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Brazil, September 21, 2021 – Brazilian leading online credit card fintech Nu Pagamentos S.A. (Nubank) announced the acquisition of Akala S.A. de C.V., Sociedad Financiera Popular, a savings and loans cooperative in Mexico, through its newly established Mexican subsidiary NU BN Servicios México, S.A. de C.V. (Nu Mexico). Nubank did not disclose the price of the transaction, but it has already received approval from Mexico’s banking regulator, Comisión Nacional Bancaria y de Valores (CNBV).

The acquisition is credit positive for Nu Mexico and Nubank in Brazil because it will provide the financial technology firm (fintech) with an operating license to access cheap and stable core deposits and allow Nu Mexico to launch new products and services to support its Mexican expansion. This transaction is also aligned to the parent’s growth plans in the region and the rapid implementation of its successful online credit card franchise focused on low income and underserved individuals. This also signals Nubank’s strategy to start its operations by leverage regulatory and market knowledge from local and licensed operating companies.

Acquiring Akala, which is regulated and has a financial services designation, demonstrates Nubank’s intention to fast expand its operations in Latin America’s second-largest economy behind Brazil. The Mexican market has garnered interest because of its favorable operating environment, low credit penetration and strong potential for financial inclusion. According to Mexico’s Instituto Nacional de Estadística y Geografía, the national census bureau, the country has around 70 million internet users and 65 million smartphones, but only 24 million people, or 25% of the country’s working age population, has a credit card.

By being able to receive deposits from the public, Nu Mexico will be able to start with low cost of funding, which will allow it to manage its prices and have a competitive position with incumbent banks that dominate the credit card business in Mexico. With an innovative and low cost business model, the fintech will likely challenge large banks to accelerate their investments in innovation and to expand its business lines beyond their traditional products and segments.

Nubank’s acquisition follows the deal announced by Credijusto (Apjusto, S.A.P.I. de C.V., SOFOM, E.R.), a small Mexican digital lender to small and midsize enterprises (SMEs), in June that acquired Banco Finterra, S.A., a local bank focused on offering financial services to SMEs in the agricultural sector. Such transactions (see exhibit) indicate a path for fintechs to overcome the high barriers to entry into Mexico’s banking sector, and signal that licensed fintechs and digital banks specializing in niche markets will intensify competition in various credit markets, challenging the profitability of smaller incumbent banks.

It is unlikely that fintechs will displace large Mexican banks because large banks will retain their dominance in the financial system by focusing on customers at the top of the economic pyramid. By comparison, fintechs and digital banks usually cater to Mexico’s sizable unbanked and under-banked segments. Additionally, several Mexican banks are forming alliances with fintechs, creating fintechs through joint ventures with large technology companies or are seeking smaller fintechs that can accelerate and improve banks’ digital strategies.

Nubank’s expansion into Mexico began when the company opened its Mexican subsidiary in May 2019, its first operation outside Brazil. In June 2021, Nubank raised $750 million in capital. which allowed it speed up its Latin American expansion. The expansion plans received an additional boost when Nubank in April 2021 received a $70 million capital injection and $65 million in revolving credit lines from US banks.

Credit Outlook: 27 September 2021. Pg. 9
Moody’s Investors Service

Peru, March 9, 2021 – The Government of Peru (A3 stable) issued an emergency decree to allow banks to restructure loans under its state guarantee programs Reactiva Perú and FAE-MYPE until 15 July 2021 and also allow an additional 12-month grace period during which borrowers will repay only the interest portion of their loans.

By allowing banks to restructure existing Reactiva and FAE-MYPE loans through mid-July, allowing an additional grace period, and providing state guarantees for up to 98% of a loan (depending on its size), banks have strong asset-risk protection for longer. However, Peruvian banks also risk reduced interest income dragging down their margins.

The Reactiva Perú program was set up in April 2020 and is a PEN30 billion ($8.9 billion) state-guaranteed credit facility that provides working capital to small and midsize enterprises (SMEs) and large corporates. The program aims to relieve liquidity strain and limit the number of loan defaults among corporate and SME borrowers, which supports banks’ asset quality and the economy. The FAE-MYPE program targets small and micro agricultural producers and will be used by banks as well as credit cooperatives.

