$NU: is Nubank Capital One in 1994 or Capital One in 2006? | Vanshap Capital

0:01David Vélez: This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+.

0:27Evan Vanderveer: all right hello and welcome to yet another value podcast i'm your host andrew walker today we've got a really fun one i've got evan vanderveer from vanshuk capital we are talking about nu the ticker there is nu and it's a really interesting conversation this is a company that is very very popular among fin twit compounder types and evan lays out oh really compelling reason why why you know you've got a fintech that's grow roe 30 percent growing quickly trading at a reasonable valuation, the much better KPIs, founder led, like he lays out a really good reason why. And we are going to have a really insightful conversation on the risks, on the risk to new bank particular, the risk of the financial sector in general, as you're just going, we've got lots of parallels to Capital One in the nineties to a bunch of other things.

1:12Evan Vanderveer: So it's really good conversation. I think you're really enjoying it. And Evan has an energy and a pace of talking that I think matches mine. And I always appreciate that in someone. So I had a ton of fun doing it. We're going to get there in one second, but first a word from our sponsors and our podcast today is sponsored by Trata. If you've listened to this podcast for the first year, you know that I really enjoy Trata. If you like this podcast, I think you will really enjoy Trata too, because it's just like this podcast. It's two sharp by-siders who hop onto a call, anonymize and talk about all the risks and all the upsides and all the things that they're thinking about when they're making investments into this company.

1:47Evan Vanderveer: So if you haven't tried Trata yet, you should. And one easy way to is go to trotta.com, T-R-A-T-A.com slash and you, and you will see a Trotta transcript from just a month or two ago that I actually read and used heavily when I was prepping and thinking about and getting ready for this call. So if you like new, if you like this podcast, go to trotta.com slash and you, and you will see a free Trotta transcript that will show you why I like them so much. So thanks Trotta for sponsoring this episode. Go check out the product. And now let's get to Evan and you. All right. Hello, and welcome to yet another value podcast.

2:24Evan Vanderveer: I'm your host, Andrew Walker. And with me today, I'm happy to have on for the first time, Evan Vanderveer from VanChap Capital. Evan, how's it going?

2:30David Vélez: It's going great, Andrew. Thanks so much for having me. I appreciate it.

2:33Evan Vanderveer: I'm excited to talk about the stock today. Before we talk, disclaimer, remind everyone, nothing on this podcast is investing advice. There's a full disclaimer at the end of the podcast. There's a full disclaimer in the show notes, so people can go check that out. So, Evan, this talk we're going to talk about today is pretty popular in finchwit circles, I would say. When I was prepping for this podcast, one of the first things I do now is I have my AI pull all the fun letters it can find from Fiscal AI's fun letter database. And it was like, hey, there's 87 different write-ups of this company. But I think you have a really interesting angle on it, and you've done a lot of work and thought about the historical parallel.

3:08Evan Vanderveer: So, anyway, the company is Nubank. The ticker there is NU. and I will just toss it over to you. What is NewBank and why are they so interesting?

3:16David Vélez: Yeah, so thank you again for having me and I'm excited to talk about this company. We've owned and been studying for, I guess, coming up on four years or so. So just as some background. So basically, NewBank is a digital bank. It's one of the largest in the world. They have about 140 million customers as of the earnings report yesterday. They're by far, their biggest market is Brazil, although we'll touch on Mexico and Colombia are coming up nicely. It was started back in 2013 by three founders, the largest of which, or the CEO, is a gentleman named David Velez, who is actually from Colombia, grew up there.

3:52David Vélez: And out of a frustration with opening a bank account in Sao Paulo in 2012, there was armed guards and bulletproof doors and all kinds of months of paperwork and so on. Out of that frustration came NewBank. And basically, the idea that he had at the time was a branchless bank with mobile, which was coming up in Brazil very quickly at the time, a zero fee credit card, and basically, most importantly, a fanatical customer culture focused on NPS and really pleasing the customer in many different ways. And over the last 13 or so years, we would argue the results have been absolutely staggering. They have about 60 % of the adult population as total customers.

4:29David Vélez: the most of the referrals that they get about 80 to 90 percent are organic so that the marketing costs are extremely low versus the the competitor incumbent banks and most importantly they are extremely efficient so we can get into it but the efficiency ratios are about 20 compared to the incumbent legacy banks which are more in the in the 40 to 60 percent and over the four or so years since we've been studying the company back then it was it was barely profitable and now the company is extremely profitable. So because of the operating leverage, which we'll get into, the ROEs are now, again, as of yesterday, around 30, in the mid-30s or so.

5:06David Vélez: And then just to bring it forward, I would say, particularly this year, earlier in the year, there was some macro concerns, some credit concerns, and some transitions that the business has gone through that caused a very significant decline in the stock price, which was why we think it's particularly timely to discuss at this company today?

5:25Evan Vanderveer: No, look, great overview. I am laughing because you said the founder, he goes, tries to open, one of the reasons he goes, he starts this is he tries to open a bank account in Columbia and there's armed guards and all this paperwork. And like, look, I am one for efficiency. And whenever there's something inefficient, I hate it and I want to fix it. But, you know, this is just me, a mere mortal, not a man who started a multi-billion dollar banking startup that's like taking over all of Latin America. But when I go and I'm like, oh, there's arm guards are part of the problems. I'm like, okay, I'm not touching that, right?

5:57Evan Vanderveer: But this guy starts it. Okay. So lots to touch on there and lots that we will touch on. But I guess to start, let's just frame it high level. The market's a competitive place. And this is a finance startup, right? They give lots of details. I believe I was reading, I think it was a trotter call that said, hey, this is the company that gives actually out of all the fintechs I've ever followed, this is the company that gives the most disclosure on just all sorts of different KPIs and everything, right? So this is a company that gives a lot of disclosures. As I mentioned, you know, like 70 fund letters that are mentioned, this is a top holding, very visible, big company now.

6:30Evan Vanderveer: What are you, and I suppose the other funds, what are you seeing that you think the market is missing that makes this an alpha opportunity?

