Earnings Call Transcript
Nu Holdings Ltd. (NU)
Earnings Call Transcript - NU Q3 2025
Operator, Operator
Good evening, ladies and gentlemen. Welcome to Nu Holdings conference call to discuss the results for the third quarter of 2025. A slide presentation is accompanying today's webcast, which is available in Nu's Investor Relations website, www.investors.nu in English and www.investidores.nu in Portuguese. This conference is being recorded, and the replay can also be accessed on the company's IR website. This call is also available in Portuguese. I would now like to turn the call over to Mr. Guilherme Souto, Investor Relations Officer at Nu Holdings. Mr. Souto, you may proceed.
Guilherme Souto, Investor Relations Officer
Thank you, operator, and thank you, everyone, for joining the earnings call today. If you have not seen the earnings release already, a copy is posted in the Investor Relations website. With me on today's call are David Vélez, our Founder, Chief Executive Officer, and Chairman; and Guilherme Lago, our Chief Financial Officer. Throughout this conference call, we'll be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for Nu Holdings, but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies. Reconciliations of the non-IFRS to the IFRS financial information are available in the 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 the earnings release. I will now turn the call over to David. Please go ahead, David.
David Velez-Osomo, CEO
Hello, everyone, and thank you for joining us today. In Q3 2025, effectively every single one of our metrics continued to grow, reinforcing our position as the leading digital bank in Latin America and one of the leading fintech platforms globally. Our customer base grew to 127 million customers, with more than 4 million net additions in the quarter while maintaining an activity rate above 83%, a clear reflection of the depth of engagement we continue to build with our users. In Mexico, we surpassed 13 million customers, now reaching around 14% of the adult population. In Colombia, we're approaching 4 million customers. Both markets continue to demonstrate strong traction, highlighting the scalability of our model. The solid growth, combined with continued ARPAC expansion, which surpassed $13 this quarter, has led to record revenues of over $4 billion. These results highlight the compounding effect of our customer expansion, deeper engagement, and disciplined monetization. Our gross profit continues to rise sharply, reflecting strong unit economics and operating leverage. And with a cost-to-income ratio of 28%, we continue to progress on our trajectory of improving efficiency. Finally, we delivered net income of $783 million, another quarter of solid profitability even as we keep investing in growth and innovation across all markets. This consistent performance is a direct result of our business model, one that attracts millions of new customers every quarter, fosters deeper engagement that expands monetization, all while operating on a low-cost and highly efficient platform. This formula continues to drive our earnings growth across markets, but with each component playing a distinct role in every geography. In Brazil, we now serve over 60% of the adult population and estimate that we're already the largest player in the SME segment by the number of accounts. Having reached scale, revenue per customer has become the main growth driver. Our focus going forward is broadening our product portfolio, deepening engagement across all segments and continuing to execute our credit strategy, increasing exposure among customers with the strongest risk-adjusted returns. In Mexico, our main focus remains on expanding our customer base, deepening product adoption and advancing financial inclusion, all while laying the groundwork for sustainable long-term monetization. Given the scale-up phase, ARPAC levels are already nearing those seen in Brazil, reflecting the strong unit economics of the credit card business in that market, driven by a higher share of interest-bearing balances and a steadily declining cost to serve supported by our ongoing platformization efforts. Both markets demonstrate the strength and adaptability of our model, which is capable of driving rapid growth and scale in earlier stages while expanding profitability as the market matures. Diving deeper into Mexico, our second S-curve, we see a market now beginning to scale and one that we expect will contribute meaningfully to our results in the years ahead. We're building strong foundations, having reached market leadership position in the Mexican digital banking space, already reaching 13 million customers or around 14% of the adult population compared with about 10% when Brazil entered its inflection point back in 2019. Even with the product portfolio still largely centered on the credit card, ARPAC has already reached $12.5, reflecting strong customer engagement and the favorable unit economics of this product in Mexico. On the cost side, cost to serve is already below $1 and recent adjustments to deposit yields are beginning to flow through our cost of funding. Looking ahead, we'll continue stacking U.S. curves with focus and discipline, while Brazil and Mexico remain our core priorities where most of our resources and execution efforts are directed. We also see transformational optionality in the U.S. following our filing for a national bank charter, a step that could unlock new opportunities over time as we remain fully focused on our core markets. As we continue scaling across markets, we're also building the next generation of our platform, redefining how we operate and how customers experience banking. We have heard several investors