Good afternoon, ladies and gentlemen. Welcome to the Nu Holdings conference call to discuss the results for the fourth quarter 2021. A live presentation is accompanying today's webcast, which is available on the 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. To access, you can press the icon on the lower right side of your Zoom screen and then choose to enter Portuguese room. After that, select Mute Original Audio.
[Non-English Content]
Please be advised that all participants will be in listening 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 floor over to Mr. Federico Sandler, Investor Relations Officer at Nu Holdings. You may proceed.
Thank you very much, operator. Good afternoon, everyone, and thank you 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 in today's call are David Vélez, our Founder, Chief Executive Officer and Chairman, Guilherme Lago, our Chief Financial Officer, and Youssef Lahrech, our Chief Operating Officer. Additionally, Jag Duggal, our Chief Product Officer, will be joining us for the Q&A section of the call. Throughout this conference call, the company will be presenting non-IFRS financial information, including adjusted net income. These are important financial measures for the company, but are non-IFRS metrics 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.
Finally, before we begin our formal remarks, I would like to remind everyone that today's discussion might include forward-looking statements. These forward statements 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 that 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. Now, I would like to turn the call over to David Vélez, our founder and CEO.
Thank you, Fede, and thank you all of you for joining us today. This is our first earnings call as a public company, and the first time we speak directly with a number of investors. We very much welcome this opportunity and look forward to a transparent and constructive dialogue with all of you over many years to come. While today we will be discussing a strong quarter with important improvements across key metrics, many of you on this call may be new to our story. I would like to take this opportunity to talk a little bit more about Nu, including our values and mission, our growth strategy, and our powerful ecosystem. Subsequently, Guilherme Lago, our CFO, and Youssef Lahrech, our COO, will take you through our performance in Q4 of 2021, after which time we'll be happy to answer your questions.
Let me start by telling you about our IPO process. Nu was born with a mission to fight complexity to empower people, and we've been doing so relentlessly in Latin America since we were founded in 2013. However, how we accomplish our mission is just as important as accomplishing the mission itself. Our IPO was no exception. We certainly wanted to accomplish a very successful equity offering, raising approximately $2.8 billion, but we wanted to do so in a way that was aligned with our core values, aligned with our values of always putting our customers first and working backwards from there, and aligned with our value of challenging the status quo. How have we accomplished these goals in our IPO?
First, we decided that we needed to allow all of our customers to participate in it, irrespective of the then prevailing conventional wisdom that a public equity offering targeted at Brazilian retail investors was both unnecessary and inconvenient. We structured our IPO as a concurrent dual listing in both Brazil and the U.S., allowing for all of our Brazilian retail customers to invest in Nu. It was the first such dual listing in the history of the country. Second, we decided to honor the trust placed in us since our earliest days by gifting a piece of the company in the form of one Brazilian depository receipt, a BDR, each to millions of our customers in Brazil. More than 7.5 million customers joined this program, which will help multiply the number of Brazilians financially included in the investment world.
It was the largest directed share program, DSP, ever made globally, and the innovation in capital markets did not stop there. We also offer shares to our customers in Brazil, where over 800,000 made reservations. These represented the largest number of retail investors to participate in a Brazilian IPO ever. The IPO marked the beginning of another chapter as we mature as a company, and most importantly, it will enable us to expand, deepen, and strengthen our relationships with our customers. We could not be more excited with the opportunities ahead of us. We will continue to pursue these opportunities relentlessly, and we will continue to assess these opportunities based on their potential to accrue value to Nu and its shareholders in the long term.
We are and will continue to be long-term focused, and if needed, will put the long-term interests of the company ahead of short-term results. Since the very beginning, we have seen ourselves as a technology company that happens to be in financial services and not a bank that has a better website or a better app. Our strategy is focused on four main differentiating pillars. We have a mission-driven culture. We're on a mission to drive much more inclusion, competition, and efficiency into financial services in Latin America. Number two, we are a customer-obsessed company and spend a lot of time understanding customer pain points, then working backwards to build phenomenal user experiences. Number three, we're a technology company at heart.
We build our own technology, including our proprietary core banking system, using our own programming language, and that ultimately gives us the ability to control our destiny, continuing to scale our platform with lower and lower costs and much more efficiency. Finally, since the beginning, we have been an AI and machine learning first company. We initially applied these technologies to a very large market, unsecured credit in Latin America, and now we have applied these capabilities to different areas of the company. We have always thought that strong competitive advantages in data science, machine learning, and AI were going to be relevant competitive moats, and we believe we maintain an edge on these fronts. These all translate into unique customer experiences that are simple, convenient, low cost, and empowering.
We have built one of the largest digital banking platforms in the world with nearly 54 million customers in Brazil, Colombia, and Mexico, and are still growing at a pace of about 2 million new customers per month. I would draw your attention to three things in the chart on this slide. First, Nu started with a credit-first approach, beginning with credit cards. Starting with credit is hard. It requires you to develop proprietary credit underwriting capabilities, state-of-the-art data platform, and local currency funding. We believe it was a worthwhile path to take. Consumer credit is where 70%+ of the profit pool of the industry is. Since the launch of our company in 2013, we have navigated extremely difficult macroeconomic environments, including the largest recession in Brazil history and a pandemic.
All of this has forced us to develop robust risk systems and a generally conservative underwriting approach. Second, most of our customers come to Nu organically through word of mouth, allowing us to scale very fast while having one of the lowest customer acquisition costs in the industry. This is a testament of the unique customer experiences we deliver. Our NPS is in the 90s, which we think is among the highest, if not the highest, in the financial services industry globally. Third, over 5 million of our customers didn't have a bank account or a credit card when they became our customers. This shows that we're helping grow the size of the market, and we're just not simply gaining market share from incumbent players. We think of our business model as a two-part ecosystem.
On one end, there are 52+ million consumers in Brazil, Colombia, and Mexico, and on the other end, there is 1+ million small businesses or SMEs. Our products are both parts of this ecosystem and are composed of proprietary solutions that we build in-house, such as our credit cards or personal loans or mobile payment platforms, and also third-party solutions provided by first-class product partners, such as our insurance, secured loan, e-commerce, and digital products and services. We expect that these solutions, both products and services, will expand fast while the two sides of the ecosystem continue to grow in both size and engagement. We're moving fast on that front. We enhanced our marketplace initiative as we expanded our platform to strategic partnerships. We're pleased to report that we ended the year with over 20 partners across nine different verticals.
