Earnings Call Transcript - NU Q4 2023

Operator, Operator

Good afternoon, ladies and gentlemen. Welcome to Nu Holdings Conference Call to discuss the results for the Fourth Quarter 2023. A slide presentation accompanies today's webcast, which is available on Nu's Investor Relations website. 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. Please be advised that all participants will be in listen-only mode. You may submit online questions at any time today using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer at Nu Holdings. Mr. Friedemann, you may proceed.

Jorg Friedemann, 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 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 fourth quarter 2023 results and provide an overview of our company priorities for 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. Q4 2023 marks our second year as a publicly-listed company and 10th anniversary since our foundation. Our mission dedicated to fighting complexity and empowering people continues to gain strong momentum, now serving nearly 100 million people in Brazil, Mexico, and Colombia. Meanwhile, our business model anchored in three fundamental principles: fast customer expansion, expanding revenue per customer, and efficient operating costs, is delivering substantial earnings power. Customer-base growth has consistently outpaced our expectations, reaching approximately 94 million customers at the end of the quarter, compared to 54 million just three years ago. We are on our way to crossing 100 million customers in 2024, and we plan to continue marching towards the development of the largest consumer platform in Latin America. The base of customer net adds in Brazil remains impressive, averaging 1.3 million customers per month, resulting in a total of 87.8 million customers by the end of 2023. At the same time, our growth in Mexico has accelerated, with a net add of almost 1 million new customers in the quarter, reaching a total of 5.2 million customers by the end of 2023. This underscores the success of our Q3 decision to increase deposit yield in Mexico, which has accelerated our company-wide flywheel in the country and consolidated Nu as the indisputable leader in the digital banking category in Mexico. Finally, let me share some financial highlights with you. In the fourth quarter, our revenue surged to $2.4 billion, accelerating sequentially to a 57% year-over-year increase. Our gross profit surpassed $1.1 billion, growing 87% year-over-year, while our gross margin expanded once again, reaching 47.5% in the quarter. The sequential gross margin expansion boosted our net income, which reached $361 million, while adjusted net income stood at $396 million, reflecting a 229% year-over-year increase. This demonstrates the strength of our business model, capable of combining strong topline growth with very solid levels of profitability. The third chart on this slide illustrates our robust pricing and underwriting capabilities, where quarterly gross profit calculated as total revenues minus funding costs, transactional expenses, and credit loss allowances increased by more than four-fold in the same period. Lastly, we believe 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 resulted in a significant acceleration in net income growth. We anticipate this compounding effect to continue in the years ahead, driven by the combination of sustained growth and heightened profitability within our platform. Now, I'd like to highlight how our flywheel isn't just driving customer acquisition and data growth, but also sustaining strong momentum in our key financial metrics. Our three geographic regions continued to expand, leveraging the inherent operating advantage of our model, where a holding company has effectively transformed its potential into profits. In the fourth quarter, Nu Holdings achieved an adjusted net income of $396 million, reflecting an adjusted annualized return on equity of 26%, surpassing the performance of most peers in the region, and despite maintaining considerable excess capital of $2.4 billion in the holding company. Our return on equity in Brazil alone continues to increase and remains above 40%. In summary, we believe 2023 was the year we proved to the market that the digital banking model we have been building for over a decade is the future of banking.