6:37David Vélez: Yeah, it's a great question. So again, to your point that there are all kinds of analysts on the sell side and buy side covering the name, I would say still, even though that is the case, I think we still meet quite a few investors out there who are unfamiliar or sort of categorize it as like an EM, you know, sort of more early stage, not as profitable, however you want to say risky bank. So again, acknowledging that it's definitely become more known over the years, now 70 whatever billion market cap, it's still, in our opinion, not maybe understood. But I would say to answer your question, most importantly, is the view that we have over the long term.

7:11David Vélez: So I would say that there's a view out there, aside from the sort of the short term noise that the company, as I said, has already gotten 60 % of the customers or sorry, 60 % of the population in Brazil. And so obviously that, you know, you're, you're getting to the point of, uh, you know, maturity there in terms of, um, you know, how many customers you can get. Um, and I think that the market is missing that, uh, while they've spent the last, say five years getting those customers, they're going to spend the next five sort of deepening those relationships. And again, we can get into this, but basically there's a whole maturing of the, those customers over time.

7:43David Vélez: And if you sort of run those numbers out, um, In Brazil alone, you come up with a far more profitable enterprise. So that's part of it. And then the other part is Mexico, which I think correctly so the market has been extremely skeptical of, although until recently, that business has the potential, in our opinion, to be a similar size, if not bigger than Mexico over time. And they mentioned yesterday on the call that, for instance, it sort of benchmarked back to 2020 where Brazil was at that point in time, that the revenue per customer, what they call the RPAC per month, is double where it was at the same time in Brazil.

8:15David Vélez: So you have that, and then we could get into Columbia, which is obviously smaller, and then I'm sure at some point we'll touch on the U.S. opportunity. But, yeah, I would say to summarize, again, our view, we're taking the sort of 10-year view where maybe many of these other folks are not taking the same time horizon kind of opportunity.

8:30Evan Vanderveer: So let me pull on to a few points there, right? And I want people to keep in mind the deepening of the customer relationship point that you said. Look, banking, robbing all these things, you get the customer relationship, and this is why they give you – if you get one of those emails, hey, sign up for this credit card and we'll give you$150 or do a direct deposit, we'll get$200. The relationships tend to be very sticky and that's their customer acquisition costs they plan on making back. So as you said, they've grown a lot quickly. And I think they're hoping, hey, we spent to grow and all these customers, we're going to get them.

8:59Evan Vanderveer: They took the credit card, we'll get the bank account, whatever. Your write-up. So I just want people to keep that in mind. Your write-up and anyone who's followed this company, there's a lot of parallels to the Capital One story in it. And I think people point to that positively because Capital One has been a good story in banking. So I'd love for you to maybe go through the parallels and everything. And then I'm going to follow up with some questions on kind of, I think, bear cases that could emerge from that.

9:25David Vélez: Yeah, sure. So I guess a few things there. Maybe it's helpful to give some background on David, if that's all right, because I think it's a core part of the story, David Velez and the co-founders. So as I mentioned, David grew up in Colombia. He had a very entrepreneurial background. His father, I think, started or co-owned a button factory, as we understand the story, where David worked in quality control, I believe, checking the buttons. He apparently bought, I think, one cow and grew the herd of six cows before he sold the cows, I should say, and went to Stanford. And I won't bore you at this point with the rest of the story.

10:00David Vélez: But the point is that he had a very entrepreneurial background. When he was starting new bank in 2013 or 2012, thereabouts. He brought in, Sequoia was an investor in the seed round. I believe they invested$2 million. And another big investor, to your point about Capital One, to close the loop here, was QED, the fintech firm, and Nigel Morris, who was a big backer of the company at the beginning. And so at that point, and from then on, a lot of folks from Capital One were involved on the data science side on the board, obviously at the governance level, but also more importantly in the operational side of things.

10:34David Vélez: The parallels between the two companies are really, as I say, the focus on data science. So like Capital One, they would start with a credit card and a very low limit and a huge reliance on data and having the algorithms and the models constantly updating and so on and so forth. And obviously, as the customer matured and behaved, they would increase those limits. So I would say that that's really the genesis of sort of where they came from and sort of the similarities between the two organizations over time.

11:05Evan Vanderveer: Okay, perfect. Perfect. So, you know, for those, I'm sure most of my listeners are domestic, most of people know Capital One, right? But the Capital One story is these were like the smartest guys in the room, right? They start in the 80s. And they they figure out segmentation credit cards and having people I mean, it's credit card business. And they figure out direct mail, if you have somebody switch their credit card balance, like that's actually a really undervalued thing, credit cards are super profitable. That's how Capital One gets started. And the reason I think new bank is interesting is because capital one is a killer stock the ipo in november of 1994 the stock is up like 13x over the next 12 years right it crushes the market it's a great stock uh in 2001 i'm just kind of looking at my bloomberg grant glancing at they're approaching forex price to book value all this sort of stuff right so this is a great growth company trading for a huge probability and then what happens you know they they find this loophole but two things happen.

11:59Evan Vanderveer: You know, a lot of company, a lot of the companies they're competing with, because you're offering a financial product, they start doing balance transfers to right chase all these guys. So it gets a little bit more competitive, people start hiring the capital one execs and saying, hey, come over here and bring that all that data science to us. So the market gets a little more competitive. And they kind of grow, start taking so much that market, they have to expand, right? They buy a bank, they start doing deposits. What happened since 2006, the stock, I'm just looking at it, you know, this stock 2006 today, it does fine.

12:27Evan Vanderveer: It's up like 3x over 20 years, fine. But the market's up like 8x over that time, right? So crushes the market the first 12 years, but then it kind of grows into a mature fintech and it doesn't really do that well, right? It's kind of trading around tangible book value today. And if you held it like you're kind of disappointed. So I'm sure people can see where I'm going with it. But when I look at NewBank, I see this company and 30 % ROEs, great growth over the past few years. But say, hey, in Brazil, I can't remember off the top of it, but I think they're hitting like 60 % of the population has relationships with them.

