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Nubank Q2 2022 Earnings Review: what will drive the growth past 2022?
Nubank reported another stellar quarter: the company added 5.7 million new customers, passing by the 65 million total customer milestone, and grew its revenue 244% compared to Q2 2021. Deposits grew 77% YoY, the interest-earning portfolio grew 209% YoY, and gross profit grew 118% YoY….I mean, this was a fantastic quarter all across the board.
However, the company pulled back considerably on loan originations over concerns about the economic situation in the country and the rising interest rates. As the interest income growth is both, the key component and the key driver, of the company’s revenues, I argue that a slowdown in lending will hurt the company’s revenue growth in the coming quarters. Don’t get me wrong, the company will still deliver 150%+ YoY revenue growth this year even if the revenue remains flat for the rest of the year. However, my concern is: what will drive the growth in 2023?
Let’s break down the company’s financials!
If you are new to Nubank, I suggest reading my previous reviews:
👉🏻 Nubank Q4 2021 Earnings: why is Warren Buffett so bullish about this neobank?
👉🏻 Nubank Q1 2022 Earnings: growth is strong, but rising interest rates are a trouble
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Nubank added 5.7 million customers in Q2 2022, finishing the quarter with 65.3 million customers. This represents a 57% growth compared to Q2 2021, and 9.6% growth sequentially. I continue to closely watch the company’s progress in new markets: thus, Nubank finished the quarter with 2.7 million customers in Mexico (up from 2.1 million at the end of Q1 2022), and 314K customers in Colombia (up from 211K customers at the end of Q1 2022).
The company reported 52.3 million monthly active customers in June, 2022, representing an activity rate improvement from 72% in Q2 2021, and 78% in Q1 2022. In addition, the company claims that 55% of its customers are using Nubank as their primary banking account.
It is impressive that Nubank can grow in Brazil despite already serving more than 35% of the adult population in the country. I believe a part of the trick lies in the fact that Brazilians are using multiple banking providers. Nevertheless, I am still of the opinion, that the company’s growth outside of Brazil is crucial for justifying its valuation.
Loan Portfolio and Deposits
Nubank reported $13.3 billion in deposits, representing 77% growth compared to Q2 2021 and 5.6% growth sequentially. In addition, the company finished the quarter with $8.15 billion in personal loans and credit card receivables on its balance sheet (net of provisions), up 88% compared to Q2 2021. It should be noted that the company does not use external funding or securitization to fund originations.
A lot of questions on the company’s earnings call were dedicated to the slowing growth in the loan portfolio. As you can see from the chart below, the personal loan portfolio was flat quarter-over-quarter, and the growth came purely from the increased balance of credit card receivables. The interest-earning portfolio grew from $3.1 billion in Q1 2022 to $3.2 billion in Q2 2022.
The company stated that the slowdown in lending growth did not come from lower customer demand, but rather from a conservative credit policy of the company and loan repricing efforts. Last time I wrote that the rising interest rates (the Central Bank of Brazil is fighting inflation) started to hurt the company’s profitability; hence, reprising efforts do not come as surprise. However, the dramatic slowdown in origination volumes raises the question of whether the management is just being conservative or not comfortable with the quality of their loan book.
Nubank reported $1.16 billion in revenue for the quarter, representing a 244% increase compared to Q2 2021. Interest income grew 361% YoY and represented 73.7% of the total revenue for the quarter, and fee and commission income grew 101% YoY and represented 35.7% of the total revenue. This is really impressive growth, so hat off to the company’s management!
Q2 2022 was the fourth consecutive quarter of 200%+ revenue growth, but, of course, the main question is what rate of growth Nubank can sustain going forward. Purely mathematically, even if the revenue stays at the Q2 2022 level ($1.16 billion), Nubank will report 141% YoY growth in Q3 2022, and 82% YoY growth in Q4 2022, and will finish 2022 with 156% YoY growth for the full year.
As can be seen from the chart below, fee and commission income grew 18% compared to Q1 2022, which was driven by a 12.5% increase in monthly active customers (46.5 million in March 2022 vs. 52.3 million in June 2022) and a 16.4% increase in average revenue per customers. Interest income grew 37.7% compared to Q1 2022, and given the fact the interest-earning portfolio remained almost flat and the deposit base increased just 5% sequentially, the income growth primarily came from higher interest rates on lending and higher income on investing cash balances.
Breaking this down even further, you can see that the income from the credit card balances grew 28.7% QoQ, the income from the lending portfolio grew 17.5% QoQ and the income from financial instruments grew 30.1% QoQ. The new position “Interest income - other credit operations” is related to the acquired credit card receivables. Given limited growth in balances, the interest income growth is the result of the above-mentioned reprising efforts.
In summary, I’d expect a moderate sequential revenue growth given that a) management seems to be conservative in its credit policy; thus, we should not expect rapid credit portfolio growth, b) sequential interest income growth came primarily from repricing efforts and I would expect those efforts to have a limited capacity, and c) non-interest income represents only 25% of the total income, thus, even a double-digit growth (i.e. 20% QoQ) would have a minor contribution to the total income.
