Nu Holdings: All Digital, All Mobile Bank Developing A Franchise In Latin America

Summary:

• Nu Holdings is a profitable digital banking platform operating in Brazil, Mexico, and Colombia with a rapidly growing customer base.
• The company differentiates itself through its low-cost structure, superior customer service, and innovative product offerings.
• Despite operating in politically and economically volatile markets, NU stock has shown strong revenue and customer growth, making it an attractive investment opportunity.
• Nu has a strong management team with deep domain expertise.
• It has been able to build a strong franchise in Brazil, and it is taking that playbook to Mexico and Colombia.

Nu: The World’s Largest Digital Bank – Does It Have A Secret Sauce?

The fintech world has not been a happy destination for most investors including this writer. There have been more than a few busted dreams including Upstart (UPST), to point out the most spectacular flame out and Pagaya (PGY), the latest fintech causing investor angst. Even those fintech companies who have achieved a measure of operational success such as Affirm (AFRM) have had a bumpy ride when it comes to valuation. Many fintechs were conceived in an era of a very low cost of funds; as the cost of funds has risen, spreads have contracted, at least in some cases, and it has been difficult for many companies in the space to offset narrowing spreads with higher volume.

Nu Holdings (NYSE:NU) is a fintech business – a digital banking platform actually – that is quite a bit different than most of the other fintech investment opportunities in the public markets. For one thing, it isn’t located in the US; its center of gravity is in Brazil, and it has rapidly growing operations in Mexico and Colombia. I have linked here to the current investor deck that provides much background and lots of graphics. And it Nu is already quite profitable with a current EPS estimate of about $.40 and a ROE of 26%. It is also relatively large, even at this stage of its corporate development. Revenues this year, as reported, are expected to be more than $11 billion-that is an EV/S estimate of about 5.5X exceptionally low for the growth rate estimated this year to be 40%+. That said, this is a bank, and many valuation metrics are different compared to tech companies. It has a charismatic CEO with deep domain expertise, and the balance of its management team is also very experienced both in banking and technology.

Nu shares have had a very volatile trading pattern since its IPO. Initially, the shares traded as high as $11.85. Then came 2022 and the great rerating of growth companies. The shares made a low of about $2.56 at the end of that year. Recently, as markets have improved, and as the company’s operating results have shown both hyper-growth and strong margins, the shares have made an all-time high, trading above $12/share. Even at a new high, I believe that Nu’s valuation does not reflect its growth and its rapidly increasing profitability. I am recommending purchase of Nu shares at this price and this time.

I don’t want to pretend to have expertise I don’t have. My experience with banks in Brazil has been limited to interactions I have had on a few trips to that country. I have been able to make some anecdotal checks about Nu, but they are just that, anecdotal checks. On the other hand, Nu’s strategy and the results of its operations are fairly transparent. While its headquarters are in Sao Paulo Brazil, it reports using US GAAP and provides metrics that are consistent with those of many other global financial institutions. While it is a bank, of course, it is based on digital technology and based on providing a differentiated level of customer service to its clients. It isn’t involved in offering commercial loans in infrastructure projects, or in loans to government agencies. It is simply involved in gathering deposits from clients in Brazil, Mexico, and Colombia, extending credit through various products to those customers, and capturing a spread, all through the use of mobile digital technology enabled by highly skilled practitioners in the space. Of course, it is more complex than that, and the article tries to highlight some of the risks and complexities.

Nu is a digital bank that in a few years has acquired almost 90 million accounts in Brazil and a few million customers in Mexico where it is just now starting its rapid growth journey. Its operations in Colombia are more nascent. It has become one of the leading credit card issuers in Brazil and it is gaining significant market share from legacy banks. Part of its success is that of having had a significant 1st mover advantage in furnishing banking services to vast swathes of unbanked consumers in Brazil who heretofore have had almost no access to modern banking services. As a digital bank, it has no branches and minimal fixed infrastructure other than a digital network. Because it has no branches and has leveraged technology, its operating costs are far lower than competitors, and this advantage allows the bank to invest in new geos and new products.

