Nu Holdings opens coverage at Watchlist following second-quarter results released after the close on August 13. The Brazilian digital bank reported net income of $1.06 billion, the first time it has cleared a billion dollars in a single quarter, on earnings per share of $0.22 against a $0.20 consensus. The shares jumped 9.3% the following session, then handed back more than half of that within two trading days.

Was the beat what it appeared to be? Not on closer reading. Profit before tax came in at $1,236 million against $1,229 million in the first quarter, an increase of 0.6%. The entire sequential gain in net income came from the effective tax rate falling from 29.1% to 14.2%, a swing worth roughly $185 million. Applying the prior quarter’s rate to the same pre-tax profit produces earnings of about $0.18 per share, which would have been a miss rather than a beat. Nu did not explain the movement in its release or on the call, and no analyst raised it.

Did anything genuinely improve? Several things. Gross profit rose 25% sequentially to $2.35 billion, and risk-adjusted net interest margin recovered 290 basis points to a record 12.4%, ahead of what management guided to three months ago. Deposits reached $45.3 billion at a funding cost of 88% of the interbank rate. Mexico converted to a full banking licence on August 6 and passed 16 million customers, unlocking payroll accounts, the product that anchored the Brazilian business. The offset is that a $469 million gain in gross profit was absorbed almost entirely by a $458 million rise in operating expenses.

Is the valuation demanding? Not obviously. At $14.74 the shares trade on 17.8 times current-year consensus and 5.4 times book for a business earning better than a 30% return on equity, and they are down 19% year to date while earnings have risen. The report’s probability-weighted fair value is $17.47.

What holds the rating back? Timing and concentration. Brazil votes on October 4, roughly 85% of Nu’s customers sit in that one country, and the loan book is by management’s own account being steered deliberately toward higher-risk, higher-return borrowers. Ninety-day-plus delinquency has already risen 35 basis points to 6.9%. An accumulation zone of $12.80 to $13.60 is identified, with disclosure of the tax driver at third-quarter results named as the development that would move the call to Buy.

The scenario analysis and full scorecard sit in the complete Nu Holdings (NU) report on our Reports page.