XP Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 11 speakers on the call.

Operator

Good evening, everyone. I'm Antonio Guevaraes, Investor Relations and XP. It is a pleasure to be here with you today. On behalf of the company, I'd like to thank you all for the interest and welcome you to the 2023 3rd quarters earnings call. This quarter, we had a strong set of results, which will be presented by our CEO, Thiago Maffre in our CFO, Bruno Constantino, who will also be both available for the Q and A session right after the presentation.

Operator

If you want to ask a question, you can raise your hand on the Zoom tool and we will attend you on a first come, first served basis. We also have the option of simultaneous translation to Portuguese, so there's a button on the Zoom if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on Page 2, on which we clarify forward looking statements. Additional information on forward looking statements can be found on the SEC filings section of the IR website. So now I'll turn it over to Thiago Maffre.

Operator

Good evening, Maffre.

Speaker 1

Thanks, Antonio. Good evening, everyone. Thank you for joining us today on our 2023 Q3 earnings call. It's a pleasure to be here with you tonight. I will start with a brief introduction to this quarter's highlights and key updates.

Speaker 1

In the Q3 of 2023, we had a strong quarter with increased top line growth and profitability across different metrics. This quarter, despite the tough macroeconomic conditions that led to weaker organic net new money, We ended the quarter with $1,100,000,000,000 inclined assets, reaching all time high records in most of our investment KPIs. For this quarter. As a result of our continuous focus in executing our strategy, we achieved the highest net income in our history at $1,100,000,000 up 11% quarter over quarter and 5% year over year. Our discipline in cost control as reflected in the best efficiency ratio in the last 3 years at 37.3%, ROE rose 58 bps quarter over quarter, reaching 22.6%, the highest during the year.

Speaker 1

At last but not least, our diluted earnings per share increased 7% quarter over quarter to BRL1.96, also the highest in your history. Moving to the next slide, I want to reinforce our 3 focus points. Financials and operations, which should be fully integrated in 2024. At the same time, we have reached and all time high in different investment KPIs, enhancing our capacity to reap the benefits of our leadership position hand in hand with more positive market conditions. 2nd, superior product offering translated into the continuous improvement of our new verticals performance.

Speaker 1

New verticals revenue grew 3 times in the last 2 years and now represents 11% of our total last 12 months revenue. We are certain that expanding the product offering into new verticals was the right decision, enabling us to diversify our revenues and deliver growth Even in a tough environment for the investment market, this evolution confirms our initial thesis of the importance of having clients' investments first. For example, in credit cards, we estimate We have 50% of Principality out of our total cardholders' base. This is a clear example of many opportunities we will explore ahead in a proper time. Lastly, client folks.

Speaker 1

High quality and excellence in everything we deliver is a key pillar to achieve our long term goals. We remain focused on that, maintaining the NPS above 70 at the top of the industry once again this quarter. High NPS directly translates into high share of wallet and we see this consistently in our client base. INPS directly translates into high share of wallet and we see this consistently in our client base. Our strategy is centered on providing advisers with the best tools, technology and products, so they can better serve our clients.

Speaker 1

In this direction, we have evolved our incentive plans to advisors, providing them with more intelligent models and systems in order to improve clients' asset allocation, resulting in superior experience for retail investors. Moving to the next slide. As I mentioned earlier, we are happy to see improved profitability in our financial results for the quarter, while we have made progress on Modelo's integration. Following an initial recovery in capital markets activity in the 2nd quarter, GCM volumes have continued to increase in the 3rd quarter with all time high revenue in corporate and issuer services. As we said in the last quarter, a faster recovery in retail revenue and net inflows May take more time as it depends on better performance in riskier assets, which is tougher due to high interest rates.

Speaker 1

On the profitability front, we have increased 3 key metrics for XP, 74 bps in EBIT margin quarter over quarter with higher operating leverage, plus 58 bps on ROE quarter over quarter, One of the main metrics we look going forward, plus $0.13 in diluted EPS despite the issuance of 18,700,000 shares related to Modal's acquisition in the quarter. Talking about Modal, we already have fully consolidated Modal's financials into our 3rd quarter results. In this Q1 of integration, Modal has accounted for $161,000,000 in top line and $111,000,000 in SG and A. Lastly, in accordance to what we have been saying about returning more capital to shareholders, we just announced an additional to shareholders. We just announced an additional dividend of $0.73 per share to be paid in December 22nd, contributing to the optimization of our capital structure.