12:59Evan Vanderveer: They're into the teens in terms of market share. And I can say, hey, that all sounds great. And let's put international aside for a second. But when I look at that, I say, hey, they're capital one in 2006 at this point, right? And the future is a lot slower growth. ROEs coming down, expanding a lot. So that's kind of my first worry when I look at the story. So I threw a lot out there. there. Hopefully it was a fun little story and fun little trip down memory lane for anyone who remembers Capital One. But I'd love to hear what you kind of think of that as the pushback.

13:26David Vélez: Yeah, no, it's a fair pushback. And again, obviously, our thesis going forward does not rely on so many more customers, particularly in Brazil. Again, Mexico, US, and Columbia are different stories. But I would say to sort of frame it up, I think we look at sort of the Brazilian profit pool. And again, I'll somewhat answer your question by touching on Capital One, but I'm not as deeply familiar with that business as I am with new. So I'll sort of touch on and try to answer your question. But the profit pool generally in Brazil is about$100 billion of gross profit in the banking system. And today, new banks are at like 7 % of that.

14:00David Vélez: If you sort of look by a different product type, for instance, they just got into the payroll, which is actually the largest part of the credit business in Brazil, payroll loans. And they are now at like 1 % of that, for instance. And so if you go down the different verticals, as I say, different product lines, not only in Brazil, but then the other countries, it's hard for us to see how they don't grow materially from here, frankly. And again, I'm sure we can get into it, barring some downturns and crises and so on. There will be competition. And again, we can get into that from other fintechs.

14:35David Vélez: There's a few thousand, I think, fintechs in Brazil alone. So there are other players. I would argue that at the end of the day, NewBank has reached the point where they are so well known and that the brand and reputation is so strong that when they go into these other verticals, they have a distinct competitive advantage. And again, we can touch on the data advantage that they have. But I would say there is no question that obviously that they've in some ways they've picked the lowest hanging fruit in Brazil. But our argument is that there's not only in Brazil, the other countries where they're just getting started, there's tremendous opportunity.

15:06David Vélez: And I think that maybe most importantly on our thesis is David Velez and the fact that he and his co-founder still control the company and own about 20 percent of the stock. I think particularly in banking, as Munger used to say, I think you really need to trust the banker, the insurance company or the bank. You really need to have someone you can trust. And so him still being in his mid 40s and controlling the company and making sure that culture and growth is intact gives us tremendous comfort and optimism going forward.

15:34Evan Vanderveer: I mean, that is just wild. And, you know, you look at this, like you mentioned, this is a 70 billion market cap company that he started after Capital One. Capital One's the model. I mean, Capital One today is I think it's less than 70 billion in market cap. So like they started later, like this is just it's an incredible, incredible growth story here. But let me go to valuation. Right. So they reported this morning. The stock is up about 10 percent. So that's probably pretty nice for you. And oh, Capital One's market cap right now is 140 billion. I was looking at I had their 2007 market cap on the head.

16:05Evan Vanderveer: So they reported this morning, stocks up about 10%, probably pretty nice for you. We've planned this before, but obviously you still think there's a long way to go. People can listen to the whole podcast and hear that. As we're talking, the stock's trading about 15. That puts them at high teens to about 20 times price to earnings on an LTM basis. This is a business that earns a 30 % ROE, right? Right. My my worry is I talk to a lot of investors who are U.S. domestic based and they'll whether it's a bank or a tower company or whatever, they'll point and say, hey, look at this great company I found.

16:41Evan Vanderveer: You know, peers in the U.S. trade at 10 times EBITDA. This trades at nine times EBITDA and it's growing faster. So it should trade for a higher multiple. And I always think to myself, well, maybe you're right. But like domestic, you know, I had this with Vion recently. Emerging market companies should have like a higher cost of capital. So what is the right answer? So here you have a company that's earning a 30 % ROE trading for 18 times, 20 times earnings that's growing quickly. I mean, if this was the US, you'd be like, hey, this should trade for infinite price to book with those metrics, right?

17:15Evan Vanderveer: We're talking about how much of the TAM can they hit before they start slowing down. Brazilian banking, I don't know. Like what's the right cost of equity for a Brazilian bank? Because if it's 15, they're still earning a ton, but that's way higher than a US bank. If it's 45, which if this was, I don't know, some emerging market beyond Brazil, they'd actually be destroying capital. Like what's the right cost of equity? How do you kind of frame that valuation? How do you think about all of that?

17:37David Vélez: Yeah, it's a great question. I think at the core, maybe some of it is philosophical, right? So when you're, in my opinion, when you're investing on one of these leading edges of a sort of a disruptive business model, as we believe is not that's not only in Brazil and these other countries. I'm not sure anyone has the right answer to the question. So I would say we would argue that this is more of a tech company than a bank. Obviously, if you go back and look at the history of banking with branches and they're not even in mortgages, basically, if you look at traditional, what a bank balance sheet looks like, it almost looks not much like, although obviously there's loans and deposits.

18:12David Vélez: Otherwise, it doesn't look like that, like new banks. So I think it depends how you frame it up. The way we frame it up is we sort of look at 2029, 2030. We think the company can make about$2 in earnings. Or to answer your question on multiple, we use this roughly 16 times multiple, which I think is fair. You can also look at, for instance, Itaou in Brazil. I think it's Itaou coming back to today, which is one of the five legacy banks, which has an ROE, I think, about something about half or less of new banks and is trading also seven times 2029 earnings. So I guess to go back to your question, again, I don't think anyone knows exactly the answer.

18:51David Vélez: The company and ourselves would say it's more of a tech company than a bank. I think time will tell how true that is so far. I think it's been a fair argument. And I think to your question about Capital One and if they can continue to grow at this rate and produce these kind of returns, I think that their argument will be more true 10 years from now than it is now. But we shall see.

19:13Evan Vanderveer: No, it's interesting because every other word you say there, I find myself either nodding like, yep, I agree, or going, no, I think that's crazy. Like, it's just emerging market bank, like, that is the key debate here, right? Let me try to frame it a different way. You know, the two public market companies that come to mind when I hear this as loose parallels, aside from Capital One and, like, you know, the, hey, is this Capital One in 94 or 2006 comps? the two that come to mind would be Melly, M-E-L, Mercari Libre, and Caspi, K-S-P-I. And Melly, I think, is a little bit of a different business.

