AGI (NYSE:AGBK) reported second-quarter financial results on Wednesday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

AGI reported strong growth in the second quarter of 2026, with over 7 billion reais in gross credit originated and a record 7.6 million active clients.

The company launched a new subscription platform, AGI, which has already attracted 250,000 subscribers in 45 days, expected to drive recurring revenues.

Private payroll loan originations grew by nearly 50% quarter-over-quarter, reflecting recovery and adaptation to regulatory changes.

AGI's market share in INSS payroll benefits increased to 9.6%, while fee revenues, excluding credit provisions, reached over 135 million reais.

Management expressed confidence in sustained growth and profitability improvements in the upcoming quarters, despite a temporary dip in pre-tax profits due to upfront growth costs.

The company's funding strategy was bolstered by credit rating upgrades, indicating strong financial stability.

AGI's non-performing loans over 90 days decreased to 3.3%, with a comfortable coverage ratio of 182%.

Full Transcript

OPERATOR

Good afternoon, everyone, and welcome to AGI's second quarter 2026 earnings conference call. Today's conference call is being recorded at this time. I would like to turn the call over to Felipe Gasparo Rivera, Head of Investor Relations. Please go ahead.

Felipe Gasparo Rivera, Head of Investor Relations

Hello everyone, and welcome to AGI's second quarter 2026 earnings conference call. Thank you for joining us. I'm Felipe Gasparo Rivera, Head of Investor Relations. Joining me today are Marciano Testa, our Founder and Chairman and CEO, Marcelo Dube, our Chief Financial Officer, and Matteo Girardi, our Chief Client Officer. During today's call, we will discuss our second quarter results and business review, followed by a live Q&A session with our management team.

Throughout this conference call, we'll be presenting certain non-IFRS financial measures. These are important measures for AGI's management, but should not be considered in isolation or as a substitute for IFRS measures and may not be comparable to similar types of measures reported by other companies. Reconciliations between non-IFRS and IFRS measures are available in our earnings release unless otherwise noted. All figures discussed today are presented in Brazilian reais.

I'd also like to remind everyone that today's discussion may include forward-looking statements which are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. These statements are not guarantees of future performance. This outlook reflects management's current expectations and assumptions, including among others, assumptions regarding the trajectory of Brazil's benchmark interest rate, the pace of credit originations, the regulatory environment governing payroll-linked lending, including the INSS framework, and general macroeconomic conditions in Brazil, and is not a guarantee of future performance. The outlook is only effective as of the date given and should not be considered updated or affirmed unless and until we do so publicly. Before I hand the call over to Marciano, let me briefly walk you through today's agenda. We will begin with an overview of how the market environment has evolved over the past several months and why we believe the operating backdrop has become increasingly supportive of sustainable growth.

Matteo will then introduce AGI, our new subscription platform, and discuss why we believe it represents an important new avenue for customer engagement, recurring revenues, and long-term value creation. Finally, Marcelo will review our second quarter financial results. With that, I will now turn the call over to Marciano. Marciano, please go ahead.

Marciano Testa, Founder and Chairman and CEO

Good afternoon everyone and thank you for joining us today. I would like to begin today's call by reinforcing the three key principles that guide our business long term. First, we live for the customers, which means that we prioritize clients' value when we make all of our decisions. Second, we win with technology, so we continue to enhance our technology capabilities to serve and operate in a better way. And third, we promote an entrepreneurial culture to innovate and grow while we maintain a disciplined focus on long-term returns.

I keep these three principles in mind every day, and I want to make sure you understand them because they shape how we make decisions, allocate capital, and build the company for the long term. Next, I want to share some thoughts on the evolution of our performance since the end of last year, first walking through the significant disruption we had over the past year, and finally showing that we are still growing in this scenario and we see the second quarter '26 results as the inflection point of this trajectory.

As you know, we were affected by several regulatory changes in the market which impacted the whole sector and temporarily paused growing new client signs and origination in the second half of last year. Our results for the second and the third quarter are below our normal performance levels due to the delayed impact of slower origination in 2025. Since mid-April, the INSS has staged full management and implemented a series of measures to strengthen governance, improve operational processes, and restore confidence across the system.

