Nubank, the largest digital bank in Latin America, sees substantial growth opportunities in boosting its lending business in Brazil.
After a cautious approach in recent quarters, Nubank is all set to resume loan book expansion this year. The neobank is gradually developing a more significant risk appetite for unsecured loans, while it expects to roll out its payroll loan product in full in the following quarters.
“Payroll lending is “one of Brazil’s largest profit pools,” CFO Guilherme Lago said. The executive underscored Nubank’s strategy to set foot in a market of $560 billion reais, or over $110 billion US dollars. The fintech has recently launched a pilot version of NuConsignado, as the product is known and will later scale to most of its Brazilian users.
“Entering into payroll is a super important venture from a strategic perspective,” the CFO told analysts. According to Nubank, roughly a third of all payroll clients in Brazil are signed up as Nubank customers, suggesting significant potential for the digital bank to begin cross-selling strategies. “That means we don’t need to fish outside the tank to tap into this huge market.”
The digital bank reports over 70 million customers in Brazil alone.
Nubank’s lending portfolio
While fintechs have mostly shied away from lending, loans are critical to driving revenue. This is especially true as rising rates worldwide have put further pressure on fintechs, leading them to accelerate their revenue strategies. Companies like Nubank are fully aware of this, gradually establishing small footholds in some of Brazil’s credit markets.
“We have resumed growth in our unsecured personal lending product in Brazil and expect it to be an important revenue and earnings growth driver,” CEO David Velez said in the latest earnings call. The executive said that the credit strategy was built from the get-go. “It is virtually impossible to build a large financial services business in the region without having credit underwriting as a core capability.”
The digital bank saw loans rise 54% yearly in the first quarter of 2023, up to $12.8 billion. “Over the past four years, we have established new toeholds in every additional credit segment,” Velez said.
The digital bank’s most mature credit strategy is credit cards, which comprise most of its loan portfolio. On the other hand, personal loans represent $2.3 billion or less than 20% of the book.
The digital bank was highly cautious through 2022, as the rise in interest rates and inflation brought significant risks to unsecured lending. But according to Velez, the scenario is shifting. “The performance of our personal loans improved over the last several months, giving us the conviction necessary to increase loan originations.”
Neobanks make strides in Brazil’s $1 trillion loan market
Neobanks in Brazil is gradually increasing their share in Brazil’s 1 trillion dollar loan market. But at less than 6% of loans to individuals, they have a long way to go as traditional banks continue to dominate one of the most lucrative markets in the country.
Fintechs and digital banks expanded their share in the Brazilian credit market during the second half of 2022. Digital banks now represent roughly 6% of all loans to individuals in Brazil. That is up from 4.8% by the end of 2021 and virtually nothing five years back.
“While our customer penetration in Brazil is significant, it is clear that we still have substantial room to expand our presence in each profit pool,” the CEO said.
The strategy bears risks
To be sure, growing into loans in Latin America does not come without risk. Lenders have to excel at credit underwriting in a region more prone to fraud and defaults than developed markets.
During the first quarter, 90-day non-performing loan ratios at Nubank increased to 5.5% from 5.2% in the linked period. 15 to 90-day ratios were also up. Overall, the digital bank segment was one of the most affected by delinquencies, data by the central bank showed. However, most lenders have fared reasonably well, as traditional banks and credit unions alike also felt the uptick in defaults.
“Without a doubt, there is a learning curve in the lending process and in the use of data to increase its assertiveness,” Bruno Diniz, a fintech advisor in Brazil, said to Fintech Nexus. “This is a complex and turbulent period for credit, with a significant increase in defaults .”