19:47Evan Vanderveer: I think they have more retail focus as well, but they do have a fintech segment here. And Caspi obviously, like, owns Kazakhstan. And both have been kind of catnip for investors in a similar way to this. You know, you can look at fund letters and people, and I think smart investors there. And both haven't worked out as well as I think they would have. You know, both are still growing nicely. The ROEs on both are nice. And I think the answer there has been, A, there's always this regulatory acts that people are worried about with an emerging market. And we can talk about the Brazil specific new bank one in a second, but I do think there is something to, Hey, people just aren't going to give you a big multiple.

20:20Evan Vanderveer: They're, they're always going to worry about that because of this cost capital issue and everything. So how would you look at new bank? You know, if you're investing today, you're doing it because you think it's going to be alpha and Caspian Mellie, they haven't performed poorly over the past five years. they just haven't like generated tons of help. So what do you think is different here versus those two peers? And if you can also say, hey man, I haven't done any work on those, but I do think the framework is at least helpful.

20:42David Vélez: Yeah, well, coincidentally, the two companies you mentioned are other two large holdings. So I know them well. I guess if I can, in the most respectful way, push back on your research. Please, no, no, no, please. I'll just ask some questions.

20:53Evan Vanderveer: No, no, no, absolutely. People are saying, man, it ain't me.

20:56David Vélez: On Mercado Libre, I think just to touch on that, we again think that's a phenomenal business. you know, I think that in that case, you mentioned the five year sort of look back. And that is absolutely true. I would say that the valuation, in our opinion, back in the during the COVID 2021 time was extremely rich. And now we would say it's undervalued. So I think if you go back to the IPO, what is there, 27 years ago, I think it's compounded in the in the 20s.

21:20Evan Vanderveer: I had to stop it at five years, because if you go to like 10 or 15 for Melly, it looks really damn good. There we go.

21:25David Vélez: So yeah, our view is that the next five or 10 will be back back on track. As it relates to Caspi, I would say somewhat similar. The valuation got quite high just prior to the Ukraine-Russia war. And so the multiple also has contracted from, I think, was at a peak of 19 times down to bottom kind of six times. So in our opinion, both of those businesses, including new, are firing on all cylinders. There have been short-term issues that we could get into another time on Caspi or something like that. But I would say those business models over the long term remain intact. And our view is that Nubank has a similar competitive advantage with the data that they have, the scale, and so on.

22:06David Vélez: Just basically constantly pleasing customers, adding more and more products, going into more and more geographies, and so on. So, yeah, summarize, the short term is a question mark, but our view is that all of the three businesses that we're discussing that you mentioned should have a tremendous opportunity over the next five to 10 years.

22:25Evan Vanderveer: Let me go back to one more thing you said earlier. You said, hey, NewBank, in our mind, isn't a financial company so much as a fintech, right? Like internet. And look, again, people can go look at the metrics they publish, and they publish lots of metrics, more than most companies. You can look at their, they've got better loan underwriting, all this sort of stuff. A frequent thing I hear from people is, hey, just in researching this, a frequent thing I hear is, hey, these guys are actually too conservative on their loan underwriting. They would be more profitable if they actually increased their loans and did some more bad loans, which is not something you hear a lot, right?

23:01Evan Vanderveer: But I did hear you say, hey, these guys are branchless, better technology. And it does remind you, you know, of, you mentioned LA in 2021, it reminds you of the so far in 2021, a bunch of these branchless banks, fintechs that were coming along that said, hey, we've got better tech. Consumers love us. We're simpler. Robinhood's probably worked out okay, probably the best of them. But that was the pitch, right? And what happened? Well, the really young people flocked to that. But then guess what? It's really competitive when you're giving out a loan because what do people want when they want loan?

23:32Evan Vanderveer: Yeah, they want a sleek interface and all this sort of stuff, but they kind of just want the lowest rate. And if you're lending at 30 % ROE, maybe it's because you're more efficient, but there's always going to be incentive for some guys to undercut you to stay in business. So I guess my question is with their market share, why isn't this right now kind of at the path of, it might come back to Capital One in 2006, where it's, hey, they're so big, they can't take much more share without the banks really pushing back aggressively. The banks look at that and say, all right, it's existential for us now, we need to cut costs.

24:03Evan Vanderveer: Or even the regulators step in and say, NewBank, you're the fifth largest bank in Brazil, we just need to cap your lending because you're becoming a SoFi, a financial significantly institution that is kind of too big to fail. So there's a lot of out there, but I'd love to just ask about like kind of that forward look.

24:21David Vélez: Yeah. So I guess I'm trying to pick it apart. I would say as it relates to focus, I guess you mentioned SoFi and some of the other fintechs in the US and Robinhood, obviously those have done fantastic well. I would point out, obviously, in my opinion, that they are not nearly as focused as NewBank, having all different kinds of businesses and transforming and so on, which has obviously worked for them, but in my opinion, is not the same focused economic model that NewBank has. As it relates to pushback by the regulators and so on, it's important to keep in mind that NewBank has brought a lot of their customers out of the unbanked population.

24:54David Vélez: As you can imagine in Brazil, and it's also the case in Mexico and Colombia, and actually here, even in the Latino population in the US, many folks have no credit score, no access to the banking system, and their ability to use their data to be able to underwrite, even in a small way, those folks at the beginning is very powerful. And they really, for that reason, well, for many reasons in Brazil in particular, have a very sort of fanatical following. So the idea of the regulators or the population going against them anytime soon seems unlikely, but anything is possible. I would also say that as it relates to the loans, you mentioned the efficiency, the fact that they are, however you want to frame it, at least twice as efficient, if not more.

25:42David Vélez: For instance, I don't think I mentioned they have something about 13 ,000 customers per employee at NewBank, where the legacy banks have about 1 ,300. So again, on that metric, it's almost 10 times as more efficient. So what that allows them to do is underprice, not on every product, but as it relates to the private legacy banks in Brazil, they're able to underprice them because of that efficiency. So again, over time, I'm sure there will be competition. You see it in the different markets, but our argument would be even that competition, it's going to be difficult for them, but more likely that those folks will be eating out of the legacy banks or the legacy banks, both in Brazil, Mexico, and the other geographies.

