Description

Snapshot: 

Long: Nu Holdings - Emerging Leader in Digital Banking in Latin America with Idiosyncratic Upsell and Margin Tailwinds

Thesis: 

Nubank ("NU") represents idiosyncratic earnings growth levered to the highly profitable banking system in Latin America, where bank ROEs reach 30%, well above what US-based banks report. Nubank is the largest digital banking platform outside of Asia and well-positioned to further penetrate Latin America both in its home country Brazil and in new markets.

NU earnings growth and end-state margins should exceed what incumbents in Brazil have historically realized. NU has a structurally lower expense base / cost to serve via its digital-first approach. NU has no physical branches, so the capital investment and personnel base required to service customers are lower than at competitors like Itau. For example, Itau has ~100k employees covering ~65-70mm individual clients, while NU has 8-9k employees covering 100mm+ individual clients. NU estimates that their cost to serve is 85% lower than incumbents.  

Consumer preference and product advantages look very real. NU highlights NPS 2-3x higher than incumbents across its geographies, and ~90% of their customer acquisition is word of mouth (friend/family member just sending a sign-up link over WhatsApp, etc.), reducing CAC well below industry averages. Specific example of products receiving differentiated support from customers is NU's secured lending products with 78 NPS versus category average of just 44. Additionally, NU generally prices its products below incumbents. 

NU has a quantified underwriting advantage versus the market in lower income cohorts (NU is effectively at market for higher income cohorts). Example is for customers at incomes 2-3x minimum wage, NU reported NPL 90+ of 7.1% versus the market at 10.6% as of Sep-2023 (In Jan-2019, NU reported 5.3% versus market at 6.7%). Their proprietary (and recently built) data set is particularly valuable - NU's CEO compares Brazil's lack of FICO to other regions' lack of an MLS and the opportunity that created for RE players.

NU is overcapitalized, mitigating the impact of regulatory changes to capital requirements. Current capital adequacy ratio in Brazil is 6.75% but will rise to 10.5% by 2025; NU currently reports 11% capital adequacy ratio in Brazil.

NU can drive revenue growth by continuing to upsell its products to new customers. Current ARPAC is ~$11.40, while older core customers already report $20-30 ARPACs. And the ARPAC pie should continue to expand as NU continues to build out its suite of products including new consumer lending products. Of note, in 1Q24 NU ARPAC grew 30% YoY (FXN) while cost to serve was roughly flat on an FXN basis. NU has stated consistently that current cost to serve levels are sustainable (current reported cost to serve levels represent monthly average per active customer).

Expected to roughly double EPS in 2024, earnings growth looks poised to continue at an outsized rate as the emerging NU product flywheel takes hold. 

Key risks include: 

• Brazilian macro including consumer credit trends
• Competition as incumbents improve their digital product suites 
• Regulation
• New market expansion / extended payback periods

Business overview: 

NU was founded in 2013 and began operations in Brazil in 2014 (Mexico in 2019; Columbia in 2020). NU provides a digital banking platform for both individual consumers and small businesses. NU's CEO David Velez is a well-known Brazilian entrepreneur with prior experience at Goldman Sachs, Morgan Stanley, and General Atlantic. 

NU initially launched a retail credit card product in Brazil with no annual fees and a mobile-first experience. With the success of its initial launches, NU has since expanded into saving and checking accounts, consumer lending, and other card products.

NU's current customer base is predominantly retail customers, but small businesses continue to penetrate active accounts (currently in the LSD millions). 

Total revenue at NU represents Net Interest Income and Commission & Fee Income. Commission & Fee income is primarily derived from interchange fees from purchases with NU credit and debit cards and are determined as a percentage of the total payment processed. Interchange rates are pre-determined with Mastercard.

NU breaks down its addressable market into 3 parts: (1) serviceable addressable market; (2) near-term serviceable addressable market; (3) total addressable market. Of the total addressable market, credit is ~75%, where NU still accounts for only LSD of the Brazilian market. NU is similarly underpenetrated as a % of total deposits in Brazil. In 2017, NU launched NuAccount, a mobile-first bank account that is interest-earning and offers all customary checking account services. NU has since launched a business-oriented version of NuAccount. 

NU "obsesses" over customer experience, with its applications designed to be intuitive and easily accessible. That said, NU's customer base continues to skew younger than incumbents in Brazil, but newer products like NuInvest and NuInsurance should drive share gain in older cohorts as well. 

NU's expense base includes funding costs, costs to serve, customer support and marketing, as well as corporate SG&A. 

Catalyst

New product launches and demographic penetration

Continued addressable population share gains

Continued above-market earnings growth, including quarterly margin accretion in-line with consensus expectations