PagSeguro Digital Ltd

NYSE:PAGS

Q1-2025 Earnings Call

[Operator]

Good evening. My name is Audir, and I'll be your conference operator today. Welcome to PagSeguro Digital Earnings Call for the First Quarter of 2025. The slide presentation for today's webcast is available on PagSeguro Digital's Investor Relations website at investors.pagbank.com.

Please refer to the forward-looking statements and reconciliation disclosure in this presentation and in the company's earnings release appendix. [Operator Instructions] Today's conference is being recorded and will be available on the company's IR website after the event is concluded.

I would now like to turn the call over to Gustavo Sechin, Head of IR. Please go ahead, sir.

[Gustavo Sechin, executive]

Hello, everyone, and welcome to the PagBank's earnings conference call for the quarter ended March 31, '25.

I'm Gustavo Sechin, PagBank's Investor Relations Director. Thank you for taking the time to join us today. We will begin by sharing the highlights of the quarter, followed by our live Q&A session.

Tonight, I am joined by Ricardo Dutra, our Principal Executive Officer; Alexandre Magnani, our CEO; and Artur Schunck, our CFO.

Now I would like to turn it over to Dutra. Please, Dutra.

[Ricardo da Silva, executive]

Hello, everyone, and thank you for joining our first quarter 2025 earnings call. I will begin with Slide 4, where we present our key operational and financial highlights. I'm pleased to announce another strong quarter, delivering growth with profitability despite the challenging macroeconomic environment. We ended the quarter with 32 million clients, growing 0.6 million clients year-over-year. Our financial performance this quarter was marked by a robust top line growth and a resilient bottom line, while earnings per share grew at an accelerated pace.

Payments TPV reached a record first quarter of BRL 129 billion, a 16% growth year-over-year. Our credit portfolio and funding are experienced rapid year-over-year growth, further solidifying our financial strength and competitive position.

Going to financial highlights. Our net revenues increased 13% year-over-year, reaching BRL 4.9 billion. Our non-GAAP net income was BRL 554 million, a 6% growth year-over-year. Our diluted EPS on a GAAP basis reached BRL 1.72, 14% growth year-over-year, which reinforces our commitment to continuously create shareholder value.

In this context, following our existing buyback program with BRL 1.9 billion repurchased over the past 12 months, we are pleased to announce the launch of 2 key initiatives to further enhance shareholder value and drive more efficient capital allocation. We are canceling 23.9 million stocks held in treasury. And for the first time, we announced the payment of cash dividend of BRL 0.14 of a dollar per common share to be paid in June 6.

Going forward, at the discretion of PagSeguro Board and company and market conditions, among other factors, we expect to pay dividends corresponding to approximately 10% of net income.

In conclusion, this quarter's performance highlights our ability to consistently create value and deliver solid results. We remain one of the few companies in our segment to have posted positive results every single quarter since our IPO, a track record we have held despite evolving industry dynamics and economic cycles.

On Slide 6, we illustrate the consistent growth in our earnings per share. Since our IPO in 2018, we have delivered a 15% CAGR for our reported GAAP basis EPS metric. This trajectory reflects our strong operational execution and our disciplined capital allocation strategy, including increasing buybacks over time, which showcases our confidence in the long-term value of the company.

Along the way, we have achieved several key milestones that have expanded our addressable market and increased profitability. The acquisition of our banking license enabled us to broaden our product offering and deepen customer engagement through our credit offerings and digital banking platform.

More recently, our strategy has focused on winning the MSMBs, attracting and retaining these profitable customers while continuing to scale our platform. The results of this shift are already visible in our improving monetization metrics and sustained EPS growth.

Moving to Slide 7, we highlight how we've been building the company with a long-term vision. Our fully integrated ecosystem, combining payments, banking and credit allows us to use one business to effectively leverage the other by offering a comprehensive suite of products and features to our clients. This approach has allowed us to deepen engagement, boost monetization and capture a greater share of wallet by becoming a primary financial partner for our clients.

Moving to next slide, we show that on top of our robust performance, there remain significant room for market penetration and future growth. In some banking businesses, we have less than 1% market share, so that we strongly believe we are still scratching the surface in terms of the full potential our platform can reach. As we scale our banking operations, we open up new avenues for sustainable growth, including a deeper focus on cross-selling banking products, strengthening our deposit franchises and increasingly expand and diversify our credit portfolio.

Now I'll pass to Alex, who will deep dive into our operational performance for Q1 '25. Thank you.