26:20Evan Vanderveer: That is crazy. 13 ,000 versus 13 ,000. Though you also don't know, like, you know, is there mortgage servicing on one or the other, but that is just wild on the Facebook. Let me ask, Brazil is their largest market. Yeah. Let's put the other markets to the side for a second. Just are there any risks around Brazil, macro, regulatory, anything that you worry about with this company?

26:41David Vélez: Absolutely. So, yeah, just to be quite clear about that, it's Brazil. As you and many of the listeners know, there's, I think, a crisis there every normally every few years or whatnot. There has not been in a handful of years. And so obviously, you know, we'll see over time. I would say a few concerning things. One would be, for instance, that the plus 90 day NPLs in the banking system are at 15 year highs. And part of the reason for that is the sell it rate, the interest rate in Brazil was up in the mid teens. And just recently they've started to drop it down. But as you can imagine, that stretched the customer to a large extent.

27:16David Vélez: the average customer in Brazil is heavily indebted. And so if you speak to Brazilians, they're getting credit card offers in the mail every five seconds and calls and so on for new credit cards. And so there is an element of, there's no question that the consumer in Brazil is stretched from, as I say, from a leverage level. So there's a presidential election more short term coming up in October. Our view is that the market is pricing in another Lula win. And again, obviously, Lula is the president now. So things have been going just fine for New Bank. But obviously, to the extent that there's political turmoil of any kind later in the year, that that could cause a problem.

27:53David Vélez: So we could go into it. I guess I've touched on some of the mitigants as to why we think even even in a more macro stress situation that New Bank should do just fine. But yes, for sure, there it's you know, it's an emerging market at the end of the day that has a history of some very volatile periods.

28:11Evan Vanderveer: No, that's perfect. And I want to start talking about some of the emerging markets, Mexico, where I think they're furthest along than Colombia, maybe even the US. But if I just put those emerging markets and everything to the side, you kind of mentioned, hey, when I run this out to about, I think you said 2030, I look at you valued at like 17 times 2030 EPS, which does not assume any multiple expansion, right? So you're valuing it all on growth. But when you talk about that 2030 number, how much value are you baking in for Brazil versus the expansion markets?

28:45David Vélez: We don't count the US. And obviously, the company thinks that there's a pretty decent shot that they can earn significant market share. I have to go back in the numbers. But Brazil is obviously still a very, very large part of it. We are assuming that Mexico sort of continues on the trajectory. Colombia is a small part, but again, earlier stage similar to Mexico. So, you know, we sort of continue the ascent of all three companies at sort of the current rates. It's not like one becomes more outweighed. I would say on a profitability, obviously, Mexico just crossed over the break even here in the last few quarters.

29:17David Vélez: So obviously, that will, in terms of profitability for the company, that will start to increasingly become more meaningful as the operating leverage starts to shine through.

29:25Evan Vanderveer: But if I was kind of, it sounds like Brazil, I mean, obviously, Brazil is the scaled one. It's the largest Mexico is growing, but it sounds like the vast majority of your forecast, maybe you're not even doing it by geography at this point, but the vast majority of your value is still coming from the core Brazil.

29:38David Vélez: Yes, that's right. Particularly under the assumption you're mentioning, we have sort of the RPAC again, which is a contribution margin effectively per customer per month. We have that going from roughly 17 up to, I believe, in the high 20s. The mature cohorts in Nubank are already in that range and the incumbent legacy banks are more in the 40s. And there's some good reasons why they structurally should be hired because they have other additional services that NewBank doesn't currently offer. But yes, that's correct answer and summarize your point.

30:07Evan Vanderveer: Let's go. So they've got three expansion areas, Mexico, Colombia and the US. Mexico just crosses profitability. The other two are drags because they're investing to get the start of businesses. If you want to say anything specific about any of the geographies, you're welcome to. But I guess my overarching question when I look at this is like, hey, fintech, banking focused fintech, if that's fine, fine for me to say. Banking focused fintech going into separate geographies. Like I know their whole thing is, hey, we're going to be the first one that actually does this all on a core technology platform.

30:41Evan Vanderveer: But I can't remember a single banking focused fintech that has successfully gone from their geography to any other geography, right? Because every other geography has unique rules, unique relationships, unique regulatory regimes and stuff. So I think that served as a massive barrier. Like Citibank is famous for this. In the 90s, they say, hey, we're going to be the global banking center. Terrible. Underperforms for 25 years. Right off, right off, right off, right off, right off. And you can take it forward to pretty much any fintech you want, all the 2021 buzzy ones. I can't remember a single one that was successful in the expansion.

31:15Evan Vanderveer: So my question would be twofold. I mean, Mexico is already past break even, but like, why do you think this should be successful? And given the upside that they have in the Brazil market, like, does it even make sense for them to spend time kind of diversifying away from this?

31:29David Vélez: Yeah, all great questions. So we could spend an hour just on, sorry, just on the philosophical part of that. But I would say one point I would make, and it's an important one that I didn't touch on earlier, is part of the reason for the underperformance recently, the stock, is that there was a handful of management departures, and particularly people that were very highly regarded by investors, including the CFO. And so one of the reasons, in our opinion, or maybe the main reason those folks left is that David is trying to take the company in a more global direction. And part of that is obviously finding folks that have built global businesses.

32:06David Vélez: So Rob Livingston, the new CFO who just joined the company recently, for instance, was the CFO of Visa North America. He had spent a lot of time, I think, 18 years or so at Capital One. There's folks like that. The new product officer, chief product officer just came from Shopify. So I would say to answer your question, the risk there is not lost on the management team, number one. As it relates to the U.S. and going past where the current geographies, they have mentioned that they're going to cap the investment for the next few years at 100 basis points, the efficiency ratio. So they are very aware that they are not going to, they don't want to spend the golden goose going into all these geographies and risking the company.