Speaker 1

Now, I will hand it over to Bruno, so he can discuss his quarter's financials. Thank you.

Speaker 2

Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again. Starting with our gross revenue on the left part of the slide. This quarter, we reached record quarterly revenue in our history, R4.4 billion dollars a 17% growth quarter over quarter and 14% growth year over year.

Speaker 2

After discounting Modal's revenue contribution of BRL161 1,000,000, XP ex Modal, Revenue would be R4.2 billion dollars 10% higher than our previous record of R3.8 billion dollars reached on Q3 2022. The sequential growth in gross revenue was mainly led by retail, which was responsible for 45% of the growth quarter over quarter, in corporate and issuer services, representing 37% of the growth quarter over quarter. Both retail and corporate and issuer services benefited from capital markets activity, especially in BCM, which we will explore in detail on the next slides. On the right, in terms of revenue mix between segments, the highlight is Corporate and Issuer Services, with the strongest growth quarter over quarter, increasing its relevance by 57% from 7.6% in 2nd quarter to 11.9% in 3rd quarter. On the next couple of slides, we are going deeper into retail revenue, first focus on retail core and then on new verticals.

Speaker 2

Moving to the next slide. When we look at our core equities, fixed income and funds platform, the main highlight for the quarter is fixed income. We had a strong sequential improvement to R718 1,000,000, all time high fixed income quarterly revenue, representing a growth of 24% quarter over quarter. Our previous record was in Q2 2022 when fixed income Revenue reached BRL580 1,000,000. As you know, fixed income revenue has 2 main components: in secondary trading and distribution of primary offerings.

Speaker 2

The later had a growth of 100% quarter over quarter and was 5 times the revenue of Q1 when we experienced a dysfunctional corporate bond market due to the impact of Americanas. We underwrote some offerings during this turbulent moment, aiming to distribute them whenever conditions return to normal. This had an important contribution to the record quarter. We continue to see a healthy VCM pipeline, but we expect the Q3 fixed income revenue to be the best quarter for the year. Funds platform had a slightly decrease of 5% quarter over quarter, reaching R323 1,000,000 as expected considering the 2nd quarter head performance fees, which is seasonal and recognized at the end of every semester.

Speaker 2

Excluding revenue from performance fees from 2nd quarter results, 3rd quarter was 8% higher quarter over quarter. And lastly, Equities revenue increased 6% sequentially to R1.1 billion dollars positively impacted by Modal, approximately half of the growth and a continuous gradual improvement over time in equities. Moving to Slide 9. Our new verticals continue to grow well, reaching a total of BRL442 1,000,000 in 3rd quarter, plus 52% year over year and 11% quarter over quarter, enhancing our diversification and cross sell opportunities. The main highlight of the quarter has continued to be Card's revenue, reaching BRL259 million, a growth of 12% quarter over quarter and 77% year over year.

Speaker 2

When we compare our quarterly growth in TPV with the market based on recent data released by AbEx. XP grew 11% quarter over quarter compared to 7% from the market. We expect cards to remain outperforming the other new verticals in the following quarters. Moving to Slide 10, coming back to total retail revenue. We have updated this slide to include 3rd quarter results.

Speaker 2

The 2 key messages we delivered last quarter still stand. Number 1, XP is a cyclical grower company. Corn retail revenue is the best demonstration of this and applicability. The peak of BRL8.3 billion in revenues in 2021 has not been reached yet again. 3rd quarter 'twenty three last 12 months core retail revenue improved from last quarter to R7.6 billion dollars reducing this gap that was R1 1,000,000,000 last quarter to R740 $1,000,000 this quarter.

Speaker 2

It is worth remembering that in 2021, Our clients' assets were BRL815 1,000,000,000. Our active clients were BRL 3,400,000 and our IFAs were R10.3000. As of Q3 this year, the same KPIs are BRL1.1 trillion of clients' assets, BRL4.4 million active clients and 14,300 IFAs. The development of the main KPIs in investments fostered the way or potential upside as the market recovers. And number 2, new verticals continue to help offset macro headwinds, diversifying our business and increasing the resilience of our model.

