New NU thread -- help me understand

I thought I should share an anecdotal evidence.
I am in Brazil right now and I went to the stadium last Saturday to watch a soccer match (my addiction :soccer:). It’s fair to say that more than 70% of the soccer stadium public is lower income people (especially at the beginning of the season like it is now, when tickets are cheaper).
At half-time, I went down to grab drinks at the bar. The two people on the cashier next to me pulled Nu Bank credit cards.
Again, nothing scientific about the observation, but I’ve never seen a Nu Bank card before…

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Earnings and revenue growth look good as usual, they did spin the credit quality decrease briefly on the press release: Part of the growth on NPL has been coming from expansions down the credit spectrum, as the company continues to see meaningful opportunities to expand its credit portfolio aiming for attractive returns and robust resilience - fwiw, I agree with them on the attractive returns part, if not the robust resilience portion

NU 3/31 credit quality:
For all tables below, credit card receivable balance (which as a reminder includes their installment loan product) increased 4.2% from 12/31 to 3/31

15% increase in overdue credit card receivables

10% increase in stage 3, 5.9% increase in stage 2

10% increase in higher risk credit quality, higher risk quality credit card receivables are now 26% of the total balance

They are definitely charging enough for the risk they’re taking with their customers, as evidenced by the revenue growth. But the balance sheet risk is enough for me to continue to stay out.

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One concern I had after reading the Q1 report is that the growth of net income was way slower than the growth of revenue. Although revenue grew by 13.76% QoQ, net income only grew 4.96% QoQ. Will need to take a deeper look at the earning call transcripts to learn about the reason.

Luffy

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Adjusted earnings grew by 12.9% QoQ, revenue was up by 11.2% QoQ. That seems in the ballpark to me.

Otherwise, with the earnings report, I don’t like the uptick of nonperforming loans from 6.2% to 6.3%, but the net interest margin going from 18.3% to 19.5% more than makes up for it.

Best,

bulwnkl

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Exactly. I am ok with them taking on more risk, as long as net margin increases too.

I an getting concerned that they are getting closer to exhausting their TAM in Brazil, and maybe they are. They say they have 54% of the Brazilian adult population as customers, and that 59% of those have NU as their primary bank. This adds up to almost 32% of Brazilian adults having Nu as their primary bank. Tough to improve from that, but then you see their acceleration in Mexico, where it seems they are perfecting the playbook even more. And Colombia is coming, too.

Nu’s pace of customer growth continues to consistently surpass expectations, reaching a total of 99.3 million
customers from 59.6 million just two years ago. The activity rate increased to a record high of 83.2%. In
Brazil, the customer base has grown by 22% YoY to 91.8 million, now accounting for 54% of the country’s
adult population, up from 53% in the prior quarter. Moreover, approximately 59% of the monthly active
customers have designated Nu as their primary banking account (PBA). The sequential acceleration of
customer net-adds in Mexico, amounting to nearly 1.5 million in the quarter, contributed to a total of 6.6
million at quarter-end. This highlights the success of Nu’s pricing strategy following the launch of Cuenta in
Mexico, affirming the effectiveness of the playbook for driving accelerated customer expansion. Nu Colombia
now has more than 900 thousand customers.

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The continued opportunity in Brazil was highlighted in a couple of places on the call last night.

The short version is that having a percentage of the population as customers doesn’t mean that all of those customers are yet using all of their products or won’t pick up new products as they are introduced. So customer acquisition in Brazil will no doubt slow at some point, but increasing spend for those customers still has a long runway.

Guilherme Lago

If you take a look at the total - unsecured personal loan pie in Brazil, which accounts for the second, or third largest profit pools in the country, our customers alone as of the end of the fourth quarter accounted for about 43% of the entire loan book in Brazil.
**> **
> And we still have no less than 8% market share there. So, we have plenty of room to grow. Now, at the beginning of the second half of 2023, we expanded in secure personal loans, which encapsulates consignado our public payroll loans, FGTS and investment banking loans. Public payroll loans and FGTS account for about 90% of our total originations, with investment banking loans accounting for 10%.

We expect that the originations of secure personal loans will continue to outpace the originations of unsecured personal loans, as we increase the collateral agreements that we have as of today. So today we offer public payroll loans Jorge, primarily to INSS and SIAPE, which are federal public servants and pensioners and retirees, which account broadly for 50% of the target market of secure personal loan in Brazil. We will be increasing our scope to add armed forces in many states and municipalities, and we hope to reach about 75% of the target market by the end of 2024.

