Nu Bank is an underrated achievement $NU

Here is my broad idea on Nu Holdings (Nu Bank), i welcome any critique, as this is purely me thinking out loud, and hopefully getting input from other members here so i can test my own idea against opposition.

Long story short, Nu Bank is the biggest bank in Brazil, starting out as a small issuer of credit cards, roughly a decade ago.

Its total number of active customers in Q1 was 114 million. Out of those, 12 million are from Mexico and 4 from Colombia. In Q1, SoFi had only 14 million ‘members’. I would guess many of you are surprised at the fact how small SoFi is compared to Nu Bank.

But scale can mislead, as revenue per active customer is logically lower for Nu, due to the markets it operates in. Revolut is standing at 50 million retail customers (unclear if active, or just accounts). Klarna same ballpark. The closest comparable (i could find) is not a neobank at all, but Capital One, at around 100 million, and where much of Nu Banks management used to work.

What i find notable is, they built a proprietary banking platform, inhouse, from scratch,  going as far as sponsoring an esoteric open source programming language, which their system is built on. They scaled this system to the biggest group of customer of any neobank, and have done so in an economic environment much more volatile than US or EU markets. But there is no shortage of opinions dismissive of this achievement, as many like to point out, incumbent Banks can "simply digitize”.

I do not believe, and this is the crux of the idea, that incumbent banks can digitize to compete on the same low cost basis, or with on par service. Ever. Impossible. I do not think closing a few branches and buying a new frontend does the trick. I think its easier to build a new bank from scratch, than it is to reform an incumbent bank. This is a high conviction personell belief (which means if im wrong, its bad). To me, incumbent banks are more akin to a corrupt soviet government office, than they are to a modern tech co in terms of service and hierarchy. Further, i think incumbent banks are still in the business of buying or leasing offices and employing people to do nothing, with fee revenue generated by services which should be free. Consider the following efficiency ratios, which is OpEx / Revenue (read as costs on a dollar of revenue):

Nu Holdings 19%

JPMorganChase 52%

BNP Paribas 61%

Deutsche Bank 72%

SoFi Technologies 81% (todo: check if growth related)

UBS 86%

Some housekeeping is necessary due to the nature of this discussion board. Banks come in many sizes and shapes, and they often do very different things. The BMW Bank offers short term returns on cash by facilitating auto loans. Some investment banks serve only high networth individuals. Nu Bank is a commercial bank. A commercial bank serves the regular customer and businesses with accounts and credit. What a commercial bank does, in its original form, is to take in deposits. These (excess) cash deposits are intermediated by the bank to customers seeking a loan. This activity results in Interest Income. Other than that, a bank will often charge fees, which is the second revenue stream banks have. Contrary to popular belief, investment banks are mostly fee driven. Swiss giant UBS only generates 18% of its total revenue from interest income. I consider a banks “core” business the intermediation of customer funds. Nu generates 86% of revenue with interest income, Sofi only 63%.

I think this is notable. First, the low cost basis, and secondly, having that low cost basis while generating revenue mostly by interest income, and not fees.

But banks are banks, and banks are by nature opaque and complex, especially from the outside. They are inherently risky investments, and entire balance sheets can be repriced quickly, and violently. During the great financial crisises, as the end of this repricing, many learned there was no equity left. The bank was bankrupt.

In my personal DCF i have a fair value of $25 per share (double), given the following 10 year time horizon Assumptions:

1. in 10Y, World (US+) will be bigger than Brazil-Mex-Co cohort
2. in 10Y, Nu is banking half of Mexico
3. Net margin and activity stable
4. 6% CAGR in ARPAC
5. User growth slowing by 100 bp YoY

I would argue for a company this impressive, this stock is not cheap, but its certainly not overvalued either. Most likely, it is fairly priced as of now. The recent pullback, in my opinion, offered a reasonable entry position into the stock.

The main bearish factors are, that the market seems to be skeptical Nu can expand into the US, given the much higher competitive landscape. Also, recently, the CFO stepped back from his position, citing personal reasons. He is beloved by markets, and has carried the company through IPO to what it is now. Added to this, is the fact that the majority of the business is still in brazil, and political turmoil and regulatory pressure are high. Political risk in LatAm is something every investor into the region should be hyper aware of.

Having said that, given how important financial services are, services we use daily many times, and being this structurally important in our lifes, i always found it curious that there is no bank above 1 trillion market cap. In my opinion, current banks are badly run businesses, decades behind the times. Remnants. Sorry, Jamie.