Speaker 2

If we compare the last 12 months revenue with 2021 revenue, new verticals have increased approximately 182%. In summary, there is potential for growth as the market recovers, although We expect a more gradual recovery considering the pace of interest rate cuts, the terminal interest rate debates and the impacts for riskier assets. And we keep increasing the resilience and diversification of our business model. Moving to Slide 11. Corporate and Issuer Services, together with retail fixed income, were the highlights of Q3 'twenty three results.

Speaker 2

This shows the importance of our strategy to keep diversifying our revenue stream, opening new addressable markets as corporate, for example, and connecting everything with our core, retail. This quarter, corporate and issuer services revenue, which reached all time high record at R519 1,000,000, grew 83% quarter over quarter and 19% year over year. Corporate had its better quarter year to date, probably the best quarter for the year, reaching BRL197 1,000,000 of revenue, benefiting from derivative demand from our corporate clients, also related to DCM activity in the period. Issuer services reached the highest level in 11 quarters at BRL322 1,000,000, a growth of 105% quarter over quarter and 41% year over year. The positive result was led by DCM activity, as already said, rewarding some underwriting we did with good corporate quality names in the Q1 this year when DCM market became dysfunctional after Americana's event.

Speaker 2

We do not expect the same magnitude of revenue for corporate and issuer services in the Q4. Moving to Slide 12. Total SG and A, excluding revenue from incentives, has increased to BRL1.5 billion as already anticipated in our previous quarter. The main impacts on Q3 were inclusion of modal expenses, which represented R111 million dollars and the seasonal expenses related to the expert event around ZAR60 1,000,000. The ratio between people and non people expenses were 68% people and 32% non people, in line with the long term trend of 70% 30%, respectively.

Speaker 2

When we gave our SG and A guidance between R5 and BRL5.5 billion for the year, Modal was not being considered. Even including Modal in our numbers, the SG and A guidance remains the same. On Slide 13, As we said on the last earnings call, we remain focused on cost discipline, keeping both efficiencies and comp ratios near all time lows since our IPO. Last 12 months' efficiency ratio decreased from 38 0.3% to 37.3% quarter over quarter, close to our lowest level since Q4 2019, when we reached 37.1 percent efficiency ratio. Compensation ratio decreased from 26.8% to 25.7% quarter over quarter, the best level in 12 quarters sequentially.

Speaker 2

It is natural to assume higher levels of comparator when compared to 2020 when our share based compensation program was just kicking in. Our cost control discipline is a priority and has played an important role in our operating margins, which We are going to talk on the next slide. EBITDA, a good proxy for earnings power, reached of BRL1.157 billion this quarter, a 18% growth year over year and 20% growth quarter over quarter. It is our all time high quarterly EBT beating the Q4 'twenty one EBT at the peak of the last bull market cycle. Our EBIT margin has also improved in the quarter, increasing 86 bps year over year and 74 bps quarter over quarter, driven by operating leverage.

Speaker 2

Excluding Modal, Our EBITDA margin would have been 28.8%. Our year to date EBITDA margin is in line with our annual guidance between 26% 32% from 2023 to 2025. Moving to the next slide. Our net income also benefited from operating leverage, reaching of BRL1.87 billion this quarter, up 11% quarter over quarter and 5% year over year. Despite the best quarterly net income in our history, the growth has been lower when compared to EBT growth.

Speaker 2

We expect this to be the trend given our accounting tax expenses should be higher going forward in the next years to come. In terms of net margin, Q3 'twenty three presented a 26.3 percent margin, a 123 bps decrease quarter over quarter and a 218 bps decrease year over year. Expert, modal and higher tax expenses in the quarter are the main reasons behind lower net margin sequentially. Excluding the impact from both Modal and Expert in the quarter, Net margin would have been around 100 bps higher and flat quarter over quarter. Now moving to the last slide.

Speaker 2

Our return on average equity has continued to grow sequentially. In Q3 'twenty three, our annualized ROE reached 22.6 percent, increasing 58 basis points quarter over quarter. Despite Modal's effect, which added R2 $1,000,000,000 to our equity, excluding Modal, Our return on average equity would have been 23.4%, an increase of 143 bps quarter over quarter. At XP, we have a conservative approach towards our balance sheet. But when we look at our capital ratio, plus our capacity to continue generating healthy profits over time, plus the lack of need to retain too much capital to grow.

