NU Earnings and Growth are Steady

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NU Holdings reported earnings of $0.10/share, which were a 20% surprise on the upside and up 47% YOY. Revenue is 2.848 B, up 52% YOY.

  • Much of the earning surprise was from a reduction in loan loss reserves. Nu Holdings reduced this because it’s early deliquency rate is dropping. They claim to have improved their underwriting, and they expect further improvements through an AI company that they recently purchased.
  • The efficiency ratio is now down to 32% which is a slight reduction. This means that the banks overhead is about 32% of revenues. A VERY good number.
  • Adjusted net margin has jumped from 16.2% to 19.1% QoQ. This is in part due to a reduction in loan loss reserves.
  • Customer growth is 5.2% QoQ, a gradual slowdown from around 6% over the last year.
  • 1.2 million customers joined in Mexico and 0.4 million joined from Columbia, so it’s nice growth from the newly entered countries, slower growth in Brazil.

Importantly, NU management said that new loan origination is not close to saturation with loans. Even though customer growth is gradually slowing, loan origination is accelerating 8% QoQ.

Overall, this is in line with my expectation. Customer count is good but slowing. Loan growth is great and accelerating. Underwriting is getting better, so loan loss provisions are being adjusted down accordingly.

This is a solid report. I will stay the course with my 16.0% allocation. The market currently agrees with me. Nu Holdings is up 4.21% as I write this, and it’s up 59.06% YTD.

Best,

bulwnkl

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Excellent summary, thank you!

The slowdown in customer growth in Brazil, where NU still added around 1.2 million customers, bringing the total to 95.5 million, raise some concerns about market saturation in their primary market. NU will need to increasingly rely on growth in newer markets. However, their strong performance in these markets, particularly in Mexico, eases my concerns. Mexico presents a huge opportunity, especially given its large unbanked population.

Regarding the uptick in 90-plus day Non-Performing Loans (NPLs), the increase from 6.3% to 7% suggests that NU is taking on more risk as it expands its lending business. This rise was anticipated, as it aligns with the company’s strategy to grow its lending portfolio, especially in higher-risk segments, which naturally comes with higher delinquency rates. Hopefully, their efforts to improve underwriting will help mitigate these risks.

Before the report, I had slightly increased my NU position from ~4.5% to 6%. I plan to maintain this position moving forward.

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SailingDev,
Thanks. The 90-day plus nonperforming loan losses were discussed with the analysts with NU during the earnings call. The explanation is that the 90-day NPL will drop. Since significant improvements in underwriting are a recent thing, the big drop in 15-90 NPL, from 5.0% to 4.5%, during the last quarter and this quarter is the key. Importantly, you are looking at the 90+ day NPL, which increased from 6.3% to 7.0%, during the same time frame. Nu says that it will simply take time to digest those loans that were made with the less optimal underwriting criteria. Apparently, the anaconda will need time to digest its meal.

Also, while the customer add is gradually slowing, there is a lag between the time most customers create savings accounts with the time that they would want or need a loan. Loans are a new thing with a formerly unbanked clientele. Those loans are key for Nu Holdings growth. Loan originations grew 8% QoQ, so they are increasing at a significantly higher rate than the customer add (5.2% QoQ). Nu believes that this will accelerate further and that there is a large greenfield opportunity here.

If the combination of better underwriting and a significant, long-term acceleration in loan originations are as advertised, I welcome you to the steep part of the S curve!

Best,
bulwnkl

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While I sold off most of my positions in May to fund personal goals, I kept three. NU tops that list, now at 36.02% of my portfolio.

Life may have other ideas, but I hope to hold it as long as possible because they are going places.

I don’t post much anymore due to time constraints and the preference here for discussions of minutia well beyond my ability to analyze or, in many cases to understand.

But I’m posting now as a reminder from someone who can’t analyze numbers well but whose business is people, what motivates them, and what creates success in the long term in any endeavor–from relationships to governments to businesses large and small. In a word, that thing is culture.

The video below is, in a 26-minute nutshell, why I will never sell my NU shares unless I need the money outside my portfolio or if management changes.

Nubank CEO, David Vélez, explains not only the long-term plans and trajectory for the company, but the culture that has made them successful and, in my view, that will continue to ensure their success.

Importantly, the core of what he’s saying is applicable not just to every company, but to every walk of life. You could adapt the five values that Nubank articulated at its founding (and that still guide them today) and put them into a speech at a college graduation, to a class of political science majors, or a conference of psychologists. I recognize in them principles that I lift up regularly in sermons to the congregations I serve.

Whatever the role of AI and Robots, no business exists without people–leaders, employees, customers, end users. A corporate culture that abuses or ignores any one of those constituencies is always one minute away from catastrophic failure. One whistleblower report; one viral tweet or video; one door falling off a plane.

I think investors could do a lot worse than analyzing the culture of their companies with the lens Nubank provides. A well-made product is great; a huge TAM is a plus; product-market fit is necessary; industry tailwinds are fun and profitable to ride; fast growth is a heady trip; visionary ideas are a wonder to behold.

