Nubank Leans On Loyalty to Extend Credit Offering Despite Rising Default Rate

“We are not throwing credit in the ocean as other banks have been doing,” the neobank’s founder and CEO David Vélez said in an earnings call with investors after better than expected Q4 results

David Vélez, founder and CEO of Nubank
February 15, 2023 | 07:37 PM

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Bloomberg Línea — Nubank (NU) saw an increase in default rates of more than 90 days in the fourth quarter of 2022, from 4.7% in the previous quarter to 5.2%, but the digital bank’s earnings report was still better than analysts expected, and it plans to accelerate personal lending this year after tempering its credit offering in 2022.

Nubank executives said secured and consigned lending, both of which are lower risk, will be drivers of loan portfolio growth in 2023 and 2024.

“We’re going to monitor that closely if the environment changes,” Nubank CEO David Vélez said on a conference call with shareholders on Tuesday night.

Nubank shares climbed around 10% in premarket trading on Wednesday after the fintech reported revenue and net income that beat analysts’ expectations for the fourth quarter, as well as profitability, as measured by return on equity (ROE) of 35%.

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Vélez said Nubank was continuing to gain market share even in a very adverse environment.

“We are growing our credit portfolio with our own account holders. We offer credit to users who receive their salaries, make payments and use our account, this generates loyalty and better underwriting,” Vélez said in response to investors regarding default rates.

“We are not offering credit ‘thrown to the wind’ as banks have been doing. We have a different strategy where we use our customer base,” he said.

Nubank's headquarters in São Paulo.dfd

According to Vélez, who is the bank’s principal shareholder, Nubank has sought out consumers who pay their bills on time to offer credit cards to, which is a less leveraged and healthier user base than many traditional banking customers, and he said that Nubank also has more data available for credit analysis.

The bank expects the default rate to decline from the first quarter of 2023 as the year progresses. Provision expense this year is expected to be driven by loan portfolio growth, Vélez said.

“Our credit story has two stories. On the one hand, credit cards continue to grow strongly, up 69% year-on-year. On the other hand, we have been more cautious with the origination of the personal loan portfolio, in line with the higher risk of this product,” Guilherme Lago, Nubank’s CFO, said during Tuesday’s conference call.

“Personal loan originations increased slightly and the overall portfolio grew sequentially during the fourth quarter to $2 billion,” he added.


“The pace of growth [in personal loans] has been slower than credit cards, at 33% year over year, but with the continued performance of the portfolio, we expect it to accelerate in the coming quarters.”

Although it does not publish guidance for the next quarter or year, Nubank said it assesses that funding costs should remain stable this year.

According to Velez, Nubank has already become the largest credit card issuer in Colombia and Mexico, while these countries are naturally growing faster than in Brazil, as they are newer operations where the base is still smaller.


Nubank expects Colombia and Mexico to more quickly reach the profitability levels that Brazil has, although it recognizes that more capital allocation will be needed in these countries in the coming years.

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Higher return on equity

Nubank’s CFO recalled that as of April 1, Brazil’s central bank’s rule modifying the interchange fee cap for prepaid cards will come into effect, which could weigh on the bank’s margins.

Nevertheless, Nubank expects 2023 to be “another year of healthy levels of return on equity”.

“We have a much higher ROE than traditional banks. We don’t have branches and we don’t need a very expensive office with a lot of staff. That was always the hypothesis, and now we have finally been able to prove it,” Vélez said.


Nubank also expects its loan portfolio to outpace the growth of deposit accounts and that the lower cost of funding will continue to increase the company’s margins.

In a report, Matheus Guimarães, an analyst at XP, said he sees Nubank’s results as positive, with customer activity driving results, despite the higher default rate.

“Nubank’s operating indicators maintained the positive trend by increasing its operating leverage,” he wrote.


Nubank managed to keep costs and expenses under control, bringing its recurring net profit to $58 million, $17 million above XP analysts’ forecasts.

“While we maintain our conservative view on the case, we do not rule out that the result will further build on the stock’s current positive momentum,” the XP analyst said.

Major fund managers have increased their stakes in Nubank recently. T Rowe Price, Rappi’s Latin American investor, increased its stake in Nubank in December 2022 by buying 35,156,061 shares of the digital bank, representing 1.85% of the outstanding shares.


Capital Group, which holds 2.86% of the outstanding shares, bought 8,463,039 shares at the end of last year.

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Translated from the Portuguese by Adam Critchley