These initiatives have increased confidence in the market that the regulatory environment is becoming more stable, predictable, and supportive for the long-term sustainable development of the payroll lending market. As a result of our three principles and the business model, we were able to adjust to these structural changes and the new regulatory requirements very quickly, perhaps faster than others, and I believe we are among the first companies to return to strong growth based on this quick adaptation.

Since the end of the first quarter we started seeing strong growth in the customer base, principally with AGI. As a result, we grew fee business and credit origination through our hybrid platform, which means digital channels and smart hubs network. As you can see here on this slide, we originated over 7 billion in gross credit this quarter while attracting more than 600,000 new customers, reaching 7.6 million active clients, a record for the company.

As we will see further in this presentation, we have been able to grow at this pace while maintaining the asset quality under control. Our private payroll portfolio grew by almost 50% quarter over quarter, with new origination doubling versus the previous quarter. Unsecured personal loan originations also increased by more than 80%, demonstrating that growth is returning across multiple products, not just a single business line, and at the same time we continue to gain market share in the INSS payroll business.

We surpassed INSS payroll benefits of 1.5 million customers; we left Santander behind us. As a result, we are reaching 9.6%, an increase of 60 basis points in just one quarter. This shows that even after all the disruption the industry faced last year, we continue to execute well and strengthen our competitive position. Other clear evidence that our operating engine has fully recovered is the fee revenues reached over 135 million in the second quarter and increased by more than 35% quarter over quarter.

Unlike credit revenues, these carry no provision dynamics and are recognized on a daily basis, making them one of the best real-time indicators of business activity. Based on the performance in this current quarter, we are confident in delivering even higher growth in the third quarter. Taken together, these metrics give us the confidence that the business has reached an important operational inflection point. The origination engine is performing at full capacity again, and we expect this momentum to continue flowing through our financial results over the coming quarters.

When you grow at this pace, we observe three costs up front: expected losses, provisions on every new vintage; the customer acquisition cost; the cost to serve and activate them on the platform. The revenues from these same customers—interest, fees, or sales—accrue over the following quarters and years. In other words, this quarter is the period that will carry the full cost of customers whose earnings belong to the upcoming quarters. These improvements will take some time to show in the numbers during the next few months because we have a natural lag between operational improvements and the income statement.

So I believe our results will begin to drive sequentially higher income starting in the third quarter and the full recovery in the fourth quarter with even more force. And again, we are at the inflection point. Finally, at the end of the quarter, we launched AGI, our new subscription product, already showing strong engagement and an increase in the number of customers who now use the platform daily or weekly, deepening each relationship. We will become a subscriber bank, the evidence of which is our over 250,000 subscribers in only 45 days, and we will see this positive impact reflected in our financial statements in the quarter.

With that, I will pass over to Matteo to cover AGI in detail and Marcelo to present its unit economics.

Matteo Girardi, Chief Client Officer

Thank you. Thank you, Marciano. For those of you who I have not met, my name is Matteo Girardi and I am the Chief Client Officer here at AGI. It is a pleasure to be part of this earnings call to discuss a strategic milestone. We are very excited about the launch of AGI, our new subscription program. Within the current challenging macroeconomic environment in Brazil, characterized by high interest rates, elevated household debt, and rising consumer credit delinquency, we took on the mission of finding a new way to deliver the solutions our customers truly need.

Our clients face daily challenges that go far beyond financial products: a lack of access to private health care, unexpected expenses, the high cost of medication, limited internet access, and daily household responsibilities. This is precisely where we see a clear opportunity for AGI to expand the relationship with the customer beyond financial services, increasing the customer lifetime value of the bank, generating cross-selling opportunities, improving retention, and boosting engagement through solutions that address real recurring needs.

This allows us to expand our relationship with the customer, increase customer lifetime value, and drive recurring, predictable service revenue. AGI is designed as a low-cost, high-value subscription service available in three tiers ranging from 39.9 to 59.9. The program bundles medical, residential, and dental assistance with mobile phone bonuses and even extra services such as pet care in our premium tiers. Furthermore, our plans provide monthly credits for daily expenses such as cooking gas, food, and groceries ranging from 100 to 150 reais.

