Nu ($NU) – Earnings Review – August 13, 2024
Read my Nu Deep Dive here to learn about the company in detail.
Demand
Nu beat revenue estimates by 1.4%. Its 56.7% 2-year revenue compounded annual growth rate (CAGR) compares to 77% Q/Q & 94% 2 quarters ago. New customer growth also exceeded internal expectations across all three of its markets.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profits & Margins & Credit Health
- Beat $464M net income estimate by 21%. Net income rose 134% Y/Y on a foreign exchange neutral (FXN) basis.
- Beat $420M GAAP net income estimate by 16%.
- Crushed 43.1% GAAP GPM estimate by 460 bps.
- Operating expenses rose by 50% FXN to drive more operating leverage. All operating cost buckets quickly grew, revenue growth just outpaced them all.
Annualized ROE was 33% vs. 19% Y/Y; annualized GAAP ROE was 28% vs. 17% Y/Y. That is not a normal pace of progress. It continues to productively place a larger and larger portion of its balance sheet into higher yielding assets. ROE metrics are already among best-in-class for Nu, despite 31% of its cash & equivalents being held as excess cash on its balance sheet. It’s also still heavily investing in early growth in Mexico and Colombia. Brazilian ROE is over 40% to show you where this business can eventually go.
Gross margin was supposed to be flat Q/Q due to the elevated Mexican and Colombian investment levels and rising cost of funding due to mix shift towards those countries. Rapid expansion was thanks to Brazilian profitability gains more than offsetting these headwinds. It continues to deliver rapid leverage while 2 of its 3 markets are firmly in their investment phases and burning cash.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $8.5B in cash & equivalents; $1.74B in borrowings.
- $12B in credit card receivables; $4B in loans to customers.
- Its capital ratios are well in excess of regulatory minimums (even without the $2.4 billion in excess liquidity it’s holding on its balance sheet).
- Diluted share count rose by less than 1% Y/Y.
Guidance & Valuation
Nu sees NIM and risk-adjusted NIM expanding throughout the rest of 2024. It doesn’t offer formal guidance. Nu trades for 32× 2024 earnings. Earnings are expected to rise by 66% Y/Y this year and by 52% Y/Y next year.
Call, Letter & Presentation
Update on its Edge:
Broken record alert: to win over the long haul in any commodity sector, cost edges are needed. Nu updates us on its own cost advantages every quarter, and the importance of these advantages staying intact cannot be overstated. Nu combines the branchless cost edge that fintech’s enjoy with the deposit-funded loan cost edge that incumbents enjoy. It gives you the best of both worlds and that remained true as of this quarter.
- Note $7 cost to acquire is about 85% lower than the average incumbent.
Thriving:
No matter how you slice and dice the data, Nu is firing on all cylinders. There was considerable foreign exchange noise in today’s release, and we’ll focus on FXN growth to gauge the true operating momentum of this model. FX headwinds will ebb and flow.
Purchase volume rose by 29% Y/Y FXN; Ultravioleta purchase volume (high next worth) rose by more than 70% Y/Y FXN; deposits rose by 64% Y/Y FXN; customer count in Brazil rose 20% Y/Y despite it now having 56% of the entire population in its base; Mexico added 1.2 million customers to approach 8 million total and Colombia raced past 1 million total customers to reach 1.3 million.
But it’s not just strong top-of-funnel momentum helping Nu’s results… engagement gains remain strong as well. Active customer rate is now 83.4% vs. 82.2% Y/Y, which is a mile higher than any fintech competitor in its region. Average revenue per active customer (ARPAC) rose to $11.20 vs. $10.60 Q/Q and $8.60 Y/Y FXN. That has a ton of room to run considering its most mature cohorts have ARPACs of $25.
60% of its customers in Brazil now use Nu for their primary banking account (PBA), which continues to climb. It’s now the largest active customer creditor in Brazil. It has tripled total deposits in Mexico in just 6 months to $3.3 billion and pushed Colombia deposits from near $0 to $200 million in a quarter. 80% of that deposit growth came in June for its brand new Colombia banking products. ActualQ/Q deposit declines in Brazil were entirely related to FX headwinds, as FXN Brazilian deposit growth rose 10% Q/Q FXN (61% Q/Q in Mexico).
The Credit Portfolio & Metrics:
The declining 15-90 day NPL Q/Q was in excess of expected seasonality. The outperformance was attributed to underwriting strength. The sharp rise in Q/Q 90+ day NPL is due to the season spike in 15-90 day NPL rate last period. 90+ day lags 15-90 day by about a quarter. Credit loss allowance expense (CLAE) actually fell Q/Q, which was a positive surprise. The decline was partially related to FX benefits, but FXN CLAE still fell Y/Y. There are two factors contributing to this — one positive and one negative. On the positive side of things, 15-90 day NPL outperformance is putting downward pressure on CLAE. On the other hand, slower origination growth in Q2 vs. Q1 also helped this fall.