David Velez

And just to finalize that, Jorge, I think one perhaps easy way to understand the significant opportunity we continue to have ahead is, we have more or less 60% of the Brazilian adult population as a customer. That 60% owns something like 40% to 50% of the entire credit pool in the country. And if you just look on an average basis across the lines, we probably have something like 10% market share.
**> **
> So, we could double, triple, quadruple the size of our existing credit portfolio. And the bottleneck to growth is on the unsecure side, our own willingness to grow, our own willingness to take risk. And that’s in certain areas we go very slowly, and we test our way into acceleration. And on the secure side, our bottleneck is signing up a bunch of contracts, with a number of different entities.

We have been signing up all those contracts. Whenever we go to the entities, and we say we are going to be offering products for your associates that are 30% to 40% lower interest than everybody else that is a very good value proposition for them. And so, we haven’t seen a lot of real resistance, in signing up the contracts with us. There is some interconnection of systems. We have to integrate with a number of older systems.

So that takes some time, and that’s going to be taking some time over the next year. But so far we feel very good about, our ability to grow in the pool of addressable secure portfolio in the country.

One thing that was new to me on the call was that they were beginning to accumulate SMB’s, which seem to be called SME’s in Brazil. Here’s the Q&A about that, which seems like a great, new path for them.

Thiago Batista

Thanks, Jorg. Thanks for the opportunity. I have a question about the SME business of Nu. We saw that Nu already achieved more than 4 million clients in the SME business, something close to 2.4 active clients in this segment. When you look to central bank data, Nu is charging about 9%, 10% per month in these short-term work capital loans. This is probably a very small portfolio for Nu right now, but can you share with us Nu strategy in this segment, and how big this can be in the future?

David Velez

Hi, thank you for the question. So you’re right, we actually haven’t really talked publicly that much about our growth on the SME side, but it is a significant opportunity ahead of us. And partly this opportunity has come to fruition, as we started to cross-selling SME account to our large consumer base. So just to give you one data point, out of the 93 million or so Brazilian customers that we have, we think we have in our base something like eight or nine million small businesses.

And that’s a significant percentage of something like 15 million of total businesses existing in Brazil. So already in our base, we have a path towards pretty significant operation with small businesses. We by the way, see that they tend to be very badly served also, especially if they are owned by one shareholder or two shareholder. So as we call here in Brazil, May.

So this is a big opportunity that we’ve been developing, as it has grown consistently. Today, our value proposition is fairly basic. We began with an account for the small business, then we launched a debit card. We have already started growing for a few quarters the credit card for the small business. This is a product that we’re very excited about, because we get to use a lot of the credit and the rating data that, we have on the consumer side for the small business side.

There actually is a lot of synergies, in using a lot of the data for both sides of the consumer, and allows us to see a consumer more, with a more complete basis. And we also see that, when we start banking somebody both on the consumer side, as well as the small business, we see a pretty significant increase in ARPAC. We see a higher increase in engagement. We see higher activation. So, it not only adds additional ARPAC, it brings a lot of synergies to the platform as a whole.

In terms of working capital loans, we are just beginning to test that product. It’s tiny in our base. It’s something that we are ramping up slowly. And we’re testing a number of different secured and unsecured products for the small business, but we haven’t really rolled out anything big yet.

Guilherme Lago

The only thing, Thiago, that I would add to that is, that similarly to the profit pool that we see in consumers, the profit pool that we estimate to exist in SME is still 65% to 70% driven by credit. And within credit, we started with credit card for SMEs. The credit card business, is performing extremely well. We are super encouraged by the early results, and then, we are now gradually expanding into working capital.

What we expect, however, in SME is that differently, for example, from the public payroll on market, it is not necessarily a market in, which our growth will hinge on someone else’s losing market share. We think there’s a tremendous opportunity to increase the size of the pie within the credit penetration in the Brazilian SME space. It still has very low penetration, and we think we can expand the market quite strongly.

I was really pleased with the results. Do I know all the ins and outs of banking in LATAM? Nope. Do I have absolute confidence in David Vélez? Yes. This is still my highest confidence position.

JabbokRiver
long NU–largest position. (Just over 19% at the close yesterday, likely over 20% when it opens today as it is up pre-market.)

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I think that the change in non-performing loans from 6.2% to 6.3% is not so much a change as a ‘same as previous quarter’ result.

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