is the evolution of the purchase volumes for both credit cards and prepaid cards. You can see that the prepaid cards have outpaced credit cards over the past 4 or 5 quarters. And our market share in prepaid plus debit volumes has started to catch up with that of credit cards. I think for credit cards, we have approached the market share of about 12%, 12.2% in the third quarter in terms of purchase volumes. I think prepaid cards, we used to be slightly below that but we are quickly catching up. The average purchase volume on prepaid cards is slightly lower than the average purchase volume of credit cards, and that’s one of the reasons why you see on the right-hand side of slide 14 that the newer cohorts start with relatively lower levels. So, I think that’s the answer to your first question. I believe that a credit card is simply a credit card. There is no connection between the purchase volume of prepaid cards and our portfolio of credit cards. So, going to your second question, I think I would draw your attention to slide number 16, and we try to break down the credit card portfolio in three buckets, as you can see. So, you can see the non-IEP, the revolving IEP, and non-revolving IEP. And there are two things that I would draw your attention here. So first, I think we have an IBB, interest-bearing balance, as a percentage of the total portfolio that has been below that of the industry and we have been catching up over time. Now, we have not been catching up over time by increasing the revolving balance. So, if you take a look, the revolving balance has remained pretty much stable between 6% and 7%. What has really driven the growth in our IBB has been the increase in the financing portfolio that went from 5% to 10%. And that has been a very intentional addition of Nu products and features that we have added into credit cards that basically allows consumers to basically take financings within the credit card like PIX financing, boleto financing, and even bill finance. Those are intentional features that we have successfully launched over the past quarters that have increased the usage of credit cards to our customers. Now it’s important to mention, as I think Youssef highlighted in his opening remarks, that even though those are described as financing features within credit cards, they are accounted for as the credit card family, so there is no transferring of receivables or financing from credit card to personal loans or vice versa.
Jorg Friedemann, Investor Relations Officer
And our next question comes from the line of Jamie Friedman at SIG.
Jamie Friedman, Analyst
So, in prior calls, you had disclosed some detail about principality. I don’t see it in the slide deck. I may have missed it, I apologize, Lago. But any commentary you might have on principality would be useful.
Guilherme Lago, CFO
Sure. I want to highlight slide 12 for you. On the left side of slide 12, we define what we mean by primary banking relationship customers. A customer is considered our primary banking relationship customer if they transfer more than 50% of their post-tax income to Nu every month. When a customer transfers over 50% of their income, we recognize them as having established a primary banking relationship with us. There are two key points I want you to note from this chart. First, since January 2017 until January 2022, we've become the primary banking relationship for over 50% of our customers across all cohorts. We're not just collecting social security numbers; our goal is to establish primary banking relationships with our customers. The second point is that we are achieving 50% primary banking relationships more quickly. For the January 2017 cohort, it took us around 60 months to reach that point; now it takes us less than 12 months. This acceleration is due to two factors: one external and one internal. The external factor is the increased acceptance of digital banking among Latin American consumers. Specifically, in Brazil, PIX has greatly facilitated the growth of digital banking. The internal factor is that as we introduce more products and features, we earn the opportunity to be the primary banking relationship for more customers. Our value proposition has become much more attractive. Back in 2017, a Nubank customer had only one product, a credit card. Now, they have access to multiple products including credit cards, prepaid cards, bank accounts, investments, and insurance. This expansion has significantly strengthened our ability to establish primary banking relationships with our customers.
David Vélez, CEO
There is a lot of discussion around cryptocurrencies lately. For us, it's primarily about customer engagement and support in delivering a product that our customers are eager to learn more about. Over the last 12 to 24 months, we've noticed more funds moving to cryptocurrency brokers than to traditional investment brokers. This shows there's significant interest, even during this cryptocurrency downturn. We’ve been pleasantly surprised by the adoption of our crypto platform, which has surpassed 2 million users, with 1.3 million actively using it. We want to support our customers in this area, as this is an asset they are consistently investing in. Additionally, we’ve announced our plans to develop our own crypto token related to a potential loyalty initiative throughout our entire ecosystem. We are still working on setting this up with Polygon. Ultimately, we view this as a major opportunity to enhance loyalty and engagement across all our products. We also foresee building a marketplace connecting our 70 million customers with over 2.3 million small businesses and the larger merchants that operate within our marketplace. We are enthusiastic about leveraging crypto to foster that loyalty and look forward to investing in the opportunities this technology can offer us.