Speaker 2

It is our desire to gradually reduce the level of our capital ratio at XP Inc. Level. In Q2 'twenty three, our capital ratio was 24.2%. We ended Q3 'twenty three with a capital ratio of 22.1%. The reduction quarter over quarter was mainly driven by the dividend payment of US320 $1,000,000 in September.

Speaker 2

Looking forward, We expect to end next year with a capital ratio below 20%, to a very conservative level. To get there, We need to continue expanding our net income and returning capital to shareholders. In that context, we have decided to pay an additional dividend on December this year of $0.73 per share, around US400 $1,000,000 Now both Mafra and I We'll be happy to take your questions.

Operator

Great. Thanks, Bruno. So now we're moving on to the Q and A session. We have many hands raised here. So as usual, we will attend you on a first come, first serve basis.

Operator

The first one today is Mr. Jorge Curi from Morgan Stanley.

Speaker 2

Can you hear me? Hello? Can you hear me? Hello?

Speaker 1

Hello. Now we're here, Giorgia.

Speaker 3

Great. Thank you. Thanks. Sorry for that. And Congrats on the results.

Speaker 3

I wanted to ask, now that we've seen more of the rate cuts This quarter, visavis the previous quarter, how do you see your retail revenues trending? In particularly, how are you seeing equities and the funds platform behave so far this quarter? And you mentioned something, Bruno, that it is evidently super important for the narrative on XP, which is the debate on the Terminal rate for Brazil. So the focus survey shows consensus moving rates up By year end 2024, I think now it's at 9.25%. I know some economies are already at 10%.

Speaker 3

So I wanted to get your reaction on how does the business look again on the retail revenues, particularly equities? How does that look It would kind of cannot go below 10% rates at least during 2024. Thank you.

Speaker 1

Hello, Jorge. This is Mafra. Thank you very much for your question. Going straight to your point, we haven't seen yet any big change on the retail clients' flow. So we have been repeating that in the last calls and meetings with investors.

Speaker 1

When we are talking about retail clients, they are lagging. They will not move just because We see 100, 150 bps cut on CELIC rate. If you look, The level of interest rates still very high, but more important than that, if you look the performance of riskier assets In the past 12 or 24 months, almost every asset class is losing to Cerro del Credit. The only asset that's not losing to Ceric rate is basically The LCIs, LCAs, the tax exempt CGs from banks when you gross up it back, okay? So It's very hard to see retail clients moving if we don't see the price action from other assets going up.

Speaker 1

So That's my view. So we don't see yet any coming back from retail clients.

Speaker 2

If I may add just one data point, Jorge, to what Mafra just mentioned. A moderate portfolio, moderate, not aggressive, in the past 2 years It's probably below 60% of the Selic rate. So that's pretty much the picture that we have right now. And in this environment, it's hard to see the flow coming. Although, usually, In moment like this is especially the good moment to invest in those asset classes.

Speaker 2

So that's the job that the advisers need to do, but it's hard for the individual to move in that direction. Individuals are being well remunerated to keep their money in cash, 12% per year. So that's the picture.

Speaker 3

And thank you for that. And regarding the second part of my question on next year and the current expectations for Rates maybe to settle probably not much below 10%. How do you just envision the retail investor base as such?

Speaker 2

I mean, we are positive for the future considering interest rates have already started coming down and we believe that one path to see riskier assets performing better. So whenever the assets are performing better, they tend to attract more individuals and more flow to the assets, to the funds and so on. If you ask the portfolio managers, we know because we are the largest funds platform in Brazil. If you look at the performance of multi market funds, for example, everybody is below the hurdle. So whenever You have those funds performing better and interest rates going down again.

Speaker 2

It's a precondition For that to happen, we believe we're going to see a better market environment. It's more about the performance of riskier assets than the level, terminal level of interest rates by itself.

Operator

Thanks, Jorge. Next one in line is Mario Piahi from Bank of America.

Speaker 4

Hey, guys. Good afternoon. Let Let me ask then 2 questions. One is a follow-up to Jorge's question. But if you could discuss a little bit more about the Activity of the IFAs, right, because we see your inflows on a stand alone basis of BRL 14,000,000,000 Only in the quarter, this is a drop of 60% year on year, but your IFA base expanded by 25%.