But continuing growth isn’t just about being the first to offer digital banking services – although without that, the opportunity would be significantly attenuated. It is about providing a level of customer service unknown heretofore in Brazil. That is at least as much of the company’s secret sauce as its technology and its credit products.

While Nu’s center of gravity is in Brazil, with operational headquarters in Sao Paulo, it reports results in dollars and uses US GAAP measures. The company is covered by 17 analysts, most from large brokerages. Of those 17 analysts, 11 rate the shares as buy, 5 rate it as hold and there are 2 underperform ratings. The company went public in December 2021 at an offering price of $9/share.

Most of us have to deal with banks for a variety of financial services. While many banks tout their level of personal service and offer various digital touchpoints, the reality is that in an effort to remain profitable to fight against cyber-crime and remain compliant with a myriad of regulations, banking customer service in the US, at least based on some survey measures, has declined.

By all accounts, banks in Brazil specifically, have provided what can best be described as execrable levels of customer service. And that has been compounded by a wave of cyber crime which tends to make legacy banks even more sclerotic. The large banks in Brazil were hidebound and were not offering the kinds of credit products that have become almost standard in other countries. This was an opportunity that the Nu’s co-founders, David Velez, and Cristina Junqueira identified and exploited. Nu Holdings was designed to take advantage of a substantial market opportunity by bringing low-cost banking services to a substantial segment of the Brazilian population using digital technology to control operating expenses.

Velez had been an investment banker at Morgan Stanley and had also worked at General Atlantic and Sequoia, two high-profile private equity/VC firms. He is comparatively young as a banker-he is 42 and comes across in calls and presentations as knowledgeable, competent, and articulate.

Ms. Junqueira is the company’s Chief Growth Officer who is responsible for the company’s newer operations in Colombia and Mexico, she also has roles in marketing and communications. She worked for several years at Unibanco, now a part of Banco Itau, the largest banking organization in Brazil.

The company’s COO is Youssef Lahrech who worked at Capital One in the US and Canada. He has a significant background in product development and analytics.

Overall, the company’s management seemingly has backgrounds that are both diverse and exceptionally qualified for their roles. Of course, it is impossible for me to evaluate all of Nu’s executive team but it certainly appears to place them in a position to become a major business.

The company has had what can only be described as an extraordinary track record in terms of operating efficiency, and growth. Fintech in general, has been marked by a rapid loss of differentiation and first-mover advantage. While I maintain that Affirm, for example, is quite differentiated, the conventional wisdom about fintech is that it is challenging or impossible to build a differentiated platform that can produce sustained high growth and profitability because technologies can be readily adopted by competitors, eliminating any competitive advantage.

Nu’s Differentiation

Nu’s investor presentation talks about its competitive advantage being its best-in-class cost structure. The four cost pillars of retail financial services that are highlighted by Nu are the cost of customer acquisition, the cost of serving those customers, the cost of risk in extending credit to those customers, and the cost of funding. Basically, the cost of operating Nu’s platform is less than $1 per active customer which is 85% lower than larger Brazilian banks.

Nu currently has a 6% loan delinquency rate, despite its very rapid growth, and that is 15% below the average for the Brazilian industry as defined as 90-day+ non-performing loans. Nu uses digital technology and AI as part of its loan underwriting process. While AI as a tool for loan underwriting is hardly unique for Nu, it has a multiyear history and enough data points that it can realistically use technology as a factor in underwriting credit and obtain differentiated results.

