Bloomberg Línea — Nubank (NU) beat the projections of analysts surveyed by Bloomberg in its second-quarter financial results, released Tuesday, with the fintech posting net profit of $224.9 million, while analysts had estimated $146.6 million.
In contrast, in the same period of 2022, Nubank reported losses of $29.9 million.
In after-hours trading on the New York Stock Exchange, shares were up 3.9% at 20:50 New York time, while the shares have so far this year gained close to 100%.
Another highlight was an annualized adjusted return on equity of 19%.
According to Nubank co-founder and CEO David Vélez, the company achieved this profitability while maintaining regulatory capital ratios above the minimum requirements (per the Basel index). The company also has cash of $2.4 billion.
Vélez commented on the bank’s gains in more expensive and riskier credit models, such as revolving credit cards, in the call with analysts held earlier in the evening.
Nubank’s strategy and growth in credit were some of the main themes of the conference call
“From the beginning, we have never been a fan of the revolving credit business model, as this market has complexities all along the chain and ultimately forces issuers to charge excessively high interest rates. That has never been our approach. We chose to build a transaction-focused credit card model,” Vélez said during the conference call.
Deposits up 35%
Adjusted net income was $262.7 million compared with $17 million a year earlier. Total revenue was $1.87 billion, up 61% from a year earlier, beating the estimate of $1.65 billion.
Total deposits increased to $18 billion, a 35% year-over-year growth, beating analysts’ expectation of $17.21 billion.
The fintech doubled the number of customers from 42 million at the halfway point of 2021 to 84 million by the end of the second quarter of 2023. In July, the company surpassed the 80-million-customer mark in Brazil, consolidating itself as the fourth largest financial institution in the country by this criterion, behind only Itaú, Bradesco and Caixa.
According to Nubank, the increase in the customer base was driven by cross-sell and up-sell opportunities facilitated by the high engagement of its platform. This strategy resulted in a more than fivefold increase in revenue over two years, accompanied by triple-digit revenue growth over the same period.
The company’s quarterly gross profit, calculated by deducting financing costs, transactional expenses and credit loss provisions from total revenues, nearly quintupled over the period. Gross profit margins rose despite a rise in credit delinquency over the past 12 months, thanks to a conservative provision for expected credit losses.
Questioned by analysts, the company’s COO Youssef Lahrech said delinquency coverage of 90 days or more has remained reasonably stable. “Balance coverage generally reflects non-performing loans of 90 days or more and has behaved as expected. If the frequency of defaults improves, obviously provisions could become favorable, but we will track actual performance as that happens.”
Payroll loans
Lahrech also said that the fintech had to integrate several different contracts to launch the payroll loan offering. “We have already done that. We’re iterating the product, making sure it’s great for consumers and easy to understand.”
“We’re getting more and more comfortable with the kind of feedback we’re getting and I think we’ll start to see the pace of origination increase over the next few quarters if everything goes according to plan. We should start to see significant demand. Again, this is the largest for-profit market in financial services in Brazil, a very large market,” the COO said.
According to Lahrech, the interest rates on consigned credit charged by Nubank are 30% to 40% below market rates. “This should allow us to gain a significant share of this market. But again, we will have to take gradual steps and see how things go and start rolling out to the entire customer base.”
The fintech will also launch the consigned product for the INSS and the portability tool. According to the company, in an environment of falling interest rates, “the ability to transfer loans from other banks can be a relevant source of growth”.
Nubank does not expect these loans to have a significant impact on net income or balance sheet in 2023, but something that will be seen from 2024 onwards.
With the offer of payroll loans, INSS and FGTS guaranteed loans, the fintech expects these to be the most important products in the coming years in a lower risk credit environment.
Card purchase volume increased to $26.3 billion, up 30% year-on-year on a neutral basis. According to Nubank, the increase in purchases was driven by successful up-sell and cross-sell strategies, along with higher customer engagement.
According to the digital bank, customers who have been with the bank for some time generally make purchases at higher volumes, while new users tend to grow more slowly.
Growth in consumer credit portfolio
Nubank’s market share in purchase volume is about 13.9% of the industry total, with 14.5% for debit cards and 13.6% for credit cards, according to the fintech.
The consumer credit portfolio, comprised of credit cards and personal loans, totaled $14.8 billion, up 48% year-over-year. Total credit card loans continued the growth trend, up 54% year-on-year.
“The increase in provisions, therefore, is directly related to the higher volume of credit originations recorded in the quarter,” said Nubank’s CFO, Guilherme Lago, in the conference call with analysts and investors.
“Our risk-adjusted net interest margin reached another record of 8%, an expansion of 140 basis points quarter over quarter and 570 basis points higher than a year ago.”
The loan portfolio increased 33% from a year ago.
The fintech said it is focused on increasing the share of credit card loans that earn interest. Risk-adjusted rates of return for installment loans represent 19% of total credit card loans.
The company said it is confident in its ability to maintain loan portfolio growth. The loan-to-deposit ratio increased to 35%, optimizing the balance sheet.
According to Nubank, net interest income and interest margins reached record levels. Operational efficiency also improved, with an efficiency ratio of 35.4%, or 29.2% excluding shared business offsets.