During the fourth quarter, we onboarded large financial services and non-financial services players, including Magalu, Creditas, Via Varejo, and Shopee. We're also reaching important milestones in our international expansion, where Nu model has proven to be exportable as we continue to beat our most optimistic forecasts in our new geographies. In Mexico, we ended Q4 of 2021 with 1.4 million customers or over 7 million applicants and a record high NPS of over 90. We believe we have already become the largest new credit card issuer in Mexico at this time. In Colombia, the third country that is a part of our international expansion today, the results are equally encouraging as we have learned to launch in a new country more effectively and efficiently over time.
Nu has many different growth vectors to fuel its expansion over the coming decade, from continuing to grow our customer base to offering new products to geographic expansion, and we're in the very early innings of this journey. There is also significant opportunity to further monetize our customer base. This will happen through both additional upsell as well as cross-sell initiatives, including proprietary and third-party products. This monetization will be realized using a low-cost operating platform, highlighting the operating leverage of our business model. Now I'd like to turn the call over to Guilherme Lago, our CFO, and Youssef Lahrech, our COO, who will review our performance in the fourth quarter of 2021 in more detail. Thank you.
Thank you, David. In the fourth quarter and the full year of 2021, we delivered a very strong set of operating and financial KPIs. We did so by leveraging our simple yet powerful value generation formula. First, continuing to grow our base of active customers in Brazil, Mexico, and Colombia. Second, continuing to increase the monetization of our customer base by expanding the average revenue per active customer or ARPAC as we introduce more products and features and our customer cohorts mature. Third, delivering all this growth while maintaining one of the lowest cost operating platforms in the industry. We believe Nu has very high operating leverage potential driven by deep cost advantages across the four traditional cost pillars of financial services. Low customer acquisition cost, low cost to serve, low cost of risk, and low cost of funding.
These cost advantages are expected to deepen as our ecosystem expands. Now let's take a deep dive into the quarterly results of our business. During the fourth quarter of 2021, we added almost 6 million customers, mostly coming through organic channels and representing over 60% year-over-year growth. More importantly, this growth has not come at the expense of customer engagement. On the contrary, our monthly activity rate grew from 66% in the fourth quarter of 2020 to 76% in the fourth quarter of 2021. All this while we added over 20 million customers to our base in the period. We are not in the business of just collecting Social Security numbers. We are in the business of becoming the primary banking relationship of our customers, both consumers and SMEs.
As you can see from the three charts on this slide, the compounding effect of higher engagement in our customer base with more products and features in our ecosystem has proven very powerful. It has driven the monetization of our customer base as reflected in the expansion of the average revenue per active customer or ARPAC. During the fourth quarter, we continued to achieve ARPAC expansion. Our average ARPAC reached $5.6 per month in the period, but the ARPAC of our more mature cohorts already exceeded $15 per month. We expect this trend to continue as customer cohorts continue to mature and we add new products and features to our ecosystem. The combination of more customers, more active customers and higher ARPAC enables us to grow revenue at triple-digit rates.
In the fourth quarter of 2021, our revenue reached $636 million, increasing year-over-year by 224% on an FX neutral basis, mainly driven by the increase in transaction volumes and strong growth in our interest earning portfolio. Let's move on to purchase volume, a key KPI to track and understand the progress of our cards business over time. During the fourth quarter of 2021, purchase volume reached $14 billion, growing almost 100% year-over-year on an FX neutral basis. The strong evolution in purchase volumes during the quarter is a result of a growing and engaged user base, the continued maturation of our cohorts, and the increase in usage across our product portfolio. That includes credit card, prepaid cards, secured cards, and the premium Ultravioleta cards.
Let's have a look at our credit portfolio, another key driver of our revenue growth. During the fourth quarter of 2021, we continued to post above market growth rates in our core consumer finance products, credit card and personal loans. In the three months ended December 2021, our credit card receivables portfolio grew by 21% quarter-over-quarter and 78% year-over-year, both on an FX neutral basis. We estimate we outpaced the market in Brazil by 2x. Also, during the fourth quarter, our personal loan portfolio grew by 58% quarter-over-quarter and 7x year-over-year, both on an FX neutral basis. We estimate our market share in terms of personal loan portfolio expanded from less than 1% in December 2020 to approximately 4% in December 2021.
I would like to point out that we are still in the very early days in personal loans. Now let's take a look at our deposit space, which continues to attract very strong net inflows. One of the key pillars of our business model is that we continue to fund our operations primarily with local currency retail deposits. We believe that having local currency retail deposits at competitive rates is key to funding a consumer credit business at scale and superior to other sources of funding, such as wholesale funding or securitization. As we continue to witness this strong trend in people and SMEs shifting from branch-based banking to digital-based banking, our deposits franchise continue to grow at very steady pace.
As of the fourth quarter of 2021, our deposits reached almost $10 billion, a year-over-year growth rate of 87% on an FX neutral basis, with an average funding cost that is lower than that of the risk-free rate in Brazil or CDI. Additionally, given the growth in our deposits franchise, we can comfortably cover our interest earning portfolio with retail deposits. Moving on, let's take a look at our cost to serve per active customer, a key pillar to appreciate the operating leverage of our business model. This metric has decreased over 20% year-on-year as we gain operational efficiency resulting from our increasing customer base. It is a guidepost that give us the confidence that we are on the right track in the pursuit of strong operating leverage as we continue to see our ARPAC outpacing cost to serve per active customer.
In the fourth quarter of 2021, and in the full year of 2021, we posted record gross profits of $227 million and $733 million respectively. While gross profit margins remained stable for the full year, we saw lower gross margins in the last quarters of 2021 as a result of the very strong growth in our interest earning portfolio in these periods, and our loan loss provisioning methodology that front loads the recognition of provisioning under IFRS. Moving on to adjusted net income, let me quickly walk you through the adjustments we made to GAAP net income to arrive at this metric in order to give you a better sense of the recurring profitability of our business.
We define adjusted net income as profit allocated to our shareholders, adjusted for expenses related to share-based compensation in our IPO, as well as the tax effects applicable to these items. As you can see, as a result of our growing scale, we are beginning to reap the benefits of operating leverage on an adjusted net income basis. This is an important data point, as it gives us the confidence that we are on the right trajectory with our earnings formula. For a detailed reconciliation between our net income and our adjusted net income, please refer to the appendix of this presentation. Now I'd like to turn the call over to Youssef, our Chief Operating Officer, who will walk you through our credit underwriting.
Thank you, Lago. Let me now walk you through a few key indicators that track asset quality and the overall health of our credit portfolio. In Q4 of 2021, credit performance remained strong, with delinquencies normalizing along expected lines, but still below pre-COVID levels when adjusted for portfolio mix between credit cards and lending. We expect the normalization to gradually continue and reach pre-COVID levels for both credit cards and for lending. We are underwriting based on these writing loss expectations as a baseline, and then requiring that every loan that we originate be resilient to risk worsening on top of that, resulting in cohorts that are able to withstand approximately a doubling of risk depending on the product and segment.