[Alexandre Magnani, executive]

Thank you, Ricardo. Hello, everyone. In this section, we'll walk through the performance of our business units for the first quarter of 2025. On Slide 10, we announced that from this quarter on, we are adopting a new classification criteria for our client segments. Merchants with a total payment volume up to BRL 3 million per month are now classified as MSMBs compared to the previous threshold of up to BRL 1 million per month.

Additionally, we now define merchants with TPV above BRL 3 million as well as online merchants, e-commerce and cross-border under the large retail and online segment, former called LMEC. This change was implemented to more accurately reflect the dynamics of our business in line with our strategy of winning on the MSMB space.

Moving to Slide 11. In first quarter '25, we reached 32 million clients, adding 600,000 clients in the last 12 months. We ended the quarter with 17.7 million active clients with our client base expansion driven by a sustainable growth of 5% year-over-year in the banking-only clients. As we have seen in previous quarters, we have been focusing on activating higher-value clients, prioritizing monetization and profitability.

On Slide 12, we show that our merchant acquiring business keeps growing in all segments. TPV reached BRL 129 billion in Q1 '25, growing 16% year-over-year with TPV per merchant growing 20% on a yearly basis. In the fourth quarter of 2024, we initiated a strategic repricing process in response to the ongoing interest rate hike in Brazil. Now 6 months into this effort, we believe that acting early was crucial in partially offsetting the impact of higher rates, while also helping to manage our product mix more effectively.

In accordance with the new segmentation mentioned previously, the MSMB segment, which now includes merchants with a monthly TPV up to BRL 3 million grew 11% year-over-year. For comparison purpose, if we have maintained the previous classification used through 4Q '24, MSMB TPV would have grown 13% over the same period in 2024. This expansion of our core segment is mainly driven by increased productivity in our hubs.

Meanwhile, the large retail and online segment, which includes merchants with monthly TPV above BRL 3 million as well as e-commerce and cross-border operations grew 30% year-over-year. Excluding the online business, our large retail segment grew approximately 8% year-over-year. Growth was particularly strong in cards-not-present transactions, enabling us to extend our market reach beyond traditional POS channels.

Now on Slide 13, we show that our strategy to deliver a seamless experience by integrating payments, banking and value-added service drove cash-in levels to BRL 83 billion in the PagBank accounts. Cash-in per active client, a key metric of our client engagement, grew 23% compared to the first quarter of '24, reaching BRL 4,800 per client. The evolution of our engagement metrics is shown on the bottom left graph, which demonstrates the increasing usage of our app.

Furthermore, we observed the significant penetration increase of bill payments and PIX service, investments and insurance products across our customer base.

On Slide 14, we show our strong deposit performance and cost of funding reduction. Total deposits were up 11%, reaching BRL 33.9 billion. This growth is particularly noteworthy given our ongoing efforts to reduce the cost of funding. It shows that we are successfully managing our customer deposits while improving the efficiency of our funding base.

The APYs for total deposits decreased by 700 basis points, reaching 90% of the CDI last year as a result of our strategic efforts to lower the average cost of funding such as adjusting remuneration, the duration as well as diversifying our funding sources.

Our deposits are primarily utilized to fund prepayments to merchants and our loan book. As of December, our loan to total funding ratio, which measures our total funding against our expanded credit portfolio stood at 114%.

On Slide 15, we highlight that we have been able to expand our credit portfolio gradually in a sustainable way. This quarter, our total credit portfolio reached BRL 3.7 billion, a 34% year-over-year increase led by the origination of secured products, which represents 85% of our book loan. Since second half '24, we have gradually resumed credit underwriting for unsecured products, mainly focusing on working capital loans for merchants. This has been driven by the continued improvement in asset quality, risk assessment and collection processes.

Consequently, there has been a 16% increase in working capital loans in the last quarter. When we consider the financial operations related to prepayment to merchants, facilitated by our instant settlement feature on the acquiring side, our expanded credit portfolio exceeds BRL 46 billion, a 34% increase over the past 12 months. Our NPL 90 on the bottom right of the slide demonstrates the improvement in our asset quality in the last 12 months, moving from 4.5% to 2.3% in the period, which is significantly below the market average.

Now I turn over to Artur for the financial highlights of the first quarter of 2025. Artur, please?

