Nubank just had its best three months ever. The digital bank's parent company, Nu Holdings, reported second-quarter net income of $1.06 billion.
Strip out currency swings and earnings rose 49% from a year earlier. That beat every estimate Bloomberg surveyed from analysts, so the market got a pleasant surprise rather than the disappointment it saw last quarter.
The engine behind the jump is lending. Nubank's credit portfolio expanded 37% year over year, and the bank got a little more efficient at managing what it costs to lend. Credit costs, the money set aside for loans that might not get paid back, came to $1.7 billion in the quarter. That is up from $1.1 billion a year earlier, but it actually improved from the prior quarter.
Brazil's credit cycle is not easy right now, and Nubank is responding by leaning into credit cards and personal loans. New CFO Rob Livingston said the lender underwrites as if a recession were right around the corner, using AI models to size up borrowers' creditworthiness.
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That cautious stance shows up in the numbers. Livingston said before the earnings release that he expects the risk-adjusted net interest margin, a key measure of how much money the bank makes on loans after accounting for defaults, to stay around 12%. In plain terms, the bank is finding a sweet spot between charging enough for loans and not taking on too much risk.
The caution makes sense given recent history. First-quarter results spooked investors because the bank set aside more money for potential losses, and shares fell 5.7%. This quarter's numbers suggest the strategy is starting to pay off, but the bank is not declaring victory.
Growth is not free. Operating expenses hit $806.2 million in the second quarter, up from $548.1 million a year earlier. The bank's efficiency ratio, which measures operating costs as a share of revenue, improved by 1.8 percentage points from a year earlier to 19.5%. Lower is better here, and that is a solid number, though it slipped from the first quarter thanks to marketing costs and international expansion.
Part of that spending is tied to new territory. In July, Mexican regulators granted Nubank a banking license, which opens the door to more product categories in Latin America's second-largest economy. Livingston said growth there should pick up speed, though profit gains will come more gradually.
The company also expects its full-year efficiency ratio to land near 20%. That reflects return-to-office policies introduced in early July and the push into the U.S. market. Nubank previously said that U.S. expansion would shave less than 100 basis points, or 1 percentage point, from the ratio this year and next.
The bottom line: Nubank is spending more to grow, but it is doing so while profits hit record levels. The AI underwriting push and the Mexico license have not fully paid off yet, and the bank is honest about that. For investors, the question is whether the bank can keep this balance as it expands into new markets.
The record quarter says the formula is working for now. The rising costs say the real test is still ahead.
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