Nubank Q1 2022 Earnings Review: growth is strong, but rising interest rates are a trouble
Nubank ( NU 0.00%↑ ) reported Q1 2022 results on May 16, 2022. The company added 5.7 million customers during the quarter and is approaching the 60 million customers mark. It is also rapidly growing its deposit base (130% YoY), loan portfolio (159% YoY), and revenues (258% YoY).
Nevertheless, the company’s stock price keeps falling. One can argue that all growth companies are being repriced, as rising interest rates (in the United States) changed investors’ sentiment. However, I would argue that rising interest rates (in Brazil) give investors an additional reason to worry, as those negatively impact Nubank’s profitability. Let’s break down the company’s quarterly results!
If you are new to Nubank I suggest reading my previous newsletter, “Nubank Q4 2021 Earnings: why is Warren Buffett so bullish about this neobank?”
Customers
Nubank finished the quarter with 59.6 million customers, which represents 61% growth YoY, and 11% sequentially. Out of the total customer base, 57.3 million customers are based in Brazil (55% YoY growth), 2.1 million in Mexico (950% YoY growth), and 0.2 million in Colombia. As I wrote earlier, growth outside of Brazil is critical since Nubank is already serving “33% of the country’s adult population” in its home market.
The number of monthly active customers grew to 46.5 million at the end of the quarter, which represents 78% of the total customer base. As you can see from the chart, the growth in active customers came from both, new customer onboarding, and a higher activity rate (proportion of active customers to total customers).
There isn’t much to comment on the topic of customer growth: Nubank is still acquiring millions of customers per quarter, these customers are actively using the company’s products, and, as I will illustrate later in the text, the cost of customer acquisition is still ridiculously low. I’d expect the growth in Brazil to slow down at some point, so it is good to see the growth in Mexico and Colombia picking up steam.
Loan Portfolio and Deposits
Nubank finished the quarter with $12.6 billion in customer deposits (130% growth YoY and 30% sequentially), and $7.90 billion in loans to customers, net of provisions (159% growth YoY and 32% sequentially). So far Nubank has been able to attract deposits well over its loan portfolio growth, which is good, but as deposits become more expensive due to rising interest rates the loans-to-deposit ratio will become an important metric to watch (63% in Q1 2022 vs. 56% in Q1 2021).
In terms of the loan portfolio composition, $1.7 billion were personal loans (22% of the total loan portfolio), and $6.2 billion were credit card receivables (78% of the total loan portfolio). Interest-earning portfolio stood at $3.1 billion and grew 417% YoY and 55% sequentially. Only the revolving part of the credit card receivables is earning interest; hence, the difference between the total loan portfolio and interest-earning portfolio.
The loan portfolio growth is another strong positive in Nubank’s performance. As can be seen from the chart above, the loan portfolio grows at an incredible rate, and, on top of that, the share of the interest-earning portfolio almost doubled YoY (from 20% of the total loan portfolio in Q1 2021, to 39% of the total loan portfolio in Q1 2022).
Revenue
Nubank reported $877.3 million in revenue for the quarter, which represents 258% growth YoY and 38% growth sequentially. 71% of the revenue came from interest income and gains on financial instruments, and the remaining 29% came from the fees and commissions.
2020 was a difficult year for Nubank (and it’d be fair to say for the whole world). The revenue growth came down to 20% YoY (from 80% YoY in 2018, and 92% YoY in 2019), but as can be seen from the chart below Nubank has been picking up the pace since early 2021. It is more than impressive to see such revenue growth at their scale, and it is even more impressive to see the growth accelerating.
It is important to decompose the growth of the revenue. Thus, the fee and commission income grew 119% YoY and 31% sequentially, while interest income and gains on financial instruments grew 387% YoY and 40% sequentially. In 2020 due to the risks triggered by the pandemic, Nubank put the breaks on lending. However, the restart of lending operations lead to the build-up of the loan book, and compounding interest income.
On the final note, I want to reiterate that Nubank is earning a large part of this revenue stream by investing the unused deposits and company cash into liquid financial instruments (hence “…gain on financial instruments”). Thus, Nubank earned $194.8 million in interest income and gains on financial instruments, which represented 22% of the total revenue.
You can think of it like this: Nubank earned a) 29% of Q1 2022 revenue by charging their clients fees and commissions, b) 49% of Q1 2022 revenue by charging their clients interest on credit card balance and personal loans, and c) 22% of revenue by investing cash in liquid financial instruments.
Gross Profit
Nubank reported $294.1 million in Gross profit for the quarter, which represents 154% growth YoY and 30% growth sequentially. Nubank calculates Gross profit by deducting interest and other financial expenses, credit loss allowance expenses, and transactional costs from revenue. I think it would make sense for Nubank to report similarly to other banks (i.e. Net interest income, Non-interest income, etc.), but for now they report as a true Fintech company (i.e. Revenue, Gross profit, etc.).
