They are saying you need to by no means discuss cash with individuals who have far more or a lot lower than you. Touring in rising market international locations will shortly make you see how necessary that rule turns into when negotiating costs. Equally, once you analyze a agency that’s offering monetary providers in rising markets, you should take away your ethnocentric goggles and attempt to perceive what’s occurring in a world that’s completely different from the one you’re accustomed to.
Brazilian fintech Nu Holdings (NU) has been raised by our readers quite a few instances as a result of it’s a compelling thesis that’s simple to digest. The Latin American fintech alternative is very large – maybe within the vary of a number of hundred billion {dollars} – and the chief on this house proper now seems to be the biggest digital financial institution on the planet – Nubank. As we found with different giant fintechs like SoFi, it’s a chore to determine the place the revenues come from.
How Does Nubank Make Cash?
Open the most recent earnings deck from Nubank and see in case you can work out how they’re creating wealth. Point out is fabricated from insurance coverage merchandise, bank cards, private loans, funding merchandise, even crypto, however nowhere within the deck can we shortly glean how this firm makes cash. After an hour of probing round their collateral, we got here throughout a desk on web page 212 of the 2021 annual report that exhibits us the place the cash comes from.

The 4 income streams highlighted above in yellow account for 85% of the corporate’s 2021 revenues.
- Curiosity revenue from bank cards – 22%
- Curiosity revenue from private loans – 17%
- Curiosity earned on property – 18%
- Interchange charges – 28%
The biggest of the lot – and essentially the most fascinating – can be interchange charges that come from Nubank clients utilizing their bank cards to make purchases. The newest earnings deck tells us 95% of those clients are positioned in Brazil, 4% in Mexico, and fewer than 1% in Colombia. If we use this as a proxy for worldwide income diversification, Nubank remains to be closely depending on a single nation – Brazil – for his or her fortunes.
When evaluating how these 4 income streams could be impacted by exterior forces, interchange charges appear essentially the most secure. Shopper spending would possibly flatline or decline a bit, or the interchange charge construction may shift a bit, however this appears to be essentially the most secure and predictable aspect of their enterprise mannequin. Distinction this to lending which turns into a bit trickier.
Nubank Private Loans and Credit score Playing cards
Curiosity revenue coming from private loans and bank cards constituted practically 40% of 2021 revenues for Nubank with private loans rising at over 600% year-over-year. Hopefully, they’re being selective with who they lend cash to, one thing StoneCo discovered the exhausting manner when their mortgage portfolio imploded.
To assist traders higher navigate Nubank, we’ll use their newest earnings deck – Q2-2022 – and level to the related slides used to observe loans and bank card debt excellent. Web page 14 of the deck comprises the under chart exhibiting the excellent stability of bank card receivables and private loans.

The bank card receivables seen above usually are not all curiosity bearing, and the precise quantity may be discovered on web page 30 of the deck – what they name their “curiosity incomes portfolio” – in a chart that exhibits the loan to deposit ratio (LDR) which Nubank expects to at all times be above 14%.

Along with ensuring that deposits continue to grow to match the expansion in lending, traders additionally want to observe how the curiosity incomes portfolio performs.
We’re seeing a big improve in private loans pushed by buyer demand and as extra clients change into eligible for our private mortgage product. Bank card balances are additionally rising, pushed by a rise in PV, primarily on account of the general progressive restoration of PV ranges because the financial results arising from COVID-19 steadily subside and we add new clients.
Credit score: Nubank
Rising bank card balances hardly looks like a number one indicator of shopper monetary well being. For those who make a private mortgage providing accessible to individuals, they’re extra prone to avail themselves of it. Nubank additionally expanded the variety of methods through which they’ll monetize their bank card portfolio, which implies extra issues may be financed, and all of us simply should hope and pray that Brazilian customers aren’t overextending themselves.
One technique to gauge the standard of Nubank’s mortgage/credit score portfolio is by non performing loans (NPLs) as a share of complete loans. The under chart exhibits the share of NPLs over time (individuals who have missed a fee for 90 days or extra).

The above chart may be discovered on web page 32 of the earnings deck in an appendix. That’s as a result of a latest methodology change by Nubank produces the a lot nicer chart seen under (web page 24 of the deck) which is what you’ll be able to count on to see going ahead.