Speaker 4

So Can you I guess that the high rates negative impact, but like the productivity of your IFA network has If you can just discuss what you think is impacting, how can that improve? Also, if You can give us any perspective on the inflows throughout the months of the quarter, were they fairly even or did you see like a drop off in September? And then the second question is a quick one related to Motao. We see that your headcount increased by about 700 people, roughly 600, I think it was about 700 people, even though Modal Only brought in about 200,000 clients. So how do you think are there like any cost synergies to be realized with Modal?

Speaker 4

Have You already achieved that. If you can give us some color on that also, that will be helpful. Thank you.

Speaker 2

[SPEAKER JOSE MARIA ALVAREZ

Speaker 1

ALVAREZ:] Thank you, Mario. This is Thiago. So to your first question, for me, it's the same reasons that we already I mentioned on Jorge's question about the performance of riskier assets, macro environment and so on. And of course, The productivity of the IFAs, they are much lower this year than It was in the past for the same reasons we already mentioned, but we are keeping investing on expanding The IFA numbers, the internal advisers because we believe investments is made by humans, by advisers. So [SPEAKER JEAN PIERRE ANDRE DE CHALENDAR:] And when the market comes back, we are ready to capture market share and growth.

Speaker 1

But again, for the same reasons, the level of productivity is much lower. On your second question about Model, we received the approval in July 1. So we are at the very beginning of the integration and for sure, we have a lot of synergies. And probably the easiest way to answer your question, we believe already in 2024, The deal will be accretive on earnings per share basis, okay? So on earnings, We will already be accretive in 2024.

Speaker 1

Yes. For that to happen, we need

Speaker 2

in Model and Model's clients because we have already migrated part of the clients to XP and Ricoh brand to deliver Bottom line above BRL 150,000,000. So that's the threshold to make it accretive in EPS base, and we believe we can achieve that next year.

Speaker 4

Okay. Let me ask a couple of follow-up questions then. Like What was the net impact of Model this quarter on your bottom line? You talked about revenues and SG and A. What about the bottom line?

Speaker 2

It was not relevant, something around $20,000,000

Speaker 4

dollars 20,000,000 Okay. And then to go back on the question about inflows, Were the inflows relatively stable throughout the quarter or did you see like a drop in September or an acceleration in September? And also, How do you think about your market share, Ryan, like because the Inflows, the organic inflows decelerated quite a bit. We saw data from some of your other peers that show like higher inflows than what you had. So some people are starting to speculate if you have already reached a mature market share that it will be very difficult for you to continue to gain share.

Speaker 4

How do you feel about that?

Speaker 2

Yes. Regarding your first part of the question, Mario, We prefer not to answer on a monthly basis and the main reason is that we believe is misleading for investors. The business has already a lot of volatility on a quarterly basis, imagine on a monthly basis. Regarding your second part of the questions, we still feel confident about the potential. We are planting the seeds.

Speaker 2

We can talk better about the affluent client where we have the highest share among the segments that we have in terms of client assets in XP platform. And the affluent client, It's the scenario we described already with the industry performance, the funds performance and so on and being well remunerated to stay in cash. So we believe it's the cyclical part of our business And we are still investing because it's cyclical. So it will the tide will turn at some point and we're going to be ready and BUGER. The ecosystem now is much bigger.

Speaker 2

It's that slide that I talked about for the Q3 conceptually that shows the potential of the core in retail that is still not an all time high in terms of revenues. But in terms of the KPIs of investments, client assets, active clients and number of advisers, All of them are in all time high. So we believe there is room to grow in terms of market share.

Operator

Thanks, Mario. And our next one is Thiago Batista from UBS. So let's move to next one and I'll try to get back to Batista later. Next one then is Mr. Titula Barta from Goldman Sachs.

Speaker 5

Hi, good evening, thank Antonio. Good evening, Marafa and Bruno. Thanks for the

Speaker 6

call and thanks for my questions.

Speaker 4

A little bit of a

Speaker 5

follow-up, but maybe to play a little devil's advocate, Bruno, on that slide you mentioned

Speaker 6

on Slide 12, right, where The core revenues are down despite all the investment capabilities. I understand the cyclicality of

Speaker 5

the business. But you can look at this that You've made all these investments and your revenues are down, right? So aside from interest rates, do you think there's anything else at play there, maybe Competitive environment has gotten tougher,

Speaker 6

which is also why the revenue is down. And

Speaker 5

as rates Do come down, you need rates to get below that 9% level to go back to those all time highs. Just to understand, like how sensitive it is to rates? Is there anything else going on in terms of competition or something else that could potentially limit the upside that you potentially see when things improve?

