(Bloomberg) -- Shares of Nu Holdings Ltd., one of the world’s largest digital banks, rallied after second-quarter profits more than doubled from a year earlier, overshadowing analyst red flags linked to rising delinquency rates and falling provisions for bad loans.
Shares gained as much as 5.9%, shrugging off early concerns about the loan book and approaching the median analyst price target of $13.41, according to data compiled by Bloomberg.
Nu recorded $2.8 billion in revenue in the quarter through June 30 compared with a median estimate of $2.66 billion in a Bloomberg survey. Net income more than doubled from a year earlier to $487 million, surpassing analyst expectations of $418 million.
The bank, which gets the bulk of its business from Brazil, crossed the mark of 100 million customers during the quarter, while posting a return-on-equity of 28% and growing deposits in its newer markets of Mexico and Colombia. Nu is on its way to becoming “the largest consumer technology platform in Latin America,” founder and chief executive officer David Velez said in a statement.
While delinquency rates for loans from 15 to 90 days decreased to 4.5% in the quarter, loans of more than 90 days jumped to 7% from 6.3%. That followed a concerted effort to grow the credit business, Chief Financial Officer Guilherme Lago said in an interview before the release.
“The increase in delinquency was intentional and very well within expectations,” Lago said. “I don’t think it should come as a surprise.”
Still, analysts raised questions in post-earnings reports and during the call with executives about the rising non-performing loan metrics and falling provisions.
“We see the management messages (on the release and earnings call) towards the asset quality failing to address our (and street) concerns with the apparently conflicting movements of NPLs (going up) and provisions (going down),” wrote XP Investimentos analysts led by Bernardo Guttmann, who has a neutral recommendation on the stock. “We have highlighted our concerns in previous reports, and we see asset quality becoming increasingly harder to understand.”
Lending as a portion of the credit portfolio has jumped to about 25% from 15% over the last few years and carries a higher delinquency rate than credit cards, Lago said. The bank is being properly compensated for the higher risk, the CFO added.
Total Clients
The total credit portfolio ended the quarter at $18.9 billion with lending growing 92% from a year earlier and credit cards up 39%.
Nu’s exact customer count jumped to 104.5 million by June 30 with 95.5 million of those in Brazil, amounting to about 56% of the adult population. Mexico now has 7.8 million customers and $3.3 billion of deposits, while Colombia has nearly 1.3 million customers with $220 million in checking accounts.
On the earnings call, executives said Nu has already become “one of the leading financial institutions in Mexico,” and its banking license could be granted in the coming months.
The biggest headwind in the quarter came from weaker currencies in those markets. The Brazilian real, Mexican peso and Colombian peso led declines in Latin America, weakening more than 7% each.
‘Raise Eyebrows’
Nu, which has a market capitalization of $64 billion, has gained nearly 60% year-to-date, becoming Latin America’s most valuable publicly-traded bank.
“We remain constructive on NU’s combination of growth and profitability going forward,” Goldman Sachs Group Inc. analysts led by Tito Labarta wrote in a note. We’re “keeping our PT of $17 unchanged. Maintain Buy.”
The stock has 13 buy recommendations, eight holds and two sells, according to data compiled by Bloomberg.
“Nu delivered an EPS beat on lower provisioning – the former part of this has already driven a post-market positive reaction on the stock, while the latter is likely to raise eyebrows,” Citigroup Inc. analyst led by Gabriel Gusan wrote in a note.
--With assistance from Philip Sanders.
(Updates share price in second paragraph.)
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