Nubank (NU) – Earnings Review – Q3 2023
NuBank is a large and rapidly growing digital bank in Latin America.
Demand
Revenue was 4.4% better than consensus. Its 111% 2-year revenue CAGR compares to 136% as of last quarter and 157% as of 2 quarters ago. Revenue rose by 53% Y/Y on a foreign exchange neutral (FXN) basis.
Margins
- Beat net income estimates by 18.4%.
- Beat GAAP net income estimates by 22.7%.
- Beat 40.5% GAAP GPM estimates by 230 bps.
Please note that a lower credit loss allowance expense is a good thing.
“We anticipate continued gains in operating leverage as we continue to scale… we believe there is potential for increased future leverage as our Mexican and Colombian businesses, which are currently operating with losses, reach their inflection points.” – CFO Guilherme Lago
Balance Sheet
- $2.3 billion in excess cash.
- $1.1 billion in borrowings and financing vs. $585 million Y/Y.
- Loan to Deposit Ratio (LDR) of 35% vs. 35% Q/Q & 25% Y/Y. The team sees room for this to rise further to continue lowering the cost of funding loans.
Call & Release Highlights
Customer & Product Growth
Nu is now the 5th largest financial institution in Latin America by customer count and the 4th largest in Brazil. Rapid customer growth continues to coincide with rising engagement. Its customer activity rate set a new record high at 82.8% vs. 82.2% Q/Q and 81.6% Y/Y. Customers using Nu for primary banking services rose from 58% to 59% Q/Q as well. Impressively, it has 51% of Brazil’s entire population as customers vs. 49% Q/Q. Impressive.
Revenue per active member rose to $10.00 vs. $9.30 Q/Q and $7.90 Y/Y. Products per member on average surpassed 4.0 for the first time. Per the team, cross-selling is a main driver of its “extraordinary pace of customer growth.” It continues to enjoy a modest $7 customer acquisition cost because of this cross-selling. That reality allows it to invest more heavily in customer growth. It’s a key competitive edge. Specifically, its cost to serve users is 85% lower than incumbents.
Broader product breadth also means better access to consumer data which it can use to sharpen underwriting and boost approval rates. This quarter, it added payroll lending to further fortify this equation. It will add a new savings account in Colombia this year.
“We believe $7 is one of the lowest customer acquisition costs among consumer fintechs and banks on a global scale.” – CFO Guilherme Lago
Demand Metrics
- 23% Y/Y credit card customer growth to reach 38.9 million
- 100%+ Y/Y NuInvest customer growth to reach 12.4 million
- 32% Y/Y bank account growth to reach 64.7 million
- 52% Y/Y loan customer growth to reach 7.3 million.
- Personal loan originations rose 93% Y/Y.
- 54% Y/Y small merchant account growth to reach 2 million.
- Overall purchase volume rose by 36.8% Y/Y (28% FXN) to reach $29 billion.
- In Brazil, its growth is outpacing growth of the 5 largest banks there… combined.
Market share across Brazil, Mexico and Colombia continued to rise at a rapid clip. In Mexico specifically, its Cuenta Nu savings product was credited for re-accelerating user growth as the product gained rapid adoption. Cuenta Nu already has 2.4 million accounts and $150 million in deposits early on. Per CFO Guilherme Lago on the call, this success will lead to it “further expanding the deposit franchise model across Latin America.”
Deposits & Credit Portfolio Growth
The rapid 36% Y/Y deposit growth was 26% Y/Y on an FXN basis. This continued momentum in building deposits is directly helping its cost of funding. This quarter, that cost sat at 80% of the Brazilian Interbank Deposit Rate (CDI) vs. 95% Y/Y. 80% is not a floor.
Its credit card and lending portfolio rose by 58.7% Y/Y (48% Y/Y FXN growth) to reach $15.4 billion. Importantly, NuBank’s shift to interest earning assets within this base continued. 21% of its total portfolio is now within the interest earning bucket vs. 10% Y/Y. This is feeding net interest income and is positively supporting its overall results. The trend is expected to continue.
NuBank’s new secured credit product is off to a good start as well. This product is secured by a customer’s federally-mandated savings account in Brazil. Thanks to the entirely digital nature of this offering, time to fund the loan and input costs are best in class.
Credit Health
15-90 day non-performing loan (NPL) rate was stable Y/Y at 4.2%. The 4.2% result improved slightly Q/Q vs. 4.3%. This is good news considering the metric is a leading indicator of 90+ day NPL rates. Still, the 90+ day NPL rate continued to worsen. It rose from 4.7% to 6.1% Y/Y and vs. 5.9% Q/Q. NuBank blamed this on the buildup of newer originations continuing to mature. This is leading to a “stacking up” of early delinquencies. All in all, delinquency rates for the firm are about 15% lower than Brazilian benchmarks. It continues to outperform in its underwriting role. This is true across 98% of its addressable market (and the 98% that are most difficult to underwrite):
“Our personal loan cohorts continue to exhibit expected behavior. This is enabling us to continue to increase originations… we see an opportunity to expand credit with attractive returns and robust resilience going forward. This may lead to higher delinquency rates, which we expect to be more than offset by additional revenue.” – CFO Guilherme Lago
Margins & Ratios
Cost of financial and transactional services is similar to gross margin for a non-bank. It deducts costs directly tied to the firm’s products. This margin line sharply improved from 32.7% to 42.8% Y/Y. From an operating expense (OpEx) point of view, general/administrative costs are driving the firm’s rapid leverage. This cost bucket was flat Y/Y while demand torridly grew.
Nu’s Capital Adequacy Ratio (important capital ratio in its markets) sits at 11.0% and is well above its 6.75% minimum. This gives it a lot more room to use low-cost funding sources like deposits to fund credit.
Trailing 12 month return on equity (ROE) (using adjusted net income) was 25% vs. 19% Q/Q and 8% Y/Y.
Take
Another impressive quarter from NuBank. The 90+ NPL rate is a bit concerning, but the cohort build-up reasoning does make sense. Aside from that, there’s absolutely nothing to pick at here. Only growth, market share gains, rapid leverage and successful product launches to praise. Its competitive advantages are clear. Its costs to acquire customers and service them are comparatively low; its 35% efficiency ratio is comparatively excellent and improving; its funding supply is healthy and cheap; its underwriting is outperforming.
To see the complete earnings report, check the SEC filings here.