asking us about our AI strategy, and so we wanted to spend a few minutes on it. Our vision is to become AI-first, which means integrating foundation models deeply into our operations to drive an AI-native interface to banking, while creating meaningful benefits for both our customers and our business. For our customers, AI is enhancing our understanding of each individual and their financial needs, allowing us to deliver personalized recommendations, contextual offers and products, and proactive insights at the right amount. It will also transform the way people interact with Nubank, be it through a simpler and seamless app or through a number of additional channels, embedding conversational user interfaces. We think there is a significant opportunity to include agentic workflows across most products and services, improving customer experiences across the board. For our business, AI is strengthening how we manage risk and scale efficiently. It is helping us to design safer and more precise financial solutions, reducing credit and fraud losses, and enabling tailored collection strategies that drive better recoveries. At the same time, it is enhancing productivity across the company from leaner operations to faster development cycles and higher engineering throughput. When we bring all of this together, becoming AI-first means accelerating our flywheel by scaling to offer higher-quality products at lower costs, unlocking the full value of open finance, deepening cross-sell and product penetration and opening new revenue streams, all while optimizing pricing and delivering superior value for both customers and shareholders. But AI is not a buzzword for us. We believe Nubank is uniquely positioned to become AI-first and a leader in the use of AI in financial services globally, and we're already starting to see the first breakthroughs. Since our early days, we've known that technology and data will be our strongest competitive advantage, being cloud-native and built entirely on modern architecture enables us to simulate, experiment, train, and deploy foundation models at scale. Coupled with our proven ability to attract world-class talent, this puts us ahead of incumbent banks and regional fintech competitors and places us in a unique position globally. Over the past 12 to 15 months, we developed nuFormer, our proprietary approach for building large generalizable models based on advanced transformer architectures and self-supervised learning principles, similar to those powering world-class LLMs. These models provide a deeper understanding of customer behaviors and can be deployed across our critical risk and personalization engines. To reach this level of performance, the first generation of our nuFormer model was built with 330 million parameters and trained on approximately 600 billion tokens, an unprecedented scale of data by financial industry standards. Yet that represents only a fraction of our full data set, which spans trillions of tokens and reflects the vast scale and diversity of Nubank's platform. Our business model with principality at its core generates a deep repository of high-quality transactional and behavioral data, giving us a distinctive edge by enabling nuFormer to learn from richer context and continuously strengthen its predictive power. Historically, gains in credit performance have come from our main fronts, incorporating more and better data sources into models, expanding training samples or reducing bias within them, optimizing positive frameworks, including the use of complementary models that evaluate different dimensions of credit risk, and finally, refining modeling techniques from the definition of targets to model architecture and feature engineering. The adoption of foundation models represents a radical expansion of this last frontier. It brings a research-driven approach that moves the needle through advances in model architecture and training processes, enabling rapid and continuous improvement as AI researchers push the boundaries of what's possible. When we applied this approach, the models were built to deliver an average improvement about 3x higher than what's typically observed in successful machine learning model upgrades. Translating this into business outcomes, our initial models enable a major upgrade to credit card limit policies in Brazil, allowing us to meaningfully increase limits for eligible customers while maintaining the same overall risk appetite. This successful breakthrough within an already robust underwriting model, like Credit Card Brazil, underscores the significant potential of these advanced approaches. We're now focused on scaling this innovation beyond Brazil, already in motion in Mexico, and extending them across every part of Nubank from personalization and cross-sell to fraud and collections, further reinforcing both the strength of our model and our ability to execute at scale. That said, we're still just scratching the surface. As always, at Nubank, it's still day one, but we believe that embedding AI into our business represents a once-in-a-lifetime opportunity to further differentiate Nubank from traditional banks. We're building on years of experience in model governance, privacy, and large-scale model deployment to ensure we continue evolving responsibly. This means having robust processes to make sure our tools truly promote our customers' financial well-being with the right guardrails in place to bring these advanced models safely into production within a highly regulated environment. We'll continue to share our progress as this journey evolves. And with that, I'll hand it over to Lago, our CFO, to walk you through the financial highlights of the quarter. Thanks a lot.