AGI ensures a seamless end-to-end experience, and this is key to our strategy. It creates a sticky ecosystem that encourages daily engagement for the customer. The value is immediate and tangible. A subscriber on our entry-level plan can save up to 1,500 annually. For AGI, this model is a powerful engine for recurring service revenues, driving higher app open frequency, improved retention, and deeper loyalty. This way we are expanding our value proposition while also effectively de-risking our business model.

We are very pleased with the launch of AGI and have conviction that this program represents a shift in how we engage with our customers. We look forward to seeing AGI become a cornerstone of our long-term growth strategy, and we are confident that AGI will serve as a significant lever in the evolution of AGI's service revenues, a trend confirmed by our initial adoption rates and early engagement metrics. With that, I would like to turn the call over to Marcelo who will discuss the product, unit economics, and this quarter's results.

Marcelo Dube, Chief Financial Officer

Thank you, Matteo, and good afternoon everyone. We are very excited about the launch of AGI and the revenue stream it has the potential to bring to our business. On slide 12 we've highlighted a few early sales metrics and unit economics which we believe are very encouraging, given that the product has been in the market for less than two months. As we think about AGI, we see a clear two-phase growth path. The first wave is driven by penetration within our existing customer base.

With 7.6 million active customers, we have a significant opportunity to distribute the product through channels we already own at a very attractive customer acquisition cost. The early results are encouraging. In just 45 days we reached more than 250,000 active subscriptions, with 67% of new credit originations including an AGI cross-sell and 99% of our sales agents successfully selling at least one subscription. The second wave comes from the continued Expansion of our customer base as AGI continues to add new clients across INSS beneficiaries, private sector workers and public servants. Alguplus becomes another scalable layer of monetization embedded in our ecosystem. Just as importantly, the unit economics are very compelling. We estimate an annual RPAC of approximately 600 reais per customer against servicing costs of around 118 reais, resulting in an expected contribution margin of approximately 80%.

We believe this makes Alguplus not only a highly attractive product for our customers, but also a meaningful long-term contributor to earnings and revenue diversification. With that, let me now turn to our financial results. In the second quarter we made further progress against our core strategic priorities, growing our customer base in Brazil with a focus on multi-product relationships, expanding our market leadership in payroll lending through new products and integrations, and maintaining our position among Brazil's most efficient and trusted financial institutions.

On today's call, I will walk you through our second quarter results in the context of a challenging macro environment and, more importantly, the positive inflection we believe is now underway across our business. On slide 14 we outline a few of the key drivers of improvement we are seeing, with material increases in active clients, credit portfolio and INSS market share relative to last year, as well as a sequential decline in our greater-than-90-days NPL.

Taking a closer look at customer growth as seen on slide 15, total active customer counts increased 36% in the second quarter compared to the prior year period and 7% quarter over quarter, and we had 7.6 million active customers as of the end of the second quarter of 2026, which we define as those using at least one product at quarter end. We believe this growth demonstrates the resilience of our business, as earlier explained by Marciano. Turning to our credit portfolio on slide 16, total loan balances grew 21% year over year in the second quarter of 2026 to 37.1 billion reais.

Our credit portfolio maintains a healthy mix with secured loans representing 88% of total, or 32.6 billion reais, and unsecured loans representing 12%, or 4.4 billion reais. We believe this mix brings a sustainable balance of profitability, credit quality and focus on long-term relationships with our clients. Unsecured lending, which is restricted to account holders who maintain primary relationships with AGI to mitigate default exposure while improving margins, was flat year over year at 4.4 billion reais in the second quarter.

Quarter over quarter, we see a slight decrease sequentially, reflecting the short-term duration of this portfolio. However, we saw in the second quarter an increase in the number of clients with principality reaching 1.5 million clients. Within INSS payroll credit, we continue to successfully execute against our strategy of being the disruptor of this segment in Brazil. As you can see on slide 17, based on our strong positioning with the INSS and leveraging our competitive advantages in this segment, our market share in Q2 was 9.6%, an increase of 160 bps year over year.

