Nubank (NYSE: NU 0.00) delivered another stellar quarter. In Q4 2022, the company acquired 4.1 million new customers, increased gross revenue by 128% compared to Q4 2021, and posted another profitable quarter. However, the most exciting piece of news was that Nubank started scaling its credit business. Over the last three years, the company’s potential in lending was hindered by the pandemic, inflation, rising interest rates, and uncertain economic prospects. In the meantime, Nubank’s management stayed patient and grew the company’s customer base from 20.1 million in 2019 to 74.6 million at the end of 2022.

Of course, there are challenges and uncertainties ahead (i.e. delinquency rates are still rising, growth outside of Brazil seems to be slowing down, and acquiring new customers became considerably more expensive). Nevertheless, 74.6 million loyal customers, an ample deposit base, and healthy profit margins make me excited about Nubank’s prospects in 2023 (and beyond). I believe we will hear many impressive earnings reports in the future, but in the meantime, let’s break down the company’s Q4 2022 results!

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Customers

Nubank added 4.1 million customers during Q4 2022 finishing the year with a total of 74.6 million customers, of which 70.9 million were based in Brazil, 3.2 million were based in Mexico, and 0.56 million were based in Colombia. The company’s customer base grew 35% YoY in Brazil, 129% YoY in Mexico, and 392% YoY in Colombia. Last quarter, the company reported 66.9 million customers in Brazil, 3.0 million in Mexico, and 0.44 million in Colombia, which suggests the growth in Mexico and Colombia is slowing down compared to earlier quarters in 2022.

The activity rate, which is the number of monthly active customers expressed as a percentage of the total number of customers, improved only marginally in Q4 2022 compared to the previous quarter and stayed at 82%. Nubank claims to be the primary banking partner for over 58% of its monthly active customers, compared to 55% in the previous quarter. Out of the total of 61.2 million active users, 53 million used digital banking accounts, 34 million used credit cards, and 7 million used NuInvest, which compares to 50 million, 32 million, and 6 million active users for banking accounts, credit cards, and NuInvest respectively in Q3 2024.

In summary, another strong quarter in terms of customer growth. Growth in Brazil should start slowing down sometime soon, as the company already serves 44% of the country’s adult population (compared to 39% in Q3 2022). Nevertheless, the high penetration amongst the adult population was expected to translate into a growth slowdown already in 2022, and yet, Nubank managed to maintain the pace. A slowdown in customer growth in Mexico and Colombia is concerning, but the company continues to extend its offering and secured new funding to support growth in these markets, so, perhaps, let’s just be patient here.

Loan Portfolio and Deposits

Nubank reported $15.8 billion in deposits at the end of Q4 2022, which represents a 63.5% increase compared to Q4 2021 and a 12.6% increase compared to Q3 2022. $14.3 billion, or 90.3% of the total, were classified as “Bank Receipts of Deposit”, which the company can use for lending purposes. In July 2022, Nubank launched “Money Boxes”, which are a form of savings accounts that provide users with more flexibility, and allow the company to lower its cost of funding below the CDI rate (CDI rate is paid in full only if the funds remained in the “money box” for at least 30 days). Thus, the company’s cost of funding was 78% of CDI in Q4 2022.

The company reported a loan portfolio of $9.9 billion, net of provisions, at the end of Q4 2022, which represents a 65.8% growth compared to Q4 2021, and a 21.1% growth compared to Q3 2022. After a few quarters of flat to no portfolio growth (see the chart below), Nubank found comfort in loosening credit policies and scaling origination volumes. Thus, credit card receivables increased by $1.2 billion from the previous quarter, and, as per the earnings call, the management expects to start scaling personal loan originations in Q1 2023 as well. The interest-earning portfolio increased from $3.5 billion in Q3 2022 to $4.0 billion in Q4 2022.

I believe that it is the expanding Net Interest Margin (NIM) that gave Nubank’s management confidence to return to the growth mode in lending. Thus, as you can see from the chart below, the 15-90 day NPL rate, which is an early delinquency indicator, declined from 4.2% in Q3 2022 to 3.7% in Q4 2022; however, the 90+ day NPL rates continued to advance from 4.7% in Q3 2022 to 5.2% in Q4 2022. The improvement in the 15-90 day NPL rate was partially attributed to seasonability and the management expects an uptick in Q1 2023. However, a higher NIM (due to higher interest rates charged to borrowers and lower cost of funding) compensates for higher credit losses. Thus, the risk-adjusted NIM (NIM adjusted for the credit allowance expense) improved from 2.0% in Q4 2021 to 5.4% in Q2 2022.

In summary, Nubank returned to the growth mode in credit card lending, and is expected to start scaling its personal loan business as soon as Q1 2023 (the company also plans to launch new lending products, such as secured lending and auto loans). While the NPL rates might not have stabilized yet, it looks like the company has built a sufficient buffer for error through higher NIM, which allows lending profitably even at higher delinquency rates. I would expect lending portfolio growth to be the main income growth driver in 2023 (and, hopefully, beyond).