Guilherme Marques do Lago, CFO
Thank you, David, and good evening, everyone. To begin, I'd like to start with our credit portfolio. Total balances reached $30.4 billion in the third quarter, up 42% year-over-year on an FX-neutral basis, with very solid growth across all products. Credit cards accelerated during the quarter, supported by our ability to continuously enhance the precision of our credit models and increased limits for our customers, all while maintaining very healthy risk metrics as we will see in the following slides. At the same time, secured lending grew 133% and unsecured loans 63% year-over-year, reflecting the ongoing diversification and maturation of our portfolio. Together, secured and unsecured loans now account for nearly 35% of total balances, up from 27% a year ago. This reinforces our capacity to broaden the credit spectrum and serve a wider range of customers' needs over time. Moving to loan originations. We reached a record high of $4.2 billion in the quarter, up 40% year-over-year on an FX-neutral basis with growth coming from both unsecured and secured lending. In unsecured lending, performance was supported by the strong momentum in our SME portfolio and by new credit policies introduced for both business and individual customers. These updates are enabling us to safely expand eligibility and increase average loan sizes while keeping new originations more concentrated in lower-risk segments. In secured lending, results were driven by strong originations in public payroll loans or Consignado, which grew nearly 130% year-over-year along with a gradual normalization of INSS loans. Now turning to deposits. Our balances reached $38.8 billion, up 34% year-over-year on an FX-neutral basis, while the cost of funding actually improved from 91% to 89% of interbank rates. This is a clear demonstration of our ability to grow volumes while enhancing efficiency, continuing to build a scalable and sustainable funding franchise across Latin America. In Colombia, deposits continued to grow steadily, even with funding costs below the interbank rate. In Brazil, we saw strong inflows across all segments, reinforcing the depth and the resilience of our deposit franchise. And in Mexico, we had anticipated some outflows following the recent reduction in deposit yields. This was a deliberate move that reduced our consolidated funding cost and this was fully aligned with both our expectations and our long-term strategy for sustainable growth. Recent trends in Mexico reinforce our confidence in our ability to continue expanding and strengthening our deposit franchise. Moving to net interest income. We reached $2.3 billion in the quarter, up 32% year-over-year on an FX-neutral basis, driven again by the continued expansion of our credit portfolio. Net interest margins contracted by about 40 basis points from the prior quarter. This reflects our disciplined approach to optimizing risk-adjusted returns as we continue to expand originations in lower-risk segments, including in credit card interest-earning portfolios, unsecured loans also to lower-risk individuals and higher shares of SME and secured loans within our total interest-earning portfolio. While some of these products carry lower nominal yields, they strengthen the portfolio's overall quality and resilience over time. Our credit portfolio continues to outperform our expectations, supported by disciplined underwriting and a healthy mix shift towards customers and products with stronger risk-adjusted returns. Combined with better recoveries, these factors drove a 7% decline in credit loss allowance expenses quarter-over-quarter, also on an FX-neutral basis, mainly reflecting lower provisions in our two largest products, namely credit cards and unsecured loans. As a result of this lower cost of credit, our risk-adjusted net interest margins expanded to 9.9% in the quarter, underscoring the resilience and the quality of our portfolio. Next, looking at delinquency metrics for our consumer credit portfolio in Brazil. The 15-90-day NPL ratio remained well within expectations, ending the quarter at 4.2%, slightly below the historical third-quarter seasonality. The 90+ day NPL ratio increased marginally to 6.8%, also very much in line with the expected seasonality and the underlying portfolio dynamics. Our coverage ratios remained solid, even though they declined modestly in line with the recent movements in credit loss allowance. We continue to maintain what we believe to be a quite robust provision buffer both over the total portfolio and specifically over the 90+ day NPL balances. Moving to gross profit. We delivered another quarter of solid growth, reaching $1.8 billion, up 32% year-over-year, also on an FX-neutral basis. The expansion in gross profit margin now to 43.5% reflects the consistent top line growth, combined with the continued improvement in the risk-adjusted performance that we saw in the prior slide. These trends reinforce the sustainability and the scalability of our business model as we continue to balance growth, profitability, and risk discipline across the three markets in which we operate. In the third quarter, our efficiency ratio decreased slightly to 27.7%, reflecting continued progress in productivity and operating leverage. Yet, we will continue to invest intentionally and strategically to become the largest and the most loved retail financial institution in Latin America. These investments are fully aligned with our long-term value creation strategy, even if they sometimes create short-term pressures on costs. That all said, the structural trend remains clear, as we scale, revenue growth, and disciplined cost management will continue to drive efficiency gains and margin expansion. Now, to wrap up, we delivered a record high net income of $783 million and a record ROE of 31%, up 39% year-over-year, also on an FX-neutral basis. We achieved these results while we continue to deliver strong operational growth, always putting our customer at the very center of everything that we do, offering better products, lower fees, and an exceptional experience. These results once again highlight the strength and scalability of our model as well as our ability to combine growth with profitability. Now with that, we will open the call for questions. Thank you.
Operator, Operator
I would now like to turn the call over to Mr. Guilherme Souto, Investor Relations Officer.
Guilherme Souto, Investor Relations Officer
Thank you, operator. Could you please open the line for Mr. Yuri Fernandes from JPMorgan.
Yuri Fernandes, Analyst
Congratulations on your performance. I think many investors are curious about your provisions, particularly regarding Lago. Notably, your cost of risk has decreased, indicating a shift towards more middle-income clients in Brazil and an increase in secured lending. Your recent Stage 3 formation has also shown improvement. However, investors are likely looking for clarity on the lower provisions this quarter that contributed to EBIT. If you could explain what led to this reduction in provisions, it would aid in their understanding of the quarter. Thank you again for your efforts.