Under Reactiva, banks were awarded state guarantees in auctions that ensured the lowest rate for the end user for a 36-month loan with a 12-month grace period of no capital repayment. The government provides a guarantee to the lending bank for 80%-98% of the loan on a pro rata basis, depending on the size of the credit.Lending under the Reactiva Perú state-guarantee for corporations and SMEs now accounts for around 16.5% of total loans, according to Central Bank data. The program ended on 30 November 2020 which was the last date when state guarantees could be applied for.

Problem loans in Peru were 3.4% at year-end 2020, 75 basis points higher than year-end 2019 before the pandemic. However, government aid such as the Reactiva program is key to mitigate an expected deterioration in credit quality. The four largest banks in the market – Banco de Crédito del Perú (Baa1/Baa1 stable, baa21), Banco BBVA Perú S.A.(Baa1 stable, baa2), Banco Internacional del Perú – Interbank (Baa1/Baa1 stable, baa2) and Scotiabank Perú (A3 stable, baa3) – hold around 90% of total loans to midsize companies and almost 100% of total loans to SMEs and are the greatest beneficiaries of the Reactiva program.

However, the additional grace period will reduce Peruvian banks’ interest income as capital on restructured loans need not be paid, which will compress their net interest margins. We estimate that the average rate on Reactiva loans with a 24-month maturity is 1.6%, well below average rates on other loans. In 2020, bank net interest margins fell by 100 basis points as provisioning expenses rose 120%; net income to tangible assets fell to 0.4%, from the 2.1% 2016-19 average. With the ability to restructure loans and allow borrowers to pay only interest, the new measures will allow banks to keep their loan-loss provision expenses in check, which will aid their net income.

Under the new measures, loans of up to PEN90,000 can be restructured without any requirement, loans between PEN90,001 and PEN750,000 can be restructured if the borrower’s sales fell by 10% in the fourth quarter of 2020 versus fourth-quarter 2019 and for loans between PEN750,001 and PEN5 million, borrowers must show that fourth-quarter sales fell by 20% versus 2019.

Credit Outlook: 15 March 2021. Pg. 17
Moodys

United States, November 18, 2020 – Google parent Alphabet Inc. (Aa2 stable) announced that it will launch Plex Accounts next year, a digital bank account offered within its Google Pay app in partnership with 11 US banks and credit unions. Google’s expansion into the distribution of consumer banking services is credit negative for US banks because it will increase competition for customer relationships, and in particular, competition for deposits, US banks’ primary funding source.

The launch of Google Pay Plex Accounts is an example of big tech’s expansion into retail financial services. It capitalizes on the rising popularity of digital wallets, an example of the widening application of digital innovations in financial services that we expect will continue to drive disruption across banking. Digital innovation and a flourishing financial technology sector present a threat to US banks.

Alphabet’s expansion into retail financial services distribution is consistent with our central scenario that large nonfinancial institutions intent on enhancing customer engagement will partner with incumbent banks to distribute financial services. Alphabet’s ability to partner with US banks and credit unions demonstrates the increasingly low barriers to entry for firms with large existing customer bases to distribute consumer financial services including deposit offerings. Digital innovation and changing customer behavior have lowered such barriers that historically included building out an expensive branch network.

US banks’ balance sheets are built on a foundation of low-cost, sticky deposits. Google Pay Plex Accounts will have no fees for monthly service, low balance, overdraft or in-network ATM use, and market its user-friendly interface and capabilities. Many US banks have similarly introduced online-only deposit products with low to no fees and/or high interest rates to capture additional deposits and customer relationships. Over time, increasing competition could raise deposit costs, pressure deposit fees and increase the need for banks to invest in emerging technology to attract or maintain customers. Failure to respond risks driving shifts in market share to those banks who best meet customer expectations.

The 11 US banks and credit unions partnering with Alphabet to offer Plex Accounts, including Citibank, N.A. (Aa3/Aa3 stable, baa11), would benefit from an inflow of consumer deposits and the potential to deepen new customer relationships. Citibank, N.A. and the other partnering banks will also have an early-adopter advantage in evolving their digital strategies to meet new customer needs. With the accelerating use of mobile payments and rising popularity of single-click digital wallets, incumbent banks need a strategy to stay in the customer-facing part of the payments business.

Alphabet will offer Plex Accounts within its own digital ecosystem, Google Pay, which provides a level playing field for partnering banks. However, the lack of friction within such a digital environment could ultimately increase competition among financial institutions, on and off the platform. Alphabet’s expansion into the distribution of financial services would align with big tech strategies to increase the scope and appeal of their digital platforms through enhanced customer engagement and a further strengthening of their consumer value proposition.

