Shares of the Brazilian digital bank Nu Holdings (NU -1.40%) were trading roughly 4.4% higher at 11:09 a.m. ET today after receiving some bullish sentiment from Wall Street.
Bank of America analyst Mario Pierry in a research note increased his earnings estimates for Nu, largely on the belief that the fintech company's funding costs will soon decline.
Pierry raised his estimate for net income in 2022 to -$60 million from his previous estimate of -$211 million. In 2023, he expects Nu to generate a profit of $261 million, as opposed to his previous estimate of -$115M. In 2024, Pierry projects Nu will generate $719 million of net income.
On a positive note, Pierry writes that customer growth and engagement have been better than he initially expected and that funding costs look as if they will peak soon. Pierry also said he liked Nu's progress on efficiency, which shows the company can generate operating leverage, meaning it can grow revenue faster than expenses.
But Pierry also notes that there are risks, notably the deterioration of credit quality, which started to show in the second quarter of the year in Nu's personal loan book. Pierry also said that monthly average-revenue-per-customer numbers are likely higher than they would normally be due to higher interest rates.
Pierry maintained a neutral rating on the stock but raised his price target from $5 per share to $5.50.
I am a fan of Nu Holdings at current levels because of how fast the company is growing and because it is showing a clear path to profitability. I also agree with Pierry that the efficiency gains are a welcome sight.
Nu will always be a riskier kind of bank due to the region it is operating in, but I think the company is also likely to continue to be a big disruptor in the Latin American banking market.