NU (NU) Q3 2025: Credit Portfolio Climbs 42% as AI-Driven Underwriting Reshapes Risk and Growth
Nubank’s third quarter saw a 42% surge in credit portfolio balances, powered by disciplined credit expansion and AI-driven risk management, while Mexico’s rapid scale-up signals multi-market momentum. Margin compression reflects a deliberate shift toward lower-risk assets, offset by robust risk-adjusted returns and operational leverage. Management’s focus on AI integration and regional diversification sets the stage for continued structural growth, though regulatory and funding cost dynamics warrant close investor attention.
Summary
- AI-Driven Credit Expansion: Proprietary models are reshaping underwriting and enabling disciplined limit increases.
- Mexico’s Rapid Scale: Customer growth and ARPAC gains support Nubank’s multi-market monetization thesis.
- Margin Compression Trade-Off: Strategic risk migration and funding cost shifts challenge near-term NIMs.
Performance Analysis
Nubank delivered another quarter of record revenue and net income, propelled by robust customer acquisition and disciplined credit expansion across Latin America. The customer base reached 127 million, with over 4 million net additions and activity rates above 83%, underscoring deepening engagement. Credit portfolio balances soared 42% year-over-year (FX-neutral), with secured and unsecured loans now comprising 35% of total balances, up from 27% a year ago. Loan originations hit $4.2 billion, up 40% YoY, reflecting both unsecured and secured lending momentum.
Gross profit rose 32% YoY to $1.8 billion, with gross margin expanding to 43.5%, benefiting from both top-line growth and improved risk-adjusted performance. However, net interest margin (NIM) compressed by 40bps sequentially due to a deliberate portfolio shift toward lower-risk, lower-yielding assets and higher funding costs in Brazil, even as risk-adjusted margins improved. Credit loss allowances declined 7% QoQ, driven by better recoveries and precision in credit modeling, contributing to a record net income and a 31% ROE.
- Credit Mix Shift: Growth in secured and SME lending is reducing portfolio risk but also NIMs.
- Deposits and Funding: Deposits grew 34% YoY, with cost of funding improving overall, though Brazil’s funding costs rose due to targeted customer incentives.
- Efficiency Gains: Cost-to-income ratio improved to 27.7%, reflecting operational leverage and continued investment in growth markets.
Mexico’s contribution is accelerating, with ARPAC nearing Brazil’s level and cost-to-serve already below $1, signaling early monetization strength in a rapidly scaling market. Operational performance across all regions is supported by Nubank’s technology-driven, low-cost platform.
Executive Commentary
"Our vision is to become AI first, which means integrating foundational models deeply into our operations to drive an AI-native interface to banking, while creating meaningful benefits for both our customers and our business."
David Vales, Founder, Chief Executive Officer and Chairman
"As we scale, revenue growth and disciplined cost management will continue to drive efficiency gains and margins expansion. We achieved these results while we continue to deliver strong operational growth, always putting our customer at the very center of everything that we do."
Guilherme Lago, Chief Financial Officer
Strategic Positioning
1. AI-First Banking Model
Nubank is embedding advanced AI models, “new former,” into core operations to enhance risk management, personalization, and operational productivity. These proprietary models, built on transformer architectures and trained on vast transactional datasets, have already delivered a threefold improvement over prior machine learning upgrades. AI-driven credit limit increases in Brazil demonstrate tangible business impact, and the company plans to extend these innovations across Mexico and other products.
2. Regional Diversification and Monetization
Brazil remains the profit engine, but Mexico is rapidly gaining strategic weight. With 13 million customers (14% of Mexico’s adult population) and ARPAC at $12.50, Mexico is approaching Brazil’s monetization levels despite being in an earlier growth phase. Nubank’s cost-to-serve in Mexico is already below $1, and management expects further scale and cross-sell opportunities as the product suite expands beyond credit cards.
3. Credit Portfolio Evolution
The portfolio is shifting toward secured and SME lending, with secured and unsecured loans now 35% of balances. This deliberate risk migration is compressing NIMs but improving risk-adjusted returns and portfolio resilience. Recent credit limit increase programs are weighted toward lower-risk customers, and AI-driven underwriting is expected to further optimize both growth and asset quality.