But companies with all of that still fail in a heartbeat and we sit and wonder why. Apart from Black Swan events, the answer, I believe, can be found, almost always, within the culture.

Do yourself a favor and listen to David Vélez. You will hear why NU is successful, and how much greenfield there is for them, even in Brazil, where they have pretty much saturated the market in terms of the number of customers, but where most of their verticals are still in the single digits of penetration with those customers.

But if you pay close attention, you will hear what it takes to succeed, not just in business but in life.

My portfolio as of this writing is:

Nubank ($NU) 36.02%
Pure Storage ($PSTG) 25.77%
Samsara ($IOT) 24.11%

I have just over 12% in cash, but that is cash destined to leave the portfolio, not to be redeployed.

JabbokRiver

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This is a long comment which will probably be viewed as off topic by many. Please feel free to ignore. If a board monitor thinks it best to delete, that’s OK. I understand why you might want to do that.

@JabbokRiver42, you and I have had our differences on some things in the past (i. e., BEEM), but I fully concur with your assertion regarding the importance of culture. And more specifically, your example of a door (plug) falling off an airplane in flight.

We do not often talk about corporate culture on this board. It’s an intangible. If it shows up in the quarterly report, it is only by inference. I don’t have a block of cells on my company tracking spreadsheet for culture.

My 30 year career was in the employ of the company responsible for the door plug “never event.” That’s a term borrowed from the medical profession. It refers to a preventable event that should never have occurred in the first place. I’ve only known it to be associated with a potentially disastrous outcome, but actually, it could go either way. We would probably call it a “miracle” should it have a positive result.

In any case, Boeing was extremely fortunate, maybe “lucky” is a better word choice. No one suffered a serious injury, though some claimed emotional trauma - that’s probably a valid claim.

This never event was the direct result of the corporate culture at The Boeing Company.

When I first started working at Boeing, the company’s goal was to strive for excellence. Boeing wanted to be, and for the most part was the engineering/manufacturing company that every other similar company tried to emulate. It was truly the US company that stood as the envy of the world. Every employee (well, maybe not “every”) knew what the goal was. Every employee was motivated to do the best job they could possibly do in their assigned tasks. Boeing did not strive for profitability. In fact, the CEO at the time, T Wilson, asserted that if the company pursued excellence, the bottom line would take care of itself.

In a nutshell, Boeing’s culture was one of being in constant pursuit of excellence.

All of that changed due to the actions of Harry Stonecipher who was placed in a position of authority by the BOD subsequent to the merger with McDonnell Douglas. Prior to Harry’s influence, Boeing’s products were free of serious problems. Commercial jet airplanes are complex. I’m not trying to say every plane was flawless. In service problems did arise but Boeing was always quick to assume responsibility if the flaw came out of the factory. And irrespective of who was to blame, Boeing maintained an incredibly responsive customer service organization. Boeing could have a repair team on sight anywhere in the world in less than 24 hours, usually much less. Boeing’s reputation was unblemished.

So far as Harry Stonecipher was concerned, nothing but the bottom line mattered. Every scandal, there have been several, and every production failing that has befallen the company has been a direct result of the change in culture wrought by Harry Stonecipher. Lest there be any doubt about that observation, Harry was proud of having altered Boeing’s culture. He bragged about it.

From Harry’s POV, quality assurance was considered an inhibition to productivity. Ethics were nothing but a costly inconvenience. Regulations were to be skirted to as great a degree as could be legally argued. At times, legality was not a requirement if there was a way to get away with it. Adversarial relations between management and staff became the norm. Overtime pay was reduced. Overtime labor was increased.

You get the point I hope. Culture is vitally important. Of course, great corporate culture does not guarantee success, it just makes is far more achievable.

BTW, Harry was forced into resignation due to an illicit affair with a subordinate. But, the damage was done. The BOD had a chance to fix the problem before it infected every aspect of the company. After Harry was forced into retirement, the BOD had the opportunity to promote Alan Mulally to CEO. Instead they replaced Harry with the dim bulb, Jim McNerney (just so happens he was a year ahead of me in the same high school - we did not know one another). Jim was the CEO of 3M. He had been schooled by Jack Welch at GE. Jack and Harry had a lot in common. Meanwhile Mr. Mulally was drafted to become CEO of Ford where he pulled the company back from the brink of bankruptcy and returned them to profitability. I knew Alan, not well, but I did know him. He was a terrific manager. He well understood the importance of corporate culture. In fact, Ford benefitted from the cultural changes instituted by Alan.

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Here’s a link regarding Nu Bank’s expansion in Mexico. It’s great place for Nu’s expansion with high per capita GDP and low level of banked population.

https://www.businesswire.com/news/home/20240819761268/en/

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Culture is vitally important for the longterm success of a company – but as @brittlerock says, we can’t really track it as investors. Nor, I would argue, can we really learn much about the culture of a company by listening to top management talk about it (sorry, @JabbokRiver42, we’ll just have to disagree on that one!).