It is worth mentioning that we were able to expand our market share by 60 bps in this quarter despite the recent periods of regulatory volatility in private payroll credit. On slide 18 our credit portfolio grew to 1.4 billion reais, an increase of 48% sequentially and 184% year over year. It is worth mentioning that our appetite for production of this product remains strong after making enhancements to its credit model and observing good evolution in its credit quality.

With regards to credit quality in the overall portfolio on slide 19, non-performing loans exceeding 90 days declined in the second quarter to 3.3%, reflecting normalization in the falling cohorts at the quarter end. NPLs for the overall portfolio remain comfortably below the average for consumer credit in Brazil, which continues to trend up. The coverage ratio, measured by provisions over NPLs over 90 days, was 182% at the end of June, a level we consider comfortable to operate the business.

On slide 20, we have aggregated the key financial KPIs across our business, which I will now discuss in greater detail. Turning to our revenue on slide 21, in the second quarter we delivered total revenue of 3.2 billion reais, a slight acceleration in the quarter and an increase of 26% year over year and 6% quarter over quarter, even considering the disruptions in the period. On slide 22 we see net interest income growth of 11% year over year and 3% quarter over quarter to 1.3 billion reais.

The slight decline in NIM on an LTM basis is primarily due to the asset mix, with a lower contribution from personal loans. In the credit portfolio, annualized NIM was flattish at 11.9%, and after provisions was 6.8%, compressing 50 bps on a quarterly basis, suggesting that the portfolio is in a normalization test after the impacts of the suspensions. While persistently high interest rates continue to weigh on spreads, we view this compression as transitory and expect margins to recover as higher-yielding vintages season and our asset mix normalizes.

Moving to efficiency on slide 23, which highlights the operating leverage embedded in our unique and highly scalable business model. Our operating efficiency ratio, which we calculate as NII plus fee revenues divided by operating and personnel expenses, increased to 48.9% in the second quarter, up 570 basis points quarter over quarter. This increase mainly reflects the operating expense growth tied to the acceleration in principality clients and in our credit portfolio costs we incur ahead of the revenue these relationships generate.

Continuing down to the income statement and to slide 24, recurring net income in the second quarter reached 200 million reais, an increase of 7% over the previous quarter, indicating that AGI's profitability improved quarter over quarter. Now onto our funding approach on slide 25. As a regular debt issuer, AGI maintains established relationships with Brazil's credit markets, diversifying funding sources to support portfolio expansion. As a result, total deposits reached 39.9 billion reais, an increase of 18% from the second quarter 2025, institutional counterparties now representing 62% of total funding, while retail sources came down to a share of 38%. Recently AGI also received a credit rating upgrade from both Moody's and Fitch Ratings, who raised a notch the bank's credit rating from AA- to AA. These upgrades are a significant demonstration of confidence in AGI's business model. Moving to equity on slide 26, it increased by 62% in June 2026 compared to the prior year period, reflecting the receipt of the net proceeds of the IPO. Return on equity over the last 12 months was stable at 21.6%, impacted by the proceeds of the IPO now being accounted for in the net equity.

On slide 27 you can see our total assets have grown to 51.1 billion reais, an increase of 33% year over year and representing a 1.7 trailing twelve months increase in ROE driven by the growth of the credit portfolio. Lastly, as you can see on slide 28, our capital adequacy ratio consolidated at the holding level declined by 60 bps to 18.7% in the second quarter, with a Tier 1 capital ratio of 17.6%, also reflecting the receipt of the net proceeds from the IPO.

These are comfortable levels of capital adequacy allowing us to continue investing in customer growth and technology while maintaining disciplined focus on long-term returns. As Marciano mentioned, we believe we have compelling evidence of a recovery in the business both in our credit products and in our fee-based revenue. Looking ahead, we are encouraged by improving trends in the business and are confident in AGI's long-term investment thesis and our ability to execute towards a full recovery in 2027.

On behalf of AGI, I would like to thank you all for your interest and support. And now we would like to open the call for the Q&A session. Thank you very much, operator.

OPERATOR

Thank you. We will now begin the Q&A session. If you like to ask a question, please click on raise hand. The first question comes from Georgia Kouri with Morgan Stanley.