It sees NPL rates continuing to rise due to a multiple expected trends. First, it continues to grow unsecured loan originations faster than credit card receivables. Unsecured loans have higher NPL rates. Specifically, 24% of its credit portfolio is now personal loans vs. 19% Y/Y. Secondly, it continues to expand down the credit spectrum to riskier borrowers as planned. This expansion is going better than it expected.
The metrics to focus on are gross margin, NIM and risk-adjusted NIM to gauge if it’s properly pricing risk for these new borrowers. Expansion for all 3 offers clear evidence that it’s being compensated fairly for taking on more risk. There is one caveat. Balance sheet optimization also props up these metrics and can offset worsening underwriting on a temporary basis. But outperforming NPL and its expectation of NIM and risk-adjusted NIM expansion while also expecting a slow pace of balance sheet optimization tell you underwriting quality remains robust.
It also added a new chart of risk-adjusted margin with this downward move in credit originations and when adjusting for it. The purple line being well ahead of the red line tells you this move to accept riskier credit is going very well. It’s in a better revenue and profit spot today because of the decision.
This second chart shows you that the rise in NPL is related to the intentional shift to personal loans and riskier credit, rather the deterioration in apples-to-apples credit vintages:
- The overall credit portfolio rose by 49% FXN Y/Y to $18.9 billion. The Q/Q decline in portfolio size was entirely due to FX headwinds.
- It’s credit cards are delivering “rising share of consumer wallets” across all income cohorts.
- Loan receivables rose 92% Y/Y FXN to $4.6 billion. Its “continued strong credit performance enables more scaling of originations.”
Balance Sheet Optimization:
The shift from revolving-style credit to interest earning installment credit remained in full force this quarter. Its interest-earning portfolio (IEP) rose to 28% of its total portfolio vs. 19% Y/Y. The pace of this rise will slow in the coming quarters, as absurdly high Pix and Boleta financing adoption is expected to moderate a bit. PIX is basically a nationalized Venmo in Brazil where Nu customers can use credit card limits to make transactions; Boleta uses a credit card to pay bills in installments. IEP rising means more net interest income growth on top of revenue coming from more members and more products. It adds another powerful leg to the revenue growth engine, which will slow going forward. That’s entirely as expected and why sell-side sees growth slowing to 28% Y/Y next year.
Secured Credit:
Nu signed six new collateral agreements with the Brazilian armed forces and local governments to unlock more secured lending populations. This will allow it to address up to 75% of Brazil by the end of the year, which compares to 50% today. It’s wrapping up work on driving easier loan portability and seamless refinancing opportunities… and that’s a big deal for Nu.
The Open Banking push in Brazil is picking up steam. There is mounting pressure on incumbents to freely share customer data across an ecosystem of banks. For Nu, this could free it to know when a shared customer has a more expensive loan at a competitor, with an easy means to undercut the rate with a refi offer. It can routinely do this, thanks to its lack of physical branches, agents and direct integrations with Brazil’s version of the IRS to cut out middlemen. Rate-undercutting is just one example.
If incumbents want to offer customers Pix and Boleta products (which is table stakes) they have to opt into data sharing. This could greatly accelerate lending market share gains. We’ll see.
It’s also worth noting that the growth bottleneck for secured lending is simply putting the contracts and partnerships in place to drive adoption. It’s not credit risk appetite like on the unsecured side, which means more durable origination growth across cycles. Partnerships have now been added and the foundation has been laid. It sees secured credit continuing to rise as a percentage of total over time.
More on Mexico & Colombia:
Deposit growth has been better than expected since it rolled out its new high yield savings product a few years ago. Most Mexicans are paid 0% interest on deposits, so it makes sense that Nu is finding success with a 10%+ rate. Nu does not pay the highest rate in Mexico (others like Meli pay more), yet Nu captured 70%+ of all fintech deposits across Mexico and Colombia during the quarter. It doesn’t feel the need to beat everyone on yield. It can rely on its superior product breadth and world-class interface, while getting away from offering a still strong yield.
Mexico is arguably the most compelling fintech expansion market on the planet. Its population’s GDP per capita is higher than in Brazil, yet its underbanked rate is a whopping 85%. Its credit card penetration rate is also a low 12% vs. roughly 50% in Brazil. Furthermore, 60% of Mexican credit is encouragingly interest-bearing vs. 20%-25% in Brazil. The population is relatively affluent and the opportunity is quite untapped. It now has the credit risk models in place to confidently underwrite, and saw originations in that nation double Y/Y as a result.
Take
This is a special company delivering the kind of financial results that most firms can only dream of. It’s not normal to have 56% of an entire population on a banking app… it’s not normal for that to take a little over a decade… and it’s not normal to continue delivering 20% Y/Y customer growth when most of the target market is already in your base. In the absolute best of way , there’s a lot about Nu that isn’t normal.
This is where best-in-class growth, profits, leverage, team and runway all collide. This quarter was simply more of the same elite execution that we’ve come to expect.
