Nubank sees crisis in Brazil as a chance to grow faster

The slowdown in the Brazilian economy could represent an opportunity for the bank to gain market share despite the higher risk environment, said David Vélez, co-founder and president of digital bank Nubank.

Nubank, one of the world’s largest digital banks with 48 million customers, expects defaults to rise this year as consumers grapple with inflation and high interest rates, as well as economic stagnation.

But Vélez believes that Nubank will be able to keep its indexes below market averages due to the use of artificial intelligence to grant credit. Nubank’s 90-day default rate on credit cards is 3.3%, compared to an average of 4.8%.

The higher risk outlook could even create an opportunity for faster growth for Nubank, Vélez said in a video interview with Reuters on Tuesday.

With deposits from its retail customers, Nubank does not depend on funding from the markets and has a large cushion of resources after its IPO, which raised US$ 2.6 billion (R$ 13.7 billion).

“We may have the opportunity to accelerate and gain more market, and leave interest rates low to make our products more competitive,” said Vélez. The credit portfolio has a short term, an average of 6 weeks for credit cards and up to 6 months for personal credit, which facilitates risk management.

The expansion of the credit portfolio is seen by analysts as essential to take Nubank to profitability. Each Nubank customer generates revenue of less than R$200, according to a recent Morgan Stanley report, while an Itaú account holder generates around R$1,200.

The most profitable lines of credit for retail banks are mortgages, followed by payroll and personal loans, Morgan Stanley said.

Nubank is evaluating the best way to enter the payroll-deductible loan market, Vélez said, as well as expanding the portfolio of secured loans for real estate and cars offered by partner Creditas.

ROLLERCOASTER

Vélez says the more than 20% drop in Nubank’s shares in the two months since the IPO doesn’t surprise him, given the heightened volatility of tech stocks. “We had already been telling investors during the IPO to expect volatility, Brazil is volatile and so is Latin America,” he said.

The bank debuted on the NYSE on December 9 as the most valuable financial institution in Latin America, worth US$52 billion (R$275.3 billion).

But the recent slump has reduced Nubank’s market value to below large traditional rivals, such as Itaú Unibanco and Bradesco.

Vélez predicts that rising interest rates in the US and Brazil will affect Nubank’s share prices in the short term, but will not stop the long-term growth trajectory, as consumers will continue to look for better and cheaper financial services. Vélez says that Nubank grew despite the crises in Brazil, having gone through two recessions, an impeachment and the Covid-19 epidemic.

Another channel to increase revenue will be to sell more investment products through Nu Invest, a result of the Easyinvest acquisition in September 2020.

Nubank is also expanding customer services on its app, which already includes e-commerce services, games and partner insurance offers, where Nubank usually has an equity stake through its venture capital fund.

AGENCIES

A staunch supporter of the purely digital banking model, Vélez admits that Nubank will have to consider having some sort of physical presence in the future to serve some specific customers, although this is not yet a current priority.

“Eventually, if we want to serve some market segments, we need to consider a physical presence to serve customers,” he said, citing as an example very high-income investors seeking investment advice and property buyers seeking financing.

Nubank may consider partnering with traditional banks to offer real estate credit. “We would be very happy to partner with any of the big banks.”

More in the short term, Nubank is preparing to launch current accounts in Mexico this year, after regulatory approvals for the purchase of Akala bank.

The growth in Mexico has been a positive surprise, Vélez said, and Nubank is already the country’s largest issuer of new cards per month, with 760,000 customers. Financial penetration in Mexico is lower than in Brazil and the sector has less competition, she said.

The expansion in Colombia, where Vélez was born, will take a little longer, with the start of the process of seeking operational licenses.