Nu Holdings Banks More Than Half the Adults in Brazil

Brazil has about 213 million people. As of the end of the second quarter, about 118 million of them — more than half the country, before even narrowing the count to adults — were customers of Nu Holdings (NU +9.33%), the digital bank behind the Nubank brand.

The company reported second-quarter results after the closing bell on Thursday, and the headline number was profit. Net income surpassed $1 billion for the first time, rising 49% year over year on a currency-neutral basis, with a 33% return on equity.

But the numbers that describe saturation may matter more for the long run. Nu’s monthly activity rate in Brazil surpassed 86% for the first time, meaning the accounts aren’t just open — they’re being used.

So what does growth look like for a bank that has, in one sense, already won its home market?

Growth without new customers

Nu added about 4 million customers in the quarter, reaching 138.9 million globally, up 13% year over year. That is a solid rate, and also a slowing one. It is the natural arithmetic of a company running out of Brazilians to sign up.

The growth now comes from each customer, not just more of them. Monthly average revenue per active customer (ARPAC) reached $17.10 in the quarter, up 22% year over year in currency-neutral terms, while the monthly cost to serve an active customer held around $1. In annual terms, that is about $205 of revenue per active customer against about $12 of cost to serve. The overall monthly activity rate expanded sequentially to 83.5%, with Brazil above 86%.

The balance sheet is scaling with the engagement. On a currency-neutral basis, Nu’s credit portfolio grew 37% year over year to $39.4 billion, deposits grew 18% to $45.3 billion, and gross profit climbed 43% to $2.4 billion.

Put another way, the average active customer generates more revenue every quarter, costs almost nothing to serve, and increasingly borrows from and deposits with the company. With engagement above 80%, gains like those can flow through to profit quickly. That is how net income grew several times faster than the customer count.

“This is no longer a hypothesis, and we are now generating more than a billion dollars in quarterly net income,” founder and global CEO David Vélez said in the company’s second-quarter report.

Mexico looks like Brazil in 2020

The headroom argument rests on the newer markets. Nu ended the quarter with 15.8 million customers in Mexico (a count the company says reached 16 million in July) and more than 5 million in Colombia. Nu says it reaches 16.5% of Mexico’s adult population, comparable to where Brazil stood in 2020, but that Mexican cohorts are monetizing earlier, with ARPAC of $12.30 at a stage when Brazil’s was $5.60.

That comparison is, to me, the whole bull case in miniature. Brazil went from 16% of adults to more than half of all Brazilians in about six years, and profitability followed. If Mexico and Colombia repeat even part of that path, they likely carry the customer growth for years to come.

Neither is guaranteed to follow it. Both countries come with entrenched incumbents and their own regulators. But customers who pay more, earlier, are an encouraging start.

Today’s Change

(9.33%) $1.30

Current Price

$15.23

Key Data Points

Market Cap

$74BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$15.00 – $16.22

52wk Range

$11.20 – $18.98

Volume

156.4M

Avg Vol

76.5M

Still cheap?

Shares trade near $15 as of this writing, after jumping about 8% in after-hours trading on the report — about 23 times earnings.

Measured against analysts’ forecasts for the coming year, the forward price-to-earnings ratio is closer to 17. The gap between those two multiples is the market acknowledging the profit growth.

And against the pace of that growth — earnings per share rose 47% over the past year — the stock’s valuation looks arguably modest.

However, a saturated home market changes the shape of the risk. Nu’s growth in Brazil from here depends on wallet share and credit. And a credit portfolio growing 37% a year, in a country where the company already banks more than half the population, is the number worth watching. Credit is where fast-growing lenders have historically gotten hurt.

I think the second quarter settled one argument. A digital bank serving most of a large country can be extraordinarily profitable, and the model no longer needs the benefit of the doubt. The growth argument now runs through Mexico and Colombia. For now, they look the way Brazil did in 2020, by the company’s own measure.