Now before I go further, I would like to recap the impact that expected credit loss or ECL as a loan loss provisioning methodology has on a consumer finance business with high growth rates, as is the case of our credit card and personal loan businesses. Per IFRS 9, loan loss provisions have to be recognized when a loan is granted, even before any revenue associated with that loan is accrued. This results in an intentional timing mismatch between revenues and costs. For this reason, the higher our growth rate is, the higher the provisions we have to book are. As Lago mentioned earlier, this negatively impacts gross profit and gross profit margins during periods of high growth. As growth rates normalize, vertical gross profit margins are expected to converge over time towards those of mature cohorts.
Moving from this basic concept to our actual experience, the charts on this slide show the average evolution of risk-adjusted margins or RAM for our credit card and personal loan cohorts. We define risk-adjusted margin simply as revenues minus funding cost and minus cost of risk expressed as a percentage of revenues. As you can appreciate, in earlier months, risk-adjusted margin is negatively impacted by the accounting recognition of non-cash upfront loan loss provisions I spoke about a moment ago. As revenue begins to accrue, RAM quickly expands and converges towards a 60% level or more for both products with a payback period that is around six months or less. We are very deliberate in terms of which credit products we manufacture ourselves versus distribute. We tend to prefer products that have shorter duration and are more data intensive as this plays to our underwriting strengths.
Having shared these perspectives on credit and asset quality, let me now turn the call back to David Vélez, our founder and CEO, for his concluding remarks.
Thank you, Youssef. We have delivered another great year that has seen effectively all our metrics improving and accelerating. Our successful IPO has given us a strong footing to pursue our strategic milestones in 2022 and beyond. We believe the secular market trends that are accelerating our growth, such as significant migration to our digital financial products and growing financial inclusion across the region, remain as strong as ever, and we remain focused on disciplined execution against our priorities and in continuing to advance our business. We look forward, as always, to keeping you updated on our progress next quarter. Now we'd like to take your questions. Thank you.
We will now start the Q&A section for investors and analysts. If you wish to ask a question, please press the Reaction button and then click on Raise Your Hand. If your question is answered, you can exit the queue by clicking on Put Your Hand Down. Please limit yourself to one question and a follow-up. If you have further questions, please re-enter the queue. You may submit online questions at any time today using the Q&A box on the webcast.
Thank you, operator. The first question is coming from Tito Labarta. Could you please open the line?
Hi, good evening. Can you hear me okay?
Yes, Tito.
Can you hear me? Hi, Fede, can you hear me?
Yes, sir.
Okay. Great. Thank you. Sorry, I was having trouble with my computer. You know, thank you for the call, and the presentation and taking my question. I guess my question is in terms of your revenue per client. You saw some good evolution in the quarter. Clearly you've been able to grow the loan portfolio. Any guidance or color you can give on how that revenue per client can grow this year, particularly, you know, given, you know, some of the macro risk and your ability to continue to grow the loan portfolio.
You know, a bit behind that, like how much of it can come from continuing to grow the loan portfolio and also with fee income growing also at a healthy pace, do you expect any color on how the mix would evolve between the loan and fees to benefit the revenue per clients? Thank you.
Hi, Tito, this is Lago. Thank you so much for your question. It's certainly a great one. The evolution of the average revenue per active customer is something that we are monitoring, you know, very closely. If you go to slide 13 of the earnings presentation, you will see there the evolution of the ARPAC or average revenue per active customer. You can see that it is going up across all of the cohorts. Our average ARPAC has achieved about $5.6 per month per active customer, coming from about $4.9 last quarter. More importantly, the more mature cohorts are already operating at, you know, over $15 per active customers per month.
In fact, if you take a look at, you know, the customers who have our three core products, credit card, bank account, and personal loans, their ARPAC are already at above $30 per active customers per month. We think that, you know, ARPAC will continue to go up over the course of 2022 and going forward as a result of two things. First, and it's something that is not necessarily fully appreciated by many investors, is the maturation of the cohorts. As the cohorts season, as the cohorts mature, you can see that we become the primary banking relationship of more and more of those customers, and we increase the usage and engagement and the purchase volumes with our core products. Then secondly, it's the cross-sell.
As we launch new products, as we launch new features, we actually increase this, you know, average revenue per active customers. In 2022, we do expect that we will continue to pursue a very, you know, strong growth in both credit products as well as non-credit products. We believe that credit card personal loans will continue to play a key role there, but other products will start to, you know, kick in more aggressively in their contribution to the ARPAC. We are not, however, providing guidance on the ARPAC levels for 2022 and going forward.
Great. Thank you, Lago. That's very helpful. Maybe one follow-up, and you know, pointing to slide 13 on the presentation. In the past, all the cohorts you know looked like took about 57 months to get to that $15, but I guess the newer cohorts seem to be getting there maybe a bit faster. Is that fair to assume that you know with time that you can shorten the amount of time to reach that $15 ARPAC per client as you know you kind of continue to grow? Maybe shorten the period from that five years to I don't know three, four , like. Or any color on the timing that you think it could take to get to the $15 ARPAC?
It's a great question, Tito. I think it is somehow unfair comparison across the cohorts because the earlier cohorts, we only had, you know, bank accounts and credit cards, so we had a much more limited product portfolio. As we launch more products, as we launch more features, and as we cross-sell more of those products, as you can see on the slide in the middle of, you know, 13, the ARPAC potential and the LTV of our customers go up. Yes, it is, I think, reasonable to assume that the customers, the newer customers of the newer cohorts will be able to mature faster with more, you know, products than the earlier customers from the earlier cohorts.
Okay, great. Thank you, Lago. That's helpful and congratulations on the strong results.
Thank you, Tito.
Thank you, Tito. The next question is coming from [Esther Osinaiya] from Morgan Stanley. Can you open the line, please?
Hi, it's Jorge Kuri from Morgan Stanley. Hi. Good afternoon, everyone. Congrats on the great numbers. I have a question on your revenue outlook for this year. You beat market expectations on revenues this quarter by around 18% vis-a-vis the consensus. Revenue per active customer beat was around 15%, and your net adds were well above what the market was anticipating. As we think about 2022, the current consensus on net revenue is around $2.9 billion. How do you feel vis-a-vis that number? Where do you think are the potential upside risks to the number? Meaning what parts of your business are doing better that you think you can actually outpace that?
On the other hand, what do you think are the risks to that number, where that number may prove to be optimistic, what are some of the things you're looking closely at? That would be incredibly helpful. Thank you.