It has been able to attract $24 billion of deposits at 80% of the interbank rate. How has that happened? It isn’t, obviously, because of promotional pricing-at least in Brazil. One of Nu’s core concepts is that of customer service. All banks talk about customer service. For the most part that is more honored in the breach than the observance. In the case of Nu, however, there are reasons to believe that their claims have a factual foundation. The company has an exceptional 80+ net promoter score. I am a bit dubious when it comes to those scores as being totally accurate. That said, one of our Ticker Target subscribers was kind enough to share some of his anecdotal checks regarding Nu’s level of service. And another contact of mine who recently spent significant time in the country on a business assignment confirmed that Nu has a unique reputation for service amongst banks. Basically, Nu has seen the equivalent of a cult movement – much of this is a reaction to the low levels of service offered by larger Brazilian banks who have been slow to digitize and slower still to make banking available to many lower-income Brazilians.

While most Nu customers bank with it because of its service offerings which have a very competitive fee structure, its reputation for customer service has allowed it to capture deposits at differentiated rates. It has been able to provide this level of customer service while maintaining very tight cost discipline. It is a secret sauce and one that remains secret in terms of the company’s competitive advantages.

Reviewing NU’s Recent Results

Nu reported its results for its Q4 on February 22, 2024. The results were well received and ultimately the shares have climbed about 14% to current levels from the levels at which they were trading just before the earnings release. Despite the strong results, none of the analysts covering the shares have changed their ratings or price targets; the shares have worked higher without any particular new initiations or upgrades. The company does not provide explicit guidance, but results were substantially greater than prior 1st Call expectations in terms of growth and modestly greater in terms of profitability metrics.

Specifically, the headlines were as follows: Revenues, as reported were $2.4 billion, an increase of 57% year on year, on an FX-neutral basis Sequential revenue growth was 12.5%. Gross margins were 48% compared to 40% the prior year and to 43% the prior quarter. The credit loss allowance in the quarter was 3.3% of the credit portfolio, compared to 3.7% the prior year and 4.1% the prior quarter. Adjusted net income was $396 million compared to $121 million in the prior year and $263 million in the prior quarter.

I spend most of my time analyzing IT companies. At the moment, I can think of no IT companies with this kind of growth. The combination of growth and substantial profitability is unique in my coverage universe. In valuing NU, I have used a 3-year CAGR of 33%, a rather conservative estimate, and one that probably doesn’t provide an adequate level of growth from the nascent operations in Mexico and Colombia.

There are a number of other KPIs – Nu is, at the end of the day a bank, and banks have numerous additional measurement criteria beyond headline P&L data. The company’s customer count has continued to grow significantly; overall the company is acquiring about 4-5 million new customers each quarter and its active customer count has reached 78 million. Customer engagement has also continued to increase. Overall revenue growth is a function of the expansion of active accounts and the growth in revenue/customer. Average monthly revenue/customer has reached $10.60, up 23% year on year and up 6% sequentially. Most of the growth in average monthly revenue/customer is being driven by cross-sells. Nu continues to roll out a variety of new credit, investment, and insurance products and user engagement has continued to climb.

The company has grown its portfolio of loans both from credit cards and from personal lending. The portfolio has grown almost 50% year on year. Loan originations have grown about 100% over the past 12 months, mainly funded by deposit growth. Overall deposits rose 38% year on year.

As previously mentioned, the company’s average operating cost per active customer has remained stable at less than $1/month. With revenues per customer rising and opex/customer stable, this has allowed gross margins to climb noticeably.

The ancillary KPIs such as credit card customers, active account holders, and personal loan customers are all showing similar positive trends. The loan to deposit ratio is at 34% suggesting substantial opportunity to grow the company’s interest income asset base without capital constraints.

Nu’s 2024 Outlook

As mentioned, Nu does not provide specific guidance for revenue and earnings. 1st Call consensus estimates are based on relatively few contributing analysts. The consensus numbers call for Nu’s revenue to rise by a bit less than 40% this year, and for non-GAAP EPS to increase to $0.41 for the full year, up from $.25.

The company’s strategy is basically to drive market share growth in Brazil and Mexico. In Brazil, the company has a 14% market share for credit cards and 6% for personal loans according to a recent interview the CEO gave to Bloomberg. The company’s market share has grown significantly year on year. Part of its market share strategy is related to Pix, the Brazilian equivalent of Cash App and Venmo, but which is managed by Brazil’s Central Bank. About 35% of Nu’s credit card users use the Pix financing feature.