[Artur Schunck, executive]

Thanks, Alexandre. Hello, everyone, and thank you for joining us today. I'm pleased to present our consolidated financial results for the first quarter of 2025. Turning to Slide 17. We delivered total revenue and income of BRL 4.9 billion, representing a 13% year-over-year increase. This growth was driven by sustained strength across both our Payments and Banking segments, as previously highlighted by Alexandre.

Our consolidated gross profit margin reached 39% of total revenue, reflecting the ongoing repricing process that partially offset the impact of higher interest rates throughout the quarter. Looking at the chart on the right side, payments revenue totaled BRL 4.3 billion, supported by TPV expansion and the evolution of our clients and product mix. Banking revenue reached a record of BRL 582 million, growing 60% year-over-year, driven primarily by higher interest income from our expanding credit portfolio and increased float from our cash position.

Additionally, revenue from servicing fees grew, supporting our strategy to deepen client engagement, improve principality and drive greater profitability. Finally, the gross profit margin of our banking segment reached 70%, marking its fifth consecutive quarter of growth.

Moving on to the next slide. Here, we present a comparison of our gross profit from Q4 '24 to Q1 '25. The most significant impact comes from our repricing strategy, which helped offset the negative effects of quarterly seasonality and an average interest rate hike of 31 basis points compared to the last quarter of 2024. It is important to note that we initiated repricing at the beginning of Q4 '24.

In the right side of the slide, I want to highlight the strong performance of our banking business, which has become an increasingly strategic pillar in our overall results. Banking gross profit grew 85% year-over-year with its share of total gross profit rising from 13% to 22% in the last quarter. This growth was accompanied by a margin expansion from 60% to 70% of the same period. These results reinforce our resilience, the diversification of our revenue base and our ability to scale complementary products and services efficiently.

Moving on to the next slide, we take a closer look at our costs and expenses, providing deeper insights into the evolution and impact on our financial performance. Our continued financial discipline, a key lever in balancing growth and profitability was instrumental in delivering this quarter's results. We achieved an additional 10 basis points of operating leverage compared to the same period of last year.

On the cost side, transaction costs rose 5% from Q1 '24, growing at a slower pace than TPV due to the shift in product usage by our clients. Financial costs increased 42%, driven by higher interest rates and TPV growth, which required larger prepayment volumes. These effects were partially offset by funding initiatives aimed at diversifying sources and reducing interest expenses. Meanwhile, total losses declined, reflecting the evolution of our fraud prevention processes.

Operating expenses decreased by 3% quarter-over-quarter with marketing costs remaining in line with Q4 '24 and reductions in personnel and other administrative expenses. This reflects our disciplined approach to cost management and the efficiency achieved.

Finally, tax efficiency remains a fundamental pillar of our business strategy. We continue to advance tax optimization initiatives aimed at enhancing profitability and driving long-term value creation for our shareholders.

Moving on to Slide 20. As demonstrated throughout the presentation, this quarter was characterized by resilient operational and financial performance. We achieved a non-GAAP net income of BRL 554 million, reflecting a 6% growth compared to Q1 2024. Shareholder value creation measured by diluted GAAP earnings per share reached BRL 1.72 in the last quarter, reflecting a 14% year-over-year increase.

On the right side of the slide, I'm pleased to present the improvement of 140 basis points in our annual return on average equity, which increased to 15% from 13.6% as reported in Q1 2024. Despite maintaining a conservative capital structure, the company continues to deliver consistent returns.

On the next slide, we will take a deeper look at our capital allocation strategy. So on Slide 21, I would like to share the initiatives we are executing to create value for shareholders and strengthen our capital structure. We maintained a consistent execution of our buyback program throughout 2025, repurchasing over 8 million shares. To date, we have executed more than 75% of the current program approved in August 2024. In addition to that, I would like to highlight 2 main initiatives that we are announcing this quarter, aligned to our commitment with sustainable shareholder value.

First, we are immediately canceling approximately 24 million treasury shares, reflecting our confidence in the long-term value and performance of our business. Finally, as Dutra mentioned earlier, we have announced the first cash dividend in the company's history, $0.14 per common share to be paid on June 6.

Going forward, we expect at the discretion of PAGS Board of Directors to pay dividends correspondingly to approximately 10% of net income, subject, among other factors, to market and company performance and financial conditions. This demonstrates the company's ability to balance growth and profitability and our commitment to strengthening the capital structure and creating value for shareholders.

Our Basel Index consistently declined from December 2023 to Q1 '25, reflecting an improvement of approximately 5 percentage points in capital structure.