Jorge, this is Lago. Thank you so much for your question. Look, unfortunately, we do not provide financial guidance to the market. We very much appreciate the arguments in favor of guidance. We just believe that its costs outweigh the benefits for the company at this point in time. We are and we will continue to be long-term focused, and if needed, we will put, you know, the long-term interest of the company ahead of our short-term results. That's the reason why we have not provided guidance in order to maintain the culture and the focus of the management team in the long term. Having said that, we do expect, you know, 2022 to be a strong year for us.
We think that we're gonna make good strides across many products, both credit and non-credit. More importantly, I think we're gonna make, you know, very good strides in new geos. The operations that we have launched in Mexico and Colombia have been having very encouraging, you know, signs of success. Mexico was the first, you know, country that we launched outside of after Brazil. We now have, as you may have seen, over 1.4 million customers in Mexico as of December 2021. We believe that we have already become the largest issuer of new cards in Mexico in the fourth quarter. We will be expanding products, we will be expanding geos, and we will continue to expand the number of customers.
Unfortunately, I will not be able to provide you with much guidance on whether we think we will or will not beat market consensus and by how much. I hope you can understand, Jorge.
No, I understand, Lago. Thank you. But I guess just to focus, I mean, I think it's pretty evident to everyone what could be the sources of potential upside. Can you maybe talk about the risks to the 2022 revenue number? What do you say are the top three risks that management is looking closely at, following closely, and how do you expect those to play out during the year?
Jorge, I think on the risks that we have, I think what will kind of move the needle more strongly in 2022 is we will have to continue to see our cohorts mature. We have seen the cohorts maturing, and we have seen the purchase volume per active customers go up by, you know, five to six times over time. We believe that this will continue, but it's a risk going forward. The second risk that is, you know, inevitable that we will be watching very closely, and we are hyper-focused, is on monitoring the asset quality of the portfolio. We are not blind to the macroeconomic deterioration expectations that exist.
As of today, we are very optimistic that the market will prove to be favorable to the expansion that we plan to have, especially as we start with a much lower market share. We will be watching this very carefully and with a hyper-focus on short-term delinquency indicators.
Hey, Jorge. David here as well. Just following up here on Lago. I think, you know, clearly macro is a source of uncertainty for us, and we are, as Lago says, we're taking a very close look into any potential deterioration for macro, and we will adjust any growth expectations if we start seeing signs that we feel uncomfortable with the risk that we're taking. That being said, the type of credit products that we pick-
Products that we picked.
These are two products that give us very good visibility, and they're very data intensive. They're very short-term duration in nature, very high return on equity, very high return on capital. Will give us the opportunity to react very quickly if we see any deterioration, and there is a lot of buffer and cushion on the profitability of these products. At the same time, if the macro does take a turn for the worse, we are entering this year extremely well capitalized, with all of our IPO capital effectively untouched, and that should also open up for a number of opportunities that we would expect to see.
Customers, as we've seen historically in all our history, which we've only seen—unfortunately, we've only seen Brazil in a recession, effectively since we started in 2013. Customers tend to become even more sensitive to products that charge them less fees, the product that charge them less interest. That environment tends to be an environment where our products are so focused on the customer excel. That combination of more differentiation with the capital that we have can open up a series of opportunities for us. Net-net, we are really kind of observing both sides of the trade, being very aware of some of the risks that we might be facing over the next few months. Ultimately very comfortable with the strategy that we are executing.
Thank you, David and Lago. Much appreciated and congrats again.
Thank you, Jorge, for the question. Next question is coming from Thiago Batista from UBS. Can you open the line, please?
Sorry, can you hear me?
Yes, Thiago, we can hear you.
Actually, you opened “Jörg” Friedemann from Citi, and I appreciate the opportunity. My question is related to a bit of what David just you know mentioned. When you look into the evolution of revenues quarter-over-quarter, it expanded by more than 30%. Gross profit you know low single digits exactly because of this expected you know loss methodology you're using. I understand that you're comfortable with the strategy. But you know I also like to understand how comfortable you are with your excess liquidity. Asset quality, I think is well explained, but you have more than $9 billion of deposits and at this moment $2 billion of interest-earning assets.
To some extent, could this jeopardize your ability to continue expanding margins and or you need to be a bit more aggressive also to be able to capitalize on this difference? Thank you.
“Jörg” Friedemann, thank you so much for your question. I think it is, it's a great provocation. We do believe that in Latin America, for you to play in consumer credit underwriting, you need two things. You need not only a state-of-the-art credit underwriting platform, but you do need to have access to local currency funding at competitive rates. I think as you mentioned, we have now a fairly comfortable funding structure today. Our balance sheet is very simple. We have now about $9 billion of deposits to basically support about $2 billion of interest earning assets. Therefore, we have lots of flexibility. Our loan to deposit ratio now is one of the most, you know, conservative that we can find.
Going forward, we do expect that we will fund the majority of our interest earning asset portfolio or our credit portfolio in general, with our own local currency deposits. I think you were alluding to also the cost of those deposits. Look, we do have for the majority of those deposits, we pay 100% of CDI, which are the deposits for consumers. For the deposits for SMEs, we have already started to pay 0% of CDI. Thirdly, I think the credit card working capital structure in Brazil is also very favorable for the issuer because it has a negative working capital scenario. As we grow our credit card, it increases the floats to which we expect. Going forward, we do expect to remain and to pursue our the lowest possible cost of funding for us.
We will be watching carefully the opportunities that we have in the value proposition to our customers as to how we can price the deposits in the coming quarters and years.
No, that's perfect. If you allow just a follow-up. On the, you know, point about, expansion of revenues versus, gross profit, you alluded to how you see the effects of IFRS in slide number 23. You know, using this as a reference and also what you just mentioned, in terms of, you know, cost of funding, when do you think in your strategy we are going to see, you know, the gross profit accelerating more aligned with the revenue profit? Thank you.
“Jörg”, it's a great question. I think I would even take advantage of turning your attention to slide 24 that Youssef has highlighted. As you can see there, at maturity, our products converge towards a 60%+ risk-adjusted margin. We expect that we will converge towards a much higher gross profit margin as the growth rate in our interest earning assets now stabilizes. As we have now high growth in interest earning assets, we should expect to see the expected credit loss provisioning putting pressure on our gross profit margins, even though it is an intentional time mismatch. Once they converge at maturity, all of the cohorts have converged towards a 60%+ risk-adjusted margin. It's a
Your question is probably when are we gonna start to post much lower growth rates, is where we're gonna achieve this 60% or closer to the 60% risk-adjusted margin. It is also a function, as you may have seen, of the ratio between the front book and the back book. Even as we continue to grow, the back book will continue to gain relevance, relative relevance. The more relevance the back book has, the higher the gross profit margin should get.