Guilherme Lago, CFO

Thank you, David, and good evening, everyone. Before starting the discussion around our year-end results and to better frame our operating and financial key performance indicators, I would like to recap the three key elements of our simple and powerful value generating strategy. First, we continue to expand our customer base in the three markets where we operate, quickly transforming new customers into active ones. Second, we are focused on increasing the average revenue per active customer (ARPAC) through effective cross-selling and upselling initiatives. Third, we deliver growth while maintaining one of the lowest cost operating platforms in the industry. Let's delve deeper into our fourth quarter results to understand the evolution of each of these pillars. During the fourth quarter, we experienced a noteworthy expansion of 26% in our customer base year-on-year, as we welcomed nearly 5 million new customers, bringing our total to 93.9 million customers at the year-end. Brazil continues to deliver a high monthly net addition of almost 1.3 million customers, with a significant portion acquired through cost-effective organic channels. In Mexico, our customer count increased by almost 1 million, crossing the 5.2 million mark. In Colombia, we are now serving more than 800,000 customers, driven by the regulatory approvals we received to operate in the country. More important than the process of onboarding customers is our ability to effectively activate and retain them. Our active customer base increased by 27% year-over-year. Our monthly activity rate is now reaching 83.1%, which highlights our ability to engage our customers effectively. Now turning to revenue expansion, we have established primary banking relationships with around 61% of our active customer base, up nearly 2 percentage points compared to last quarter. As more customers choose Nu as their primary bank, the more products they tend to utilize. Our active customers are consuming an average of four products on our platforms versus an average of 3.8 products a year ago. Our revenues reached a new record high of $2.4 billion, up 57% year-over-year. This strong performance underscores the power of our product cross-sell, upsell, and customer engagement capabilities. Our consumer finance portfolio, including credit cards and personal loans, had another increase this quarter, up 49% year-over-year to $18.2 billion. Despite our growth, we do maintain a careful watch on credit quality across our portfolios, and we remain committed to ensuring that our growth is sustainable and responsibly managed.

Youssef Lahrech, President and COO

Thank you, Lago. Good evening, everyone. I will now take you through some highlights of asset quality and credit portfolio health for the fourth quarter of 2023. Our leading indicator, NPL 15-90, declined slightly on a sequential basis to 4.1%, in line with our expectations. Our NPL 90-plus ratio remains stable sequentially at 6.1%, also in line with our expectations. We have maintained our strategy of not selling any credit receivables, therefore, our NPL rates require no adjustment. We anticipate that a part of our credit portfolio growth will come from expanding down the credit spectrum, and while this may result in intentionally higher delinquency rates, our goal is to ensure that these are more than offset by additional revenues leading to higher risk-adjusted margins as we expand. We are pleased to report another strong set of results this quarter. Our healthy asset quality and robust returns reflect our effective risk-based pricing approach and superior credit underwriting capabilities.

David Velez, CEO

As mentioned earlier, we believe we're in the very early stages of a full transformation of financial services in Latin America and globally. With already close to 100 million customers in Latin America but owning less than 5% of the financial services revenue in the continent, we think it's imperative to continue investing significantly and responsibly in growth and expansion versus trying to optimize short-term earnings. To give two data points around how much we're currently investing: In 2023, our operations in Mexico and Colombia accounted for only 6% of our consolidated revenues, but represented nearly 21% of our headcount. As of the end of Q4 2023, approximately 42% of our operational personnel was allocated to growth and moonshot projects. In 2024, we will double down on our investments in new products and features, and we will double down on our investments in Mexico and Colombia. While we believe we will continue to operate with healthy levels of profitability, the opportunities we have ahead of us are compelling, and it is time for planting, not for harvesting. We find ourselves at a particularly exciting moment, as the landscape of the Latin American financial services industry has undergone rapid transformation. The emergence of new players like Nu, coupled with technological advancements and evolving regulatory frameworks, presents us with unprecedented opportunities. Moreover, Nu's distinctive position, boasting exceptional access to capital and talent in the Latin American region, sets a stage for potential success. I would like to outline our priorities for 2024.

Operator, Operator

We will now start the Q&A session for investors and analysts. I would now like to turn the call over to Mr. Jorg Friedemann, Investor Relations Officer.

Jorg Friedemann, Investor Relations Officer

Thank you very much, operator. And we are going to start the Q&A session with a question posed by Jorge Kuri from Morgan Stanley.

Jorge Kuri, Analyst

Hi, everyone. Thanks for the opportunity to ask questions and congrats on the great numbers for the quarter and the year. I wanted to ask about payroll loans and if you can give us some flavor of how you are winning on payroll loans? Evidently, David said at the very end that you're offering prices that are well below what the incumbents are offering. Is this just across the board for all clients? Are you seeing some sensitivity on prices, where people are switching their payroll loans to you because you have a better user experience? Is it payroll loans to people that didn't have a payroll loan before, or are you refinancing existing payroll loans, and from which banks are these primarily coming? On the payroll lending as well, are you seeing the payroll payment being deposited to you as well? That would be my first question. And if you don't mind, I would like to add a second question about one of your priorities for 2024. David mentioned Nu products for the Supercore client base, meaning high-net-worth individuals. What type of products are you talking about there? Thank you.