Moving on to the next slide. Let us take a quick look at this year's guidance. Q1 results are well aligned to the company's outlook for the year, confirming that we have started on the right path to delivering our expected performance. Diluted earnings per share based on the same share count as of December 2024, excluding the effects of the new shares repurchased in 2025 and the new shares to be distributed under the 2025 long-term incentive plan grew 15% year-over-year, demonstrating the resilience of our performance and the disciplined execution of our strategy.

We expect this metric to continue improving throughout the year as we balance growth and profitability while exploring initiatives to strengthen our capital structure. Regarding CapEx, current investment levels align with expectations for this point in the year.

Now I will turn it back to Alexandre for the closing remarks.

[Alexandre Magnani, executive]

Thank you, Artur. Before we finish, let's turn to the next slide for closing remarks. Overall, this quarter results captured the disciplined execution of our strategy focused on diversifying our revenue sources and preserve profitability in a challenging macro environment.

I would like to highlight once again the increasing contribution from our banking business, which now represents 22% of our total gross profit and how the company through resilient performance starts the year on track to deliver the expected guidance.

In the coming quarters, we'll focus on mitigating macroeconomic uncertainty, executing our repricing strategy and maintaining financial discipline. In addition to that, we should keep working on ways to improve our capital structure, executing the initiatives that were recently announced.

Finally, I should also emphasize that our long-term focus is to become the primary interface for our clients' financial lives, exploring the significant opportunities to drive future growth highlighted in this presentation.

Now let me give the word back to the operator, and we'll start the Q&A session. Thank you.

[Operator]

[Operator Instructions]

Our first question comes from Arnon Shirazi from Citi.

[Arnon Shirazi, analyst]

My question is related to TPV. We saw the growth was slightly above 16% year-over-year this quarter, decelerating for 28% from the 4Q. What explains this?

[Ricardo da Silva, executive]

Arnon, this is Ricardo Dutra speaking. Thank you for the question. Just -- I'll take advantage of your question. Just to remember that we are not a payment-only company anymore, right? So 22% of our gross profit comes from the banking operations. We already have more than BRL 3 billion in credit portfolio, controlling NPLs, close to 18 million active clients, 2/3 of the clients are from the bank.

So just to remember that company is much more diversified as of today than it used to be in the past, and it is diversifying quarter after quarter. But going back to your question about TPV, you're right, we grew 16%. It decelerated a little bit from Q4. Important to say we had a kind of -- I'll not say easy comp, but the volumes in Q1 '24 were a little bit higher than what we had in the past. So it's a difficult comp compared to Q1 '24.

And remember, we've been saying that our focus is in the -- winning the MSMBs and online. So if you look at Slide 12, we're going to see that in large retails, we grew 8%. In e-commerce and cross-border, we grew more than 30%. And MSMB, we grew 11%. So it is aligned with the strategy that we've been saying to the market in the last, I would say, 2 years. We are -- our plan is to win on MSMBs and win e-commerce. And part of the explanation is because we had this repricing.

As interest rates in Brazil goes up, the tool to mitigate this increase in financial expenses is to make the repricing and the large retail are more sensitive to this type of movement, which is fine, which is fine because our focus is in the MSMB. So we are always trying to balance growth with profitability. So we delivered a very decent growth in Q1, very decent profitability. But in large retails, we had this kind of deceleration, which is fine because these clients, they have lower margins usually.

But part of the explanation is because it's natural that we make the reprice and then we had a decrease in growth in the larger clients. But remember, we had -- if you look at the financial expenses, we had a 42% year-over-year growth. So we had to make this reprice to keep the profitability of the company. Some of the clients are more sensitive and they have, I would say, moving part of the volumes to some another company, but that's the explanation.

[Arnon Shirazi, analyst]

Okay. Got it. Super clear. And if I may, I have another question here is regarding the announcement of 10% dividend distribution on future net income for the following years. Why only 10% and not more since the company has a lot of capital on the balance sheet?

[Ricardo da Silva, executive]

The dividends that we are announcing, it's initiative that are combined with the share buybacks. So we'll keep working in both initiatives. As you could see, we've been much more aggressive in buybacks in the past quarters. We bought more than BRL 1.1 billion in shares in the last 12 months. So the idea is to combine dividends with buybacks. We keep doing the share buybacks, and we plan to keep doing so. And the 10% is just to have a sense of what we have in mind at this point. It doesn't mean that we could not change, but remember, this is a combined initiative with buybacks.

