Latin American digital bank Nu Holdings Ltd. will likely face growing pressure to show profitability over the short- and medium-term following its blockbuster initial public offering as global investors place its net income under closer scrutiny.
Nubank's ultimate goal will be to turn a lossmaking operation into a profitable business, according to industry experts.
On Dec. 8, the Brazilian fintech attained a market capitalization of $41.5 billion at the New York Stock Exchange and launched the biggest IPO for a Latin American company in the U.S. in all of 2021. The initial pricing of the IPO, with shares at $9 apiece, transformed Nubank into the largest bank by market value in the region.
But the company has some pending matters. Nubank has yet to produce profits out of its regional business, and its profitability is nowhere near that of traditional competitors such as Itaú Unibanco Holding SA, Banco Bradesco SA and Banco Santander (Brasil) SA.
As analysts begin to raise questions about existing tensions between the company's unparalleled expansion capabilities and the monetization of that growth, Nubank's stock price has reflected significant volatility.
Following a strong debut with 16% gains on its first day of trading and after hitting an $11.85 peak on Dec. 10, the share price receded in the following trading days. Amid a broader global context of aversion to technology firms, the stock price dipped to $8.94 on Dec. 20.
"The stock has been showing great volatility since the IPO," Rafael Schiozer, a finance professor with the Fundação Getulio Vargas think tank, said in an interview. Although that volatility is not uncommon for new stocks, Schiozer said, it may signal that "investors may be questioning themselves" about how Nubank will increase its profit margins and "how soon that will happen."
A change in mindset
A shift toward a profitability strategy will imply a reset in the company's mindset, according to industry experts.
"In the past, they were just growing and growing without looking at profitability," Guilherme Machado, a bank analyst with S&P Global Ratings, said in an interview. "It was almost as if they did not care. Now that has changed for good."
The volatility could continue for a few quarters as the company strives to strike the right balance between two strategies: further expansion of its clientele across Latin America and seeking profitability over the short term through product diversification.
Nubank has focused aggressively on customer growth, and its successful strategy has paid off, securing a client base of 48 million in Brazil, Mexico and Colombia that establishes the bank as one of the largest in the world by users.
"It might take a while for Nubank to change its mindset from growing the customer base to focusing on shareholder return," Schiozer said, adding that new investors and shareholder activism could lead Nubank to consolidate their corporate governance in this new stage.
A broader financial services menu
Nubank's original product was a popular purple credit card. It then expanded to add a savings account, investment brokerage, lending and insurance. In 2020, it bought an investment platform, Easynvest. It also inked a deal with collateral loans provider Creditas Soluções Financeiras Ltda.
"Nubank has been pursuing a clear product diversification strategy in Brazil," João Bragança, a principal with Roland Berger consultancy firm, said. "If they want to be profitable, then they cannot afford to be just a pure payments business. [They] must have a broad product portfolio."
For him, that could mean taking a more aggressive approach to credit in Brazil, which would contribute to an increase in profit margins.
In its IPO filing, Nubank disclosed an average revenue per customer of $4.90 by the end of the third quarter. It is a tenth of what big banks show, the company acknowledged.
But Nubank's business comes from dealing in big numbers.
"While we may not reach these levels because the vast majority of our products have no fees, we believe we can increase our [average revenue on customer] meaningfully over time," the bank said in the filing. To that end, cross-selling additional financial products was as important as expanding the user base, Nubank said.
In the filing, Nubank said the revenue on customers can grow from $4.90 to $23 through adequate cross-selling of its products.
"They still have an account activation issue," Bragança said. "They report almost 50 million clients … [but] obviously a quarter of the Brazilian population is not operating through neobanks."
The expectation is that the bank will eventually turn dollars out of its operations and that the path will yield results.
"They are getting there," Ratings' Machado said. "They have a good knowledge about the credit capacity of their clients, and they have the models to do a good job by offering loans to them. They are able to get profitable pretty much when they want."
A growth company
In an on-site interview at the NYSE, Nubank CEO and co-founder David Vélez said the proceeds of the IPO would help fuel external growth. "A lot of the capital we raised is going for new markets in Mexico and Colombia. We continue to prioritize growth."
The company has expanded beyond Brazil in recent years, looking to replicate its homeland success in other underbanked markets.
Nubank taking on the challenge of geographical expansion looks attractive to investors. "Its potential to turn into a global bank is what gives Nubank a greater dimension than already established Brazilian banks," Joelson Sampaio, a São Paulo-based economist, said in an interview.
The bank leverages on a lower entry barrier by nature of its operation: It is fully digital, has no branch footprint and has lots of flexibility to set up abroad.
But as its user base grows, so does the pressure to deliver results. The company reported a $99 million loss for the nine months ended Sept. 30, an improvement from the $230 million loss reported for 2020.
As of Dec. 20, US$1 was equivalent to 5.72 Brazilian reais.