4. Funding and Deposit Strategy
Deposit growth remains robust, but funding costs in Brazil have risen due to targeted incentives for primary banking relationships and new products like turbo money boxes. Management is actively repricing deposits in Mexico to lower funding costs, accepting some outflows to support long-term margin sustainability.
5. Regulatory and Market Optionality
Nubank is monitoring regulatory proposals in Mexico (e.g., interchange fee caps), which could impact unit economics for new-to-credit customers. The company is also pursuing a U.S. national bank charter, signaling intent to eventually unlock new growth avenues beyond its current core markets, though Brazil and Mexico remain top priorities.
Key Considerations
This quarter highlighted Nubank’s ability to balance rapid growth, disciplined risk, and operational efficiency, all while laying groundwork for long-term AI-driven differentiation and regional expansion.
Key Considerations:
- AI as a Competitive Moat: Early success with proprietary models is already improving credit outcomes and operational leverage.
- Mexico’s Monetization Trajectory: Rapid ARPAC growth and cost efficiency suggest Mexico could rival Brazil in profitability over time.
- Margin Pressure from Asset Mix: Strategic migration to lower-risk, lower-yield assets is compressing NIM, though risk-adjusted returns are rising.
- Funding Cost Dynamics: Brazil’s funding costs rose due to targeted incentives, partially offset by improvements in Mexico and Colombia.
- Regulatory Watchpoints: Proposed interchange caps in Mexico and changes in Brazil’s lending regulations could impact future growth and profitability levers.
Risks
Margin compression from asset mix and funding cost volatility, especially in Brazil, could persist if market rates or competitive dynamics shift. Regulatory actions in Mexico (e.g., interchange fee caps) threaten the economics of financial inclusion. Rapid credit expansion, particularly in new markets, introduces execution and asset quality risk, while AI integration requires robust governance to avoid unintended consequences in underwriting and collections.
Forward Outlook
For Q4 2025, Nubank guided to:
- Continued disciplined credit expansion, with focus on secured and SME lending
- Ongoing investment in AI and platform modernization across all markets
For full-year 2025, management maintained a focus on:
- Balancing growth, profitability, and risk discipline across Brazil, Mexico, and Colombia
- Investing in customer acquisition and product portfolio expansion, especially in Mexico
Management highlighted several factors that will shape the outlook:
- AI-driven underwriting and collections expected to further reduce credit risk and improve recoveries
- Deposit repricing and funding mix optimization will be actively managed to protect margins
Takeaways
Nubank’s Q3 results reinforce its position as a technology-led, multi-market digital banking leader, with AI integration and regional diversification driving both growth and resilience. The company’s disciplined approach to risk and efficiency is evident in both operational and financial outcomes, but margin pressures and regulatory headwinds warrant vigilance.
- Credit Expansion and AI Gains: Proprietary models are already reshaping risk, supporting disciplined growth and improved recoveries.
- Mexico’s Outperformance: Early monetization and scale in Mexico provide a credible path to multi-market profitability, validating the regional expansion thesis.
- Margin and Regulatory Watch: Investors should monitor margin compression from asset mix and funding costs, and regulatory developments in Mexico and Brazil that could alter growth economics.
Conclusion
Nubank’s Q3 showcases a business balancing rapid expansion, operational efficiency, and AI-driven innovation, while navigating evolving funding and regulatory realities. Execution on credit discipline and regional scaling remains strong, but investors should closely track margin dynamics and regulatory shifts as the company enters its next growth phase.
Industry Read-Through
Nubank’s results spotlight the power of AI-driven underwriting and operational leverage in digital banking, setting a new bar for both legacy banks and fintech challengers in Latin America. The rapid monetization and cost efficiency seen in Mexico suggest that new entrants with strong technology and data capabilities can quickly scale and rival incumbents, especially in underbanked markets. The focus on risk-adjusted returns over headline yield, and the willingness to absorb short-term margin compression for long-term resilience, are likely to influence strategic playbooks across the regional banking sector. Regulatory developments in interchange and lending will be a key watchpoint for all consumer finance players in Latin America.