[Operator]

Our next question comes from Beatriz Abreu from Goldman Sachs.

[Beatriz Bomfim de Abreu, analyst]

My question is on deposits, right? So we saw some contraction there in the quarter. The -- is the decrease on -- so the decrease on checking accounts somewhat understandable given the higher cost of opportunity due to the higher rate environment, right? But CDs also fell in the quarter. So I just wanted to understand a bit what drove the decrease there in deposits and if the 90% of CDI is a floor of what you can pay on deposits without seeing any significant outflows.

[Artur Schunck, executive]

Beatriz, it's Artur speaking. Thank you for your question. So when we take a look on the deposits, we are managing all the -- actually, we are managing all the funding lines. Sometimes we have more deposits, sometimes we have other deposits growing or even interbank deposits. When we compare quarter-over-quarter, we have -- part of the explanation is related to seasonality. When we put more focus on analyzing deeply checking accounts and CDs, sometimes we have amount moving from checking accounts to CDs.

In terms of CDs, we are putting together in-house distribution, third-party distribution. And the most important point to me is put attention on the average total cost that is stable in terms of comparison to other and past quarters. Actually, we are doing a great job on working to reduce the cost of funding for the company. And the second point is the 85% of the distribution of CDs in-house versus 74% of the distribution in Q1 '24. So we are doing a great job on reducing costs. And also, we are distributing more deposits to our clients that will engage them more and allow us to cross-sell more products for them.

[Beatriz Bomfim de Abreu, analyst]

Great. And do you think you can lower even more the API paid on total deposits? Or is 90% sort of a floor that you're seeing?

[Artur Schunck, executive]

Well, we are working to do that. So there are initiatives that we are thinking about to reduce the cost, but also we need to balance the total amount that we have versus the cost that we are -- or the percentage that we are paying for our clients. So we can reduce, but losing amount is not good for the company because we need to move to expensive other lines that are more expensive than deposits. So we are working hard to focus and distribute those products to our clients to engage them in the ecosystem and also working to reduce the cost for the company, too.

[Operator]

Our next question comes from William Barranjard from Itaú BBA.

[William Buonsanti Barranjard, analyst]

My question goes on the gross margin plan. So looking at the Slide 18 you provided, it seems like repricing is more than offsetting funding cost growth, right? So my question goes if it is fair to believe that from now on, as the average interest rates will grow slower than it grew sequentially in the first quarter. So is it fair to believe that from now on, gross margins should improve sequentially or there could be any effects on lower repricing efforts from now on or even TPV mix changes that could impact eventual margin gains from the second quarter onwards?

[Artur Schunck, executive]

William, it's Artur speaking again. Thank you for your question. So when we have this comparison, this bridge on Slide 18, as you mentioned, we are including the pricing and mix of products together in the same bucket. The majority of the positive result comes from the repricing that we had, but not 100%. I could say that we didn't compensate 100% of the increase from the Selic rate. And on top of that, during the first quarter, we have 2 increases from the Central Bank on the basic interest rate for the country. And the full impact on the cost will be in the second quarter and also in the third quarter because we had an increase last week.

So what we can say is we are working hard to reprice our clients to reduce the cost of funding for the company. On top of that, taking care on the costs, transactional costs, total losses and even compensated through expenses to continue to grow in our results going forward. So I see that we can have more impact on gross profit in Q2 and Q3. But in the end of the day, we have the guidance that shows a growth from 7% to 11% versus last year, and we are confident that this guidance will be achieved until the end of the year.

[William Buonsanti Barranjard, analyst]

But just checking, so how would you compare the magnitude of repricing effect in your gross margins, maybe in the second quarter? How would you compare the expectations with what happened in the first quarter?

[Artur Schunck, executive]

Well, we used to say that we are repricing in each round, we are repricing 60% to 70% of the clients. That will be a little bit less in terms of amount. So we are not sharing exactly the amount that we are doing. And as I -- as we communicated before, our strategy of repricing is aligned to the Central Bank increase. So after the increase from the Central Bank, we have some days to take all the repricing 100% implemented. So it's difficult to set exactly the magnitude of the impact going forward, but we are doing all the efforts that we can do to reprice our clients without to lose volumes, without to lose clients and also keeping the margins up as much as possible.

[Operator]

Our next question comes from Antonio Ruette from Bank of America.

