In its third quarter as a publicly traded company, Nubank, Latin America’s largest digital bank, has finally reached breakeven, sending bolstering signs that ripple across the regional fintech ecosystem.
Facing pressure from investors, fintech companies in Latin America have been increasingly focused on showing a path to profitability. At $7.8 million, Nubank’s net income, albeit minuscule compared to traditional banks, is an optimistic sign for other prominent startups in the region which have been signing up clients at an amazing rate but have yet to produce meaningful profitability.
Nubank’s result compares to a $30 million loss in the linked quarter and a $34.3 million loss in the year-ago period before the company listed its shares on the New York Stock Exchange.
“I’m happy to report that during the third quarter, Nu reported breakeven at the holding level,” David Velez, the founder, and chief executive, told investment analysts on a call.
Shares of the digital bank reacted positively this Tuesday, opening at a 15% increase at the beginning of the trading day. The Warren Buffett-backed digital banking firm reported a three-fold jump in third-quarter revenue, rising to $1.3 billion in the three months, up from $0.5 billion in the year-ago quarter.
Nubank’s robust customer acquisition
The neobank also reported a sustained increase in customer acquisition, rising to 70 million clients along its operations in Brazil, Mexico, and Colombia. The company drew 5.1% new customers in the quarter, most of them in Brazil, a sign that there is still further room to grow in its home country.
More than 95% of Nubank’s clientele is located in Brazil, as the company has signed up the equivalent of 40% of the adult population. The company has also made inroads in other bigger-sized economies in the region, most notably in Mexico, where its customer base rose to 3 million. In Colombia, the neobank reports 439,000 customers.
“Nubank’s recent result indicates that fintech is managing to find a path to profitability, as it expands its consumer base (especially in Colombia and Mexico) and increases average revenue per customer thanks to a portfolio expansion process,” Bruno Diniz, a fintech adviser in Brazil, told Fintech Nexus. “Despite the level of defaults increasing, the market was pleased to see Nubank’s generally positive context, showing a successful strategy in the face of the uncertainties surrounding the fintech sector.”
Concern on profitability
Driving profitability gains is the company’s effort to both upsell and cross-sell across its entire portfolio, drawing more revenue from each customer.
The digital bank saw its average income per active customer grow to $7.9 in the quarter, up 61% year over year. In a press release, the company said that growth reflected the “maturation of Nu’s customer cohorts.”
Nubank’s revenue per customer is still barely a fifth of that of larger, traditional Brazilian banks. During the call, Vélez reassured investor analysts that the company is working on narrowing that gap. “Despite our undeniable growth orientation as we expand into new product verticals, new markets, and new segments, we keep a tight look into the profitability levers of the business model. (This gap) creates significant upside in our monetization plan as we continue our product diversification.”
Critics of the company in the traditional sector have frequently pointed out a lower capacity to cross-sell products than its peers. To overcome this, Nubank has been busy rolling out products quickly, including insurance and cryptocurrency broker services. Since July, NuCripto, as the latter is known, has grown in no time and reached 1.3 million customers.
A path to consolidating products
With increasing competition and swift digitization, banks and digital lenders have vied for customers in Brazil. Most adults now have more than one account, whether virtual or on a traditional bank. Therefore, earning its place as the customer’s primary bank is decisive. In the release, the bank said it was now the “primary banking relationship” for over 55% of active customers with a one-year history with the institution.
Consolidating products and offering a comprehensive financial tool is increasingly essential. “While our business opportunity started by unbundling financial services through a fully-digital strategy, our current imperative is to rebundle,” Velez said. “Our customers actively tell us that they want to consolidate their financial lives with Nu.”
Rising delinquency, Nubank pulling the brakes on lending
During the quarter, the founder reckoned the effects of rising rates on portfolio health. Rampant inflation and higher borrowing costs are bleeding into delinquency loans as families and businesses struggle to repay their debt.
“While we saw increased delinquency in the quarter, consistent with the market trend, our risk-adjusted margins expanded by 100bps, showing we are being able to price increased risk appropriately,” Velez said.
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Non-performing loans rise
Nubank’s 90-day non-performing loan ratio reached 4.7% in the quarter from 4.1% in the linked period. Although higher rates generally benefit margins in the short term, asset quality can deteriorate significantly. To mitigate risk, the bank has decelerated the pace of lending.
The bank reported 5 million active customers of its lending product, an unsecured personal loan and credit card credit. The size of the portfolio is roughly $10 billion.
Nubank is a publicly-traded firm, and its pre-IPO investors include Berkshire’s Hathaway and the Japanese Softbank group.