Georgia Kouri, Analyst at Morgan Stanley

Hi, good afternoon everyone. Thanks for the presentation. I have two questions if I may. The first one is on your private payroll loans growing 48% quarter on quarter, not coming from a small base anymore. I mean you've been one of the leaders in that product. What gives you comfort that that is the right level of growth and then you're not going to end up with higher NPLs? It is still a relatively untested product. Some of your peers that have gone aggressively into the product have seen first time in default and delinquency levels that are well above expectations.

Just want to get some comfort on why a 50% increase in one single quarter is the right level of growth without putting too much risk on the balance sheet. My second question is if you can address your pre-tax profits, which was 115 million if I'm correct, down 47% quarter on quarter, missing consensus by say 50%. What exactly happened there and to what extent this is transitory? Is this a new level of underlying profitability? Just help us understand this very surprising decline in pre-tax profit.

Thank you.

Marcelo Dube, Chief Financial Officer

Thank you, Kouri, for your question. Good to talk to you. So this is Marcelo. I will answer both of the questions. So first of all, in the private payroll loans we previously mentioned in the first quarter we had arrived at a quality of credit modeling where we were comfortable in accelerating growth in this product at a level of circa R$200 million per month of origination. That's what we did. So the 50% comes, you know, a fixed number at a smaller base, but it's kind of the same pace.

We want to continue to go over in the future to from 200, 250 million reais net origination per month. And what gives us comfort is that we are seeing the cohorts of, we are looking into this product as providing us good quality of first payment, delinquencies below teens level. And as we improve using technology, data, AI in the credit modeling over time. Remember we took a step back in the end of the last year. We reduced a lot in the production of this product.

We tested a lot of the models and we arrived at a point that we are comfortable in having this pace of growth now at 200, 250 per month in this process. And another point is that we look at a product with the loss absorption concept, right? So we take the cost of credit and we divide the NII of the product over the cost of credit expected for that product. And if we reach a number that is 1.4, 1.5 times, then we have appetite to continue growth in that product.

And that's what we are getting from this product and we'll continue to do so. So this is what we see for the private payroll and also that is a product that can bring us cross-sell of other products, other services. Product as we have in the portfolio brings us with more relationship with the clients that we originate. So today out of the 7.6 million clients that we have, we have a big portion of those clients that are from the private sector. Not only for the private payroll specifically, but the private in general.

So circa half of the clients are from the private sector and the other half are from the Social Security system. So we are indeed continuing to have appetite and continuing growing in this product. Always we'll have cautious on taking very seriously the provisioning as you saw. And then you link to your other question, right, on the earnings before taxes. One of the reasons of the anti-transitory name that we used, I think is very appropriate for this number because we are planting the seeds in the operational side for a much stronger second semester.

As we have been saying the whole year, we are in a recovery phase. We were able to grow portfolio across the franchise in the INSS payroll credit. In the private payroll credit, our unsecured credit also, the origination also grew very strongly. You don't see that in the balance of the portfolio because of two factors: specifically for the unsecured, the short-term duration of the amortization, and also we have in the second quarter the amortization of the 13th salary in Brazil in May, which in our case is part of our unsecured portfolio as well and contributes to reduce this portfolio momentarily.

But we are in a phase of origination that will bring us to growth again going forward. So what happens is as we grow the operational side very strongly, as we did in this quarter, and growing the number of clients, growing the number of clients with principality reaching 1.5 million clients. All of that makes us absorb the costs upfront, as Marciano mentioned in his speech: the expected losses, the cost to serve these clients, and the transactional cost that is involved in serving all of this increased amount of credit origination and new clients.

What we see is that all of that will eventually compound month over month. And the escalation in the NII, as a technical explanation, is mathematically has to happen over time and we have under control the expenses going forward. We think it's in a normal pace of growth. So transitory is what we really believe for the number in terms of the earnings before taxes. On top of that, we see the fee business as very strong, not only in this quarter growing 35%, but if you open the notes, you see that specifically the brokerage fees line grew almost 80% in the quarter, which means that the business is recovering at a very healthy pace.

