Nu Holdings (NU) – New Piece of the Portfolio – April 06, 2024
Over the last month or so, I’ve spent a large chunk of time researching Nu Holdings and Latin America. I’ll have a detailed investment case sent to you all this month, but I’ve started a new position in the firm and wanted to briefly explain why right now. I didn’t want to make you wait. This will serve as a very brief, 30,000 ft. view summary of the investment case… much more to come.
Banking is a commodity. Within commodities, the best way to differentiate is with an input, capital or operating cost edge.
That’s what Nu delivers with its branch-less business model and a cost-to-serve that is lower than any incumbent. Its customer acquisition cost is lower, its cost of risk is lower as its underwriting is better (across cycles) and it generates more revenue per user than alternatives too. This leaves us with a firm that is naturally more profitable than the competition, with a higher margin ceiling and greater cross-selling potential than anyone else in the Latin American space. These advantages are passed on as savings to clients via better account yields and lower loan interest rates.
That’s how you stand out in banking, and that’s what Nu provides in Brazil. It’s now quickly following that same playbook in Mexico with a 15% savings yield. That’s a steep price to pay for deposits, but leadership still thinks the 15% can coincide with a convincingly positive NIM. While it has 50%+ market share in Brazil today, I see no reason why it won’t own a large chunk of the Mexican TAM as well. Its value proposition is perhaps even clearer there as its 15% savings yield compares to incumbents that charge clients for permission to park their funds. Customer growth in Mexico is already explosive and has accelerated since this yield was implemented. And? It already is the market share leader for new credit card issuance in Mexico (and now Colombia too). It is dominating Brazil, it is beginning to dominate in Mexico and should dominate in Colombia.
The Nu balance sheet is pristine, with capital ratios at double the regulatory minimum for Nu Bank. This doesn’t include a larger cash buffer from the holding company that would make its ratios triple the regulatory minimum. It has successfully expanded into new credit demographics as well as secured and unsecured lending products while expanding its risk-adjusted net interest margin. That recipe shows proper risk underwriting, which will only improve with time. All of these items yield the following trends seen below:
CAGR = Compounded Annual Growth Rate
bps = basis points; 1 basis point = 0.01%
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
From a macro perspective, Brazil and Mexico are both highly appealing (Colombia too). The populations are young and growing, with both governments driving Nu-friendly financial reform. Both countries combine very high interest rates with very low inflation. This leaves significant room to cut and accelerate Nu’s lending and interchange businesses. Brazil’s Financial Minister just told us that more cuts are coming.
That will weigh on currency a bit and should be a net interest income headwind. But? The tailwind to origination volume and velocity of money should more than offset that pain, while easier policy diminishes risk of economic turmoil. Expected U.S. rate cuts should diminish the relative currency devaluation risk too. It’s a decent part of the cycle to be adding Latin American exposure, in my view.
That’s as detailed as we need to get for now. It’s currently at 2% of my portfolio. Again, the investment case article coming this month will intricately expand on all of these ideas, more deeply cover Latin American economics, foreign exchange, and geopolitics, while introducing several new ideas as well. I can’t wait to share. Long Nu… hopefully for a long time.
