Nubank’s profitability is being tested by Santander; Amazing review

profitability nubank Tested by a report by Santander. According to the document, the normalized return on adjusted equity (ROE) for Nubank’s Brazilian operations would be 11% in the fourth quarter of last year, subject to regulatory risks and internal issues.

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However, the bank reported an annualized return on equity of 40% for the period, which Santander analysts claim does not match its current valuation level.

For analysts, some points weigh on Nubank’s return on equity, such as the central bank’s decision to cap prepaid card fees, which will have a negative impact on revenue of $42 million.

Another factor is the deteriorating asset quality of Nobank, with provisions as a percentage of the loan portfolio expected to be more than 12%, given the increase in defaults. For Santander, that level should be 13%, which would result in an impact of US$110 million.

There are other factors affecting Nunbank’s profitability to be tested

Analysts also point out that Nubank records low capital allocation in its Brazilian operations, noting that capital allocated is less than a third of the total, despite the importance of local operations.

In addition, it is necessary to understand the risks involved in imposing limits on the interest charged on revolving credit on Nubank results. Given the proposal being evaluated in the House, which stipulates a cap of 8% per month, like overdrafts, the impact could be 17% on revenue, according to the report.

Despite the criticism, Santander analysts recognize that Nubank has managed to improve financing costs by offering mini-fund functionality, a tool created for customers to save money. “Tangible results were already seen in the last quarter, and we believe there is enough room for further improvements in the coming quarters, considering that we didn’t see the impacts in a full quarter,” says an excerpt from the report.

Santander has a recommendation to sell Nubank shares, target price of $3. Within 12 months, Nubank shares have fallen 33.24%, bringing the market value to $22.4 billion. At the time of the report’s release, Nubank shares were down 1.34% at $4.80.