And on top of that, you might have seen today we launched the AGI product which will add another very stable stream of revenue to our results. So we are very confident with the place where we are now operationally and financially. We are momentarily with these adjustments, but in a very good position for the second half.

Georgia Kouri, Analyst at Morgan Stanley

Thank you, Marcelo. If you don't mind, can I do a follow-up on this last part? I want to make sure it's clear. So if I understood correctly, the rapid acceleration in loans, particularly private sector payroll loans, required an upfront investment that is pressuring your pre-tax profit more than expected, also because the growth was higher than expected. Now, how do I think about the provisioning? Because if I look at your provisions for the quarter at 562 million, that was up 12% quarter on quarter, which is obviously nowhere near this very rapid growth you're seeing in type of payroll loan.

So. Or am I just not able to look exactly at what the provisioning is for that specific product? And to what extent do you think that it is really the provisions that show that upfront investment or is there anything else on the P&L that you think is not going to be recurrent at this high level going forward, because it's related to that growth that we saw in the second quarter?

Marcelo Dube, Chief Financial Officer

Yeah. So for the provisions, if you look at the cost of credit in percentage, it's, you know, a bit higher, but very, very slightly in terms of, you know, the percentage, 5.9%, and that is due to the mix, right. So when we add more of the product that, you know, has higher provisions like the private payroll, and the pace of growth, it brings us to a higher necessity. So we take very seriously the CMN 4,699 instruction to provision in our balance sheet.

And on top of that, our NPLs went down, right, as you could see, with the coverage ratio also going up to 180%. So for us, everything, you know, matches and goes together with the growth that we saw and the mix that we had in this quarter. In terms of expenses, what we saw is, as I said, expenses that are a part of the expenses that are variable with the number of clients and the originations and the transactional expenses. So part of that is due to technology involved, part of that is due to the cost to serve the new clients with principality.

And that will be surpassed by the compounding of the revenues and the growth of the NII going forward. This is a natural consequence. When we grow very fast, the expenses come first and then the compounding will come in a second stage. But, you know, the size that we see in the income statement, the expenses in general, expenses occupy there, I think it is appropriate for the size of the company.

Georgia Kouri, Analyst at Morgan Stanley

Great, thank you very much.

OPERATOR

Thank you, Kouri. The next question comes from Tito Labarta with Goldman Sachs.

Tito Labarta, Analyst at Goldman Sachs

Hi, good evening. Thanks for the call and taking my questions. A couple questions also, if I may. I guess first, you mentioned this quarter should be an inflection point and we're seeing some of that growth. But how do you think about the profitability from here going forward? Right, because you're having to book additional provisions given the growth in private payroll. I mean, I guess that could be a short-term headwind. You also had a very negative tax rate.

I mean, almost half of your earnings were from a tax benefit. How should that evolve going forward? How do we think about the tax rate from here? Just to think about, given that to really recover profitability, you really need to grow pre-tax earnings at a very strong pace considering a more normalized tax rate. And then my second question is maybe to get a little more color on the AGI, right? Seems to have a nice uptake with only 45 days. Can you give some color in terms of where you're seeing it?

Is it more in the entry, the medium or the premium where there's the most interest? And how quickly do you think that can really expand into your client base? Right. If you have 250,000 today, do you have targets or even initial color on how quickly that can penetrate your client base? Thank you.

Marcelo Dube, Chief Financial Officer

Hi Peter, good to be talking to you. And then, so just starting with the last part of the question at AGI. Yeah, we're correct. We are, you know, at a very strong pace of penetration in our customer base. We see this product, you know, the entry package, as the most stronger in terms of selling. But on average, you know, the average RPOC will be that 600 reais per year with an 80% contribution margin. What we see is that it is possible to reach a 1 million number of clients by the end of the year in terms of subscribers.

So it is a very strong contributor of profitability that we see now that hasn't contributed a single real in the second quarter in our revenues. So if today we already have 250,000 subscribers, we do the math, it is going to be a good contributor to the fee revenues in the income statement going forward. And you know, the penetration continues, the cross-sell continues to be very strong and improving time over time. So this is one part of your question.