Guilherme Marques do Lago, CFO
No, thanks, Yuri, for the question. Yes. I think asset quality has been positive over the past two quarters. I think this quarter, we have also seen kind of asset quality performing as per expectation, even it's likely better than expectations. We have also had some effects of the policies that we have intensified over the past now three to four quarters of reactivating customers in Brazil who had defaulted with us a few years ago and only now after they have cured their debt, we are also offering them additional credit opportunities that have materially improved the recovery levels. And then finally, we actually have seen through both machine learning, but also the predictive AI technology and modeling that David alluded to, the ability to have greater precision in some of the credit modeling techniques. So what you have seen is kind of asset quality performing in line or even better, but it's still, if I would now draw your attention, Yuri, to, let me go here, Slide 17, you see that the coverage ratio that we continue to have are at levels that we believe to be fairly robust in both the total balance as well as NPL 90+. Now let's see how it goes, but we are also kind of in the mid of the fourth quarter of 2024 now, it's November 13. And we continue to see asset quality performing relatively okay. So that's kind of the main background for the evolution of our CLA this quarter.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Jorge Kuri from Morgan Stanley.
Jorge Kuri, Analyst
Congratulations on the impressive results. My question is regarding your net interest margin. I understand from Lago that the credit mix is contributing to the decline in NIM. However, when I look at the nominal figures, your interest income increased by 14% quarter-on-quarter, while your total loan book grew by 11%. This suggests that your income is actually outpacing asset growth, which would indicate an improvement rather than a mix deterioration. Conversely, your interest expense rose by 24% quarter-on-quarter compared to a 6% increase in deposits. You mentioned a decrease in deposit costs, but the dollar figures seem inconsistent. Could you clarify these dynamics and explain the reasons behind the NIM contraction?
Guilherme Marques do Lago, CFO
Sure, Jorge. Look, two things on this. So first on the revenue and then on the cost. I think on the revenue side, we have seen the growth being kind of more heavily weighted into less risky assets, not only asset classes per se. For example, you can see that if you go to Slide 12, you can see that secured lending has outpaced the rest of the portfolio. Secured assets have no everything else constant, lower kind of yield levels. But even within lending and within credit card, Jorge, we are seeing kind of a faster growth on a balanced basis towards less risky customers that would have lower yields. So that is one of the things that would justify, but you correctly pointed out that we have also seen an increase in interest expenses, and that has come entirely from Brazil. So our average funding cost in Brazil has gone up and the average funding cost in Mexico and Colombia have been coming down. When we look at the average funding cost that we published on Slide 14, you will see kind of what we call the cost of deposits as a percentage of interbank rate going from 91% to 89%. And they may call the question, why, how do I kind of connect the dots, right? If you are lowering the cost of funding as a percentage expressed as a percentage of interbank rates, how can your cost of funding expressed in dollars be going up? It's because the piece that is going up is the piece denominated in Brazilian reais, which is subject to the nominally higher interest rates of SELIC of 15%. So the weighted average cost of fund expressed as a percentage of the interbank deposit rate, which is what you see here on Slide 14, has come down. But the overall interest expenses, dollar-wise, has gone up a little bit. So the combination of lower asset yield because of the mix with a slightly more expensive funding base in Brazil has compressed net interest margins in the quarter, which is what you see on Slide 15 that has gone from 17.7% to 17.3%. What I would, however, point out is, when you're taking into account the asset quality or the cost of risk, you actually see an expansion in margin. And that is what is shown on the subsequent slide, which is Slide 16. Our risk-adjusted margin has actually gone up from 9.2% to 9.9%, which goes to show that even though we have kind of increased the growth towards less risky assets that have come at the expense of slightly lower asset yield. This has been more than offset by much lower cost of risk, which has led to the expansion of risk-adjusted NIMs.
Jorge Kuri, Analyst
All right, Lago. Thank you very much. That was very clear. And if you remind my follow-up on the previous question, on provisions. You mentioned recoveries stronger than expected. Would you mind quantifying that and what impact it had on the combined provision number?
Guilherme Marques do Lago, CFO
We are not disclosing the specifics of the one-off impact. It primarily relates to recoveries from customers we have reactivated in the past three quarters. This program allows customers who defaulted a few years ago and have fully paid down their debt a second chance. We have observed that the recovery from these customers is higher than we initially anticipated. However, we will not provide the exact details of the additional recovery attributed to this program.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Pedro Leduc from Itau BBA.