[Antonio Gregorin Ruette, analyst]

I have 2 questions. I would like to continue on Arnon's questions. So first, on TPV. As for the deceleration, I'd like to check if you also had some impacts of the repricing strategy on MSMBs as I understood that you had some large accounts and also that you have tough comps here as first Q '24 was stronger than usual. But we do see volumes coming down from -- growth coming down from 20% to 11% year-on-year.

So I would just like to deep a bit diver here, if you could share if you have an impact from churn related to repricing or any other effects that you could share? That's on volumes. On your capital distribution, I was just curious if you could share a little bit more on why cash dividends and not more buybacks. I understand that you mentioned that this will be a strategy combining both. But why -- if you could share a little bit more, it would be great.

[Ricardo da Silva, executive]

Antonio, regarding the first one, the repricing and how it could have affected the MSMBs. When you look the MSMBs segment, it goes from BRL 1 to BRL 3 million per month. So there could be some impact in these clients. As we said before, in the large retail, they are more sensitive and the impact on churns are more immediate. In the MSMBs, it could take a while. We keep following that to control the churn rates. The larger the merchant, higher the probability that he could have some churn. And when I say it's churn, it doesn't mean that he's going to stop working with us, but he could move some of the volumes to another company.

So we keep monitoring that. I would say nothing -- it's -- I would say, it's popping up in our screens here saying that we have a crisis or that the churn is spiking up. But yes, there could be some churn in these type of clients. And remember that also in the 11%, there could be some mortality of the clients throughout this year. So when you look at the MSMBs that goes from BRL 1 to BRL 3 million, you have, I would say, different profiles of clients.

So -- but yes, it's natural that when you increase prices, you have some friction with the clients. And the whole market is increasing prices. Some companies have different strategies. They make one increase based on the future curve. As Artur mentioned before, we wait to see what's going to be the interest rate and then we decide to reprice. We do not reprice all the clients at the same time. We have different clusters for different MCCs, different geographies in Brazil. So I mean, to answer your questions, there could be some impact in the MSMBs and repricing, yes, but it's not something that is popping up in our screen here saying that we have a problem.

So -- but yes, there could be. Regarding dividends, yes, we could keep going with the share buybacks and only buy back shares, but we decided to combine part of the discussions that we had in the past quarters, dividends appeared as an option, and then we decided to make this BRL 250 million, around this BRL 250 million. And again, it's going to be combined. Both initiatives are going to be combined to deliver or to increase the shareholder value of the company.

To some extent, we're going to increase our return on equity because the equity will go down. So it's the following initiatives we've been doing in the past year to increase our return on equity and the increase in shareholder value.

[Antonio Gregorin Ruette, analyst]

Okay. Okay. If I may follow up on the first one. You mentioned that on MSMBs, you could have some impact related to mortality. What do you mean by that? Is the usual mortality of the long tail pressured by the high rate environment or something rather than the usual impact? And also on the large accounts that you mentioned that you had some deceleration related to repricing. Among those segments within those clients, could you share, which segments it was like large merchants, online? What was the part here? That's it for me.

[Ricardo da Silva, executive]

Okay, Antonio. I will just reinforce that we keep looking at many metrics here, but we think that gross profit reflects the best metric for the company because it includes many, many variables. It includes the TPV times take rate, it goes revenues, minus interchange costs, minus card scheme fees, minus losses, minus financial expenses that you know is very important for our business here. But going back to your question on TPV, the large retail grew 8% year-over-year.

So that's something that we keep working with these clients, but it's not the main focus. The main focus is the winning on MSMBs. And so it grew 8%. The e-commerce and cross-border grew more than 30% and the MSMBs grew 11%. When you look at the MSMBs, part of the mortality it is related to usually smaller merchants, many merchants that we have, some of them, you've been seeing the unemployment in Brazil.

Some of the merchants they could have employed, they have lower volumes. But I would say to you that the mortality is related to the mortality of the companies in Brazil overall. And with these interest rates, it tends to have more difficult for some type of businesses. But it's a mix of everything. There's no silver bullet here. It's a mix of many, many variables. It's the mortality, it's the little bit of the pricing and so on. So I don't have the specific number to give you here, but usually, large retailers are more sensitive to increases. So that's why it grew 8% year-over-year versus the 16% of the company on average.

[Operator]

Our next question comes from James Friedman from Susquehanna.