32:51David Vélez: I would say, though, at the same time, you know, you look at Mexico investors, you know, five or whatever years ago were saying the same thing about that. So I guess that comes back to the hour discussion about, you know, philosophically, you know, going back to Citibank, as you mentioned, in the 80s or 90s, how was that managed? And admittedly, not being an expert on what happened there. But I would say, again, a big part comes back to the management team here, the thoughtfulness. I would say at the end of the day, they acknowledge, you know, the chief product officer acknowledges, for instance, that the app will be different in each market and so on and so forth.

33:24David Vélez: And not only that, the credit metrics themselves, the data is going to be different. You have different, all kinds of different, you know, coming from the government, not coming from the government, so on and so forth. So the answer is that I think that they are going to do it in a very thoughtful, calibrated way. and if it's not working, they will stop doing it, is our hope, and deploy capital or return it to shareholders. But I do believe that at the end of the day, the business model of going into a given geography and having a far more efficient, far more attractive product to the customer is still, although it's now been around for 12, 13, whatever years, is still relatively underpenetrated.

34:03David Vélez: The digital banks around the world are still a small minority of the banking system. And our opinion is that over time, they should be the whole thing. So that's really the question.

34:13Evan Vanderveer: The nice thing about it, I believe they bought back shares in the first half of the year. And it looks like, given we talked about the stock is up to 15, and I think they bought them in the low 12s. The nice thing about having ROEs of 30 is if your stock is trading for 15 times price to earnings, ROE is 30, you have enough capital to, you're profitable enough, you can buy back stock, you can grow the core business and you can grow in emerging markets. Like you can invest in everything when your ROE is 30. It's kind of nice that works. Let me pull on one thing you mentioned there. Again, I'm just trying to think, but if I told you, hey, I've been looking at this bank that's doing great ROEs and they're letting go of all their people with local market expertise and banking background, and they're hiring people with global fintech background, that sounds nice.

34:58Evan Vanderveer: We're going to take over the world sense, But I'm also worried about, hey, that I've seen this before. You know, you hire the people and say, oh, we're making this big push and say, oops, we lost control of our core business. Writing off a bunch of loans. So how do you think about managing that when, as you said, the reason the stock might have been weak in the first half of the year is a lot of the core guys. You know, nobody likes to see the CFO leave at any type of fintech or banking platform. A lot of the core people are leaving for people who, yes, might be more well-known globally, might have more global experience, but they don't have the local banking core Brazil experience.

35:31David Vélez: Yeah, great question. I would say, and I didn't mean to overstate, that the folks who left were at the very top. And we don't get any sense that through the ranks that the core business, the actual operating people or even the people below them were departing. I would say so in that sense it's not like the whole Brazilian team is walking out the door or something like that. They've restructured it so that I believe now there's a CEO of each country that is a local or at least intimately familiar with the business and then there's a Lat-Am CEO. So it's more of a reshuffling, a restructuring and one could argue on the other side that as I understand it there were direct reports that there were too many layers in David's opinion coming up to him from the different businesses and now that has actually been streamlined.

36:15David Vélez: So I think the direct reports have actually shrunk down. So his argument would be now he's closer to the business and keeping a closer eye. And again, those folks that are, for instance, doing the credit underwriting in Brazil are still doing the credit underwriting in Brazil. It's not like they've hired some team from Iceland to do that or something like that. So I guess time will tell. But I think so far what we've heard, and again, in the last podcast that the company put out with Rob Livingston, the new CEO, David mentioned, what are you going to be focused on. And we very much like Rob Vance, which is I'm going to continue to focus on Brazil, make sure the focus of the company is on Brazil and not to the next 10 markets where we're going.

36:53David Vélez: So again, I think time will tell, but we're optimistic that this is being done in a thoughtful, prudent way.

36:58Evan Vanderveer: Slightly pivot. David is a very, I mean, look, he started a$70 billion bank in mid 40s, very highly regarded executive, right? Owns a ton of the stock. He just joined the board of open AI. So I guess I would ask you two questions about how much of new bank, in your opinion, is a valuation bet. We mentioned, you know, high teens multiple for a 30 % ROE business that's growing quickly and has a lot of room to grow versus a business bet. We mentioned KPIs off the charts versus all their Brazilian competitors, way more efficient, probably the right to win versus a jockey bet. David, you know, super well-regarded, started this business, deep ties throughout a lot of the tech circles?

37:39Evan Vanderveer: Like, how do you kind of think about this overarching?

37:42David Vélez: Yeah, it's a great question. So the way we frame up the world is we're always looking around for what we call customer fanatics. So I guess the simple answer to your question is we like to think that every investment we make is at the end of the day, a jockey bet. I would say in the case of NewBank, it's particularly jockey bet. I think not only because of his control of the company, but the way he treats shareholders. A few years ago, he had a cop package that I think would have added another few percent to his ownership if he had hit certain metrics. And he decided to get rid of that, I believe, for more or less free because he didn't think it was, at the end of the day, fair to shareholders.

38:18David Vélez: There's other similar moves that he's made that support, in our opinion, that view. I would say on the multiple, as we touch on it, I don't think you really need multiple help here. I think that, you know, David just continuing to execute, you know, in the way that he has. And as we mentioned, he's still quite young. And, you know, the longer we're in the business of investment, the more important I would say that the jockey makes. So I'm questioning the jockeys every single move. And, you know, I think it's worthwhile doing that, obviously, as it relates to going into certain countries and other geographies.

38:55David Vélez: It makes a lot of sense. But so far, the way they've built this business and clearly the results lead us to believe that, you know, he is an exceptional talent. And while one can question, you know, each move, it's probably best to at the end of the day, unless one has a good reason not to believe him, to let him continue to build the business. I'm not sure if I fully answered your question there, but. No, no, I think that was great.

39:18Evan Vanderveer: Let me ask one more question on him. And I don't know anything about him. He obviously is super highly regarded. People can hear that throughout the podcast. There's one interesting. thing. He just joined the board of OpenAI. Yes. Correct me if I'm wrong. Yeah. I thought that was interesting because A, talk about being plugged in, talks about being connected. Like, I'm sure there are boards that are more prestigious to join right now, but I mean, I don't think there are many, you know, like that's a really cool thing and speaks to connections. Obviously you mentioned the Sequoia connection, all that sort of stuff.

