What a difference a year makes.
When Euromoney spoke to Nubank’s CEO and co-founder David Vélez a year ago, he was quick to express his preference for the greater control and lower accountability that comes with private ownership.
“I think we’ll do an IPO, but we don’t want to be distracted and we are not going to be rushed into a decision when we’re not ready,” he told us in January. “If it were up to me, we would be private forever.
“For now, there is a long line of private investors wanting to invest in Nubank and we don’t need capital. But if a good offer shows up, we might take it and that might give us more leeway to keep running the bank as a private entity.”
Incumbents are taking the fight to the unbanked sector that has been Nubank’s base since its inception
Nubank completed its IPO in December. The deal valued the bank at $42 billion. What changed?
The answer is valuation. In January, after a $400 million Series G funding round, the bank was worth $25 billion. Then in June, Nubank took $500 million, at a $30 billion valuation, from Warren Buffett, and as soon as the ink was dry on the deal momentum for the IPO began to become unstoppable. By September, the underwriters – led by Citi, Goldman Sachs and Morgan Stanley – were touting a New York Stock Exchange (NYSE) listing north of $55 million. Some investors – rightly – must have seen an attractive exit door for a bank that reported a net loss of $99 million for the first nine months of this year and $171.5 million for 2020.
Vélez will now face intense scrutiny in the next phase of Nubank’s journey from potential to profitability.
That $42 billion valuation brings its own set of challenges. Nubank is now worth more than Itaú – formerly the most valuable bank in the region – which achieved a pandemic-supressed profit of R$19.7 billion ($3.5 billion) this year. Nubank’s valuation is more than 10x book, while Itaú is less than 2x.
The investment thesis, of course, is all about low cost-to-serve and high growth. Nubank brings impressive statistics to both: its cost-to-serve is around 85% lower than the traditional banks in Brazil, and it can now point to 48 million customers, with an average of 2.1 million additional clients in the third quarter of 2021.
Investor realism
But the ground is shifting, just a little. With the air coming out of the fintech tyres in the US in recent months, the IPO range was cut by 20%. That was enough to generate strong anchor accounts and a post-trading pop.
However, are there signs of creeping investor realism on the challenges implicit for fintechs and neobanks to bridge the potential of today to profits tomorrow?
Incumbent banks – often painted as lumbering anachronisms whose slow demise will drive continued neobank market share – aren’t going quietly into the night.
Take Itaú. Under its new management team, the bank is quickly getting a grip on its digital game. It has turned its digital payments wallet, Iti, into a standalone bank and it added more clients than Nubank in the third quarter: 2.2 million new subscribers took Iti to more than 10 million and the bank is confidently targeting 15 million by the end of 2021. Interestingly, this no-fee response isn’t leading to cannibalism: 85% of its clients have never banked with Itaú.
This suggests that incumbents are taking the fight to the unbanked sector that has been Nubank’s base since its inception.
Attack is often the best form of defence.