That's perfect. Thank you.
“Jörg” here, David here just adding a bit of even a little bit more of additional context. I think it's worth taking into context that we, you know, by now we have something like 30% of the entire adult population in Brazil as customers.
We only have something like 1% market share in the consumer lending portfolio, which is the largest profit pool in the banking sector in Brazil. When we go and talk to our customers, we are seeing us getting the highest net promoter score in that product consistently. It would kind of take us to conclude that over a period of time, we should be able to see our customers refinancing a lot of their existing loans with Nubank and us gaining a proportionally much higher market share, similar to the market share that we have from a customer perspective. All of this to say that there is a significant amount of growth ahead.
The customer base multiplied by the NPS is a leading indicator to future market share gains in some of the financial products that we have. We really are in the very, very early stages of that growth projection or growth trajectory in some of these products.
Perfect, David. Makes sense. Thank you very much for the explanations.
Thank you, “Jörg”. Next question is coming from Thiago Batista, UBS. Can you open the line, please?
Yes. Hi, guys. Thanks for the opportunity. I have two follow-ups. The first one is about the most recent cohorts of Nubank. When you look for the new clients, do you believe that they have the same potential for their ARPAC of the old clients or no, the clients are not so good as in the past? I want to understand if the new clients they have the same potential of the old ones. Also, the second question or second follow-up is about asset quality. You already mentioned that NPL ratio should return to the pre-COVID level. Nu is still well below this level.
Do you have a sense if this is expected to happen in 2022 or no, this should take a couple of years to return to this pre-COVID level?
Thiago, thanks so much for your question. Let me address maybe the revenue potential that you alluded, and then I will invite Youssef to address the asset quality question that you posed. Look, in our new customer, our marginal customer has proven to be, you know, as profitable as the older ones, especially if you look at the slide 13. You can see that as we launch more products and as we launch more features, you have been able, even for the earlier cohorts, to have growth curves that are at par, if not better, than the growth curves of the older cohorts.
As I mentioned before, it's not only because of the faster maturation of the customers, but also because we now have much more products and features, and we can offer a much more comprehensive value proposition to the customers. In terms of overall potential, if you take a look at the ARPAC of non-incumbent banks in Brazil, they are about $35-$38 per active customers per month. We are still at about $5 per active customers per month. The more mature cohorts are already at 15. We believe that we still have a gigantic gap to close in both proprietary products as well as third-party products. Your question also alludes to, but what about the new customers, the marginal customers?
Are they as, you know, profitable and as promising as the older ones? I think we are basically we have made very good strides into the younger middle class in Brazil. As we evolved, we are converging towards, you know, the average demographics of Brazil, and we are making very good strides into the upmarket, as well as good strides into, you know, reaching deeper into the unbanked. The balance of those two things so far has proven to be very promising, as you can see in the cohorts, which show kind of cohort lines that are even better than the older ones. Youssef, would you also be able to shed some light on the asset quality question that Thiago posed?
Yeah, I'd be happy to, Thiago. With respect to asset quality and the trajectory there and the outlook, as I've said before, we expect you know the credit environment to normalize you know back to pre-COVID levels. And if you look at what's happened over the last two years as we entered the pandemic you know we've seen extraordinarily low levels of delinquencies in NPLs but they've started to normalize back in the last few quarters. In fact, our expectation was that normalization would take place. That was our expectation all along. And if anything, it's been normalizing slower than we expected. You know, we thought this process would take maybe six to 12 months.
You know, we are 24 months into the pandemic and still slightly below pre-pandemic levels in terms of delinquencies. We expect that to continue to normalize going forward. That's our baseline scenario. Now, as I've said before, as part of our, you know, credit underwriting philosophy, we expect every loan, every credit card grant, every credit limit grant that we do to go through a downturn. That's the level of risk that we underwrite to. As a result, it gives us really strong levels of resilience. Our cohorts on aggregate are able to take in, you know, roughly a doubling of risk and still be NPV positive, and so we feel very comfortable with the level of resilience that we have inherent in our portfolio.
Very clear. Thank you, Youssef Lahrech and Guilherme Lago.
Thank you. Next question is coming from Darrin Peller, Wolfe. Thank you.
Hey, guys. Thanks. When I look at the user growth numbers, obviously it continues to look strong. We've seen a lot of other digital companies that had a pull forward in the pandemic. Maybe you could just walk through the main driving forces of that strength we're seeing, whether it's geographic or new product. Just to underscore the underlying customer acquisition cost that seems to still be strong as you grow into those new geographies and products. Anything we should expect about that to change in terms of your CAC that we've been able to see sort of somewhat industry leading? Thanks, guys.
Sure. Thank you. Thanks a lot for your question. We think the market has gone through several stages, and is not that different from any other technology adoption curve where you begin really addressing the early adopters. In fact, we started very much focused on those early adopters, convincing those early adopters that were the traditional early millennials that were much eager to adopt digital solutions. I would say somewhere around 2017, 2018, 2019, you start kind of breaking away from those early adopters to really grabbing the main market. I would say that's probably where we are today. The digital banking solution has become embraced by, I would say, a very significant percentage of Brazilians already. The pandemic accelerated that adoption among certain segments that were historically a bit more skeptical.
Segments such as people above sixty years old, segments that really were very much heavy into offline branches. Since all those branches were closed, people had no other option than starting to use a lot of the digital channels. Since we were the category leader, or we are the category leader in the digital banking solution, they tend to flock to us before they go to consider any other options. That's mainly the reason why we now start seeing actually our core growth accelerating and we start seeing our segments expanding beyond the core millennial population. This gets accelerated by our ability to launch new products. Three years ago we had one product, a credit card, and then we launched a savings account.
Now we go to market with a credit card, savings account, personal loan, insurance, a marketplace both for consumers, and small businesses. The value proposition is much more robust and complete, and that helps us get the skeptics that were saying, "No, it's very painful to have different banking solutions. Whenever you launch, you know, the personal loan, I'll go to Nubank." We see that a lot from customers that says, "I'm still waiting. When are you launching the following product? When are you launching the following product?" I'd say those combinations of forces, sort of the market embracing fully digital banking combined with our ability to provide more products, reinforces the growth adoption. Ultimately, customers are coming. Why are they coming? They're coming because it's a better experience at lower cost.