39:43Evan Vanderveer: But on the other hand, I say, Hey, you know, you've got this growth fintech that you've got this growth fintech, you're the CEO, you own a ton of it. When I look at a lot of the customer fanatic founders, you mentioned, you know, Mark Zuckerberg or Jeff Bezos. I think Mark Zuckerberg and Jeff Bezos do not sit on outside boards, right? And Jeff Bezos, he's retired and he still doesn't sit on any boards outside Amazon. And I'm sure anyone would want him. Steve Jobs sat on a few, but I don't think many. I think most of them were like direct compliments to Apple when he was there or Pixar when he was there.

40:14Evan Vanderveer: So how do you think about him joining OpenAI in the context of, it seems like that might be a little bit of a distraction. I just think it's a weird thing for like a fanatic with all of his net worth tied up in this business.

40:28David Vélez: Yeah, I would agree that there's a risk of that. So yesterday, one of the analysts asked him on the conference call about that, and he basically said that it's the benefit of NewBank. And I think that there's probably a large element of truth to that. I think obviously being on the board of one of the largest LLMs, AI businesses in the world, I would think would provide a lot of insight. The other thing, and we could dig into it now, is how much AI is helping NewBank become far. Yeah, so - When you're competing with legacy players

40:59Evan Vanderveer: and you're like the FinTech enabled player, you have to think that AI, if you exclude the, hey, the government is making sure that five players get cybersecurity protected, you have to think AI is going to be massive for them because they're just going to be so much faster, so much more faster. Sorry to cut you off, please.

41:13David Vélez: No, no. So yeah, maybe to transition, I guess you're right. Normally, if we saw what we as a fanatic, and to your point, his vast majority of his wealth is in the business. And, you know, he's obsessed with pleasing the customer and so on. So then the question is, well, why would he be spending whatever hours per month on this? And again, I guess just to touch on some highlights, you know, something like 60 % or more now of the customer inquiries are handled by AI. So without human interaction and on the first pass. So there's a tremendous cost savings there. David has talked about sort of this becoming an AI business in the sense of the AI helping on the financial advisory side on all kinds of things.

41:52David Vélez: They talk about just because you have a bank account doesn't know what you mean, you know, you know what you're doing as it relates to that. So there's a huge value of AI just helping the customer. And then, as I said, on back on the business side, I think they're using Cognition's models. And they've talked about the Devon AI agents. And basically, apparently, they put out a blog about this recently. There was like a 12 times efficiency gain in engineering hours and a 20 times cost savings on the implementation of what is going on inside the business. They also talk about how the credit scoring and the data used to take months, so they would update their model every few months.

42:29David Vélez: Now it's down to something like a handful of days. So basically, AI is changing all parts of the business, the customer service, the credit. They can obviously, therefore, to an earlier point, write much more credit with much more security in terms of understanding the risk of that. And so, again, to bring it back, we would normally be skeptical. But I would say in this case, the amount of impact that AI is having on the business is so incredible that I think that my guess is that he heard this opportunity and said, you know, this would be silly to pass down. This is going to have a huge my insight that I'm getting from this relationship and this integration as part of the board would be of huge value to NewBank itself.

43:10Evan Vanderveer: Let me ask you a broader question on AI as it relates to fintech, because there is nothing to me that is more commodity than a financial product, right? Like I have a credit card. If I'm looking for a credit card loan, you offer me 19%, you offer me 18%. Cool. I go with the 18%. Like I don't really care about anything else. Checking account, all this sort of stuff. Now, maybe that's a little bit too far because like, you know, if I need an ATM, I want ATMs close by or something, but really financial products are about as commoditized as you can get mortgage. You really don't care as you want the lowest mortgage, as long as you can send a check in.

43:45Evan Vanderveer: I have worried for all, like I've thought about the U.S. banking system. I've worried for all of them, like the U.S. banking system is built a lot on zero cost deposits, right? And people probably remember back when in March of 2023, there was the regional banking crisis and there was the whole sorting of cash, right? Everybody was worried all the cash was going to sort to high yield money markets and destroy the entire business model. That didn't really happen. But I have worried with AI, like the best place I can think of AI in terms of if consumers start using it to maximize their lifestyle would be AI, optimize all my finances, right?

44:21Evan Vanderveer: Get me all of my checking accounts into the most high yield things with, you know, in the US FDIC insurance, any place where I'm paying interest on a credit card or mortgage, go find me a cheaper one if you can and do that constantly. So I've worried about that. And so if I brought it back to new bank in the short term, I bet they are going to be so much faster than a lot of their peers at adopting the AI. But in the long term, like that, that results in super normal profits for six months, a year, two, three years. I'm not sure. But in the long term, if everybody adopts them, like I'm worried the profit pool is going to zero.

44:56And that 30 % ROE we talked about, everybody just competes in a way because AI does everything.

45:00Evan Vanderveer: So that is like a more high-minded, maybe longer-term thought. But it's something I've thought about with US banks. And as you said, it made me think with new banks. So I'd love to ask how you kind of think about that.

45:10David Vélez: No, it's another excellent question. I would say there's a lot of points there. So I'll try to remember them. Oh, so discussing AI's impact on the entire financial system?

45:18Evan Vanderveer: Is it a two-minute soundbite?

45:20David Vélez: Exactly. So I guess, number one, to your first point about commodity, and I would agree at some level that's true. I would say then if you want to make that assumption, then the most important point in a commodity business is to have the lowest cost, right? To be the most efficient is the last guy standing. As we've discussed, I think, at least as of now, and in my opinion, the foreseeable and potentially very long-term future new bank, no one is going to be more efficient than new bank in the efficiency. and therefore being able to, to your point about the credit cards, you know, 1 % lower, they should be able to offer the most efficient rate because of the, you know, the scale that they have and branchless.

45:57David Vélez: And, you know, again, that's all another conversation about how hard it is to close these branches and so on and so forth and change these legacy banks and how slow that process can be. But I would say, yes, so I think the number one is the, is the, just the fact that they are so efficient, therefore the lowest cost. Again, if you want to make the assumption of a commodity industry, I would push back on the pace of change, right? So many folks in the US, there's what, five banks that control a massive whatever percentage of the banking system, and they pay almost nothing, to your point, on deposits.