However, we do have some real advantages in the market over other investors because of boards like this one, where a former Boeing employee lets us all know where the decline of a formerly great company started – and therefore, what we need to look for to see whether there might be a turnaround in the offing.

One of my earliest memories of Motley Fool – and it’s so long ago that I can’t even remember if I was participating on that board or just read about it later from the Gardners – is when a company Fool investors were excited about, IoMega, ran into some difficulty. Wall St was quite down on the company and its chances to recover. Fools who lived near IoMega HQ, however, reported that the company parking lot was full on Saturdays and Sundays. The whole company was rising to the challenge, including working weekends.

Today, you could try to glean that kind of insight from Yahoo message boards or SeekingAlpha or somewhere else. Here, you can get it from people whose posts you’ve seen and read before, who you already trust to some degree.

In that vein, I can report that when I ask my 26 yo Brazilian pseudo-daughter (she lived with my family for a year when she was in high school and is now living and working near Sao Paulo) about Nu, she rhapsodizes about how much she loves Nu Bank, how great they are for her and her friends with income and increasing savings. And she says, “You got me thinking why don’t I invest in them – I think I should!”

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It’s true that listening to top management talk about their company doesn’t provide standard metrics for evaluation; and there are definitely interviewers who are more skilled than others in bringing out information. (Jon Fortt is the king of great interview skills, I think.) The video I linked above was in-house, so not like a CEO under the klieg lights.

But those who specialize in reading people can glean a lot–not necessarily about performance, but about the values, integrity, work ethic, communication skills, passion, and resilience of a given leader. And in my book, those things are critical to a company becoming more than a flash in the pan.

Learning to evaluate people from public interviews can also help investors when a short report or some bad news hits the airwaves. A lot of those accusations hit at the integrity of the CEO; whether you get out or buy the dip is determined in large part on your understanding of whether the CEO is trustworthy or not. Of course, those kinds of judgements are still “soft” skills and can be wrong. But those who at least try to learn them will be less prone to fall for the con man/snake oil, and save money in the process.

Other, more quantifiable, things are necessary, too, but it’s dangerous to totally ignore the C-Suite just because you can’t use math to analyze people. A company’s culture is set from the top–just like a fish rots from the head. If you only look “down fish” to figure out what’s going on, one day you’ll have food poisoning.

Glassdoor is still useful as a tool. I tried to sound the alarm a couple of years ago when LSPD was ascendant on this board. The Glassdoor reviews from employees complained that they kept making acquisitions but that they were not being integrated well. I never bought in because of that, which turned out to be a good choice.

TMF interviews CEOs all the time, which I believe they see as having more than entertainment value. They also use Glassdoor ratings. If those who would recommend working at the company can’t get more than 55-60% of reviewers recommending someone else work there; if there are long, detailed reviews of very specific issues that flash warning lights ahead, why would you disregard them? You might assign it more or less weight, depending on what you’re looking for as an investor. But not count them at all?

But I agree that this board is great because we each bring different skillsets to the table and get to know each other over time. Until a company is totally AI run (shudder), the need to grapple with the character of leadership (and the corporate culture that leadership creates) remains an important consideration–and the bigger the position, the bigger the impact a blind spot there can have on your portfolio.

JabbokRiver

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My point was simply that when the CEO is being interviewed about company culture – especially when the interviewer is the CFO – you shouldn’t take what you hear without a large dose of skepticism.

I’ve got nothing against relying on Glassdoor reports as one of many possible sources of insight. It’s subjective, to be sure – but it’s not necessarily biased in favor of the company in the way a CEO interview will be. Note that since Glassdoor is used heavily by prospective employees, a good HR team will always try to massage their scores higher.

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Just to reiterate @ActonUp’s point. When you have a completely contrived and well rehearsed interview with the CFO interviewing the CEO I find it hard to put any confidence in the content whatsoever.

Do not take that as discounting all interviews or as an evaluation of Nu as a company (though I think this particular interview is an example of poor judgment).

Every Q&A after a quarterly report is an “interview” in some respects. I tend to read those sessions very carefully. And as @JabbokRiver42 noted, some interviewers are very good at what they do.

I also think Glassdoor is a resource worth taking the time to review. I think most of us try to gather as much information as we can about the companies we invest in. That goes for both quantitative and qualitative information.

But then we need to assess what we believe to be reliable, trusted information. With respect to the present interview, I think I’ve already made my position pretty clear.

Nevertheless, long NU

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I understand that point, and I agree that an in-house interview should not be the sole evidence for validating what is said. But it’s not like it’s the only interview David Vélez has ever done.

I have watched, to my knowledge, all of them. And they all sounded like that one. Same points, same values, same style, same vision, although growing the latter across time.

It’s the cumulative effect of hearing a person be consistent across time and across venues that gives me added confidence, despite this particular one being on friendly turf.

A red flag would be if the “home team” interview sounded way different than those by other outlets. It didn’t.

I didn’t mean to belabor the point.

JR

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