Almost very simple kind of equation. Better experience is the combination of fully digital products, great customer service, very easy to use, very simple interfaces at a lower cost. We charge no fees, and especially on personal lending, but in certain segments in credit cards, we're also trying to bring costs and interest rates lower and lower and lower. It becomes almost like effectively a no-brainer solution. Why would you stay with the big incumbent that charges you more, makes you wait and go to the big branch when you have an absolute better solution? We expect this really trend to just accelerate across all the different demographics and be even increased and augmented by the product roadmap that we have ahead over the next few years.
Neat. That's. I appreciate that. The customer acquisition costs you think can be stable? Just one quick follow-up is on partnerships. I know that's also been a great source for you guys to add incremental offerings and probably attract customers. Is there progress on incremental company partnerships in different verticals such as insurance or trading like you've done before? Thanks again, guys. Nice job.
Sure. Yeah, this is what we mention as what we call the marketplace that we really launched towards the end of Q4. It's very early, but we already have over 20 different partners from a number of different e-commerces businesses that are offering their products to our customers via our app. We have secure lending products such as Creditas that offer secure lending for home equity and auto equity. Such like that, we have a number of different partnerships that we're announcing. Now that we have the right product architecture and technology platform, it becomes much easier to launch the second, third, 10, 15, 20 different partnerships.
We wanna do it in a way that maintains the simplicity for the customer, and we absolutely do not wanna pollute the entire experience and see our customers end up with 10,000 SKUs. We wanna be very deliberate and very careful about the type of products that we offer our customers and the type of partnerships that we have, so we're taking our time to do it right. Ultimately, we think this is a huge opportunity because we're able to use the scale that we have to bring better solutions and offers to our customers and accelerate the flywheel of the higher value proposition is, the more customers come. The more customers come.
The more they invite their friends, and they maintain the lower customer acquisition cost, and reinforce that value proposition. We're very excited about that marketplace, early marketplace moves.
Thank you, guys.
Thank you, Darrin. Next question is coming from Neha Agarwala from HSBC. Can you open the line, please?
Hi, Fede. Can you hear me?
Yeah, I can hear you, Neha.
Congratulations, team, on the inaugural quarter. Very good results. My question is more on asset quality. It's good to see the asset quality trends that you showed in the presentation. The NPL ratio for the consumer finance book is about 3.5% right now, but if you expect it to go to pre-COVID levels of, say, 4.3%-4.5% during this year, what does that mean for your cost of risk? The cost of risk for this year has been going up through the quarters and was for 2021 about 10%. Given that the ECL model requires you to provision upfront, would it make sense for the cost of risk to go up to, say, 13%-15% in 2022 or what level do you think would make sense? Thank you.
Hi, Neha, this is Youssef. Thank you very much for the question. So, first off, as Lago mentioned earlier, we don't provide financial guidance around this metric. If you were to think qualitatively about the trends that have been playing out and we expect to play out that impact NPLs and cost of risk, I would say there's two main things at play. One is the continued normalization to pre-COVID levels. As you rightly pointed out, we expect that to continue to put upward pressure on NPLs and translate into you know, slightly higher coverage ratios and slightly higher cost of risk. The other one is just the mix of credit assets that we book. Our lending portfolio has been growing relatively faster than our credit card portfolio.
It also comes with both higher margins and higher risk levels. We expect that to put also upward pressure on things like NPL and cost to risk. You know, qualitatively, I think those would be the two main drivers going forward that we expect.
Thank you so much. If I could just follow up, and I know you don't provide any guidance regarding loan growth, but given the macro environment today, would your preference be more inclined towards growing your loan book faster or maybe building out your platform, focusing more on the fee side of the business rather than on the interest income side of business? What level of growth should we expect, especially in the personal loan book? I mean, no specific numbers, but I mean, should it be similar in terms of nominal increase in the loan book? Should it be similar to what we saw during 2021? Do you expect to slow down growth, especially in the personal loan book for this year? Thank you so much.
Yeah, Neha, great question. On growth levels, you know, our outlook, as I mentioned earlier, is, you know, for this continued normalization to pre-COVID levels, that's our baseline scenario, and, you know, under which we would continue to grow at a healthy pace, you know, both credit card and lending. We feel very comfortable with that baseline scenario because there's a lot of resilience built into our cohorts, these come with very short paybacks, very high margins, as you saw in those slides, and they're very short duration. You know, our average duration is around six, seven months for loans. We feel very comfortable with that short duration and should conditions materially deteriorate, we feel good about our ability to detect that and to act faster.
To act fast to pull back if needed or take any other resilience-building actions around pricing, around collections intensity, etc. We're prepared to act should things deviate from our baseline.
Okay, thank you so much.
Thank you, Neha. Next question is coming from Geoffrey Elliott from Autonomous.
Thanks very much for taking the question. The fourth quarter is always a, you know, strong one for spending and card TPV in Brazil. Can you give us a flavor of how much seasonality is there in the numbers? How much should the strength in revenues persist versus being part of an impact of the fourth quarter being strong, and then likewise, any kind of seasonal impacts in expenses or anywhere else in the P&L that we should be aware of?
Sure, Geoff, thanks so much for your question. It's a great one. I think you can take a look a little bit about seasonality on slide 15, where you can see the evolution of our purchase volume. Yes, the fourth quarter of each year has historically been a strong, you know, quarter in terms of purchase volume. But overall, if you take a look at our growth, the overall growth of the company in terms of number of customers, in terms of purchase volumes, in terms of cards, has outweighed the volatility going forward. We don't expect that we will have in 2022 a behavior that is materially different to the one that we have seen in 2021.
It is also the case that there is some seasonality in terms of cost of risk throughout the year. We also expect that 2022 will follow a relatively similar trend as we see in the Brazilian market.
Okay. Could you remind us on that seasonality and cost of risk, how does that play through?
Yeah, I think historically you can see that the delinquency are usually lower in the fourth quarter and higher in the first quarter of each year. That's normal season trend that we see in Brazil, and quite honestly, that we see elsewhere in the world. That is something that we are also expecting to see going forward.
Thank you.
Thanks, Geoffrey.
Thank you, Geoff. Next question is coming from Gustavo Schroden from Bradesco. Can you open the line?
Yeah. Hello, can you hear me?
Yes, we can hear you.
Yeah, no, thank you. Thanks for taking my question, and thanks for the presentation. It's a very simple question. I just would like to understand how was the impact from the higher cash position due to the proceeds from IPO in your interest income? Especially because we could see the trading gains were stronger this quarter. Just would like to understand how was the impact, and what should we expect in terms of consumption of these proceeds. Thank you.