In Brazil, a specific loan type is based on the country’s SIAPE, INSS, and FGTS benefit programs. These programs provide workers with a long-term savings account and monthly contributions from employers and employees are mandatory. Nu offers loans based on the backing of these 3 benefit programs and in a few months, loan originations based on this product have become a significant contributor to loan growth. This is a major growth opportunity for Nu to grow its lending book.

Brazil has a variety of programs that are unique to that country. One of these is called Desenrola which is a government program to renegotiate debt-somewhat similar to debt consolidation programs offered in the US. This program is neutral to earnings but can impact some reported credit ratios.

One major component of the company’s strategy is to capture more high income clients in Brazil with specific credit products such as its Ultravioleta credit card for upmarket clients. I confess that for me a credit card is just that, a credit card. I don’t want to show it off and all I want is efficient and courteous service. But, of course, serving the higher income segment in Brazil is likely to be very profitable and to provide a noticeable growth tailwind. Nu is well established in Brazil at this point. I have linked to a table showing those banks that are gaining credit card market share. Nu shows as the leading share gainer. But to continue to maintain hyper growth it needs to expand its geographic reach

Mexico is Nu’s new geography of focus at this time. Mexico is the 2nd largest economy in Latin America. Its current population is 129 million and a GDP of around $2 trillion in USD. By comparison, the US has a population of 332 million and a GDP of $27 trillion. Brazil has a current population of about 215 million, and a GDP of about $1.7 trillion. Over time, the potential of the Mexican market for Nu’s services ought to be somewhat similar.

One of the company’s significant expected growth drivers in 2024 and likely beyond is the development of Nu’s Mexican operations. The company launched Cuenta Nu in Mexico in May 2023 and had been able to generate $1 billion in deposits by the end of 2023. Cuenta Nu is essentially the company’s digital banking platform localized for specific Mexican banking practices and regulations. It is an all-digital offering

Cuenta Nu raised its deposit rate to 15% in November 2023. The rate is designed to jumpstart the growth of Nu in Mexico and it is having a significant impact. Nu Mexico acquired almost 1 million new customers last quarter and the bank now has 5.2 million customers. With a 15% deposit rate, new customer growth seems very likely to remain at an elevated level. The 15% rate is not likely to be retained long-term but can be thought of as an investment in market development. That said, Nu’s 15% deposit rate is 80% of the inter-bank rate in Mexico so it is not necessarily a huge drain on the company’s finances.

As mentioned earlier, Nu’s gross margins reached 47.5% in Q4. The company expects to enjoy gross margins in Brazil that will be offset by lower margins in Mexico, and also Colombia where Cuenta Nu was just recently approved for launch by the Central Bank in that country.

The service offerings of Nu in Mexico will ultimately track those in Brazil, again adjusted for local conditions. The company is targeting a higher income segment of account holders in Mexico, compared to its initial journey in Brazil, at least initially-Mexico has a larger base of higher income consumers, proportionately, when compared to Brazil.

Mexico does have a significant number of established banks with digital offerings and many of the larger banks in Mexico offer some form of digital service. Here is a list of some of the principal banks in Mexico that are competitors in terms of having a mobile digital banking platform. Nu does not have all of the first-mover advantages it enjoyed in Brazil.

I don’t want to pose as some expert in terms of analyzing the state of Mexican retail banking and its levels of customer service. On the other hand, Nu does have a significant track record and experience in digital banking that is probably unique in all of Latin America. It has an experienced cadre of digital product developers and it has seen what has worked… and more importantly, what hasn’t worked.

One reason to expect that NU will enjoy hyper growth for an extended period is the opportunity it has in Mexico, and also in Colombia. Eventually, if political and economic conditions are reasonable, Nu will continue to open in additional countries. It is being prudent in that regard; it briefly made a foray into Argentina, but wisely closed the operation before starting significant operations. As the linked article suggests, it may consider opening in that country again if conditions stabilize.