[James Friedman, analyst]

Jamie Friedman. My questions are also about this -- well, Slide 18 and 19. These are good slides. And I'll just ask my 2 upfront. So Artur, in terms of the transaction costs, this is Slide 19. So the transaction costs actually declined as a percentage. They grew at 5% less than the total volume. You said in your prepared remarks that was partly due to mix. I was wondering if you could elaborate on that. That's my first one. And then in terms of -- I know you get a lot on this on the repricing on Slide 18. How durable do you think the repricing is? What are you expecting from, if anything, the competition on the repricing front? And what's embedded in your outlook on repricing for the remainder of the year?

[Ricardo da Silva, executive]

Jamie, I will start with the last one, and then Artur can answer the first one. Interest rate of the economy in Brazil used to be 10% in Q1 '24 and today it's close to 15%, 14.75% to be more specific here. So it's an increase that nobody -- I'd say, at the beginning of Q1 '24, nobody expected that. The expectation was that the rates should go down by the end of '24. As I could see, we have this growth in interest rate, not only in Brazil, but in many countries of the world. So that's the raw material for part of our company and for competitors as well.

So the increase for the companies that are looking for profitability, and we understand that everyone in our sector today is focused on profitability, not in market share or other metric. It's a matter of time. So everyone will increase the prices because that's the raw material for everyone. We will keep work with our clients and make this price increase in a very smart way. I mean, with the lowest impact in churn and lowest impact in the growth of the company, try to balance these 2 variables, increase prices and keep growing.

And I would say, looking forward, I would stick with the guidance. We are reaching the guidance in this first quarter of '25. We expect to reach the guidance for the whole year, the gross profit, earnings per share and capital expenditure. So that's the, I would say, the best answer I could give to you at this point. Regarding the first one, I'll leave Artur to answer.

[Artur Schunck, executive]

I don't know if it was clear, Jamie. But if you need more explanation, I can help you.

[James Friedman, analyst]

No, that was great. I was just -- the second question was about the mix in transaction costs. So what is -- is that like -- what are you referring to there? Is that the PIX mix? Or is that the debit credit? Or if you can elaborate, that was 1.3%, only grew 5% Slide 19.

[Artur Schunck, executive]

Yes. Slide 19. Well, transaction cost that we have here is related to all the costs that we have for the transactions in terms of banking and payment includes fee scheme fees, interchange fees from cards and other small items that also we include here that is related to banking and payments. But the majority of this transaction cost is related to interchange scheme fees.

[Operator]

Our next question comes from Renato Meloni from Autonomous Research.

[Renato Meloni, analyst]

So I just wanted to go back to your deposit and credit growth and how you've been balancing the 2. If you're looking at the loans to funding ratio that you put on your slides, that has been hovering about 110% to 115%. So I wonder if you have a target there, you aim to stay here. And then like going forward, right, do you see the deposit base at the current cost as a limitation for credit growth? And then if you have to face a decision between growing credit more and sustaining lower cost of funding, which one would you do?

[Ricardo da Silva, executive]

Renato, well, the first one, we don't have a target for this loan-to-funding chart that we see in Slide 14, just giving this information to the market, but there is no specific target. And I would say you that we could have more deposits if we wanted to. As you could see in the same slide in the bottom left, we move it from 74% from third off platforms to our own platform. So today, it's 85% in Q1 '25, which is great news because we are just having the clients using our platform. We could have more enough platform if we wanted to.

And I would say to you that our credit portfolio today of BRL 3.7 billion, if we decide to grow this credit portfolio, funding will not be a problem. And with the spreads in Brazil, the cost of funding that we might need to have in an additional funding that you might need to access to have growth in credit portfolio will not be a limitation, will not be a constraint because, may be a few bps higher if we decide to grow aggressively and the spreads of the loans support that with no constraint. So there will be no decision between one or the other as you asked it. So it's -- if we decide to keep growing the credit portfolio, funding will not be a constraint, I would say to you.

[Renato Meloni, analyst]

So -- and then the marginal cost is similar just regardless of how much you're accelerating?

[Ricardo da Silva, executive]

Yes, exactly. Because when you think that we have BRL 40 billion in total funding and our credit portfolio is BRL 2.7 billion. So even if we grow, I don't know, let's say, 30% in 1 quarter, we're saying to grow BRL 1 billion. So it's BRL 1 billion growth compared to BRL 40 billion that we already have. So it will be a small amount compared to the volume that we already have. So it's not a constraint.

[Artur Schunck, executive]

And Renato, on top of that, we -- and that's the reason we are providing total funding in that slide, not only the deposits that we have because we have been working in the last 2 years to diversify funding source lines, players, products. So we have a lot of space to grow credit portfolio as we want with a similar cost that we are presenting in the Slide 14.