The launch also provides a blueprint for other firms with large existing customer bases keen to capture an increasing share of consumer activity and build customer loyalty. Increased user engagement enables these firms to capture valuable data and boost revenue. In our view, partnerships in which banks cede control of a large share of customer relationships pose the greatest risk to incumbent financial institutions. Such developments increase the risk of our alternate scenario, where big tech firms control a larger share of distribution and displace incumbents that fail to execute timely, effective digital strategies.

Credit Outlook: 23 November 2020. Pg. 16
Moodys

Brazil, July 28, 2020 – Brazil’s Confederação Nacional do Comércio de Bens, Serviços e Turismo (the national confederation of commerce of goods, services and tourism or CNC) published its July survey which showed that consumer indebtedness had reached record levels and that delinquency pressures have intensified. The rise in household indebtedness is credit negative for Brazilian banks with significant consumer lending exposures, mainly large retail banks, because it will lead to higher asset risk on banks’ balance sheets and be reflected in rising problem loan levels as well as renegotiations and restructurings. The increase also illustrates the challenges Brazilian consumers face in managing their loan exposures.

The record level of indebtedness is particularly credit negative for Brazilian banks with large exposures to unsecured consumer lending. Such banks include Caixa Economica Federal (Ba2 stable, ba31), Banco do Brasil S.A. (Ba2/(P)Ba2 stable, ba2), Banco Bradesco S.A. (Ba2 stable, ba2), Itau Unibanco S.A. (Ba2 stable, ba2) and Banco Santander (Brasil) S.A. (Ba1 stable, ba2), which combined account for the lion’s share of consumer lending in Brazil.

Higher indebtedness indicates rising asset risk, particularly amid challenging economic conditions in Brazil because of the coronavirus pandemic. We expect Brazil’s economy to contract by 6.2% this year, with high unemployment negatively affecting household income. Since the onset of pandemic, banks’ problem loans ticked up to 3.3% in April from 2.9% in December 2019, driven largely by rising problem loans for consumers, which rose to 4.1% in April from 3.6% in December 2019 (see Exhibit 1). However, 90-day problem loans have since ticked down to 2.9% for the system as of June 2020 and to 3.6% for consumer loans as banks began renegotiating their loan exposures amid rising asset risk.

Based on available central bank data, BRL594 billion of loans were renegotiated and received loan payment extensions due to the pandemic between 16 March and 29 May, which equates to about 16.5% of total systemwide loans as of June 2020. Loans to households and small and midsize enterprises (SMEs) comprised 91% of these renegotiated loans. The payments were deferred for of up to 180 days and equal 11% of the sum of all renegotiated contracts (principal plus interest), most of which supported SMEs and households.

At the onset of the coronavirus crisis, the central bank eased provisioning requirements for any accruing loans being renegotiated until September 2020. The measures that postpone provisioning will likely delay credit losses, requiring banks to reinforce reserve coverage levels during the third and fourth quarters. In this context, rising household indebtedness to a record level in July is a sign that asset risk pressures will continue to build on banks’ balance sheets

The results of CNC’s survey showed that 67.4% of all Brazilian families have debt outstanding, the highest level on record since 2010. The levels of indebtedness were driven by lower income households, defined by those who earn up to 10x the minimum wage, of which 69% of families were indebted. For households earning over 10x the minimum wage, the level was at 59% as of July, elevated compared with historical levels (see Exhibit 2).

The CNC survey also showed that the percentage of families in the lower income group with debt payments in arrears rose 260 basis points from a year ago to 29.7%, while for higher income groups the level was 11.2% versus 10.6%, indicating rising delinquency pressures. The percentage of households unable to pay off their debts also rose in July across both income levels – up 240 basis points to 13.7% for lower income households and up 150 basis points to 4.9% for higher income households.

For indebted households, 21.6% have more than 50% of their monthly earnings dedicated to debt service, and the largest type of exposure is credit card debt, according to the survey. Following that category is payment by installments via booklets. Both categories are unsecured consumer loan classes, highlighting that banks are particularly susceptible to a deterioration in borrower repayment capacity.

Credit Outlook: 3 August 2020. Pg. 16
Moodys