{"id":1765,"date":"2023-11-15T13:05:33","date_gmt":"2023-11-15T13:05:33","guid":{"rendered":"https:\/\/bridgewise.com\/?p=1765"},"modified":"2024-02-08T16:34:09","modified_gmt":"2024-02-08T16:34:09","slug":"what-to-know-about-brazils-largest-digital-bank-nubank","status":"publish","type":"post","link":"https:\/\/bridgewise.com\/blog\/insights-and-trends\/what-to-know-about-brazils-largest-digital-bank-nubank\/","title":{"rendered":"What to Know About Brazil\u2019s Largest Digital Bank Nubank"},"content":{"rendered":"

By Ilan Furman, CFA<\/em><\/p>\n

Nubank<\/a>, founded only in 2013, is today one of largest digital banks in Brazil. In the third quarter, the company\u2019s client base reached 89.1 million.\u00a0Nubank operates in Brazil (its largest operation), Mexico and Colombia.<\/p>\n

Nubank\u2019s\u00a0third quarter earnings demonstrated the company\u2019s long-term growth and profitability potential.\u00a0Nubank\u00a0meaningfully beat consensus estimates with Net Income of $303 million, almost 20% higher than street consensus. Return on Equity was high at 21%. The main driver for the beat was asset quality, with provision expenses coming lower than expected.<\/p>\n

Nubank\u00a0continued to grow strongly in the third quarter with loan growth of 91% and Net Interest Income growth of 127% on a year-on-year basis. As seen in the charts below, growth in the past few years has been phenomenal.<\/p>\n

Nubank\u2019s combination of growth and profitability demonstrates the operating leverage potential of digital banks versus traditional banks. The difference can be assessed through three key ratios used in the banking sector \u2013 Efficiency ratio, Net Interest Margin (NIM) and Return on Equity (ROE).<\/p>\n

Efficiency ratio is calculated by dividing operating costs (OPEX) by Net Interest Income. Banks are a scalable business and if we think of the traditional banking model \u2013 growth was through recruiting more employees and opening more branches. Therefore, the marginal cost for banks\u2019 growth is growing salary expenses for an additional employee. Though digital banks need more employees to support growth as well, the scalability and efficiency are significantly higher for digital banks as their operation is done online. This is already evident in\u00a0Nubank\u2019s\u00a0numbers:\u00a0Nubank\u2019s efficiency ratio is way lower (about 20%) than its peers. Another ratio demonstrating\u00a0Nubank\u2019s structural improved efficiency is by\u00a0number of employees per active client. According to this metric,\u00a0Nubank\u2019s employee is almost 20 times more efficient than incumbents.<\/p>\n

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Net Interest Margin (NIM) measures the spread between banks\u2019 pay for deposits to charge on loans. NIM expresses the banks\u2019 pricing power. Traditional banks benefit from a large client base and a perception of stability \u2013 therefore, their pricing power is stronger than new players. Creating market presence and brand recognition requires new entrants as the digital banks pay and charge less. This was true for\u00a0NuBank a few years ago \u2013 aggressive client acquisition resulted in significantly lower NIM than its traditional banks peers. However, with time,\u00a0Nu\u2019s brand recognition increased, leading to a significant contraction in NIM versus peers.<\/p>\n

Return on Equity (ROE) this quarter was 21%, more or less inline with incumbents. However,\u00a0NuBank still has loss making operations (Mexico and Colombia) and a very high capital position due to its recent IPO. With an equivalent capital position and larger scale at its subsidiaries,\u00a0NuBanks\u2019 ROE can double from current levels.<\/p>\n

The chart below demonstrates\u00a0Nu\u2019s excess capital position:<\/p>\n

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\n<\/picture>Net Interest Margin (NIM) measures the spread between banks\u2019 pay for deposits to charge on loans. NIM expresses the banks\u2019 pricing power. Traditional banks benefit from a large client base and a perception of stability \u2013 therefore, their pricing power is stronger than new players. Creating market presence and brand recognition requires new entrants as the digital banks pay and charge less. This was true for\u00a0NuBank a few years ago \u2013 aggressive client acquisition resulted in significantly lower NIM than its traditional banks peers. However, with time,\u00a0Nu\u2019s brand recognition increased, leading to a significant contraction in NIM versus peers.<\/p>\n

