The Brazilian digital bank Nu Holdings (NU -1.09%), which is backed by Warren Buffett's company Berkshire Hathaway, recently delivered strong fourth-quarter results, reporting a $58 million profit on revenue of roughly $1.45 billion.
The bank continued to build on positive trends seen in 2022, growing customers strongly and cross-selling other financial products to its large customer base.
But Nu also did something in Q4 that investors haven't seen in the past. I thought it was flat out the most impressive number in the fintech company's earnings report. Let's take a look.
Better funding costs
Regardless of whether you are an old-school, brick-and-mortar bank or a new branchless fintech bank, funding is very important.
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A big indicator of bank profitability is net-interest margin (NIM), which essentially looks at the difference between the yield banks are making on their interest-earning assets versus what they are paying out on their interest-bearing liabilities, such as deposits. The lower your funding costs are, the higher your NIM and profitability will ultimately be.
Most new digital and fintech banks do not have strong deposit bases, and Nu has really been no exception. For most of the last year, Nu's deposit costs have only been slightly lower than the Brazilian interbank deposit rate (CDI), which is the overnight lending rate that banks charge one another. That doesn't indicate a very sticky deposit base or much customer loyalty.
But in Q4 2022, Nu's deposit costs dropped from 95% of Brazil's CDI to 78%, which is by far the lowest they've ever been for the company. This in my mind was the most impressive number in Nu's earnings results. Partly as a result, Nu's NIM expanded from 11.1% in Q3 to 13.5% in Q4. Deposits also grew from just under $10 billion at the end of 2021 to $15.8 billion at the end of 2022.
Nu's management team said a big reason for the lower deposit costs can be attributed to the launch of its money box deposit product in the middle of 2022. Money boxes allow Nu customers to set aside savings for different purposes, whether it's purchasing a house or going on vacation. The accounts also include competitive interest rates. But the creativity of the product that allows customers to better manage their personal finances seems to be adding value for customers and increasing the stickiness of their deposits, which results in lower deposit costs.
Management also thinks they can sustain this momentum moving forward. "We do expect the funding cost to remain largely at the same levels throughout the coming quarters, respective seasonality," Nu's CFO Guilherme Lago said on the bank's earnings call.
Deposits are the backbone
Ask any bank analyst or serious bank investor, and they will tell you that deposits are the backbone of any bank stock. Institutions with sticky and cheap deposits get higher valuations.
Most digital banks and fintech companies aren't known for their deposit strengths but rather for their ability to acquire new customers with better technology. Nu has certainly achieved this with its mind-boggling 74.6 million customers. The company is currently banking 44% of the Brazilian adult population.
Now, if it can marry its growth capabilities -- or even just hold onto its existing customer base -- with a strong deposit franchise, Nu could really achieve something special that virtually no fintech company has been able to. There's more work to do, but the decline in funding costs is great progress for Nu and by far the number I liked most in the company's recent earnings results.
