Nu Holdings Ltd. (NYSE: NU) closed Wednesday's trading session at $14.585, up 1.64%, as investors cheered a record quarterly profit that signaled a potential rebound in margins. However, the rally was tempered by persistent concerns over credit quality, with late-stage delinquencies continuing their upward trajectory.
Strong Earnings Beat
The digital banking giant reported net income of $1.06 billion for the second quarter, surpassing the Visible Alpha consensus estimate of $967.2 million by 9.6%. Revenue came in at $5.88 billion, exceeding the projected $5.60 billion by 5.0%. The earnings release, which landed after market close on Tuesday, initially pushed shares to $15.25 in after-hours trading, but the stock gave back some of those gains during Wednesday's regular session.
Margin Expansion
A key highlight was the risk-adjusted net interest margin (NIM), which surged to 12.4% from 9.5% in the first quarter—a 290-basis-point improvement. This expansion was driven by a decline in early-stage delinquencies, which fell to 4.8% from 5.0% quarter-over-quarter. The cost of credit also decreased by 5.6% to $1.69 billion, though it remained 60% higher on a year-over-year basis.
Chief Financial Officer Rob Livingston described the risk-adjusted margin as "sustainable in the foreseeable future," according to Reuters. However, management cautioned that a debt-renegotiation program in Brazil contributed roughly 5% of credit expenses, and seasonal improvements would have occurred even without the program. As a result, investors should not view the entire quarter-over-quarter decline in credit costs as structural.
Credit Concerns Persist
Despite the positive margin trends, credit quality showed no overall improvement. The proportion of loans past due by more than 90 days increased to 6.9% from 6.5% in the previous quarter. This divergence between improving early delinquencies and worsening late-stage delinquencies underscores the ongoing credit debate surrounding Nu's rapid loan growth.
JPMorgan analysts called the release a "solid beat" even for optimistic investors, noting that bullish projections had anticipated a risk-adjusted margin of about 11%. The reported figure exceeded that informal benchmark by roughly 140 basis points.
Growth Metrics
Nu's customer base reached nearly 139 million across Brazil, Mexico, and Colombia. The credit portfolio expanded 37% year-over-year to $39.4 billion, reflecting robust growth. Return on equity improved to 33% from 29% in the prior quarter.
Analyst Views and Risks
Wall Street remains divided on the sustainability of Nu's credit metrics. Price targets from six analysts range from $10 to $22, with the broader consensus among 22 analysts standing at $17.98—implying a 23.3% upside from Wednesday's close. Goldman Sachs holds a Buy rating with a $22 target, while Bank of America has an Underperform rating with a $10 target.
Nu also has a $1 billion share buyback authorization, effective for 12 months starting June 4, representing about 1.4% of its $70.82 billion market capitalization. While this provides some support, it would not fully offset a sudden deterioration in credit conditions.
The key question for investors is durability. If Nu can maintain a margin close to 12.4% as its loan book expands, earnings potential could improve significantly. However, any further increase in 90-day delinquencies would refocus attention on loss reserves and could pressure the stock.
Risks include currency fluctuations that can skew growth figures, accelerated unsecured lending that might raise default rates, and regulatory expenses in Brazil, Mexico, or Colombia that could weigh on returns. For now, the quarter strengthened Nu's profit outlook but did not resolve the underlying credit concerns, leaving the stock's valuation in a delicate balance.