Jag Duggal, Chief Product Officer
Hi Scott, thank you for the question. This is Jag Duggal. I’m the Chief Product Officer of Nubank, and I’ll take a stab at your great question. A few thoughts. First of all, as Lago noted earlier, we’ve seen a strong consistent trajectory now multiyear of improving our monthly active rate, as you’ve seen. So, no doubt, as we continue to hit higher and higher levels, the rate of growth is going to slow and the difficulty of continuing to tick it up is going to get harder. But we are determined to continue to try to see how far we can push it. Frankly, we’ve been surprised at how much we’ve been able to continuously push it up and to the right. The other thing I would highlight and goes back to a question that someone asked a bit earlier is we continue to focus not just on our monthly active rate but on increasingly deep levels of engagement, whether it’s our daily active rate over monthly actives or so-called DAU, MAU, which I think David noted continues to go up. So, even as our monthly active rate starts to hit some boundaries, we think we can push an even deeper level of higher engagement in DAU, MAU further up, and that’s significant focus of the company as we head into 2023. Similarly is we’ve talked a lot about our primary banking relationship rate, which continues to edge up continuously. So even as our baseline engagement in monthly actives will no doubt hit some level of saturation at some point, we believe we can continue to drive engagement up at deeper and deeper levels, whether it’s DAU, MAU, whether it’s primary banking relationship and really the confluence of the two. But as we have always done, and as Lago and David both pointed out in their presentations, the engagement of our customers and the NPS and the love of our customers of the products we provide is our North Star, and we continue to see if we can push the frontier there. And that’s all. That’s been our focus and will continue to be as we go forward.
David Vélez, CEO
We included some data on growth in slide 5. To address your question, both Mexico and Colombia are outperforming Brazil across nearly all metrics, including growth rate, customer acquisition cost, average revenue per active customer, and net promoter score. It has been quite surprising to see both of these countries perform better than Brazil, as we initially thought that Brazil would be difficult to surpass. There are not many instances globally of a financial services company achieving viral growth through word of mouth. When we considered expanding to Mexico and Colombia, we did not anticipate this outcome. We believe part of the success is due to a better product-market fit in these nations, as financial services penetration is lower. For instance, in Mexico, we have a net promoter score of 94, likely the highest for any consumer product in any category worldwide. This reflects the strong product-market fit we observe in this region, along with the significant challenge posed by the lack of access to financial services. We are very encouraged by the performance in these two countries, although we still have much to accomplish. We need to launch savings and implement our complete multiproduct strategy, but we feel optimistic about our progress thus far in both markets.
Jorg Friedemann, Investor Relations Officer
And our last question comes from the line of Alex Markgraff at KeyBanc.
Alex Markgraff, Analyst
To start, maybe just to continue on that last thought, David. I think you had mentioned some rough timing of the launch of the savings and checking products in your other geos. Any more specifics you can provide to kind of indicate where you are in the process of launching those and maybe what steps are left or what you’re waiting on with respect to those offerings?
David Vélez, CEO
Sure. The main challenges have been related to obtaining regulatory permissions. We acquired a license in Mexico and are in the process of applying for a greenfield license in Colombia. In Mexico, we’re very close to beginning tests with customers this quarter, Q4, and expect a ramp-up if all goes well with regulators through 2023. In Colombia, we also aim to have MVP testing with customers in 2023 but likely in the second half of the year. We anticipate delivering savings in both countries at a larger scale next year.
Guilherme Lago, CFO
I would like to highlight two key points regarding secured lending products, specifically consignado payroll lending and investment-backed loans. Firstly, the upfront provisioning we need to establish is lower compared to unsecured payroll lending. This results in a quicker payback from an accounting perspective. Secondly, secured personal loans require significantly less capital than unsecured personal loans, making the risk-adjusted net interest margins and return on capital quite attractive. However, it's crucial to set the right expectations. We are very enthusiastic about launching and growing the secured lending business throughout 2023, but the pace of this growth is uncertain. We anticipate that the majority of our originations in 2023 will continue to come from unsecured personal loans. The secured personal loans will likely see growth starting in the first half, with more significant traction in the second half of the year.
Eugene Simuni, Analyst
Thank you for this detailed presentation. I wanted to ask a relatively high-level question just on the gross profit margin trajectory tick-up this quarter. Could you talk us through a little bit what are the kind of the puts and takes that created this tick-up this quarter? And how permanent is this trajectory up of the gross profit margin?
Guilherme Lago, CFO
Absolutely. So, I think this uptick that we had in the gross profit margin has been driven by two things primarily: number one is the velocity of the growth of the credit portfolio; and number two is the movements in interest rates. So as interest rates go up in the country, as they have gone over the past six to eight months, you actually see a compression in the gross profit margin. And as interest rates stabilize in the country, it opens room for gross profit margins to reconverge back to their original levels of high-30s, low-40s. The second thing is as we basically accelerate the ramp-up of secured personal loans, this should allow us to equally improve our credit portfolio and increase our credit portfolio without putting as much pressure on our gross profit margin as the growth of the unsecured credit portfolio. However, if and when we do accelerate unsecured personal loans, I think it was one of the questions that I believe Mario and Jorge asked us at the beginning of the call, it will put additional pressure on gross profit margins because we will again have to basically frontload the constitution of provisions. So there will be a few puts and takes going forward. And we expect that this will be preserved or expanded mildly over the coming quarters.
David Vélez, CEO
Sure, absolutely. There is a lot of discussion around crypto these days. For us, it has primarily been about customer engagement and support in offering a product that customers are actively interested in. We are excited about leveraging crypto as a way to enhance that loyalty. We will continue to invest in this area and are looking forward to the opportunities that the technology can bring us.
Operator, Operator
And this concludes our conference call today. Thank you for attending.