Hi, Gustavo, this is Lago. Thanks so much for your question. The contribution of the proceeds of the IPO to our revenues in 2021 or in the fourth quarter of 2021 has been very, very small. We basically IPO'd, and the financial settlement of the transaction happened towards, you know, mid-December. The exercise of the greenshoe actually happened in the first week of January. There has been little impact of, you know, proceeds. In terms of trading gains, it's a great opportunity for us to clarify. If you take a look at our interest revenues, it is basically comprised by three things, the interest that we earn on credit card, the interest that we earn on personal loans, and the interest that we earn on our cash.
The financial statement, you know, describes this as gains and losses on financial instruments, but they are nothing more than the evolution of our very large investments in treasury bonds. We have a very conservative, cash policy and treasury management, and we expect to continue to have very conservative policies, going forward. Your third question was on the use of proceeds of the IPO, if I'm not mistaken. We do expect to use this for working capital and general corporate purpose in general. I would say that primarily to expand and fuel our international growth in Mexico and Colombia. We are very bullish on the potential of those two countries.
If you take a look at just, you know, the sheer size of, you know, Brazil, Mexico, and Colombia combined, those three countries account for about 60%-62% of the GDP and population of Brazil. Mexico and Colombia combined have a population that is almost the same size of Brazil. We have about 30% of the adult population of Brazil being active customers of Nu. We have less than 1% of the combined population of Mexico and Colombia being customers of Nu. I think a relevant portion of the IPO proceeds will be directed towards our international expansion in those two countries.
Oh, very clear, Lago. Just a follow-up on your interest income. It was very strong indeed. I'd like to understand how have you seen the repricing process given the high interest rates? I mean, when I talk to the other banks, they are saying that there's some competition, and when you compare to last interest rate hikes, this cycle has been more difficult to reprice. I'd like to understand how do you see that, and how Nubank has been able to reprice.
That's a great question, Gustavo. We have historically seen in the asset classes in which we play, credit card and personal loans, that repricing has been faster than what we have seen in many other asset classes. In fact, once we see the reports that have been put out by the Brazilian Central Bank over the course of the last, you know, six months, you have seen that the market in general, and with respect to credit card and personal loans, has been able to reprice relatively fast and not only defend that interest margin, but also even expand marginally the net interest margin in general. We at Nubank, however, expect that we will always be very competitive in terms of pricing, primarily in personal loans.
We will and we have kind of been very fast and swift in repositioning and repricing our products quarterly. We have not seen and we do not experience, and we would not expect to see any material challenge in repricing short-term credit products going forward.
Thank you, Lago. Very clear. Thank you.
Thank you, Gustavo.
Thank you, Gustavo. Next question is coming from Alex Markgraff from KeyBanc. Can you open the line, please?
Yeah. Hi, team. Thanks for taking the question, and nice to speak with you all. Couple of questions. Just first around credit, just more qualitatively, in your baseline scenario, do you anticipate taking a more conservative approach to credit underwriting in 2022 versus 2021? If so, are there certain segments of the retail market that you might see as more affected by this kind of change in underwriting stance? If not, do you see an opportunity to grow with customer segments, to the extent that some of your peers are maybe pulling away from in a more challenging environment?
Hi, Alexander, this is Youssef. Thanks for the question. Again, our basic underwriting stance is always to underwrite to future risk worsening. Like I said, we expect and we underwrite every loan, every credit card against an expectation that it will go through a downturn and it needs to be NPV positive in a downturn. Given that, we feel comfortable, you know, continuing with our growth trajectory. But that being said, we're keeping a very close eye on monitoring our various segments and products, looking at leading edge delinquencies, looking at the general macro environment.
We feel prepared to both pull back if needed in places where we see degradation that is faster or more severe than we assume, or to take advantage of opportunities conversely, you know, where we see a competitive window to grow market share faster or provide more competitive offers to customers.
Thank you. Just quickly on marketing expense came in a bit lower than we had anticipated. Maybe just, you know, again, kind of qualitatively speak to priorities with respect to marketing expense in 2022. You know, how do you plan to balance more top of funnel type efforts versus targeted spend to drive adoption of some of the newer products that you called out this quarter? Thank you.
Hello?
Lago, are you there?
Yeah, sorry. Chad and I could not hear.
Yeah.
Can you repeat the question, please? I apologize.
Yeah. Yep, this is Alex. Sorry about that. Just with respect to marketing expense, you know, it came in a bit lower than we had anticipated this quarter. Just wondering if you can speak to, again, qualitative priorities for 2022 and how you plan to balance some more top of funnel type marketing spend versus perhaps more targeted spend to drive adoption of some of the newer products that were called out, this quarter.
Yeah, no, it's a great question. We do expect that we will continue to have, you know, a very strategic marketing spend, especially on paid marketing. I think our customer acquisition cost, as we mentioned at the beginning of the call, has been among the lowest that we have seen in the market. We have a customer acquisition cost of about $5 per customer, of which paid marketing accounts for only $1. We expect that as we go forward that, you know, this will go up, and we will lean in more aggressively on customer acquisitions, not only in Brazil, but primarily Mexico and Colombia. We should not expect to see any material deviation from the LTV to CAC equations that we have shown to the market going forward.
I would expect that, you know, marketing will slightly go up, but it will not be a step change to what we have seen in the past.
We do see an opportunity and we will probably be investing a little bit more in marketing in repositioning the product better in certain segments where we're not that well known. We launched Ultravioleta, which is our product directed towards high-income population in Brazil last year. We're very excited so far with what we've seen. There is an opportunity to build that brand more in that segment, and we will be doing that. We also announced to be one of the sponsors of the FIFA World Cup, there will be some marketing investments surrounding that specific event. We are actively asking ourselves the question, is are we actually spending too little?
Because when you look at the LTV CAC calculations that we even discussed a lot during the IPO, in a market that is quite more competitive with the type of capital that we have and the type of returns that we see in that LTV to CAC, there is opportunity to actually be even a bit more aggressive. That is sort of the question that we're always balancing. In general, you could even double CAC and still not really move the needle in terms of the LTV to CAC that we're seeing in some of the customer segments.
Great. Thank you for the thoughtful response.
Thank you, Alex. Next question is coming from Pedro Leduc from Itaú.
Thank you guys for taking the question. A little bit on the NPLs. You'd showed a good behavior and you're showing both credit cards and personal loans on that chart, no? If we could try to dig in here a little bit, maybe how each of these lines behaved. I know one is rather recent, no? If you could remind us, if you have a relevant renegotiated book and what your strategy is for recoveries, both in terms of internal efforts, if you're engaged or plan on doing selling of portfolios as a strategy to mitigate risk. Just picking your brain here. Thank you.
