Bank stocks aren't usually on lists of coveted growth stocks, but legendary investor Warren Buffett has been a big fan of them. He's usually known for picking boring bank stocks because they're flush with cash and are eminently relevant to a growing economy. Plus, they usually pay dividends and are focused on creating shareholder value.
But Buffett's holding company, Berkshire Hathaway, also owns some more interesting bank stocks. It was an investor in hot fintech company Nu Holdings (NU 0.58%) even before it went public, and it's reaping the benefits of owning this top growth stock.
Nu stock more than doubled in 2023, but its growth story is far from over.
Continuing the momentum from 2023
Nu operates the largest digital bank in the world by funding. It's based in Brazil and has broken into a traditional bank system run by five or six central banks, capturing market share and expanding into new markets.
As of the end of 2023's third quarter, it had 89 million customers, including more than half of Brazil's adult population. Total customers increased by 5.4 million in the quarter and 18.7 million year over year. And even in Brazil, it added 1.5 million customers.
This is one way Nu is quickly expanding and taking a dominant position in Latin American banking. The other way is its strategy of hooking in customers with one of its low-fee products and then cross-selling and upselling to them as they enjoy its easy-to-use interface. Nu now offers bank accounts, credit cards, investment accounts, and insurance products.
In the third quarter, revenue increased 53% year over year. Active Nu account customers increased 32%, and credit card customers were up 23%. Active investing customers rose 100%, and the number of active insurance policies was up 50%.
Not only is this providing the company with scale, it's creating a feedback loop whereby more customers and products result in more data and improvements and lower costs, allowing it to reduce fees, attract more customers, and increase engagement.
Scaling is leading to profitability
It's also leading to robust profitability. Some growth companies make the mistake of overinvesting as they grow, and their profits never quite catch up. Nu is leveraging its large customer base and all-digital platform to grow without ratcheting up expenses, and its strategy of cross-selling leads to higher revenue per active customer without comparable marketing costs.
One of the more impressive metrics Nu reports is average revenue per active customer, which has been increasing consecutively and was $10 in the third quarter, up from $7.90 in the prior-year period.
Its credit portfolio also increased from $9.7 billion in Q3 2022 to $15.4 billion in Q3 2023, driven by growth in both personal loans and credit cards. Deposits increased 26% to $19.1 billion, and this healthy proportion of deposits to loans means that Nu is taking in higher interest on its loans than it's paying on its deposits, despite offering its depositors high rates. That's resulting in wider net interest margins, which reached a record 18.8% in the third quarter. Net interest income more than doubled year over year.
Image source: Nu Holdings.
At the same time, the cost to serve per active customer has remained largely stable, increasing from $0.80 to $0.90 in the third quarter.
Nu should soar in 2024
Nu's growth is really just beginning. It has been reporting this kind of growth in a pressured inflationary climate. As inflation is falling in Brazil just as it has in the U.S., growth could accelerate. The bank is just starting to penetrate its newer markets in Mexico and Colombia. When Nu posts fourth-quarter results, the stock should take off even more, and now is a great time to buy.