The company reported $362.5 million in gross profit for the quarter, which represents a 118% growth compared to Q2 2021, and a 23% growth sequentially. As a reminder, Nubank calculates gross profit by deducting interest and financial expenses, transactional expenses, as well as credit loss allowance from the total revenue.
As I wrote earlier, the growth of gross profit has been decelerating over the last few quarters for two reasons: a) Nubank faces higher interest expenses as the Central Bank of Brazil is raising rates in a fight against inflation, and b) credit loss allowance increases given higher origination volumes.
As you can see from the chart below, the gross profit margin decreased from 50% in Q2 2022, to 31% in Q2 2022, driven by the higher (relative to revenue) interest expenses (17% of revenue in Q2 2021 vs. 35% in Q2 2022) and credit loss allowance (25% in Q2 2021 vs. 29% in Q2 2022). The chart also perfectly illustrates the sequential decrease in credit loss allowance (relative to the revenue), as the company scaled back on origination.
Last time I argued, that it would be great to see Nubank reporting “traditional” banking metrics, such as Net Interest Income and Net Interest Margin. This time, the company’s management shared the evolution of NIM in the earnings release (see below). Net Interest Income (NII) is calculated by deducting financial expenses from interest income and gain (losses) on financial instruments, while Net Interest Margin (NIM) is calculated as an annualized ratio of NII over the average company’s assets for the period (including cash and cash equivalents, financial assets, deposits at central banks, credit card interest-earning portfolio, loans to customers, etc.).
Thus, as you can see below, Nubank’s NIM has been improving consistently despite the deteriorating gross profit margin. The company’s loan repricing efforts in combination with the higher yield it earns on its investments improved the Net Interest Margin from 6.0% in Q2 2021 to 9.7% in Q2 2022. I believe NIM serves a better representation of the company’s profitability than its gross margin given the fact that close to 75% of the company’s revenue comes from interest income.
Nubank reported $388.2 million in operating expenses, which represents a 124% increase compared to Q2 2021. In absolute terms, the increase came primarily from General and administrative expenses, which included $61 million in share-based compensation. The company reported a $24.6 million loss before income taxes, an increase from a $6.5 million loss a year ago.
The revenue growth (200%+ over the last four quarters) has outpaced the increase in operating expenses, but if my concerns over a slowdown in sequential growth materialize, I would expect Nubank to be more prudent in cost rump up. Nubank is notorious for its ridiculously low customer acquisition costs and costs to serve, but general and administrative expenses, which represented 59% of all operating expenses, clearly represent an area of potential optimization.
As you can see from the chart below, general and administrative expenses have been consistently declining relative to the revenue. The largest components of the general and administrative expenses were salaries and benefits ($70.4 million), share-based compensation ($61.1 million), infrastructure and data processing costs ($34.5 million), as well as card issuance costs ($13 million). There were no mentions of potential layoffs during the earnings call, but the management committed to “slower personnel growth in the second half of the year”.
Net Income and Adjusted Net Income
Nubank reported a $29.9 million Net Loss for the quarter, a decline from a $15.2 million Net Loss in Q2 2021. The company reported $17.0 million in Adjusted Net Income, a minor improvement from $16.5 million in Adjusted Net Income a year ago. The company calculated Net Adjusted Income by deducting share-based compensation and related tax and hedging expenses from the Net Income.
Looking at the last three quarters (see the chart below), you can clearly see a positive trend of decreasing Net and Adjusted Net Losses. Let’s see if this trend continues, but, unless the company faces a major economic shock later in the year, it looks like IFRS profitability is around the corner. Thinking ahead, I believe if the growth indeed slows next year (as discussed above), showing improved profitability will be critical for Nubank to instill investor confidence.
Things to Watch in 2022
Customer growth in Mexico and Colombia. Nothing new from me, I still believe, that Nubank’s ability to scale in the new market remains one of the key metrics to watch. The company delivered another impressive quarter in terms of customer growth in Brazil, but at some point, this growth will stall.
Sequential revenue growth. As I described above, even if Nubank’s growth doesn’t grow in Q3 and Q4, the year-over-year comparison will look impressive (141% YoY growth in Q3, and 82% YoY growth in Q4). However, sequential growth should give us an indication of what to expect in 2023. The company pulled breaks on origination volumes in Q2 2022, which will clearly slow down the interest income growth for the remainder of the year.
Loan portfolio health. For some reason, the management spent a lot of time on the earnings call covering the health of the portfolio. The combination of this attention with the pullback in originations, suggests that they might be concerned about the economy negatively impacting the health of the company’s portfolio. Hopefully, they just wanted to reassure investors, but portfolio health is definitely something worth watching going forward.
Acquisitions. The company raised $2.8 billion in its IPO and has not put that to use. I guess Nubank might be eager to explore growth through acquisitions, especially if the growth in the interest income slows down. They might use this capital to acquire a customer base in Mexico and Colombia, and/or acquire a consumer credit portfolio in Brazil.
In summary, this was a fantastic quarter for Nubank. However, I don’t want this quarter’s results to bling the investors and suggest looking at the levers of growth ahead. The company has pulled breaks on lending originations, which used to be the key driver of its revenue growth. Does it mean the growth will severely decelerate in late 2022 / early 2023?
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Source of the data used above: Nubank’s Investor Relations
Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 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.