Hi, Pedro, this is Youssef. Thank you for the questions. Let me try to address them one by one. You are right. In terms of both credit card and lending, both products have generally performed as expected, in terms of NPLs and delinquencies. You know, we've seen that same gradual return to pre-COVID levels in both. They're actually slightly below those levels, but trending gradually towards that, which has been our baseline expectation. You're asking about renegotiation. You know, we provide that option to customers. We take, you know, a pretty conservative approach to renegotiations of loans. We follow regulatory guidance around that and provision accordingly.
If you look at our renegotiation volumes, this is something we monitor in terms of the volume and the performance of renegotiated loans. It has been remarkably stable in the last, I would say 12 months or so, or even more than that. This has been no real change in that approach over the last several quarters. You were also asking about asset sales. This is not something that, you know, we have done in the fourth quarter, but it is a lever that, you know, would be part of things, you know, we might do in the future, should the conditions call for that.
Pedro, if I may just add to this and following maybe a discussion that we may have had in the past, is even the refinancing or restructurings that we do in credit card. They are entailed within our credit card delinquency and provisioning numbers, and they do not, you know, affect or influence our business in personal loans. Super important for us to keep those two products completely separate. We don't use personal loans to affect positively or negatively the delinquency of credit card.
That's very useful, Youssef and Guilherme, and especially the earlier comments on the level of the book being stable. That's very good. Thank you.
Thank you, Pedro. Next question and last question is coming from Mario Pierry from Bank of America. Can you open the line, please?
Hi, guys. Thanks for taking my question. Let me ask you two questions. They're both follow-ups. The first one is when you mentioned that you have a very high NPS score on your retail loans. I wanted to understand a little bit better what gives you a high NPS. Is it that you're charging a lower interest rate? You're making more credit available or what exactly drives a high NPS score in a retail loan? And if I can tie that in with a previous question in terms of the repricing of these loans, right? As you mentioned, your deposits, your retail deposits to individuals, they're basically linked to CDI. So as the CDI has gone up, you are repricing your portfolio as you mentioned.
Are you able to fully pass on these higher funding costs to your clients or are your spreads compressing a little bit? So that's the first question, then I'll ask the second follow-up.
Hi, Mario. Thank you for your questions. First, on the NPS on loans, it ends up being always a bit of a combination of better product or better quality at lower costs. We tend to operate our products on both ends. On the personal loans specifically, the higher quality or better product is a function of the user experience. The fact that consumers can get a loan is a very easy process to get. You can get it immediately deposited in your bank account. We have real-time algorithms that are understanding consumer patterns. Every time our algorithms are able to approve a loan, the consumer gets a message that that loan now is available. Should that person needs any support, it's very easy to reach our customer support team and really answer any questions.
That's on the user quality side, the digital aspect and the consumer support. We generally also offer that at a lower cost. We try to price today at something about 30% below the market average. We wanna maintain that aggressive kind of pricing to maintain this equation and ultimately driving to a very high NPS. That's the NPS side. On the cost of CDI, we actually effectively are able to pass 100% of that CDI increase to consumers without a bit of benefit in the account for small businesses, where we do not offer 100% of CDI as part of the value proposition.
We're not offering any yield, so we actually benefit, net benefit on an increasing CDI environment, from that perspective.
Mario, if I may just add to what David said on the interest rate. A rise in interest rates is very positive for consumer banking, and I think it is. It's no exception for us. It's neutral to net positive for us. But I would just highlight the structure of our balance sheet, which is very simple, right? So on the right side of the balance sheet, we have $9 billion of interest-bearing liabilities, for which we pay 100% of CDI, as we mentioned. $6 billion of non-interest-bearing liabilities and $4 billion of equity, total $19 billion.
On the left-hand side of the balance sheet, we have $13 billion of cash and equivalents, $2 billion of interest earning credit portfolio, and $5 billion of non-earning credit portfolio, which is the credit card receivables, also, of course, totaling $19 billion. When interest rates go up, the cost on our $9 billion interest-bearing liabilities go up, but the revenues on our $15 billion interest earning assets go up. It's a net positive for us. Just wanted to highlight kind of the overall structure of the balance sheet and therefore the impact of interest rates to our business.
Okay, no, that's helpful. My second question is related to your client base in Mexico, right? As you mentioned, you already have 1.4 million clients. It's about 2.5% of your client base. Just help us think here, you know, at what percentage should Mexico be of your total clients by the end of, you know, next two years? How should we think about the profitability of a Mexican customer versus a Brazilian customer? Do you see any significant differences in ARPACs between Mexico and Brazil?
Oh, Mario, it's a great question. I think in terms of number of customers, overall, we would expect that in the long term, the percentage of our customer base in Mexico could basically represent or mirror the population in Brazil and Mexico. Eventually, with the upside case to be made in Mexico, which is where you know, banking penetration, card penetration is so much lower than Brazil, our relative market share in Mexico can eventually prove to be even greater than it is in Brazil.
In terms of, you know, profitability of the customers in Brazil and profitability of the customers in Mexico, the ARPAC of the customers in Mexico, we expect to be likely, you know, lower in the short term than the ARPAC of our customers in Brazil, especially because we're gonna be launching there, you know, with credit card and bank accounts in the coming two to three years. Now, the flip side to that is that the credit card is a much more interest-bearing balance heavy product in Mexico compared to Brazil, and therefore, the unit economics there can be even healthier. In general, however, we expect that the ARPAC of a Mexican consumer will be anywhere 20%-30% lower than the ARPAC of a Brazilian consumer in the long term.
This difference in ARPAC, does it reflect in a lower disposable income or lower income in Mexico? Or does it mean that your ability to cross-sell products in Mexico should be lower than in Brazil?
No, I think the ability to cross-sell products in Mexico should be as good as it is in Brazil. I don't think it is a matter of product cross-sell potential. It's a matter of timing. It will take us, you know, more time to achieve the product portfolio that we have in Mexico. If you take a look over the course of the next five years, we think that the ARPAC of the Brazilian consumer will still be slightly higher than the ARPAC of an average, you know, Mexican consumer that are customers of Nubank. If you take a look, in fact, in terms of disposable income, and maybe the best proxy for that is, you know, average GDP per capita. The GDP per capita of Mexico is about 25%, 20%-25% higher than Brazil.
There's a case that in the very long term, the Mexican consumer could be as profitable if not more than the Brazilian consumer. That is not what we have in our mind for the next three to five years because of the stage of maturation of the operations in those two countries.
Guys, thank you very much. Very clear.
Thank you, Mario. That takes care of the questions. I'm just gonna pass the floor to David for closing remarks, and we can wrap the call.
Everyone, thank you very much for your time. It was a pleasure to talk about our results. We're very excited about what's coming ahead for Nu, and we look forward to continue delivering that customer obsession and those financial results that come together with that. Thank you very much for your time.
The Nu Holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.