Nubank’s more challenging start in Mexico, according to Bradesco BBI

By Isabela Fleischmann

The main credit indicators for Nubank’s (NU) operation in Mexico indicate a “challenging start”.

This is the analysis of Gustavo Schroden, Otavio Tanganelli, Eric Ito, and Camila Koga, from Bradesco BBI, in a report distributed to clients on Wednesday (26).

For BBI analysts, who analyzed data from last December to February this year, Nubank’s loan growth in Mexico is slower than the industry’s.

In addition, the fintech has higher levels of non-performing loans (NPLs), lower loan coverage ratio, considerable cost of risk and negative margins after provisions.

‘We’re not offering credit on the open sea like banks have been doing,’ CEO David Velez said.

Shares are up 6% on Wednesday on the New York Stock Exchange.

Nubank is the world’s largest listed digital bank and has become a benchmark for reviews of banking fintechs.

The Brazilian fintech founded by Colombian David Vélez together with Brazilian Cristina Junqueira and American Edward Wible in 2014 faces a higher interest rate environment, as do all players in the financial sector, which makes funding costs more expensive.

The bank’s New York Stock Exchange shares accumulate gains above 20% this year – until the close on Wednesday (26) at US$4.94 – but are still 45% below the US$9 in the IPO in December 2021.

“It is important to note that it is still only three months into the analysis, and the transaction is at an early stage.”

“That said, Nu Mexico’s initial numbers indicate to us that monetization in the region may be challenging,” the analysts say.

According to BBI, these indicators suggest that Nubank’s subsidiary in Mexico behaves more like a “popular financial company” (SOFIPO) than a bank (Banca Múltiple).

In a statement, Nubank said the first three months of 2023 represented major advancement of Nu Mexico and Nu Colombia, adding more than 3.8 million customers, up 66% in the one year.

According to Nubank, in addition to the credit card, the fintech has gradually started making Cuenta Nu available to the Mexican customer base.

This month, the company announced that Cuenta Nu now features Cajitas (Little Boxes), a feature within the app where customers can separate the money they want to save and generate a 9% annual yield without losing liquidity.

In an interview with Bloomberg Línea, Thuan Pham, former CTO of Uber and Coupang and new board member, points out how to enter different markets in a few years.

This strategy was adopted in 2022, also in Brazil, with results considered positive by market analysts because it induces customers to keep funds in the account, reducing the cost of funding.

Nu Colombia, in turn, “continues to work on the development of new financial services”.

The digital bank reported reaching 80 million clients in the first week of April, considering the operations in Brazil, Mexico, and Colombia.

Total customers at the close of the first quarter of 2023 were 79.1 million, up about 33% in 12 months.

SLOWER GROWTH

“Nu Mexico is growing slower than the industry, surprisingly,” the Bradesco BBI report pointed out.

Nu Mexico’s total consumer loans declined 1.6% month-on-month in February 2023 to MXN13.2 billion (US$730.2 million) after contracting -0.7% month-on-month in January 2023 to MXN13.5 billion (US$755.9 million).

This is even considering that since the operation is just starting, in theory, Nu Mexico would count on lower bases to favor it.

Meanwhile, total consumer loans from SOFIPOs (Mexican payment institutions) decreased -by 0.4% month-on-month in February 2023 and remained unchanged in the month-on-month comparison in January 2023.

For traditional Mexican banks, total consumer loans expanded 1.1% month-over-month in February 2023, following 1.0% month-over-month growth in January 2023, outperforming financial entities and Nu Mexico, according to Bradesco BBI data with Mexico’s National Banking and Securities Commission.

“Regarding asset quality, we also observed challenging numbers for Nu Mexico, with default rates worse than the industry average,” the report highlighted.

According to Bradesco BBI, asset quality indicators show that Nubank’s current customer base in Mexico offers more risk than traditional banks.

While Nu Mexico’s NPL for consumer loans was 12.2% in February 2023 (12.3% in January 2023 and 12.4% in December 2022), NPL for other financial entities stood at 11.4% in February 2023 (11.5% in January 2023 and 11.4% in December 2022).

Meanwhile, banks have the best NPL ratio for consumer loans in Mexico, at 3.0% in February 2023 (3.0% in January 2023 and 2.9% in December 2022).

Compared to other financial entities and banks, Nu Mexico has the country’s lowest coverage ratio for consumer loans, at 91.0% in February 2023 (88.8% in January 2023 and 84.5% in December 2022).

Nubank’s cost of risk in Mexico in February was 31% versus 15.8%, with Brazil as its largest market.

Thus, analysts believe that Nubank’s Mexico subsidiary will continue to weigh against Nubank’s consolidated profitability for a longer period.

Nubank will release its results for Q1 2023 on May 15 after the market close.

BRAZILIAN OPERATION

In Brazil, Nubank ended March with 31.5% growth in 12 months, reaching more than 75.2 million customers, including the SME (Small and Medium Enterprises) segment.

The number of entrepreneurs with Nubank’s PJ account surpassed 2.7 million, a 66% growth in one year.

“We added about 5 million customers to our base in just over a quarter, always with great contribution from the Brazilian operation and increasingly more adherence from Mexicans and Colombians,” CEO and founder David Vélez said in a statement.

“The 80 million user mark reveals Nubank’s operational efficiency and ability to balance global expansion and portfolio diversification to have more engaged customers.”

Nubank said it saw its number of investor customers in Brazil increase 130% in the Q1 2023 to Q1 2022 comparison, with more than 9.2 million active investment users.

The fintech has over R$47.6 billion (US$9.52 billion) of assets under custody.

During the first quarter of 2023, Nubank expanded its lending strategy with another step in testing NuConsignado, the consigned loans program, a modality explored by incumbent and digital banks because they offer lower risk given the salary guarantee.

The fintech said the product is gradually available to the federal public servant customer base.

According to an internal survey, more than 30% of the financial volume of consigned credit, whether public or private, in the Brazilian market is handled by customers who already have a relationship with Nubank.

With information from Bloomberg