PagSeguro Digital Ltd. (PAGS) Earnings

Management highlights

- Strategic and Ecosystem Overview * PagBank operates a fully integrated payment, banking, and credit platform serving individuals and micro, small, and medium-sized businesses (MSMBs), with current market share below 1% in most banking segments, leaving significant long-term growth headroom. * The company prioritizes profitability, disciplined growth, capital efficiency, and consistent shareholder value creation, having delivered 16% CAGR in GAAP diluted EPS since its 2018 IPO. * Over the last 12 months, PagBank returned BRL 2.4 billion to shareholders via dividends and share buybacks, for a 16% trailing 12-month total yield. - Customer Engagement and Transaction Growth * Excluding acquiring-related inflows, cash-in volumes grew 11% year-over-year to BRL 81 billion, with cash-in per active client growing 12%, reflecting stronger platform usage and higher transaction volumes for bill payments and PIX transactions. * Penetration of investment and insurance products among active clients has increased, driving deeper customer relationships and improved monetization. - Credit Portfolio and Risk Management * Credit is the company's core growth frontier and key ecosystem engagement lever, with Q1 2026 growth outpacing full-year guidance. The portfolio is shifting from primarily secured to a more balanced mix with growing unsecured exposure. * Asset quality remains well-controlled, with non-performing loan (NPL) ratios roughly half of the Brazilian banking system average, even amid broader industry credit quality concerns. - Capital Structure and Shareholder Returns * The company targets a Basel index of 18% to 22% over the medium term; its current core equity Tier 1 managerial ratio is 24.1%, providing excess capacity for credit expansion and continued shareholder returns. * An additional BRL 400 million in dividends (USD 0.26 per common share) will be distributed in June 2026, keeping the company on track to meet its full-year 2026 commitment of at least BRL 1.4 billion in dividends. - Operational Efficiency * Operational expenses declined 230 basis points as a percentage of revenue year-over-year, driven by cost discipline and AI adoption in core functions including client service, delivering consistent operating leverage. The company sees significant remaining opportunity for further efficiency gains long-term.

Guidance

- Credit portfolio growth: Q1 2026 ended above the expected full-year growth range, and management expects consistent growth to continue through the rest of 2026. Longer-term, credit growth acceleration is expected to begin in 2027, as new products (such as private company payroll loans) launch and macro interest rate conditions become more favorable for unsecured lending expansion, supporting the 2029 long-term target of a BRL 25 billion credit portfolio. - Gross profit: Q1 2026 limited gross profit growth (just 1% year-over-year) due to higher-than-expected SELIC base interest rates, but headwinds are expected to fade starting in the second half of 2026 as SELIC cuts reduce financial cost pressure. Management reaffirmed the full-year 2026 gross profit growth guidance range of 6% or higher, and confirmed it will use internal P&L levers to offset any impact from slower-than-expected rate cuts. Longer-term, falling SELIC rates and maturing credit portfolio growth will drive accelerating gross profit expansion post-2026. - Diluted non-GAAP EPS: Q1 2026 12% year-over-year growth places the metric near the top of the full-year 2026 expected range, aligned with operational efficiency initiatives. - Capital expenditure (CapEx): Management remains committed to delivering full-year 2026 CapEx within the existing guided range, despite quarterly variability in deployment. - Long-term strategy: Management reaffirmed the 2029 long-term growth and profitability targets, noting regulatory changes will be offset by new credit product opportunities with no expected material impact on long-term targets.

Segment performance

PagBank operates two core business segments: Acquiring/Payments and Banking/Credit. 1. Acquiring/Payments: Total Payment Volume (TPV) reached BRL 128 billion, flat year-over-year, representing a sequential improvement from prior negative growth. Gross profit for the segment saw a sequential decline in Q1 2026, with compressed yield driven by high base interest rate comparables and earlier pricing adjustments. Chargebacks decreased 15% year-over-year due to improved fraud prevention efforts. This segment contributes the majority of total gross profit for the firm. 2. Banking/Credit: Banking revenues grew 41% year-over-year, driven by credit expansion and higher client transactionality. Banking now represents approximately 31% of total company gross profit. Total gross credit portfolio reached BRL 51 billion, up 11% year-over-year; total standalone loans grew 36% year-over-year, led by working capital loans which expanded 191% year-over-year and now account for 10% of the total credit portfolio. Total deposits reached BRL 42 billion, up 23% year-over-year, with over 90% sourced from PagBank's own platform. Average deposit APY fell to 83.9% of CDI, a 10 point year-over-year reduction, with demand deposit APY reaching 38.6% of CDI. Total funding reached BRL 47 billion, up 15% year-over-year, and the loan-to-fund ratio improved to 109% from 114% year-over-year.

Risks & headwinds

- Macroeconomic risk: Brazilian base interest rates (SELIC) have declined more slowly than initially expected at the start of 2026, keeping financial cost pressures higher for longer than anticipated in the first half of the year. - Industry credit risk: Broad industry credit quality is showing incremental deterioration amid the current credit cycle, though PagBank's small current scale and disciplined underwriting limit near-term risk. - Competitive risk: Competitors targeting enterprise sub-acquirer segments are reporting higher TPV growth, but management notes this is a different customer segment than PagBank's core MSMB focus, and the competitive landscape in PagBank's core segment has remained stable over the past 24 months with continued rational pricing across players. - Regulatory risk: New regulatory caps on certain credit products may reduce available volume in some legacy segments, though management expects new product opportunities to offset any lost volume.

Analyst Q&A

• Q: TPV is still flat year-over-year after sequential improvement; will it turn positive next quarter, and what are the main drivers of expected gross profit acceleration this year? /

  A: Management expects the sequential improvement trend to continue, with TPV turning positive year-over-year in Q2 2026 and accelerating further in the second half of 2026. Gross profit acceleration will come from a mix of recovering payment volumes and ongoing credit expansion, plus fading financial cost pressure from SELIC cuts in the second half of the year, after a difficult first half comparison against 2025's lower average interest rates.

• Q: If SELIC rates fall slower than initially expected, will that impact full-year guidance, and can industry-wide credit deterioration limit your planned loan growth? /

  A: Guidance is set as a range specifically to account for macro volatility, and management will use existing P&L levers to deliver gross profit within the guided range even if rates fall more slowly. While broader credit quality is weakening industry-wide, PagBank is still in the early stages of credit expansion, with NPL ratios half the industry average and excess capital to support controlled growth, so there is no near-term concern about hitting credit growth targets.

• Q: Working capital loan origination is growing very quickly; can you confirm expectations for continued quarterly growth, and do you plan to increase monthly origination targets? /

  A: The presentation's gray bar for future originations signals management expects continued quarter-over-quarter working capital growth in Q2 2026 and beyond. Origination growth will be scaled gradually as the company tests new customer risk clusters and rolls out product enhancements, with updates provided as growth targets solidify. Growth is currently focused on existing internal customers, targeting the middle credit risk sweet spot to optimize net credit margins.

• Q: When can we expect credit growth acceleration, and what will drive gross profit growth after 2026? /

  A: Material credit growth acceleration will start in 2027, driven by two factors: current high interest rates make faster unsecured lending expansion unfavorable today, and new products like private company payroll loans are still in pilot and will launch widely in the second half of 2026. Post-2026, falling SELIC rates will reduce financial costs significantly (closer to pre-tightening levels by 2027/2028), and the maturing credit portfolio will drive cross-sell growth across both banking and payments.