The second part is the earnings before taxes. You are right. So the focus here, of course, we know and we understand that although net profit grew, we understand the slowdown in the pre-tax profitability and all what we are seeing in the operational side will put us in position, or already put us in position. We already passed the point of inflection. I can comment about July operational results already. So July had continued to operate at high pace of origination in all of the products that we work with.

So we continue to plant the seeds to add compounding revenues and compounding net interest income, to have the operational leverage we need to go back to increasing profitability in the earnings before taxes. So that's why we say we are in a strong position for a second half of the year and will be probably sequentially in terms of how we can demonstrate that over time. So it's a technical explanation because the expenses shouldn't move in a very, you know, brutal way over the quarters.

But the NII has the potential and the fee business has the potential to compound strongly over the course of the next months. And in terms of the provisioning, provisioning we don't see, we haven't seen much of, you know, big changes in percentage terms as I said. So 5.9%. We're saying between that and 6% or low 6% and the NPL is from 3.5% to 4%. We are now at 3.3%, the coverage ratio 180%. So we are very comfortable with a large cushion of provisions to go forward.

So also that's something, a point of comfort in our numbers. And then I'll talk about the negative effective tax rate. It's a combination of a few components. First, the cash from the IPO proceeds are allocated into eligible instruments offshore, right, and they have separate tax treatment and they are structural, you know, in our balance sheet. The way we manage the deferred tax assets in the period, including tax losses, are a result of the current organizational structure they have.

And third, which is the reason of this magnitude, is the lower pre-tax base. As we had the lower pre-tax base, it could not, you know, the current tax could not offset the deferred taxes that we saw in the quarter. So I would say directionally, as the earnings before tax recover, the rate normalizes upward going forward, if that makes sense to you.

Tito Labarta, Analyst at Goldman Sachs

Yes, it does.

UNKNOWN Analyst

No, that's helpful. Thanks, Marcelo. So just to clarify, I guess cost of risk, it sounds like it should remain around the 6% and the tax rate may be harder to figure out. How should that normalize from here? Like should it stay negative in the short term? Does it get back to positive quickly? Just any color on how do you think at least maybe the full-year tax rates are going into next year?

Marcelo Dube, Chief Financial Officer

Yeah, I mean we won't say a number here, but it will normalize upwards. You know, probably at some point going again in the positive side in the short term. Not probably maximum in the end of the year, fourth quarter, but eventually still in the third quarter. It's too early to determine here, but it will normalize upward for sure.

UNKNOWN Analyst

Okay, sounds good. Thanks, Marcelo.

OPERATOR

The next question comes from Arno Shirazi with Citi.

Arno Shirazi, Analyst at Citi

Hi guys. Thank you for the opportunity of making questions. My main question here is regarding the core fees, how it's evolving. I see that for this quarter we have a positive effect coming from AGI, which you explained the addings of 250 million subscribers with an average fee of 50 reais. But besides that, the core how we can see that the insurance distribution is recovering this quarter.

Marcelo Dube, Chief Financial Officer

Thank you. Hi Arnold, thank you for the question. Yeah, so first of all, AGI, you know, still haven't had any benefit for the second quarter. We will have that starting and contributing in the third quarter, which has the potential to be a very strong contributor, as I said. And talking specifically about the core fee business in the second quarter, if you take a look in the fee business note and you see the line of the brokerage fees, you can see there that we almost got 80% increase in the fees generated in the quarter, which is a consequence of the high growth of the products that have the new clients that we could originate.

And it's a phenomenon that we believe continue to in an improving path in this second part of the year. So we're very comfortable with the core fee business part. There's one part of the fee business which is the portability fees that we received when the client exported out from the bank to other bank, which was smaller this quarter, which was due to the new regulations, the provisional measures that the government issued in May, ties to the Disney hauler program.

But it's still temporary. We don't know if it will continue or not. And that is a small part of the fee business.

Arno Shirazi, Analyst at Citi

Got it, thanks.

OPERATOR

The next question comes from Renato Meloni with Autonomous Research.