Return on Equity (ROE) this quarter was 21%, more or less inline with incumbents. However,\u00a0NuBank still has loss making operations (Mexico and Colombia) and a very high capital position due to its recent IPO. With an equivalent capital position and larger scale at its subsidiaries,\u00a0NuBanks\u2019 ROE can double from current levels.<\/p>\n

The chart below demonstrates\u00a0Nu\u2019s excess capital position:<\/p>\n

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Net Interest Margin (NIM) measures the spread between banks\u2019 pay for deposits to charge on loans. NIM expresses the banks\u2019 pricing power. Traditional banks benefit from a large client base and a perception of stability \u2013 therefore, their pricing power is stronger than new players. Creating market presence and brand recognition requires new entrants as the digital banks pay and charge less. This was true for NuBank a few years ago \u2013 aggressive client acquisition resulted in significantly lower NIM than its traditional banks peers. However, with time, Nu\u2019s brand recognition increased, leading to a significant contraction in NIM versus peers.<\/div>\n<\/div>\n
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Return on Equity (ROE) this quarter was 21%, more or less inline with incumbents. However,\u00a0NuBank still has loss making operations (Mexico and Colombia) and a very high capital position due to its recent IPO. With an equivalent capital position and larger scale at its subsidiaries,\u00a0NuBanks\u2019 ROE can double from current levels.<\/p>\n

The chart below demonstrates\u00a0Nu\u2019s excess capital position:<\/p>\n

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This business model and its strong operating leverage potential can be simplified to the following chart:<\/p>\n

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NubankHoldings: Bridgewise recommendation<\/strong><\/p>\n

Following\u00a0Nubank\u2019s quarterly performance, the company received an Outperform rating with an 82 score, the highest score among Brazilian banks.<\/p>\n

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The main highlight was the income statement of the bank, receiving a score of 83. Taking a deeper dive into the income statement, we can see return factor momentum receives an almost perfect score of 94. This can be explained by the massive improvement seen in\u00a0Nubank\u2019s ROE to 21%.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

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Other highlighted factors include Free Cash Flow Growth (97 score) and both Liabilities Movement and Assets change (87 score).<\/p>\n

The score is higher than Brazil\u2019s traditional banks \u2013\u00a0Itau<\/a>\u00a0(Hold with a 72 score) and\u00a0Bradesco<\/a>\u00a0(Underperform with a 62 score).<\/p>\n

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Other highlighted factors include Free Cash Flow Growth (97 score) and both Liabilities Movement and Assets change (87 score).<\/p>\n

The score is higher than Brazil\u2019s traditional banks \u2013\u00a0Itau<\/a>\u00a0(Hold with a 72 score) and\u00a0Bradesco<\/a>\u00a0(Underperform with a 62 score).<\/p>\n

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More recently, high end fashion brands are using AI to support growth, operational efficiency, client relationship and many areas of the design. For example, Gucci and the entire LVMH group is starting to embrace different AI initiatives.<\/div>\n
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Investing in Luxury Brands\u00a0<\/strong><\/h3>\n

Investing in strong luxury brands, especially in the current macro environment, is interesting considering their brand recognition, pricing power, resilience in economic downturns, and growth potential.<\/p>\n

The brand recognition and pricing power are quite significant barriers to entry, supporting the high profitability of these brands.<\/p>\n

In line with the sportswear apparel trend in Luxury goods,\u00a0Lululemon<\/strong><\/a>\u00a0received an outperform rating and an overall score of 76.<\/p>\n

The company focuses on yoga and athletic apparel, and its products often incorporate high-quality materials and innovative design features. The company was founded in 1998 and expanded rapidly to reach a global footprint.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

All there is to know about Nubank, Brazil’s largest digital bank – presented by Bridgewise.<\/p>\n","protected":false},"author":3,"featured_media":1770,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","inline_featured_image":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[27],"tags":[],"class_list":["post-1765","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-insights-and-trends"],"acf":[],"_links":{"self":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts\/1765","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/comments?post=1765"}],"version-history":[{"count":0,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/posts\/1765\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/media\/1770"}],"wp:attachment":[{"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/media?parent=1765"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/categories?post=1765"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bridgewise.com\/wp-json\/wp\/v2\/tags?post=1765"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}