Extract from Portfolio Manager Commentaries – Sept 2022

Nu is a disruptive digital first bank based in Brazil with early-stage operations in Mexico and Colombia. They have grown rapidly and now have 65m retail customers and 2.3m SME customers. Their key competitive advantages come from a lower cost to acquire consumers (word of mouth is their primary acquisition tool), cost to serve (being a digital first bank they do not have the same legacy cost structure of incumbent banks), cost of risk (they have proprietary lending models which have thus far exhibited lower loss ratios vs peers), and finally cost of funding (they have a rapidly growing deposit base which provides low cost funding). They have also done a good job of driving customers to use Nubank as their primary bank due to their expanded product offering, which should materially increase revenue per customer from ~$7 today towards their aspirational target of $40 (the level of incumbent banks). The bank remains firmly in growth mode and thus current profitability is significantly below normal, but in Brazil they are attacking one of the most lucrative profit pools globally with incumbent banks historically making healthy ROEs of more than 20%, providing ample runway for Nubank to continue to scale up profitability while leveraging their key competitive advantages.

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