Can Nu Continue Its Hyper Growth And Market Share Gains?

Nu has delivered what can only be described spectacular revenue and customer growth over the past year and more. And its profitability metrics are equally strong. But can it continue that level of performance? I don’t pretend to have second sight. And there are more than a few fintech companies who have seen their business models trashed in the wake of higher interest rates.

In my opinion, there are two sets of risks for Nu. One of those relates to the fact that it operates in foreign countries. While no doubt there are some readers/subscribers who are unhappy with the trend of events in this country, obviously Brazil and Mexico are not ideal pluralistic, stable democracies.

I am anything but a political commentator. The foregoing is not really an evaluation of the economic prospects of either Brazil or Mexico. On the other hand, anyone considering investing in Nu ought to have at least a passing understanding of the political environment and risks in both countries. It is not all that many years ago that both countries had a variety of economic problems that led to inflationary spirals with international defaults and currency devaluation. Right now, I do not believe that those risks are on the investment horizon.

Brazil has been a country of much promise and limited performance for years. These days, Brazil is considered to be an upper middle income developing economy. The per capita GDP is about $11,000/year and its growth rate is forecast to be 2.2%. By comparison, the US GDP per capita has reached $80k, and our growth is forecast to be about 2.5%.

Mexico is considered to be a developing mixed market economy. Its GDP per capita is 25% greater than that of Brazil and its growth has been a little faster. Although Mexico is not a petro state, its GDP has been positively influenced by substantial oil resources. The company has suffered through two debt crises, the most recent in 1995. Mexico has the highest GDP per capita in all of Latin America.

Neither Brazil nor Mexico have what could fairly be described as high growth economies, and there seems little prospect that economic growth will accelerate in the near future. And the level of corruption in both countries is substantial; the Brazilian Car Wash scandal was broad in scope and involved many leading Brazilian leaders. Mexico suffers from both corruption and drug trafficking.

Yesterday, both Brazil and Mexico announced that their respective central banks had reduced interest rates. In the case of Brazil, the central bank cut interest rates by 0.5% for the 6th successive time. Inflation in Brazil has been slowing, despite a bump in February. and economic growth is pedestrian. This had been anticipated. The bank pledged to cut rates another 0.5% at its next meeting. Brazilian inflation has actually been consistent with inflation in this country; prices of goods have declined, while last month, services inflation came in hotter. In general, the rate reduction was expected, and the somewhat hawkish rhetoric was well received and the Brazilian currency rose in the wake of the announcement. Falling rates will have a positive impact on the operations of Nu’s Brazilian bank, with the opportunity to widen spreads with overall consumer loan demand likely continuing to rise.

Mexico’s central bank is also cutting rates for the first time, with the policy rate down by 0.25%. Inflation in Mexico has declined, and growth has stalled. There is some controversy about whether or not this is the start of a rate cut cycle. Mexico is still a small part of Nu’s asset base so the impact of a 0.25% cut in the policy rate is negligible. That said, Nu Mexico has had a 15% deposit interest rate to attract deposits and jump start growth. The cut in the Mexican central bank rate makes that deposit interest rate seem even more attractive.

Nu shares have risen by about 7% in the last 7 trading days. Probably earnings estimates for the current year will also rise. I have personally made a commitment to Nu shares in spite of the political risks in the two countries in which the company currently is operating.

At the end of the day, however, Nu also faces risks as an investment that relate to its erstwhile first mover advantages, particularly in Brazil. Many banks in Brazil and in Mexico now offer mobile digital banking services. Some banks are and will attempt to emulate Nu’s strategies and products. The nature of digital banking competition is essentially finding new and additional loan types, credit cards and deposit accounts to offer consumers. It can be difficult for consumers to choose between all the services offered by various industry participants.

