Nubank has laid out ambitions to be Latin America’s biggest financial services group as the $42bn-valued digital lender is predicted to hit the milestone of $1bn in annual profits.
Chief executive David Vélez told the Financial Times the company he launched in Brazil around a decade ago could become the region’s largest in the sector by customer numbers, with expansion under way in Mexico and Colombia.
“I think that will happen eventually,” said the 42-year-old Colombian. “We’re now in the top five. We see a path towards becoming the leading financial institution in Latin America and one of the leading financial institutions in the world over a number of decades.”
After narrowing losses to $9.1mn in 2022, equity analysts forecast the financial technology group will this month report $1bn of annual net income for 2023.
“It‘s the first time a western neobank reaches that milestone, so it should give peers and investors confidence in what can be achieved,” said Christoph Stegmeier at management consultancy Simon-Kucher & Partners.
Having shaken up Brazil’s staid banking sector, which traditionally charged for basic services such as accounts and money transfers, the company’s next big bet is Mexico.
The North American country “has the potential to be as important as Brazil for us”, said Vélez, citing its large population of almost 130mn and higher income per capita. More than half of adults do not have a bank account, according to regulator CNBV.
“The penetration of financial services in Mexico is way lower than Brazil,” added the Colombian entrepreneur.
This is down to an issue of supply rather than demand, he argued, taking aim at the country’s entrenched lenders.
“[It’s] an established oligopoly that has been extremely conservative, doesn’t want to take any risk, and has gotten to believe [it can] blame consumers and not themselves.”
Nubank began life as a zero-fee credit card managed by a mobile app and through rapid growth has expanded into a full-service banking offering, with everything from current accounts to investments and insurance. Today it boasts 90mn users, most of whom are in its homeland.
Though still smaller than regional incumbents such as Brazil’s state-owned Caixa Econômica Federal, which has about 150mn clients, the branchless financial technology group says it is adding about 1mn customers a month.
The São Paulo-based fintech floated in New York at the end of 2021, just before a downturn in valuations in the wider tech sector.
Stock in Nu Holdings, as the listed entity is formally known, has increased by more than 80 per cent in the past 12 months, rising just above its initial public offering price of $9. Shareholders include SoftBank and Warren Buffett’s Berkshire Hathaway.
With net profit above $300mn in the third quarter, Nubank’s annualised return on equity — a key profitability metric in banking — was 21 per cent in the period. “That really positions us as one of the most profitable financial institutions in Latin America,” said Vélez.
However, the challenger bank will have its work cut out replicating its Brazilian success in Mexico, where a number of industries are dominated by oligopolies and have cautious regulators.
Mexico’s slow digitalisation and strong preference for cash has been called a “puzzle” by one think-tank. In four years since entering, Nu has shot up to being one of Mexico’s largest card issuers by volume and has 5.5mn customers, according to the company.
Its loan book grew a little over 1 per cent in the six months to September and by value its credit card market share is just over 2 per cent, according to regulatory data. “We tend to pause at times to launch new credit models,” said the chief executive. “Over a longer period of time, you will see us continuing to take significant market share.”
Banking industry insiders say it is hard to make big profits on mass-market credit cards in Mexico due to high default rates and low-value, sporadic use. Card issuers also have to pay back retailers within days, versus 30 days in Brazil.
Nu’s default rates in Mexico are higher than the average at its peers, which the company puts down to its large number of first-time card customers. It is offering a 15 per cent annual yield on deposits.
“If they [Nu] manage to calibrate the additional risks they are taking with the higher profit they can have with this new base of clients, it could work, it’s a question, no one has done it on a big scale before,” said Guillermo Ortiz, ex-governor of Mexico’s central bank and a board member of Brazilian investment bank BTG Pactual.
Although Nubank’s focus for now is on the three markets where it operates — Brazil, Mexico and Colombia — it is also looking at entering new territories in Latin America and beyond, according to Vélez.
This could eventually include the US, he added. Nubank recently launched a service allowing its Mexico customers to receive remittances from there.
“It could be an interesting opportunity, particularly given the high percentage of Latino demographics in the US,” said the executive.
Pedro Leduc, analyst at Itaú BBA, said market expectations for Nu to reach a 30 per cent return on equity in 2024 would make it the most profitable large consumer bank in Latin America.
But he argued it needed to tailor more services to wealthier segments in Brazil, where it banks every other adult.
“To keep growing and gain more [market] share, they must start personalising their products to better serve the upper-income client. That’s the big challenge for them in 2024.”
Vélez said this was already a priority, giving as examples payroll loans for employees and a premium card with cashback.
“Banking in Latin America is a $1tn market cap opportunity,” he added. “We are poised to be the market leader.”
