Founder of Nubank (NUBR33) gives up extra remuneration: gesture is positive, say analysts, but brings warning about profit

The night before, Nubank (NYSE:NU; B3:NUBR33) informed that its founder and chief executive, David Vélez, had decided to end an agreement that gave him the right to a possible extra millionaire remuneration in shares in the future, generating a positive accounting effect for the digital bank.

Additional remuneration was at the center of a controversy that hit Nubank in April of this year, when the bank informed the market of a total payment forecast of up to R$816 million to directors and directors in 2022, generating discussions on social networks. More than 80% of the amount referred to the accounting effects of the Vélez agreement.

Vélez’s decision also comes after the drop in the value of Nubank’s shares before the IPO. The remuneration was based on the performance of the bank’s shares on the stock exchange.

The long-term incentive award called Contingent Share Award (CSA) was established in 2021, ahead of an initial public offering (IPO) of Nubank in New York. According to its terms, Vélez would earn 1% of the total shares if the bank’s Class A shares remained, on average, at US$ 18.69 on the stock exchange for 60 consecutive days, and would be entitled to an additional 1% if the same occurred in US $35.30.

It so happens that Nubank’s shares, which started at US$ 9 dollars each in the IPO and reached US$ 12.24 at the opening, closed last Tuesday at US$ 4.26. That is, they would have to raise more than four and eight times, respectively, for the activation of the payment.

Nubank estimated the fair value of the remuneration at US$ 423 million, a calculation that, among other specifics, is based on figures from the time of the agreement. In practice, the value received by Vélez would be higher, as it would imply a higher valuation of the company.

Fintech said the expected accounting savings between November 2022 to 2029 will be $356 million, as the bank will no longer need to recognize the ongoing effect of the potential future award of compensation.

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However, the fourth quarter of 2022 will be negatively impacted, with a one-time, non-cash recognition of expenses in the same amount, the company said, as accounting guidelines require the termination to be recorded as an accelerated purchase, even if there is no acquisition or actual disbursement, according to Nubank.

Waiver of compensation will also avoid potential dilution of other shareholders, up to 2% of total common shares, Nubank said.

Nubank, which had 70 million customers in September across Brazil, Mexico and Colombia, ended the third quarter with an adjusted net profit of US$ 63.1 million, above analysts’ estimates. The stock is still far from the IPO’s $9, but has recovered from a low of $3.30 in June.

In the assessment of Itaú BBA, the news is positive for shareholders because it will reduce expenses by US$ 356 million by 2029 (US$ 70 million in 2023), which increases by 15% the forecast of the bank’s analysts for US$ $485 million for 2023.

“All efforts count towards the broader goal of improving efficiency. Non-dilution also sends a positive message to all shareholders, including executives, that Vélez practices partnership thinking. He will basically receive a fixed salary until the end of 2023, when the terms will be discussed again”, evaluate the analysts.

The BBA analysis team points out that they do not like the configuration of incentives based on share prices, such as the one that Vélez gave up, pointing out that many driving forces of economic cycles and share prices do not depend on management execution.

“The announced change is not expected to generate tax benefits for Vélez or the company. The CEO retains a substantial stake in the company (currently $4.2 billion) and we expect him to remain fully involved in the business. All in all, we see this as a positive gesture that will likely be welcomed by the market.”

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Bradesco BBI also recalls that macro conditions have changed significantly since the bank’s IPO, especially in terms of credit dynamics, and Vélez’s attitude towards improving efficiency seems right.

“However, it is also a significant sign that the above-average profitability initially expected by management is at risk. In our opinion, although we see that [a notícia] As a positive for operating expenses, we have concerns about how the core banking business is performing, especially for loan growth, spreads and asset quality. In addition, this decision raises questions about the evolution of investments in new geographies (ie Mexico and Colombia), as such initiatives require higher operating costs and capital investments at first, until they reach the break-even point. In short, we recognize the efforts on the efficiency front, but we are questioning whether this could be a profit alert”, evaluates the bank.

Goldman Sachs, in turn, points out that the company held a conference call with analysts after the announcement, clarifying that the announcement aims to promote cost savings and transfer value to shareholders. In addition, the company mentioned that the macro scenario is now more challenging than when the program was created, but it remains committed to improving profitability.

“Although the announcement was not expected, it eliminates the potential 2% dilution and Vélez still owns more than 20% of the company. We believe the company continues to execute and manage risk properly, being well positioned to continue to monetize its customer base,” he points out.

Goldman has a buy recommendation for the NU assets traded on the New York Stock Exchange, with a target price of US$ 11, or potential for an appreciation of 158% compared to the close of the day before. Itaú BBA and Bradesco BBI, in turn, are more skeptical about the assets, maintaining a recommendation equivalent to selling the shares: BBI has a target price of US$ 3.30, or a value 23% lower compared to the close of the day before, while BBA has a price target of $3.50 (or 17.6% lower).

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