Nu Holdings (NYSE:NU) reports third-quarter results in less than four weeks, its first report since the Brazilian digital bank passed $1 billion in quarterly profit. In the second quarter, that profit reached $1.1 billion, up 49% from a year earlier. But the share of loans more than 90 days overdue rose 35 basis points to 6.9%, while the loan book grew 37% over the year. The question is whether Nu’s credit quality can keep up with its growth, and the numbers so far lean toward yes. Nu Holdings was part of our recent list of 13 Best Low Priced Growth Stocks to Invest In Right Now.
With 139 million customers, the company runs a digital bank that takes deposits and makes loans. Profit is growing faster than the loan book, so how well those loans get repaid matters more to the stock than how fast it adds customers.
Nu Turns Customer Growth Into Profit
Low costs let more of each revenue dollar reach profit. The efficiency ratio, which compares operating costs with revenue, was 19.5% in the second quarter, better than the 21.3% of a year earlier. That gap helps explain why profit grew faster than revenue.
Most customers are in Brazil, but Mexico already has 15.8 million and Colombia has passed 5 million, so Brazil is not the only source of growth. If you’re interested in digital finance, we recently compiled a report on 10 Most Promising Fintech Stocks to Buy Now.
Growth has cooled from its early pace, though. Sales grew about 86% a year over the past five years but about 57% a year over the past three, and revenue rose 39% in the second quarter. That is still fast for a lender, but it is slower than the pace Nu set earlier.
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Overdue Loans Are Rising With Growth
Much of a loan book that grew 37% over the year is recent and has not been through a downturn. Loans more than 90 days overdue made up 6.9% of the portfolio, up 35 basis points. Shorter-term overdue loans improved during the quarter, so the picture is mixed. Because most customers are in Brazil, a weaker Brazilian consumer would show up in these figures first.
Against that, cost of credit fell 9% from the first quarter, and profit grew faster than the loan book, so credit costs have not yet eaten the gains. If you own the stock, that is the trade-off: a lender whose profit is outrunning its loans, with one ratio moving the wrong way. For investors looking to add banks, our list of 10 Best Bank Stocks to Buy According to Billionaires covers more names.
What the Price Assumes About Growth
On forward sales, Nu trades at 3.08 times, about 4% above the 2.96 median for financial companies. That median is the middle multiple for the sector on the same measure, so the stock is priced much like a typical financial company.
That is a small premium for a company whose revenue grew 39% in the second quarter. The price appears to assume that growth keeps cooling or that credit losses take a bigger share of revenue. Sales leave out credit losses, which is why the overdue-loan figures matter more than the multiple. If you’re looking for cheaper picks, check out 10 Best Undervalued Stocks to Buy in October.
So can credit keep up? Through the second quarter, it did: profit and efficiency both improved from a year earlier while cost of credit fell. In the next report, the share of loans that are seriously overdue is the number to watch. If it stops climbing, the stock’s ordinary price tag will look low for profit growing this fast, and if it keeps rising, the market’s caution will have a reason.
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This article is originally published at Insider Monkey.
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