In Mexico, the strategy Nu has chosen for this stage of its growth journey is to jumpstart account acquisition by what is likely to be promotional 15% rate on deposits-basically what the company calls its Money Boxes offering. The belief is that once a consumer tries the platform, they will remain a customer and use some of the credit services that are available on Cuenta Nu. Nu is using its profits in Brazil to offset the investments it is making in order to grow Mexico, and subsequently Colombia to some scale level at which it can start to offer those consumers multiple credit products.

In Brazil, I expect that Nu will enjoy continued success for three major reasons. One, and of course the most palpable, is that NU has significant cost advantages described above. Those cost advantages provide Nu the flexibility to innovate with offerings in new products and new market spaces. It’s hard for an outsider to grade digital technology and digital experiences – but seemingly Nu continues to offer users a superior digital experience based on the evidence of NPS and anecdotal articles written about the company.

I think the following discussion by the company’s chief product officer and its CEO during the latest conference call probably provides a better insight into differentiation than I might be able to write on my own.

Jagpreet Duggal

Jorge, this is Jag Duggal, Chief Product Officer. Let me answer your first question and get into some of what you asking around. Our secured loan business and strategy, a couple of — a couple of key points that I would make, first of all, about equal volumes of our secured loan origination in Q4 came from FGTS, loans against the Social Security savings of customers, and then from consignado, particularly the Federal Employees, CRP, and the retirees. The formula we are following in terms of why customers are coming to us is very specific and will be familiar to you, as someone who has followed the company for a long time.

We offer a dramatically simplified digital mobile experience, 100% mobile. Because we are able to offer that service direct-to-consumer, making our cost — helping to make our cost very low. That allows us, as David talked about, to offer a significantly lower price than the market average. And that’s a pretty powerful flywheel where customers come both for the simplicity of the experience and also for the superior price. And we have found this to be a market, where consumers are very price sensitive.

Another aspect of your question was, are customers switching from other places? A couple of key points to make here. All of the customers to which we are offering these secured loans are current Nu bank customers. So we are fishing in our own fishbowl, not out in the open sea.

Jorge Kuri

That’s great.

David Velez

And I’ll just add one point Jorge. I think ultimately it’s the same — kind of the same receipt that we’ve been following in every single product. And it is the following. Technology distribution, direct-to-consumer distribution enables us to create a product that is better for consumers at lower cost and ultimately we measure that by NPS. In this specific category, we’re already measuring NPS upwards of 80, which would be by far the best rated product in the market today.

So that tends to be the leading indicator for growth. And that’s what we’ve seen over the past six months that we’ve been starting to roll out. It’s traditionally a very offline experience. It takes several weeks. There is a lot of fraud associated sometimes with the offline processes, a lot of paperwork. And so by just offering that direct-to-consumer distribution, we’re able to simply better products at lower price. And consumers tend to understand that — obviously, that equation.

We are preparing to invest significantly in software-related solutions. We think we don’t necessarily compete well in the offline world where there are branches required. We always said that if you need cash, if you need offline distribution, we’re not well positioned there to compete. We are well-positioned to compete when software becomes a differentiating factor and there is a fair amount of differentiation we can do with software for this product.

By adding a number of software capabilities, which by the way are relatively hard to program, we think we’re going to be able to solve a big pain point for consumers and happens to also have certain network effects that we tend to like a lot. So just like that theme of social, there is a number of themes that we will be implementing this year that we think will significantly improve the value proposition and allow us to play in an environment of software and online where we think we can win versus necessarily competing with incumbents in areas or in regions where we don’t really have a possibility of competing.

A second reason that I believe Nu will maintain its competitive advantages is the priority that Nu places on innovation. The culture of the company is all about being first with new products in new markets. This emphasis is not something that can be readily copied. The priorities of older banks in Brazil do not necessarily align with offering consumers the latest digital features or products. That is an intangible distinction, but no less real.

Finally, and the real secret sauce and differentiator here is the strategy of customer service. From what I can glean, Nu in Brazil is almost like a cult, although a cult with over 70 million current active customers. It has a significant positive differentiated reputation amongst Brazilian consumers. At the end of the day, it is really part of management’s playbook to foster an environment in which customer service is key to everything else the company does. Platitude-sure! But just because it is a platitude doesn’t mean it isn’t so.

