Nubank sees profit surge in Q3

Brazil’s Nubank had a strong third quarter in which its adjusted net profit reached US$592 million, beating the US$559 million expected by the London Stock Exchange Group. The Brazilian online lender’s annualized non-adjusted return on equity, a measure of profitability, reached a record 30%. According to Reuters, the profitability increase can be attributed to more active customers and higher average revenue per active customer. During the September quarter, Nubank reached 100 million customers in Brazil, a number that represents 57% of the adult population in the country.

Nubank is unique among digital banks globally because it is both huge and profitable. Other profitable online lenders, such as Korea’s Kakao Bank – which has about 22 million customers – are much smaller. Even the wildly ambitious Revolut is less than half as large as Nubank.

Compared to Revolut, Nubank has expanded its operations more judiciously. The Brazilian digital bank has only established operations in two other countries – Mexico and Colombia – both in Latin America. Nubank currently has 8 million customers and US$3.3 billion in deposits in Mexico and $220 million in deposits in Colombia.

One thing Nubank has to watch out for is delinquent loans. In the third quarter, the 90-day-plus default ratio for loans in Brazil, its main business, climbed to 7.2%, compared to 7% in the second quarter and 6.1% a year earlier.

In September, Bloomberg noted that Nubank’s payments of 90 days or later are significantly higher than the 5.5% average for the banking sector calculated by Brazil’s central bank. “The discussion on credit quality made us decide to follow this from a little further away,” Fernando Fontoura, a portfolio manager at Persevera Asset Management in Sao Paulo, told Bloomberg. Persevera unloaded the Nubank shares it held in June as the position became “crowded,” Fontoura said. Meanwhile, both JPMorgan Chase and UBS downgraded their outlook for the online lender to neutral in July, citing deteriorating asset quality. 

Yet investors do not seem worried. While Nubank’s stock price has fallen about 1% over the past month, the longer-term trend is encouraging. The stock is up 16% over the past six months and 73% year to date. Given Nubank’s strong fundamentals, such as its significant scale and ability to be profitable, delinquent loans are unlikely to be a dealbreaker for investors unless the ratio ticks up sharply and stays at an elevated level.