Speaker 2

Sure, Thierry. First, let me start saying that we invested a lot in the new verticals, Okay. So and the revenue is up. It's like 182% up when we compare the last 12 months to 2021, the investment that we've made in advisers for the core business, It's, I mean, we've been innovating in the IFA industry. What we are doing, we are investing in people that are outside the financial industry that want to make a career change.

Speaker 2

We use all the education part of our company as an enabler. We started as an education business, as you know, and we have been using all of that through models, training to form new advisors because we strongly believe this is a business of relationship, human contact. And if we have the right people with the soft skills and we give the tools so they can understand about the financial market and they can create this relationship and trust with the client. That's a good way to go. So it's not a heavy investment there.

Speaker 2

And again, we believe Whenever the macro helps, we believe there is a huge potential and high operating leverage in that part of the business, at Core 1. Your second part, I forgot if you can repeat.

Speaker 5

I mean, I guess, it's just a little bit related to the level of rate. I mean, do you need rates to go below the 9% level to see That inflection for yes, throughout 2021, right, and rates were coming from as low as 2%. And so How low do you think rates need to go to get to see the benefit?

Speaker 2

It's hard to say a number, honestly because we don't know if rates are above 10%, but riskier assets are performing really well and delivering returns Higher than that, it's a good environment. If we need single digit interest rates for that to happen, then We will have to wait for single digits. So I don't have like a precise answer to your question, but I think we are in the good trend, but at a slower pace than we would like. But again, we do not control that.

Speaker 5

Sure. No, understood. Thanks, Bruno. Maybe just one quick follow-up on the inflows. I think in the past, I know your net inflows are low, but You mentioned in the past that your gross inflows actually much higher, right?

Speaker 5

So you are seeing outflows. Any color you can give on how gross inflows are doing?

Speaker 2

Yes, it's stable. It's not improving, but it's also not deteriorating further. Where we have more volatility in terms of gross inflows and outflows is in the corporate and company Clients that with the threshold of BRL700 1,000,000 of annual revenue, it's allocated into retail client assets. So there, We have more volatility.

Operator

Thanks, Thierry. Next question comes from Gabriel Guzzem from Citi.

Speaker 2

Hey, guys. Good evening. So a couple of questions. First, can you remind us what is inside of the revenues and the main contributions there and why we saw such a strong pace this quarter, both in the sequential comparison in year over year. And also, we saw this quarter your effective tax rate come up, both in the accounting and the managerial view.

Speaker 2

Can you remind us why is that? What's the driver of these ups and downs? Thank you. I'll take that. Guzan, thanks.

Speaker 2

Other revenue, by definition, it's Everything that we cannot allocate in the other segments, retail, institutional, corporate and issuer services. The main revenue there, it's the remuneration over our own cash ALM, asset liability management, but we also have a lot of other stuff that does not fit in the previous segments that I just mentioned. In Q3, specifically, we had some one offs impact that made the revenue higher that we do not we see happening in the following quarters. Like for example, we had the termination of the SPAC. Interest.

Speaker 2

There was a financial positive in that with an associated expense. So net impact For EBIT, it was 0, but something around BRL 40,000,000 impacted positively the revenue and also negatively impacted the SG and A. And regarding effective tax rate, 3rd quarter, basically capital market activity. That's what explains the DCM activity, a lot of revenue at the broker dealer level. If you look at securities placement in our accounting income statement, you're going to see all time high there and broker dealer has a 40% tax bracket, so it pushed up the accounting effective tax rate.

Speaker 2

When we look with a longer time horizon, it's our expectation that EBT Should be growing at a faster pace than net income exactly because effective tax rate should be hire going forward. But that's on an annual basis. On a quarterly basis, there is going to be volatility.

Operator

Great. Next one is Eduardo Rosman from BTG.

Speaker 7

Hi, everyone. Congrats on the numbers. I have a question on your credit card business. We've been able to see a very strong growth in revenues, But I wanted to know if we should be thinking about this business as an important bottom line contributor in the future or not, right? I ask that because as As far as I know, your clients that invest a lot probably have to offer like cash back or invest back.

Speaker 7

You have a lot of benefits. Your clients do not go into revolving. So just wanted to try to understand if still, if it's possible to generate a good amount of bottom line in the future with that business. And Also trying to understand your risk appetite, right? We just saw, say, the market as a whole going through problems, right?