The methodology change was merely to jot down off NPLs after 120 days, not 12 months. In different phrases, get the NPLs off the stability sheet quicker and produce the ratio down. It’s a terrific instance of how complexity permits for firms to craft the narrative because the setting adjustments. Firms do that on a regular basis, however it turns into tough to maintain monitor of when you may have so many shifting elements.
Buyers will wish to preserve a detailed eye on the NPL metrics as a result of they need to present a number one indicator as to when clients run into issues paying their payments. Inflation has been hovering in Brazil, and individuals who have to eat gained’t hesitate to make use of debt to place meals on the desk. That’s even the case in developed markets.
Curiosity Earned on Belongings
The chance-free price of return is the rate of interest an investor can count on to earn on an funding that carries zero danger. “There’s no such factor as an funding with zero danger,” you would possibly say, and also you’d be proper. But for some purpose, financiers collectively agreed {that a} 3-month authorities Treasury invoice is the least dangerous asset one can personal. Subsequently, traders can count on to be compensated accordingly.
Investing in a risk-free asset will at present offer you round 3% yield. Distinction this to the Brazilian 10-year bond which yields practically 12% for good purpose. Buyers are being compensated for the dangers they’re taking, Nubank being one among them (our emphasis in daring).
We generate curiosity revenue from our interest-earning portfolio and curiosity on company money, which we make investments primarily in authorities bonds.
Credit score: Nubank
That is the place issues begin to get very difficult once we think about the impression of rate of interest adjustments on bond costs, the yield curve, the period of Nubank’s bond portfolio, and the listing goes on. It’s not solely an extremely advanced net of interrelated variables, it’s additionally boring as hell. So, we’ll conclude by saying that with a view to perceive how rates of interest will have an effect on Nubank, you can begin with the sensitivity evaluation work they’ve introduced on web page 256 of their annual report and shoot holes in that.
Aping the Oracle of Omaha
There are many causes to be bullish on the expansion of Latin America which magnetize even essentially the most conservative traders. Retail traders usually level to the investments made by Warren Buffet in Latin American (LATAM) fintechs as proof of their prospects however we at all times have to take institutional investor participation with a grain of salt.
Since Buffett is an energetic investor, the businesses he chooses to carry are solely based mostly on his perception that they stand to understand in value. Taking a look at Berkshire Hathaway’s present holdings, greater than 40% of the portfolio consists of Apple shares. Distinction this to his Brazilian fintech holdings – 0.13% in Nubank and 0.03% place in StoneCo. Right here’s how this appears within the context of a $100,000 portfolio:
- Nubank: $133.50
- StoneCo: $27.40
Warren Buffet has very insignificant publicity to those two Brazilian fintech shares, one thing that must be thought-about when pointing to his vote of confidence. That mentioned, at at present’s costs you’re paying much less for Nubank shares than what Buffett did, one thing which will relate to a sale restriction being lifted this previous spring which is quickly miserable the share value. Or it could possibly be that valuation fashions should be revisited within the face of Brazil’s surging inflation and better rates of interest.
Valuing Complexity
Until your day job entails analyzing Brazilian fintech shares, you’ll be hard-pressed making an attempt to maintain monitor of all of the acronyms, charts, buzzwords, and nomenclature Nubank throws at you, all whereas contemplating that the reality lies under a misleading layer of derivatives. Nubank receives curiosity funds in Brazilian reals, then pays internet hosting suppliers in U.S. {dollars}. It’s critically necessary to hedge away the danger related to that unstable forex pair, and such methods change into advanced in a rush. Simply days in the past, a significant U.S. financial institution regulator warned that the fintech sector has been working amok with many unknown dangers and little regulation to maintain issues below management.
As we discovered from the 2008 monetary disaster, dangers which can be unseen tend to develop and later to be the supply of nasty surprises.
Michael Hsu, Performing Comptroller of the Forex
Ah sure, massive banks are feeling the specter of fintech and are propelling their puppet within the U.S. authorities to warn everybody, however in case you sift by way of the Nubank 20F or the SoFi 10-Okay, you’ll begin to see his level.
Many traders make the error of setting arbitrary value targets based mostly on share value. Some would possibly assume 5 {dollars} a share for Nubank is a steal, however they could be falling prey to the propensity for retail traders to confuse the worth of a share for the worth of a share. When setting a value goal, at all times use a valuation ratio as an alternative of a share value. Since progress shares often aren’t worthwhile, we use our easy valuation ratio – market cap divided by annualized revenues. Right here’s that quantity for Nubank:
- 25,042 / (411.57 * 4) = 15
And right here’s that quantity for a handful of fintech corporations plucked from our tech inventory catalog.
Asset Title | Nanalyze Valuation Ratio |
Robinhood | 7 |
Remitly | 3 |
Adyen | 7 |
Block (Sq.) | 2 |
PayPal | 4 |
Shares of Nubank would hardly be thought-about low-cost proper now, however that’s as a result of traders have sturdy expectations of future progress. And that’s one factor you can not argue with. Nubank is rising revenues like mad.

Conclusion
A great deal of potential may be realized in LATAM fintech and Nubank is a pacesetter on this house that’s presently increasing into different geographies. Brazilians in all probability stand the most effective probability of navigating this house as they possess an energetic understanding of what’s occurring. Monetary corporations are terribly advanced, to start with, particularly fintechs making an attempt to displace banks (assume SoFi). Attempting to grasp advanced fintechs in non-native jurisdictions turns into subsequent to unattainable. Retail traders of Brazilian descent will likely be higher suited to observe the well being of Nubank’s enterprise. For all others, don’t make investments except you’re prepared to place within the time to really perceive what you’re moving into.
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