The case to buy Nu shares at this point starts with a belief that management will be able to maintain its differentiation. The preponderance of the evidence seems to support that belief.

Nu’s Valuation

Banks, self-evidently, aren’t enterprise software companies. While Nu is a bank that uses technology, it obviously has far different operating metrics – one’s that are most often used in evaluating bank shares. The current consensus forecast is for Nu revenues to grow another 44% this year, and then for growth to slow down to about 24% in 2025. At this point, no one can really know the growth cadence for Nu’s nascent operations in Mexico and Colombia. My guess is that growth in those two countries is more likely to accelerate in dollar terms in 2025 than to abate and because of that I believe growth in 2025 is likely to be similar to growth in 2024.

The consensus forecast for Nu’s EPS is for $0.41 this year and for $0.66 in 2025. As mentioned, the recent interest rate decreases in Brazil and Mexico are likely a tailwind to those estimates. The growth of Nu’s operating margins has been exceptionally rapid, relating to scale economies. If the scale grows faster, then EPS estimates are likely to prove to be conservative. Because Nu is a bank, cash flow metrics are of somewhat lesser significance. Cash flow is driven in part by net income but also by credit loss allowances. For what it is worth, the company’s operating cash flow margin last year was reported to be 16% compared to 16% the prior year. GAAP operating margins for 2023 were 13% compared to a loss the prior year. The company uses SBC; it was reported as less than 3% of revenues, down from the prior year.

In looking at costs, the key metrics are gross margins, operating expense ratios and the Net Interest margin. These all showed very positive trends in Q4 both sequentially and year over year. The company’s forward P/E is about 35X. I regard that as notably attractive, especially with estimates that seem likely to be exceeded.

Recapitulating The Case To Buy Shares Of NU

Nu has built one of the largest digital mobile banking platforms in the world. In a few years, it has become the 5th largest bank in Brazil in terms of its share of the credit card market. Its growth has been at exceptional levels, particularly for a bank. Overall, it has acquired just short of 90 million customers in Brazil, and its active account count has reached in the low 70 million range of whom 82% use Nu as their primary banking resource. Customer acquisition metrics have remained at consistent levels in Brazil and jumped sharply in Mexico.

What is equally impressive is that the bank is highly profitable with margins rising significantly and steadily over the last couple of years. Last year, gross margins were up by 800 basis points and the company continued to improve its efficiency ratios.

And the company has been able to grow without sacrificing asset quality. Its net interest margin, perhaps the most encompassing credit quality metric has reached over 18%. The company’s credit loss allowance fell sequentially last quarter and the calculation for the risk adjusted net interest margin has shown consistent growth. As noted above that there are some government programs unique to Brazil that have been a factor in enabling Nu to grow its asset base while minimizing its credit loss allowances.

The company has significant growth initiatives entering markets in Mexico and Colombia. Those two countries, together, likely have a revenue potential equal to that of Brazil. Last quarter, as the result of a significant savings rate promotion in Mexico, Nu was able to acquire almost 1 million customers, bringing its number of account holders to 5 million in that country.

Nu has been developing new credit and savings products at a steady clip and its growth in Brazil has continued at significant levels despite the penetration it has already achieved in that market.

Nu’s opportunities have not been unrecognized by investors. Shares are up by more than 30% so far this year considerably above comparables. Nu’s P/E is still just around 30X and its earnings growth is projected to be greater than 60%. That is a Price/Earnings growth ratio of well less than 1X, often cited by investors and analysts as an attractive valuation.

I don’t often find myself investing alongside of Berkshire Hathaway and Warren Buffet. But I do think that in this case my penchant for growth and his for deep value align.

I have taken a modest position in the shares that I expect to increase over time. I think the shares will produce significant positive alpha over the coming year.

---

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

---