Pedro Leduc, Analyst
If I may, on credit cards, please. Last quarter, we saw a big increase in newly granted limits. And this quarter, we may be seeing some of the effects here. There's more cards active, more cards generating revenues, transaction volumes, the cards seem to be going up. Can you talk a little bit more about how you're seeing this rollout perform on the ground? It looks like you did another small increase now in Q3. If you can talk about that as well. And I think it may tie up also to what we're seeing in the stages and the probabilities. It seems like this growth is coming from a slightly better quality mix. If you can also include that. I know it's a longer question, but I think you get the spirit.
Guilherme Marques do Lago, CFO
Sure, Leduc. Thanks for the question. So look, we announced a relatively large credit limit increase program in the second quarter of 2025. And the rollout of that credit limit program was spread roughly one-third in the second quarter, one-third in the third quarter and one-third expected to be finalized in the fourth quarter. So we have not yet seen the full effects of that CLIP program materializing in the financial performance of the company. It's something that we will only see in full most likely towards the mid and end of 2026 because it takes some time for limits to converge into PV and for PVs to converge into IBB. So there's some leeway there as well. Second point, Leduc, you're right. I think a substantial portion of the credit limit was granted to less risky customers. And so kind of the average unit of risk that we have added has actually lowered over time. However, as we increase the limits to kind of lower-risk customers, we also decrease the flip side, the utilization. So I think if you have BRL 1,000 limits and we increased this by 20%, you would experience much higher utilization than if you have BRL 100,000 limits and we increased this by 10%, but both the utilization as well as the credit performance related to this credit limit increase have now both performed largely per our expectations. So nothing kind of deviates or forces us to revisit both from the offensive as well as on the defensive side, the pace and intensity of those movements. Now even though we did disclose in the second quarter that we saw a big CLIP, a credit limit increase, I don't think we should see this as a one-off, right? This is really a continuous enhancement of the programs that will not be kind of a straight line, but we will see kind of CLIP programs being introduced from time to time. This is what we've seen over the past years. And then if you go, Leduc, to what David mentioned at the beginning of his session about the implications of the predictive AI modeling to our credit underwriting, I would say that, first, we have introduced this to credit limit increases that has not yet been introduced to releases by which I mean we have been able to sharpen how we increase credit limits of existing customers. We have not yet applied this to the determination of the new customers to which we granted the initial line, which we call customer acquisition. We have also not introduced this to lending. And we have not introduced this to Mexico and Colombia. So I think there's still quite a lot of runway for us to see further improvements and enhancements in our credit underwriting performance.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Mario Pierry from Bank of America.
Mario Pierry, Analyst
Congratulations on the results. I’d like to delve a bit deeper into Mexico and the ARPAC of $12.50 that you're reporting, which is quite impressive, particularly since Mexico is relatively new for you and the ARPAC is nearly on par with Brazil. Could you provide more details on the breakdown of this ARPAC between interest income and fees? I’m asking because we’ve seen the Mexican regulator propose a cap on card interchange fees. I’m curious about your perspective on this and how it might affect your results in Mexico. Additionally, regarding Mexico, you only present the NPL and coverage data for Brazil operations. Could you share any asset quality metrics from Mexico? That would be helpful.
Guilherme Marques do Lago, CFO
Sure, let me try to address each of your questions, and feel free to follow up if I miss any. Regarding Mexico, you mentioned the evolution of the customer in ARPAC and cost to serve. On Slide 7, you can see that our customer base in Mexico has grown to about 13 million, which represents roughly 14% to 15% of the adult population, and nearly 25% of the banked population. This means that about one in four banked Mexicans are Nubank customers, and we're very excited about this. As for the evolution of ARPAC in Mexico, most of it comes from interest related to credit card lending and floating from our deposit base, while fees and interchange from credit and debit cards make up a smaller portion of the overall ARPAC. However, you mentioned the public consultation recently issued by the Mexican government regarding capping interchange fees for credit and debit cards. Since this announcement, we have actively engaged in discussions with other industry players and the government. Although this makes up a smaller portion of our revenues, we are concerned that such caps could hinder financial inclusion and credit access, as we've observed in Brazil and other markets. This could negatively affect the economics for new credit customers. We are in ongoing discussions with industry stakeholders and are confident we can find a workable balance that will not jeopardize our ability to promote financial inclusion in Mexico over time. Did I address all of your questions?
Mario Pierry, Analyst
No, no, that's helpful. And then on the NPLs. And just to clarify, like when you say that the fees are a smaller percentage, are we talking about like 15%, 20%. Any idea or new color you could give to us?