[Operator]

Our next question comes from Maria Guedes from Safra.

[Maria Guedes, analyst]

Most of them have been answered, but maybe 2 quick ones. First, a follow-up on the credit portfolio. So I just wanted to get a quick update on your guys' appetite towards credit lines. We saw a slight uptick in the working capital loans. I know it's not representative, but just wanted to get a quicker view on your guys, if anything in terms of appetite has changed. And also, you provided the Basel ratio. And just wondering if you guys are targeting an optimal level in terms of Basel ratio as well.

[Ricardo da Silva, executive]

Maria, thank you for the question. The credit portfolio, you're right, we've been growing faster in the working capital in the last quarter. We plan to keep doing so. We see this, I would say, opportunity to increase this exposure to our best merchants in terms of credit profile. And there is no change in the guidance or what we had in mind. This is part of the plan. We expect to grow working capital faster than other lines for this year. We'll keep growing the other lines, but working capital will grow faster. And the second question is about the basal index.

[Artur Schunck, executive]

Yes. So I can help on that one. We don't have exactly a target of this Basel index, but it's important to mention that since December 2023, we reduced it from 33% to 27%. And all the efforts that we have here is to optimize in a solid way our capital structure. So we are taking decisions to dividends, decisions to buy back and also investing in the company through our CapEx, but we don't have exactly a target to pursue. And we know that we can do more and more as time goes by, but in a solid way for the company.

[Operator]

Next question comes from Eric Ito from Bradesco BBI.

[Eric Ito, analyst]

I have just a quick follow-up on your banking. I think throughout the presentation, you guys were pretty clear on saying how important the banking business is. And it's already representing 22% of the total gross profit compared to 13% in the first quarter. So I just want to understand if you guys have any target here or any idea of how much you think it could represent maybe by the end of this year on your total gross profit expectation for the year and maybe 2026, how much do you think this line can grow? And then a second follow-up here is on still on credit, but maybe if you guys could give more color on your expectations for growth for the unsecured credit line, the working capital. How do you see this growth under this scenario? Just some numbers on the previous question from Maria.

[Ricardo da Silva, executive]

Eric, thank you for the question. We are not giving disclosure about the -- how important could be the gross profit of the banking in the following quarters. I would say to you that we know that once you create this credit portfolio, you start to generate operational leverage because the system is the same. It doesn't matter if you have BRL 10 million in credit portfolio or BRL 10 billion. Usually, the technological system, the back office is the same. So we do expect to have operational leverage. We've been growing the credit portfolio in a very sustainable way, I would say. NPLs are under control, and the credit portfolio keeps growing.

We've been growing working capital faster than other lines, and we think that's going to be what's going to happen in the following quarter as well. But we are not giving the specific number here. I just would say to you that we expect that credit portfolio keeps growing and then we have operational leverage because of the items that I just mentioned to you.

In terms of -- just to complement here in terms of the unsecured growth in credit portfolio and the products that we are developing. We resumed our overdraft account last year. Now it's a positive margin. It's performing well, and we are working to scale that part of our business. And regarding to working capital, we resumed the operation this year. And now we are working to measure, track the results and working hard to also scale that business. We invested a lot in the past years in terms of developing a better process, hiring a seasoned team, investing to develop credit models, collection process, behavior model. So we are going -- we have been investing a lot to develop this piece of our business because we know that it's very important to the future. That is the beautiful piece of our business. We have the payments very well developed. And now we also have in the other side, the banking to navigate in macro scenarios that are not doing great in a positive way for our company.

[Alexandre Magnani, executive]

And just to complement, Eric and take advantage for question. In Slide 8, we gave some numbers about our penetration. And you could see that we are, to be honest here, scratching the surface in terms of banking businesses and credit portfolio that could reach in our platform. So we are not giving the guidance, but we do expect to grow in this banking businesses faster. As you could see, our gross profit grew 86% year-over-year. So it's, let's say, good possibilities here and good opportunities in the banking.

[Operator]

That's all the questions that we have for today. I will pass the line back to PagSeguro Digital's team for their concluding remarks. Please go ahead.

[Ricardo da Silva, executive]

Everyone. Thank you very much for investing your time to listen to us, and thank you very much for the questions. Thank you.

[Operator]

This does conclude PagSeguro Digital's conference call. We thank you for your participation, and wish you a very good evening.