Lower Credit Growth, Higher Default Rate Make Mexico a More Complex Market for Nubank

Bradesco BBI analysts Gustavo Schroden, Otavio Tanganelli, Eric Ito and Camila Koga say that credit growth in the country is below the market average, while the default rate is higher

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April 28, 2023 | 08:10 PM

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Bloomberg Línea — The main credit indicators for Nubank’s (NU) operation in Mexico seem to indicate a “challenging start”, according to Gustavo Schroden, Otavio Tanganelli, Eric Ito and Camila Koga, analysts at Bradesco BBI, in a report distributed to clients this week.

For BBI analysts, who analyzed data from last December to February this year, Nubank’s loan growth in Mexico is slower than the industry’s, and the fintech has higher levels of non-performing loans (NPLs), lower loan coverage ratio, considerable cost of risk and negative margins after provisions.

Nubank is the world’s largest listed digital bank and has become a reference for analyses of banking fintechs. The Brazilian fintech founded by Colombian David Vélez together with Brazilian Cristina Junqueira and American Edward Wible in 2014 faces the higher interest rate environment, as do all players in the financial sector, which makes funding costs more expensive.

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The bank’s shares on the New York Stock Exchange have accumulated gains above 20% this year - until the close on Wednesday at $4.94 - but are still 45% below the $9 of its IPO in December 2021.


“It is important to note that it is still only three months into the analysis and the transaction is in its early stages. That said, Nu Mexico’s initial numbers indicate to us that monetization in the region may be challenging,” the analysts say in the report.

According to BBI, these indicators suggest that Nubank’s subsidiary in Mexico behaves more like a savings bank than a full-service bank.

In a statement, Nubank said that the first three months of 2023 represented great advancement of Nu Mexico and Nu Colombia, which together added more than 3.8 million customers, a rise of 66% in the one-year period.


According to Nubank, in addition to the credit card, the fintech has gradually started making Cuenta Nu available to the Mexican customer base. This month, the company announced that Cuenta Nu now features savings accounts, a feature within the app where customers can separate the money they want to save and generate a 9% annual yield, without losing liquidity.

This strategy was adopted in 2022 in Brazil, with results considered positive by market analysts, because it induces customers to keep the funds in account, reducing the cost of funding.

Nu Colombia, in turn, “continues working on the development of new financial services”.

The digital bank reported this week that it has notched up almost 80 million clients in the first week of April, considering the operations in Brazil, Mexico and Colombia. Total customers at the close of the first quarter of 2023 were 79.1 million, an increase of about 33% in 12 months.

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Slower growth

“Nu Mexico is growing slower than the industry, surprisingly,” the Bradesco BBI report pointed out.

Nu Mexico’s total consumer loans declined 1.6% month-on-month in February 2023 to 13.2 billion pesos ($730.2 million), after contracting 0.7% month-on-month in January 2023 to 13.5 billion pesos ($755.9 million). This is even taking into account that since the operation is just starting, in theory Nu Mexico would count on lower bases to favor it.

Meanwhile, total consumer loans of savings banks decreased 0.4% month-on-month in February 2023 and remained unchanged in the month-on-month comparison in January 2023.


For traditional Mexican banks, total consumer loans expanded 1.1% month-over-month in February 2023, following 1.0% month-over-month growth in January 2023, outperforming financial entities and Nu Mexico, according to Bradesco BBI with data from Mexico’s National Banking and Securities Commission.

“Regarding asset quality, we also observed challenging numbers for Nu Mexico, with default rates worse than the industry average,” the report highlighted.

According to Bradesco BBI, asset quality indicators show that Nubank’s current customer base in Mexico currently implies more risk than that of traditional banks.

While Nu Mexico’s NPLs for consumer loans was 12.2% in February 2023 (12.3% in January 2023 and 12.4% in December 2022), NPLs for other financial entities stood at 11.4% in February 2023 (11.5% in January 2023 and 11.4% in December 2022).


Meanwhile, banks have the best NPL ratio for consumer loans in Mexico, at 3.0% in February 2023 (3.0% in January 2023 and 2.9% in December 2022).

Compared to other financial entities and banks, Nu Mexico has the lowest coverage ratio for consumer loans in the country, at 91.0% in February 2023 (88.8% in January 2023 and 84.5% in December 2022).

Nubank’s cost of risk in Mexico in February was 31% versus 15.8% for the fintech as a whole, which has Brazil as its largest market.


Thus, analysts believe that Nubank’s Mexico subsidiary will continue to weigh against Nubank’s consolidated profitability for a longer period.

Nubank will release its results for Q1 2023 on May 15 after market close.

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Brazilian operations

In Brazil, Nubank ended March with 31.5% growth in 12 months, reaching more than 75.2 million customers, including the small and medium-sized enterprises segment. The number of entrepreneurs with Nubank’s PJ account surpassed 2.7 million, a 66% growth in one year.


“We added nearly five million customers to our base in just over a quarter, always with a great contribution from the Brazilian operation and increasingly more adherence from Mexicans and Colombians,” said CEO and founder David Vélez in a statement.

“The 80 million user mark reveals Nubank’s operational efficiency and ability to balance global expansion and portfolio diversification to have more and more engaged customers.”

Nubank said it saw its number of investor customers in Brazil increase 130% in the comparison between Q1 2023 and the same period in 2022, with more than 9.2 million active investment users. The fintech has over 47.6 billion reais of assets under management.


During Q1 2023, Nubank expanded its lending strategy with another step in testing NuConsignado, the consigned loans program, a modality explored by incumbent and digital banks because they offer lower risk given the salary guarantee.

The fintech said that the product is gradually being made available to the federal public servant customer base. According to an internal survey, more than 30% of the financial volume of payroll loans, whether public or private, in the Brazilian market is handled by customers who already have a relationship with Nubank.

Nubank also said it is “moving forward” in granting collateralized credit to increase the credit card limit from different investments. Last November, the fintech announced a first version of a loan in which the guarantee comes from the investments of clients eligible for personal loans in the planned redemption function, in which the values continue to yield.

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