By Carolina Mandl
SAO PAULO (Reuters) - Nubank has evolved in seven years from a fintech to one of Latin America's biggest credit card issuers, now on the brink of an IPO that could make it the region's largest listed bank.
But Nubank's unique purple no-fee credit card has not only lured 48 million clients mainly among Brazilians long-used to hefty charges, it has also spawned a host of imitations among competitors who now threaten to knock it off its perch.
In the prospectus for its New York Stock Exchange initial public offering (IPO), Nubank said one of its challenges is to increase the number of products sold per client.
Brazil's biggest banks generate annual revenue per client at a rate that is ten times higher than Nubank, the fintech said. In all, some 15 competitors, including traditional banks like Itau Unibanco Holding SA and other fintechs backed by foreign investors are making Nubank's once trailblazing offerings commonplace for consumers.
That's a potential sticking point for investors as Nubank prepares to list this Thursday on the New York Stock Exchange.
A recent sell-off in tech stocks has already made markets less forgiving on valuations, prompting Nubank to slash its IPO valuation by 20%. It is also boosting its reliance on certain existing and new investors, like SoftBank Latin America Funds, to buy at least $1.3 billion in shares - or half the IPO deal. Some investors' faith in Nubank and other Latin American fintechs has also been shaken by the woes of once high-flying payments firm StoneCo Ltd, whose shares are down 80% this year after a recent failed push into lending. "Now investors want to see clear signs of how a fintech will monetize its clients, without much room for dreams," said Fabio Fonseca a partner at Rio de Janeiro-based asset manager JGP Gestão de Recursos.
Overseas interest in Brazil includes JPMorgan in June acquiring a 40% stake in digital lender C6 Bank, with more than 12 million clients, private equity firm General Atlantic financing two capital increases in Neon since 2019, while Japan's SoftBank has a 15% stake in Banco Inter.
As well as growing competition, an increasing number of investors are asking how Nubank, which has backing from Warren Buffett's Berkshire Hathaway, China's Tencent Holdings and venture capital investors such as Sequoia Capital, is going to monetize its giant client base.
Nubank declined to comment on future growth or risks.
Since launching its credit card, which remains its main product, in 2014, Nubank has added to its portfolio, including no-fee checking accounts in 2017, debit cards and personal loans in 2018, and checking accounts for small companies in 2019.
More recently, it has bet on acquisitions and partnerships.
This year it bought broker Easynvest to offer investment products and partnered with SoftBank-backed fintech Creditas to make loans secured by assets like homes, cars and salaries.
PURPLE PATCH ENDING?
Nubank's zero fees for credit card and checking accounts has been copied by both upstarts and incumbents, making competition fiercer. Since 2015, the number of credit cards in Brazil has risen by 57% to 133.8 million in 2020, central bank data shows.
This means that Nubank's IPO is not only being watched as a signal for other start-ups but also by central banks in the region who want to bring more competition to the banking sector and reduce loan and service prices.
In Brazil, for instance, the top-five banks account for nearly 80% of outstanding loans and, although they are feeling the heat from fintechs, they are fighting back.
Itau, Latin America's biggest bank, for example, has even offered to drop credit card fees for many existing clients this year, calling up consumers to offer no-fee charge cards.
This has succeeded in cutting the rate of card cancellations by half, a source familiar with the situation said. That means clients stay longer with the bank and generate more transaction fees for Itau from card processors like Visa and Mastercard.
Helped by such moves and loan offerings backed by their mammoth balance sheets, Brazil's top-three private-sector banks - Itau, Bradesco and Santander Brasil - added clients to their businesses and kept their return on equity above 18% this year.
Nubank's $451 million purchase of Easynvest is interpreted by some analysts and investors as a sign that it may be trying to move upmarket and collect more fees.
During its IPO roadshow Nubank has told investors that its retail loan book could approach Itau's in around five years. That would mean it jumping to 450 billion reais, from 26.4 billion reais.
It has also said it will double its clients to 100 million and expand beyond Latin America, where Brazil accounts for 98% of revenue after it added Mexico and Colombia in the last two years. Nubank is already an investor in Indian fintech Jupiter.
"Nubank's valuation implies that it will grow absurdly and make no mistakes on its way," equity analyst Stefan Darakdjian at asset manager Meraki said, adding there was a chance it could pull off such a valuation, given that it is the region's biggest disruptor.
The new kid on the block has so far been able to assess client risk better than established banks. Its 90-day default ratio ended September at 3.3% or 31% lower than Brazil's average ratio. But investors say the fintech has never experienced a severe economic downturn since building up a sizeable loan book.
Nubank declined to comment on the question of its loan book's vulnerability to a downturn.
Nagging questions about growth and risk signal a potentially tough sell for the closely-watched IPO as investors seek more concrete signs that fintechs can show consistent profits.
Although Nubank posted a net loss of 528 million reais ($94 million) in the first nine months of 2021, at the upper end of its IPO range it could hit a $41 billion market valuation, which means it would trade at some nine times book value, considering it may raise $2.6 billion in the IPO.
That is lower than India's One 97 Communications, the parent of fintech Paytm, which after a bruising debut, is trading at 18 times book value, but both companies are likely to be valued close in terms of price to revenues in the last 12 months, at 33 times.
Compared with the book value of Brazil's lucrative incumbent banks, which trade at a fraction of that, Nubank's valuation looks a long shot.
"When you analyze market multiples, it makes no sense, but investors are buying its future performance and Itau and Bradesco offer limited growth prospects," Carlos Macedo, at Cortex Consultoria, said.
($1 = 5.6296 reais)
(Reporting by Carolina Mandl; Editing by Christian Plumb and Alexander Smith)