Nu Holdings Slides After Brazil's Election: Is the Sell-Off Overdone?

What happened

After Luiz Inácio Lula da Silva was reelected in Brazil, Nu Holdings shares fell 16.95% on Oct. 26 to $12.59, and finished at $12.05 on Oct. 29, down 20.5% from Oct. 23.

Confirmed

Global impact / market context

Nu earns most of its revenue in Brazil, so investor worries about government spending, interest rates and a weaker currency can raise its costs and credit losses, which means borrowers may struggle to repay and lending profits could shrink.

Analyst inference

Brazil's Bovespa Index fell 13.9% on Oct. 26 and the real dropped more than 10% against the dollar intraday, a broad political shock rather than a Nu-specific event, set against strong revenue growth and rising overdue loans.

Analyst inference

What to watch

1. Third-quarter results, tentatively expected on Nov. 12, will show whether the share decline reflects market fears or weakening fundamentals; watch loan growth, financing costs, credit provisions and currency moves. Confirmed
2. Investors could compare Nu's overdue loan ratios with prior quarters to judge whether credit quality is deteriorating, since loans overdue more than 90 days rose to 6.9% while earlier-stage delinquencies eased. Proposed
3. If Brazilian interest rates stay high for long, repayment difficulties could push credit losses higher and squeeze lending profitability, so watch provisions and financing costs for signs of pressure on earnings. Analyst inference

Evidence

• zacks.com