Guilherme Marques do Lago, CFO
No, we don't provide this breakdown. But I think if you take a look at the financial statements that we posted with the regulators in Mexico, you will largely get a good proxy of kind of the weight of each of those components for us. But I think even if the, Mario, for example, let's assume that interchange accounts for a small portion. If you cap this in the magnitude that has been proposed by the government, the existing kind of business plan that we have, a significant portion of the new customers of the ones that we would bring from informality to the bank may be compromised, right? So we do believe that it's our obligation and duty to be able to share this very openly with the stakeholders in Mexico to continue to foster the competition and financial inclusion that we want to do so. Yes. No, absolutely. We do expect that as Mexico gains relevance in our overall credit portfolio, we will start providing kind of a much more granular disclosure on its asset quality. Today, it still accounts for less than 10%, 15% of our overall book, but we are certainly ready, able and willing to provide those levels of the disclosures. The asset quality and asset performance in Mexico overall has been a fairly good story for us. I think we spent the good part of 2023 and 2024 kind of sharpening the data stacks and the models. And what you have seen over the past 12 to 18 months is a relatively strong acceleration of the growth of our credit book in Mexico, growing at a clip of about 50% to 70% on an annualized basis. But more than the top line growth or the size of the book, the asset quality has performed very much in line, in some cases, even better than expected. Also, we have recently launched a lending product in Mexico. We have been working primarily with credit cards. Lending has been doing really well in Mexico. I wouldn't be surprised if differently from Brazil at some point in time, lending becomes an even bigger business for us in Mexico than credit cards. So I would say, yes, the left side of the balance sheet has expanded nicely in both quantum and quality. And then on the right side of the balance sheet, as you may have seen, we have been kind of sequentially redesigning and repricing deposits. It has led to a fairly substantial drop in the cost of funding in Mexico. And still preserving what we see very intensively there, which is primary banking relationships, transactionality, and activation. So for most of the customers, it has actually been going up. We are at an all-time high of transactionality there. So very excited about Mexico with what we're seeing. Still early days. But as David mentioned, it's playing out to be as strong, if not even stronger than Brazil.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Marcelo Mizrahi from Bradesco BBI.
Marcelo Mizrahi, Analyst
So my question is regarding the cost of risk again. So I understand what drives the cost of risk to go down. But as Lago has said, so about the campaign to recovery to bring back clients, we are already seeing the number of active cards going up. So the question is, looking forward, this level of cost of risk, it seems that is the new level in the next quarters. So the growth of the NIM will come with this proportionality, so more from the cost of risk than from the net interest margin.
Guilherme Marques do Lago, CFO
Thank you for your question. Regarding net interest margins, to address the latter part of your inquiry, it will be influenced by both our asset mix and our loan-to-deposit ratio. As we continue to increase the proportion of secured lending, we might see a gradual decline in asset yield. However, as loan-to-deposit ratios rise, we can expect potential expansion in net interest margins. The outcome will largely depend on the pace at which we grow our credit assets relative to the speed at which we increase deposits in Brazil, Mexico, and Colombia. Concerning the cost of risk, we do not offer guidance on this for either the short or long term. As you may have noted, we have been closely monitoring and managing our business with a strong focus on short-term data regarding margins. So far, the data has been quite promising, allowing us to continue growing our portfolio. Nevertheless, if we observe any decline in asset quality across any segments, products, or regions, we will not hesitate to reassess our strategy. This caution is why we are reluctant to provide guidance on both our top line and cost of risk.
Marcelo Mizrahi, Analyst
Can I follow up on the LDR? I am interested in what is currently happening in Mexico. It seems logical to expect that part of this profitability will come from leveraging the portfolio. Are you seeing that with the LDR?
Guilherme Marques do Lago, CFO
Yes. Look, I think LDR in Mexico is about 15%, 1-5, right? So certainly, it's in many respects, one of the most liquid financial institutions that we may have in the region. Having said that, over the past two quarters, most of the expansion of NIMs in Mexico has come from the lowering of the cost of funding rather than any material changes in LDR. Going forward, however, I think that LDR will play a much bigger role than any material change in cost of funding.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Thiago Batista from UBS.
Thiago Bovolenta Batista, Analyst
Congratulations for the results. I have one question, actually, one question divided into two, about regulation. The first part of the question is about mortgage. With the recent change in regulation on saving deposits and mortgage in Brazil, do you believe it is possible to start to operate in this market in the near future? And second, on the FGTS loans, with the change that we saw probably 1 month ago or less than that, do you believe that FGTS loans will be reduced in a material way?
David Velez-Osomo, CEO
Thank you for your question. We have examined the mortgage market in Brazil and identified several appealing aspects, particularly regarding loans. However, this is not a current focus for us. I don't anticipate us engaging in this area over the next few years. Our balance sheet is relatively small but well-capitalized, with high velocity and strong returns on equity. Therefore, we will prioritize products, especially credit products, that have short durations, are data-intensive, and allow for quick responses to changing macroeconomic conditions, offering us agility. Mortgages, on the other hand, are long-term in nature, reduce flexibility, and require substantial long-term funding. This makes them incompatible with the types of products we prefer to offer directly from our balance sheet. In the future, there might be a chance to partner with someone for this, but it is not a priority for us right now. Regarding FGTS regulation, I believe there will be a reduction in our FGTS originations due to this regulation. However, considering the overall size of our portfolio and other lending products we offer, the impact would not be significant. So, there will be an effect on FGTS, but it won't materially affect overall portfolio growth.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Gustavo Schroden from Citi.