As you might have noticed, the company’s gross profit grew at a much slower pace than the company’s revenue (258% YoY vs. 154% YoY). When we discussed revenue above, we saw an accelerating trend, but the chart below shows a deceleration of the gross profit growth.
Gross margin compressed from 47% in Q1 2021 to 34% in Q1 2022 driven primarily by the rising interest and financial expenses. The Central Bank of Brazil has been raising rates aggressively and this translated to higher interest expenses for Nubank, and a lower gross profit margin.
As can be seen from the table below, interest and other financial expenses grew 760% YoY, while the deposit base grew only 130% in the same timeframe. Banks, in theory, should be doing well in the rising rate environment, as they can pass the increasing rates to borrowers. However, that doesn’t seem to be the case for Nubank (interest income and gain on financial instruments grew 387% YoY).
I don’t know if the Central Bank of Brazil is done with raising interest rates, and if Nubank has the flexibility to pass through higher cost of deposits to borrowers going forward, but the gross profit dynamic is critical to watch (and this is where “traditional” banking metrics, such as Net Interest Margin, would add a lot of transparency).
Operating Expenses
Nubank reported $361.8 million in operating expenses, which represented 114% growth YoY, and 15% growth sequentially. As you can see from the breakdown below, “General and administrative expenses” (including share-based compensation) represented 68% of the total operating expenses. Total operating expenses exceed the gross profit, resulting in an operating loss of $67.7 million.
Operating expenses in Q1 2022 grew at a slower pace than both the revenue and gross profit, and as the chart below illustrates the growth considerably decelerated in the quarter. Share-based compensation is an important driver of the general and administrative expenses ($77 million in Q1 2022), and Nubank even issued a separate statement explaining why they spend so much money on compensating executives. You can read the statement (two pages), but in summary, it explains that the compensation of the company’s founder and CEO, David Vélez, is mostly share-based and linked to the share price.
Outside of the general and administrative expenses, Nubank is doing an outstanding job. Thus, the average monthly “cost to serve” an active customer in Q1 2022 stood at $0.7 down from $0.8 in Q1 2021, while the average monthly revenue per active customer was $6.7 (up from $5.6 in Q1 2021). In addition, the company spent $4.8 in marketing expenses on acquiring a new customer in Q1 2022. This cost increased significantly from $1.3 in Q1 2021, but is still lower than the average monthly revenue per active customer.
In summary, the marketing and support costs are relatively low; thus, if Nubank decided to deliver a profitable quarter, it should be able to do so by just controlling the growth in general and administrative expenses (meaning it would NOT have to sacrifice on growth by cutting investment into marketing). Given the change in the investor sentiment, and focus on profitability, I would expect Nubank to actually follow the suit and grow the expenses at a slower rate.
Net Income and Adjusted Net Income
The company reported a Loss attributable to shareholders of $45.1 million for the quarter (an improvement from the loss of $49.4 in Q1 2021). On the adjusted basis Nubank delivered an Adjusted Net Income of $10.1 million in Q1 2022.
I believe the chart below suggests that Nubank is not optimizing for (unadjusted) profit, but tries to keep the Adjusted Net Income (Loss) around zero. You cannot blame the management for this strategy, as the investments that they are making are delivering the triple-digit growth that I described above. Perhaps, the changing investor sentiment will change that, but I wouldn’t bet on that, as the company has both, growth opportunities and cash to pursue those.
Things to watch in 2022
Customer growth in Mexico and Colombia. Nubank’s ability to scale in the new market remains the key metric that I am watching. They delivered another impressive quarter in terms of customer growth in Brazil, but at some point, this growth will stall.
Interest margins. Nubank is scaling rapidly its loan portfolio, and increasing the share of interest-bearing loans; however, the rising cost of deposits is negatively impacting the company’s gross profit margin. Let’s see if Nubank can pass at least part of this increase to the borrowers, but for now, this is probably the highest risk that can derail the company’s path to profitability.
Acquisitions. The company raised $2.6 billion in its IPO, and we are yet to see the ambition behind this. As the financials suggest the company didn’t need so much capital to fuel existing operations, so I would expect Nubank to pursue inorganic growth opportunities (perhaps, in Mexico and Colombia?).
Fee income growth. As I illustrated above, the interest income share in the company’s revenue keeps increasing, as it builds its loan book. Nevertheless, Nubank is actively investing in fee-generating products (NU Pay, NU Crypto), so I will be watching how these investments translate into incremental revenue.
In summary, this was a very strong quarter in terms of customer, deposit, loan portfolio, and revenue growth. However, the rising interest rates and compressing gross profit margin might make (at least some) investors worried, which is understandable, as interest income represents a large portion of the company’s income.
Source of the data used above: Nubank’s Investor Relations
Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.