Speaker 7

I think clearly you didn't face the same, let's say, headwinds, but just trying to understand if you could increase your risk appetite and eventually track to know more clients that don't have a lot of AUC with you using the credit card to do that, right? So thanks a lot.

Speaker 1

Thanks for the question, Osman. Well, first, when we look at the bottom line of or the contribution margin of credit cards as of today is still negative, but we expect like that to change, I would say at the end of this year, beginning of next year, so it will start to be positive contributor on margin for XP, okay? So as you know, the business of credit card, there is a J curve as we are escalating, issuing new cards, but we are at the point to become positive, okay? When we look And NPL, of course, we have a big part of the our portfolio, something like BRL 4,500,000,000 to BRL 5,000,000,000 out of BRL 7,000,000,000, that's collateralized. So the NPL is it's very low, Okay.

Speaker 1

But when we look at the whole portfolio, it's close to the NPL over 90 days is close to 1%, Okay. And when we look at the provisions we have, today is 2%. So we have 2 times provisions over what we are realizing on NPL. So that's basically it's because of the profile of the customers we have, of course, Okay. So the NPL that we have is much lower than what the market has, okay?

Speaker 1

So We have been expanding the portfolio at Ricobrand that has a higher NPL, but with a very good L. A, Rachel, when you look the revenues over provisions, so They still very good.

Speaker 7

No, great, Rafael. If I may, just another question here on another topic, right? I think Bruno was talking about that the company has excess, let's say, capital, right? And you actually paid a lot, right this year, right? If we add buybacks and the dividends, I'm assuming here, let's say, BRL4.5 billion, which is more than 100% of the net income, right?

Speaker 7

Naturally, I don't think that that's sustainable over time, but just trying to understand if it's your idea to, over time, to keep paying dividends and or kind of buybacks on a recurring basis in the future.

Speaker 2

Want me to take that, Maaf? Yes. Yes. The answer is yes. We are going to keep returning capital to shareholders through buybacks or dividends.

Speaker 2

And what I mentioned in the presentation, when we look at our Capital ratio at XP Inc. Level, we ended this quarter, 3rd quarter above 22%. So it's to under leverage. We are conservative in terms of our balance sheet. We are not going in OB where the banks in Brazil, for example, that we compete against usually are with capital ratio around 14% to 15%.

Speaker 2

But we see room to leverage a little bit more, especially considering that we have a bank now. We are under corporate restructuring in our group to have the bank as the parent company of the Prudential conglomerate with the broker dealer below it and that's something ongoing in the Central Bank and that will give us the possibility to use the bank better. And by that, I mean, as the main vehicle for funding instruments because a bank, as you know, can fund itself at a cheaper and with a strong depth in terms of market achievements. So going forward, we are going to keep our profitability. We expect to keep growing our earnings, and we do not need to retain capital to keep growing.

Speaker 2

And with that in mind, Yes, you can expect us to keep distributing capital to shareholders as we move forward. Great,

Speaker 7

great. Thanks, Bruno.

Operator

Thank you, Jose. Now let's try to connect with Batista again from UBS. Batista, please.

Speaker 8

Hi, guys. Are you hearing me?

Speaker 1

Yes.

Speaker 8

Okay. Sorry for the other time. I have one question about the profitability of XP. You already mentioned in the past that the ROE should achieve 30%. And but when do you believe this is possible?

Speaker 8

Would it be a 10 years, 5 years? I want to have Thank you, Harrison, for this. Because when we look for international peers, we can see some players like Fineco that has an ROE of 30%, but we also have a Charle Charle with ROE of 20%. So trying to see when If it's 3, 5, 10 years horizon to achieve this level. And the second question is a follow-up about net new money.

Speaker 8

I know that you answered already a lot of questions about it. But how negative has been the letters, LCA, LCA, LIGI, How much negative has been those instruments for XP? And if part of the corporate structure that you just mentioned Is to be able to issue LCA is different, but at least LCA. So if this is linked with your corporate structure.