Gustavo Schroden, Analyst
Congratulations on the results and thank you for the call. Most of my questions were addressed. I have a follow-up regarding asset quality. The lower expected credit loss was noted, but some metrics such as 90-day non-performing loans are stable and early non-performing loans are improving. However, when we look at transfers to Stage 3 for both credit cards and loans, there is a continuous rise. I would like to understand how this increase in transfers to Stage 3 aligns with the lower risk credit portfolio you are adopting and the reduced provision expenses for the quarter.
Guilherme Marques do Lago, CFO
Thank you for the question. We've observed a better-than-expected performance in asset quality in certain areas, particularly with Credit Cards in Brazil. Additionally, we have significantly improved our collections processes and platforms, which has led to notable advancements in Brazil. We anticipate similar improvements in Mexico, likely beginning in the fourth quarter of 2025. Overall, the portfolio has performed steadily, and there have been no unusual trends in the past two to three quarters that we do not expect to continue unless there are significant changes in the macroeconomic environment.
Gustavo Schroden, Analyst
Okay. Okay. Understood. And my follow-up would be regarding Mexico. Assuming this, let's say, improving in cost of funding, we follow data from Mexico, and we can see that you are improving the cost of funding there. Assuming a potential improvement also in loan-to-deposit ratio, and we also follow the NPL ratio, and we see the NPL ratio in Mexico under control. So do you think that assuming these trends you are posting in Mexico, we can expect like some positive ROE or bottom line in Mexico soon?
Guilherme Marques do Lago, CFO
I cannot provide specific guidance on the P&L or net income for the company or its legal entities, nor can I give a definitive outlook on when we'll achieve net income positivity or ROE. However, I can share our insights regarding Mexico's profitability potential. Our operations in Mexico are showing strong unit economics that may be even more favorable than those in Brazil, with higher ROA and ROE. This enables us to extend significant credit access to a segment of the population previously excluded from banking and credit services. Currently, nearly 14 million customers in Mexico are using our services, with about 20% of them lacking access to banking or credit before joining Nubank. We believe our cost structure in Mexico is advantageous compared to many regional competitors, allowing us to target segments that traditional banks overlook, all while maintaining strong unit economics. We are excited about the future in Mexico. We are still in the early stages, but as we scale, we anticipate benefiting from economies of scale and operational efficiency. As it stands, Mexico currently has a cost to serve of about $1, which is significantly better than Brazil's cost at a similar development stage, and we are seeing promising trends in ROE and ROA. The key factor in Mexico is the speed of economic digitalization and the growth of banking penetration. We are eager not only to observe these developments but also to actively contribute to them alongside other industry players and the Mexican government.
David Velez-Osomo, CEO
The other point I would just add here is that if we wanted to be profitable in Mexico, we would be profitable already. It's a decision. We literally touch about on mechanization and we're profitable immediately. We have already had the scale to generate that profitability. But that would actually be a really bad decision. It would be sacrificing the future for a short-term decision. We've always told investors we're optimizing for the long run. We're really optimizing to try to make investments that will pay for long as possible. And this is a very attractive market. Another data point that I think Lago mentioned previously is, on the ARPAC question, this is a country has a 40% higher income per capita than Brazil and where credit cards are majority, about 80% are revolvers versus only in Brazil, about 10% to 15% for our portfolio are revolvers. So anyway, it's a big market, low penetration, a lot of the advantages that we have, like our capabilities on credit underwriting, the efficiency ratio. Good unit economics provide a really compelling investment opportunity. And so we'll continue investing the excess capital that we have in trying to maintain a leadership position in the country.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Tito Labarta from Goldman Sachs.
Daer Labarta, Analyst
First, I have a follow-up question, Lago, on your comment on the higher interest expenses just driven by higher funding costs in Brazil and SELIC being a little bit higher, I think. But just to understand, because average SELIC only increased modestly in the quarter. Was there any impact perhaps from just more working days in the quarter? You had also launched the Turbo Money Boxes. I was wondering if that had any impact. I was a bit surprised by how much the interest expenses jumped.