Renato Meloni, Analyst at Autonomous Research

Hi everyone. Thank you for the space to ask questions. So first a bit here on the NIM and loan mix you mentioned earlier. Well, actually even before that last quarter you said that the expectation was that unsecured loans would again gain more share, and that didn't happen this quarter. And the reason for that, it's pretty seasonal. So I wonder what went differently given that like the advanced payments for 13 salaries should have been embedded in your expectations.

And then I'd like to know, like when do you see that mix shifting again towards unsecured lending? Then the second part here is on the NIM. You're mentioning the NIM compression that happened versus for skill, you attribute that to the mix. But I'm looking here at your interest expenses also like around 6.6 quarter on quarter, your cost of funding seems to be going up. So I wonder if that was also part of the asset and if you had some change in your funding structure here.

Thank you.

Marcelo Dube, Chief Financial Officer

Hi Renato, thank you for the question. Yes, so starting by the last part of the question. Yes, of course the high interest rates in Brazil continue to weigh on spreads overall across the industry. So still have a high interest rate. In terms of funding, we don't have different structure of funding actually is getting better, improving every quarter. As you know, this quarter, few weeks ago, we got upgraded by two different credit rating agencies, Moody's and Fitch, from AA minus to AA.

And our average cost of funding, on average of the portfolio, continues to go down every month a few bps. What happens is at some point in the calendar we issue debt in different sizes. And specifically this quarter we issued another FIDC, which is a very sizable check of 2 billion, 2.5 billion reais. And that also weigh on the margins because it's a funding ahead of the origination before we deploy the capture. So we carry a little bit of time, this cash in the balance sheet when we do that.

But it's a very good way to have financial planning into deploy capital over the years. So we continue to do this type of funding in our structure. In terms of the overall NIM. Well, we advanced to you in the last quarter that the unsecured part of the credit portfolio was reducing because of the short-term duration. And what we needed to do is to increase origination. It's exactly what we did in this quarter. We increased origination by 80%. The net origination of unsecured loans increased by 80% in the quarter.

And what happened is that on top of the natural amortization we had also the 13 salary. So what we are set to do is continue to originate in the unsecured part together with the private payroll loans as well to bring back this NIM to upward movement instead of being flat as it is in this quarter. So we believe we have all the conditions and the operational part of the business demonstrate to us that we can do this in the second half of the year.

Renato Meloni, Analyst at Autonomous Research

And do you have any expectations of when the NIM will inflect and start going up?

Marcelo Dube, Chief Financial Officer

Well, this is a matter of, you know, a few months having more origination of the is a technical calculation. Right. So although we don't have still don't have the number, absolute number of our portfolio balances in unsecured growing more than the secured part, the NIM won't bounce back. So it's a matter of time. But we won't set here a specific quarter to provide you with the improving number. Also we are in an environment that Selic rate is above the expectation from everyone.

Six months ago we were expecting Selic to be, you know, at least 100 bps lower than it is now. So it depends on what will happen with the base rates as well.

Renato Meloni, Analyst at Autonomous Research

Thank you.

OPERATOR

The next question comes from Marcelo Misai with Bradesco BBI.

Marcelo Misai, Analyst at Bradesco BBI

Hello guys. Question is regarding the expenses again. So just to understand so first looking forward. So you guys believe that the level of expenses on the G&A expenses are enough to sustain the growth of the bank looking forward. So you don't expect any more growth looking forward. And also can you give us like a breakdown of this growth? What drives this growth on this quarter?

Marcelo Dube, Chief Financial Officer

Thank you. Hi Mizahin, Marcelo here. What growth you are talking about in the end of the question? The G&A expenses. Yes, so. Yes. So in terms of the—I think your microphone is open. Thank you. So in terms of the overall size of expenses we believe is very well in line with the size of number of clients that we have in the portfolio. So we don't see, you know, big movements going forward. Instead, you know, exactly what happened in this quarter, part that is variable, you know the number of clients that have principality where we see, you know, have to have the cost to serve per client per month as we increase the number of clients, and the transactional and technology part that we invest a lot of AI and usage of AI and tokens. So when we improve, you know, and increase the usage of technology, of course we use more expenses but, you know, it is a relative smaller part of the total expenses that is variable.

OPERATOR

Thank you. With this we conclude today's presentation. We thank you all for your participation and have a nice evening. Thank you.

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