Mercado Libre ($MELI) & NU ($NU) – Brazilian Monetary Policy – July 06, 2024
Brazil’s President Luiz Inácio Lula da Silva certainly doesn’t hold back on his critique of the nation’s central bank chairman Roberto Campos Neto. He’s very public about wanting rates to be lowered, and lowered now. The Brazilian Fed chair is more hesitant to cut rates more quickly, as he understandably fears an inflation reacceleration. That’s absolutely the main risk that any central bank chair needs to guard against. Runaway inflation generally means soaring rates, a weakening economy and rising unemployment. Considering Brazil’s compelling combination of high rates and low inflation, I think the president’s qualm is actually somewhat fair (despite being a bit inappropriate). The current chair will be replaced this year by the president with someone who sees eye to eye with him on policy.
What would rate cuts mean for both of these LatAm titans? While both do some credit origination and operate in financial services, I still see cuts as a net tailwind to overall operations. The main risk is that these cuts facilitate net interest margin compression, which could weigh on financials. For Nu specifically, its shift to deposit-funded credit and continued effective underwriting will, per the team, allow it to expand NIM throughout the year. This is despite expectations for many more rate cuts in 2024. Meli also just secured formal bank licensing in Mexico. This will allow it to optimize its own balance sheet with lower cost of funding its credit book, just like Nu is doing to manufacture more NIM expansion.
The other risk is currency weakness weighing on company growth rates, although expected cuts in the USA and Europe this year should buffer that. Aside from these factors, easier policy will mean both can get more aggressive on funding personal loan originations, which is a real top and bottom line driver for both. Credit risk is the unsecured loan growth bottleneck for both enterprises, and that bottleneck becomes less pressing as access to capital becomes cheaper and money becomes more readily available.
Cuts will be a tailwind for interchange revenue, a tailwind for Nu’s investing arm and a tailwind for Meli’s e-commerce marketplace. 60% of Meli’s business comes from Brazil, with a much higher portion coming from that nation for Nu. The nation (and many others in Latin America) looks to be entering a more favorable part of its macro cycle for these businesses, and both look poised to capitalize.