46:33David Vélez: And yet still, the people, including myself, keep money at these banks. And as it relates to AI, suggesting that they pull it out. Again, I think if you are offering the best rates, so on and so forth, there is an element, and I don't think that this will change probably even in our generation where even FDIC backed and so on, where you want security, you want obviously a good customer service. And if those things are being achieved, so the low cost and customer service, I don't see why you would change your, you know, even with someone's AI suggesting that you do so, I don't see any time in the future or in the near future where that would change.

47:10David Vélez: So I would say those combination of variables, again, with the customer service and the low rate, I don't see why someone would go somewhere else.

47:20Evan Vanderveer: Let me ask one last question, then I probably need to run to the bathroom, to be honest with you. We mentioned Mexico, I get it. Colombia, I get it. The one expansion where I look and I say, ooh, is this kind of too much to... Moving into the US, if you just told me, hey, there's a emerging market player that's moving into the US and fintech. But like this, they're too, they've got too much of inflated ego, right? Like the US is very, very well served. I'm not saying there aren't underbanked people, but there are lots of very juicy startups that are really attacking these problems a thousand times.

47:55Evan Vanderveer: Lots of really good banks with great tech sacks and just kind of like, hey, why are they, why are they moving in here? Like they've got so much on their plate and they've got so much opportunity to expand. And when I think that's the thing where I see, hey, we're moving to the U.S. It kind of brings me back to the question earlier where I said, hey, I haven't seen fintechs expand successfully. Say, I might believe it if you told me Mexico and Colombia. But when they move into the U.S., I kind of say, oh, maybe these guys just think they're god kings and don't understand the competition they're going from.

48:23Evan Vanderveer: Because I know people have mentioned Banco Santair moving into the U.S. I don't think that's been a screaming success. Barclays, they're in, they're out. Like the U S is just really competitive and there's really good banks, whether it's at the large scale with relationships and, you know, people say, Oh, I'm going to move in. Like, it's not easy. You have to hire a team. You have to go acquire all those customers. And maybe if you're in a very inefficient market, like it seems like Brazil was, or maybe Mexico. Okay. But if you're in a market that's as deep as the U S with this many competitors, like, man, it just, it seems like you're, you're asking for failure.

48:54Evan Vanderveer: So I just want to get your thoughts on that expansion. Cause they talk about it a lot too.

48:58David Vélez: They do. Yeah. Yeah. And again, I think that is a source of what's called anxiety for the investors today. I would say a few things. One, as I said, they've decided to sort of cap correctly or incorrectly for the next two years their investment. So it's not like that they are betting the company. And I also should note that, as I said, in our valuation, in our view of the future, we're not counting anything, nor are we subtracting anything, to your point. So obviously, if the management team decides to dump billions of dollars here and not get a return, then obviously that would be a reduction in our valuation estimate.

49:32David Vélez: But I would say so a massive something like one in three Hispanic folks in the U.S., citizens of the U.S. are unbanked, basically. And so they are not just going to the average person in the U.S. They are going to a very specific part. Being here in Miami, the co-founder, Christina, moved here in the last year or so. So they're making a huge push here, I believe, in probably Texas and California, where you have a huge immigrant population from Brazil, from Mexico, and so on. Many of these folks are familiar with new. And so I think that's part of it. The other part is that, you know, I don't know about you, but again, Chase Bank across the street or one of the others, you go there and you have to wait in line and so on and so forth.

50:10David Vélez: These branches and it takes forever to do this and do that. And while maybe the customer service is better than it was, you know, five years ago, I think New Bank thinks that they can provide even a far better service digitally. with a much better user interface and so on, and potentially over time a more attractive cost. So we shall see. Again, I think the verdict is out. They seem to be doing it in a very thoughtful way, bringing in people who know what they're doing. And it's a very, very large market. I think they've said that they're, you know, over time targeting 5 to 10 million customers would be a good scenario.

50:40David Vélez: So again, they're not assuming that they're going to become, you know, a 10 % market share bank. So we shall see. It'll be a very interesting experiment to your point. others have tried and it has not necessarily gone well and and we we shall see but i would say high level we're quite optimistic about how they're going about it and if you sort of dig into the niche that they're focused on i think there's a pretty good shot that they can um you

50:59Evan Vanderveer: know make some progress here in the u.s no look i i certainly hear you you know i just like the robin hood app is really damn good now i i i remember looking at robin hood when they were really down i was like oh man i don't know like but the robin hood app is really good like the For all the stuff that Chase, you know, the ATMs hit, the Capital One, I mean, NewBank's Model After Capital One, like these apps are pretty darn good. So yes, if you go in person, it's slow. But the in person is like, it's also there for when you need to prove your identity or when you need like cold, hard cash. Like most of the other stuff can be done online.

51:32Evan Vanderveer: So if you're saying, hey, I wouldn't compare NewBank to the in person, I would compare NewBank to the app. And I say the apps are pretty damn good across the board. So anyway, I am getting old and I had, it's Friday. So I had some Diet Dr. Pepper today. So I have to go hit the Russian. But any last thoughts you have on NewBank or anything you want to leave listeners with?

51:49David Vélez: No, I think we've done a good job covering the highlights. I think it's a name that I think a lot of people recognize has grown a lot. And our view is that it has a lot more room to grow by deepening the relationships in Brazil and Mexico and so forth. And then as we discussed, we'll see here about the U.S. But I would say considering the valuation has come down materially here, you're buying into a sort of situation with a customer fanatic at a very attractive price that over the five or next 10 years that could and should produce very attractive returns going forward, but time will tell.

52:20Evan Vanderveer: Perfect. Well, Evan, thank you so much for coming on. I've really enjoyed this conversation. Great discussion on both NewBank and the overarching just like fintech journal thing. This has been a really fun conversation, so we'll have to have you on again and we'll chat soon.

52:31David Vélez: Thanks, Andrew. I look forward to it. Have a great weekend.

52:33Evan Vanderveer: A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

53:11Evan Vanderveer: year wayfair delivers thanks