Guilherme Marques do Lago, CFO
So no, Tito, you're right, there were a few additional working days in the quarter, but it would have been equally offset by the revenues as well. But what you will see is that as we kind of took a more aggressive stance on the segmented portion of our deposits in Brazil, by which I mean, for a selected profile of customers that we think that are primary bank relationship customers or are prone to become primary banking relationship customers, we have been more aggressive with the Money Boxes, with the Turbo Cajitas and that has, all else constant, increased our cost of funding in Brazil. So that is unequivocal observation. What I was trying to allude only, Tito, is that how would you reconcile what I've just said with Slide 14, which is where we show kind of the cost expressed as a percentage of interbank rate coming down. And I was just trying to say that the reason why it comes down is because we do a weighted average of percentage of CDI, a percentage of IBR, and percentage of TIIE in Mexico. And as both Colombia and Mexico went down, that line here on Slide 14 goes down, notwithstanding the fact that overall cost of funding denominated in dollars has gone up because of our deliberate intention to play more aggressively on the segmented roles of Cajitas in Brazil.
Daer Labarta, Analyst
Okay. No, that's very clear. That helps clarify a lot, yes. I mean we expected funding costs in Mexico and Colombia to come down. I was just a little bit surprised by how much that had gone up specifically in Brazil, and as you mentioned, more than offset by the revenues. So my second question is somewhat on the revenue. Just thinking on the loan growth, very good loan growth overall. But first on the secured lending, right? And David, you mentioned your FGTS could be a headwind, but it shouldn't have an impact. Do you expect that to be potentially offset by private payroll loans? I don't think you're necessarily growing significantly there. Just think about what could offset that FGTS potential headwind would be helpful.
Guilherme Marques do Lago, CFO
Yes. No, absolutely, Tito. Look, let me put it this way. The secure lending class or segment that we define here is largely composed of FGTS, public payroll loans, and private payroll loans. So grossly, those are the three components. You do still have a smaller portion that we call IBL, investment-backed loans, but that's a much minor portion. We do expect to see a material headwind in terms of FGTS if the new regulation kind of prevails. But we do believe that this will be more than offset by an increase in public payroll loans at this point in time, more so than on private payroll loans. On public payroll loans, we have seen a fairly material uptick in our ability to originate public payroll loans in Brazil in the third quarter. We expect to see this in the fourth quarter as well. And as we see, nominal interest rates in Brazil finally coming down, we do expect to see portability going up as we have seen in all of the prior cycles, and that will give us the opening to actually get a disproportionately higher share of the public payroll loan market in the country. Now going to your third and final piece, which is private payroll loans. We are very, very bullish on this product in the medium and in long term. We are still more cautious than some of the other players in the industry with respect to its cost of risk, mostly related to what we call employee-related collateral. But we are seeing this kind of improving quarter-after-quarter, and we are reflecting and watching this very carefully on when and how we will lean in more aggressively in the future. It's not something that we are taking as a base case now, but we are certainly paying very close attention to that. For now, public payroll loans are the one that will offset the slowdown in FGTS.
Guilherme Souto, Investor Relations Officer
Operator, could you please open the line for Mr. Thiago Batista from UBS.
Thiago Bovolenta Batista, Analyst
Congratulations for the results. I have one question, actually, one question divided into two, about regulation. The first part of the question is about mortgage. With the recent change in regulation on saving deposits and mortgage in Brazil, do you believe it is possible to start to operate in this market in the near future? And second, on the FGTS loans, with the change that we saw probably one month ago or less than that, do you believe that FGTS loans will be reduced in a material way?
David Velez-Osomo, CEO
Thank you for your question. We have examined the mortgage market in Brazil and identified several appealing aspects, particularly concerning principal. However, it's not currently a priority for us, and I don't foresee us engaging in this area over the next few years. Our focus is on maintaining a well-capitalized, small balance sheet that generates high velocity and strong returns on equity. Therefore, we will prioritize products, especially credit products, that have short durations and require extensive data. This approach allows us to swiftly adapt to changing macroeconomic conditions while preserving agility. Mortgages are quite the opposite; they involve long-term commitments that hinder agility and necessitate significant long-term funding. Thus, they don't align with the kinds of products we wish to offer directly from our balance sheet. There may be an opportunity to collaborate with a partner in the future, but it is not a priority for us at this moment. Regarding FGTS regulation, I do anticipate that there will be a decrease in our FGTS originations due to the new regulations. However, considering the overall size of our portfolio and the other lending products we provide, this impact would not be significant. So yes, there will be some effect on FGTS, but it will not materially affect overall portfolio growth.
Guilherme Souto, Investor Relations Officer
So thank you, everyone. We now have approached 60 minutes of the call. So we are now concluding today's call. On behalf of Nu Holdings, our Investor Relations team, I want to thank you very much for your time and participation in Nu earnings call today. Over the coming days, we'll be following up with questions received tonight but we are not able to answer. And please do not hesitate to reach out to our team if you have any further questions. Thank you, and have a good night.
Operator, Operator
The Nu Holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.