Nu Holdings (NYSE: NU) has emerged as a force to be reckoned with, focusing on bringing banking services to underprivileged areas in Latin America. This fast-growing company has firmly established its domination in the Brazilian banking market and is now setting its sights on expanding its footprint across the region to cater to the underbanked and unbanked populations.
Despite its remarkable growth, Nu Holdings has largely remained under the radar for many U.S. investors due to its international status. However, the stock has defied expectations, delivering a roller-coaster performance since its 2021 IPO, and has recently surged, doubling in value over the past year.
So, the burning question remains – is investing in Nu Holdings a wise decision? Let’s delve deeper to find out.
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The Underlying Issue in Brazil’s Banking System
Brazil’s banking system has long been plagued by deep-seated issues. At one point, a mere five banks controlled a staggering 80% of the country’s financial assets, essentially operating as an oligopoly and subjecting customers to exorbitant fees. During a 2020 congressional hearing, Brazilian finance minister Paulo Guedes publicly denounced the country’s major banks as a “cartel” that imposed “absurd” interest rates on loans. According to S&P Global, Brazilian banks were infamous for charging up to 160% on credit card loans and 70% on personal loans, making Brazil’s banking industry one of the most lucrative globally, while simultaneously excluding a vast portion of the country’s citizens from the banking system.
David Velez, the brains behind Nu, hails from Colombia and boasts an impressive background, with an engineering degree from Stanford and experience working at Morgan Stanley, General Atlantic, and Sequoia Capital.
Velez’s noble aspiration was to democratize banking in Latin America. His primary objective was to dismantle the banking oligopoly in Brazil. Nubank adopted a digital banking model, eliminating the need for physical branches and effectively slashing overhead costs, thus putting an end to the punishing fees customers were burdened with.
The Meteoric Rise of Nu’s Customer Base
Nu’s approach to banking has yielded exceptional results. In 2020, the bank served approximately 33 million customers in Brazil. By the close of the third quarter of the previous year, its customer base had ballooned to 84 million, encompassing over half of Brazil’s adult population. During the same period, its total payment volume skyrocketed by an astounding 282%, reaching over $29 billion.
Chart by author.
The bank has excelled in expanding through cross-selling and upselling products to its existing customer base, with the average revenue per active customer surging by 18% in the third quarter. Moreover, it achieved a net profit of $303 million, marking its third consecutive profitable quarter.
Investors should be cognizant of the pitfalls associated with investing in Nu Holdings. As an international stock, it is exposed to the risks of currency fluctuations, as well as political, economic, or regulatory changes.
Additionally, Nu Holdings is not immune to the standard challenges faced by all banks, such as the prospect of loan defaults in the event of a slowdown in the Brazilian economy. Last year, Fitch Ratings warned that Brazilian banks could encounter pressure on their asset quality and profitability.
In the third quarter, 6.1% of Nu’s loans were non-performing for 90 days or more, an increase from 4.7% the previous year. While this may not be cause for immediate alarm, it is imperative for investors to monitor Nu’s credit quality and potential charge-offs in the upcoming quarters for any signs of burgeoning delinquencies or stress among its borrowers.
Expansive Growth Potentials and Investment Prospects
Nu Holdings is poised for substantial growth, having already secured a dominating position in the Brazilian market, with over half of the country’s adult population engaging with its services.
The company has set its sights on the untapped potential in two burgeoning markets: Mexico and Colombia. Over the past three years, Nu Holdings has garnered 4.3 million customers in Mexico and an additional 800,000 in Colombia. Mexico stands as the second-largest consumer market in Latin America, with approximately half of its population yet to be banked.
Nu Holdings stands as a rapidly ascending banking force in Latin America, having executed an exemplary growth strategy in Brazil. Its long-term prospects are indeed compelling as it pushes further into other regions of the continent. Although the stock trades at a premium compared to traditional U.S. banks, its growth trajectory far outpaces that of conventional banks.
Despite the stock’s susceptibility to heightened volatility due to its rapid growth and lofty valuation, it presents a sound investment opportunity for investors with an understanding of the associated risks and the willingness to weather short-term price fluctuations for long-term gains.
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Courtney Carlsen holds positions in Morgan Stanley. The Motley Fool holds positions in and recommends S&P Global. The Motley Fool recommends Nu. The Motley Fool maintains a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