Jagpreet Duggal, Chief Product Officer

Jorge, this is Jag Duggal. Let me answer your first question about our secured loan business and strategy. Equal volumes of our secured loan origination in Q4 came from FGTS loans against the Social Security savings of customers and consignado, particularly the Federal Employees. We offer a dramatically simplified digital mobile experience, 100% mobile. This allows us to offer a significantly lower price than the market average. We have found a market where consumers are very price-sensitive. We are targeting our existing Nu bank customers for secured loans. In terms of Q4 results, our product and processes around portability of these loans are still in the early stages. Essentially, all of the loans originated in Q4 were new loans from customers. Our approach has turned out to be very effective.

David Velez, CEO

And I'll just add one point, Jorge. Ultimately, it's the same receipt that we've been following for every single product. Technology distribution and direct-to-consumer distribution enable us to create a product that is better for consumers at a lower cost. We measure that by NPS, and in this specific category, we're already measuring NPS upwards of 80, which would be by far the best-rated product in the market today. That tends to be the leading indicator for growth. We're addressing a traditionally offline experience, which often involves a lot of fraud and paperwork. By offering direct-to-consumer distribution, we can provide better products at lower prices. As for products for the Supercore client base, we are preparing to invest significantly in software-related solutions. If you need cash or offline distribution, we're not well-positioned to compete, but we excel in software differentiation.

Tito Labarta, Analyst

Hi, good evening, everyone. Thank you for the call and for taking my question. Lago, you mentioned that you expect gross margin to be relatively stable this year given the investments that you're making. Can you clarify this in terms of provisions being higher as you grow the loan portfolio, or interest expenses as you're growing deposits in Mexico? Also, regarding the renegotiated discounts impacting margin and provisions this quarter, is that a one-time issue or should we expect that going forward as well?

Guilherme Lago, CFO

Tito, thanks so much for your question. Regarding the gross margin, we will largely see two effects: Our Brazilian operations are expected to continue to post expanding net interest margins, while we expect to make additional investments in Mexico and Colombia. The combination of these two effects will lead us to not expect our gross profit margins to evolve materially away from the level where it was in 2023. As for the collections and discounts, we had additional discounts of $60 to $70 million in the fourth quarter. While Desenrola has announced that it will continue, we expect most of these impacts to have been seen in Q4 2023.

Mario Pierry, Analyst

Hi, everybody. Good evening. Thanks for the opportunity. My question is related to Mexico. Can you give us a bit more color on the profile of clients that you're attracting in the country? You disclosed here 5.2 million clients in Mexico. How many credit cards outstanding do you have in Mexico? Finally, what led to your choice of remunerating deposits at 15% when traditional banks are likely remunerating clients around 7% of market rates?

David Velez, CEO

Hi, Mario, David here. Thank you for the question. Since we started in Mexico, we've seen about a 50%-50% split between banked and unbanked customers. We have targeted high-income clients first to create opportunities for broader access later. We increased our yield in Mexico to reposition the deposit product more attractively for consumers, which has clearly paid off in terms of customer growth and credit quality.

Yuri Fernandes, Analyst

Hello, guys. Thank you for the opportunity to ask questions. I have a follow-up on Mexico and your deposit franchise. Your deposits are growing much faster than loans, right? Given that you're paying 15%, could we see higher losses in Mexico in '24 or '25? Could you share your thoughts here?

David Velez, CEO

Great question. Yes, we see this as a way to accelerate credit access. We are positioned as the clear category leader. It is indeed a significant investment, but as we scale, we will start to transmute the invested yield into the financing operations necessary for sustainable growth. Our operation in Mexico is one that we have managed carefully as we enter this high-growth environment.

Guilherme Lago, CFO

As a follow-up, most of the investments in Mexico will come above the gross profit line, affecting efficiency ratios. But we expect continuous improvements throughout 2024 and beyond.

Jorg Friedemann, Investor Relations Officer

Thank you for your questions. We have surpassed the time allotted for our call and will be concluding today's session. We appreciate your participation.