Nubank becomes LatAm’s biggest, and riskiest, bank

Nubank, a Brazilian FinTech startup celebrates the company’s IPO at the NYSE in New York
David Velez, Nubank Founder and CEO Nubank, the Brazilian FinTech startup, poses outside the New York Stock Exchange (NYSE) to celebrate the company's IPO in New York, U.S., December 9, 2021.

NEW YORK, Dec 9 (Reuters Breakingviews) - So-called fintechs come in many forms. Nubank, freshly listed on the New York Stock Exchange, has just become Latin America’s biggest bank by market capitalization. It raised $2.6 billion in an initial public offering read more at $9 a share on Wednesday evening, giving it a market value above $40 billion. That’s priced for unlikely perfection.

The newbie’s valuation now narrowly tops that of regional powerhouse Itaú Unibanco (ITUB4.SA), though that could change once trading starts later on Thursday. For an eight-year-old upstart read more originally set up to offer cheap credit cards in Brazil, that’s eye-catching.

So is Nubank's price-to-tangible book value ratio, which is in the ballpark of 10 times. That’s sky high given Itaú is at less than 2 times that measure, according to Refinitiv data, U.S. giant JPMorgan (JPM.N) trades at only a little over 2 times, and less surefooted banks like Citigroup (C.N) and Deutsche Bank (DBKGn.DE) are valued below tangible book value.

The bet is on supercharged expansion. Nu Holdings, as it’s officially known, has increased its customer base more than 10-fold to 48 million in under four years. Financial-technology investors sometimes focus on growth-oriented valuation metrics like multiples of revenue. Those help justify investments in Nubank, either earlier or in the IPO itself, from entities including Warren Buffett’s Berkshire Hathaway(BRKa.N), Sequoia and SoftBank Group’s (9984.T) LatAm fund.

But the risks, as well as less friendly markets, already forced the company led by David Vélez to cut its planned IPO price by a fifth last week. And they still loom large. First, established banks have plenty of resources to fight disruptors, even if they may initially be reluctant to accept cuts in traditionally fat fees. Nubank’s no-fee credit card has attracted rival products. The company reckons incumbent Brazilian banks make 10 times as much revenue per customer. That’s a source of top-line growth, but forcing rivals to compete could reduce that potential as well as slowing its customer growth.

Second, even banks with decades of experience can make mistakes. Nubank’s prospectus says it has identified material weaknesses in its financial reporting. Such teething troubles can be remedied, but it’s another reason for caution.

To top it all, there’s an economic downturn read more in the bank’s biggest market. Data last week showed Brazil’s economy contracted in the three months to September as surging inflation and rising interest rates damped the rebound from Covid-19. As well as being the most valuable bank in the region, Nubank may also now be the riskiest punt for investors.

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- Latin American financial-technology upstart Nubank priced its shares on Dec. 8 at $9 each in an initial public offering on the New York Stock Exchange. That makes it the most valuable listed bank in the region with a market capitalization of $42 billion.

- The week before, the company, officially known as Nu Holdings, cut its proposed IPO price range by a fifth, to $8-$9 per share from $10-$11.

- Nubank also gathered so-called cornerstone investors interested in acquiring at least $1.3 billion in shares – about half the total offered – including existing backers such as Sequoia and Tiger Global Management and new ones such as SoftBank Latin America Funds.

- Nubank said in June that it had raised $500 million in funding from Warren Buffett’s Berkshire Hathaway. Berkshire bought 10% of the shares in the IPO, Bloomberg reported on Dec. 8 citing a person familiar with the matter.

- Founded in 2013 to offer a cheap credit card in Brazil, the company now offers bank accounts and other services and claims 48 million customers. In recent years it has expanded into Mexico and Colombia.

Editing by Swaha Pattanaik and Sharon Lam

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