Speaker 2

Start with the ROE question. We didn't set a target for ROE. The 30% that you mentioned, Thiago, it's basically a math equation based on the Q2 earnings result that we said, look, if we take Out of the capital, the excess capital and we also discount from the BRL977 1,000,000 of net income in the Q2, the remuneration post tax of that excess capital and we annualized that new net income And divided by the new equity, we would get close to 30%. So that was just math calculations to say, look, we have the potential as we move forward and start distributing more capital to shareholders, Again, keeping our balance sheet in a very conservative way in terms of liquidity, in terms of leverage and so on, we are not going to change that. But using better the vehicles that we have in the group, leveraging more and reducing our capital ratio as we move forward.

Speaker 2

The time horizon for that, I'd rather not answer you directly because otherwise, it would Become a guidance, when we are going to achieve the potential 30% in the future. What I can tell you is that there is A plan ongoing in the company in terms of corporate restructuring, in terms of, of course, controlling efficiency ratio, that's a must. We are not going to take our eyes out of the ball in terms of efficiency ratio. 2, keep evolving net income and controlling the capital ratio. So as I mentioned in the call, we want to end next year with a capital ratio below 20%, and we're only going to achieve that, keeping our profitability if we distribute capital to shareholders.

Speaker 2

Regarding the net income, was the net inflow question, right Thiago, the second one?

Speaker 8

Yes. The second question is about the LCA, Alicia, and LIGI. How bad

Speaker 4

is that?

Speaker 2

Yes, the impact. It's hard to say how much, right? We know there is more than BRL 2,000,000,000,000 sitting and cash in the system

Speaker 7

right

Speaker 1

now, more than that.

Speaker 2

And we know that when you have these banking Funding instruments being favored because of the macro conditions, it becomes much more a balance sheet business than an investment business by it And Expedia does not have the balance sheet that our competitors have. We do not want to have. Interest. And in times like that, we have less products like this one. Well, of course, we have a lot of fixed income products with good We try to compensate that with other offers I mentioned in past, I don't know if calls or conversation with investors.

Speaker 2

For example, we did an agreement with 1 of the big five banks to buy some LCI from them, and we could distribute billions in a matter of a few months. So there is appetite in our client base to buy that type of product whenever the market is like the way it is right now. But we do not have the balance sheet business as of the banks. That's a certainty.

Speaker 8

Yes, let's follow-up. Sorry, Bruno. But in your corporate structure to trying to become a bank is to trying to issue at least

Speaker 2

or not? Not really. That's not the plan. The plan, again, we the strategy started to go beyond investments so we could have other products to make our clients get rid of the Incumbent banks and cut completely the link with the incumbent banks, that was the strategy. We are following up that strategy as we move forward.

Speaker 2

And by having a bank, it give us the possibility with this corporate restructuring to put the bank as the main entity in Brazil for funding purposes and then we can leverage more. We can lower the cost of funding. Just to give an example, we have a corporate bond issue at XP Investimentos SCR, roughly BRL2 1,000,000,000. It does make sense. The bank It makes part of the strategy to have a better corporate restructuring and it's natural.

Speaker 2

We are moving forward as we develop the bank. It's not to have LCA because then it becomes a balance sheet business.

Speaker 8

Thank you. Very clear.

Operator

Thank you, Batista. And now we have Neha from HSBC.

Speaker 9

Hi. Congratulations on the results and thank you for taking my question. Just had a quick clarification on what you mentioned about the Mogao transaction. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] So, what was the impact this quarter? And when do you expect the transaction to be accretive?

Speaker 9

And what is the level that is required to be accretive? [SPEAKER MARIA CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Just clarification of that is not very clear.

Speaker 1

Thank you so much. As Bruno mentioned and thanks for your question, Iha. As Bruno mentioned, the net income impact was close to BRL20 1,000,000 positive, okay? And we expect the deal to be accretive in 2024. As Bruno mentioned, to be accretive, we'll have to make EUR 150,000,000 net income or more, okay?

Speaker 1

So that's what we expect for 2024.

Operator

Thanks, Nuno. And now we have Jeffrey from Autonomous Research.

Speaker 6

Hello. Thanks very much for taking the question. And apologize for the Apologies for the background noise here. Quick one on the DCM revenues. Clearly, There were some big DCM deals in the quarter.

Speaker 6

Was there also an impact to retail revenues from those, I guess, on the distribution side. And could you help us quantify it? Thanks.

Speaker 2

Yes. This year, as you know, there is secondary trading part and the primary Close, Jeffrey, exactly the numbers between secondary and primary. What I can tell you is that Secondary is still the most relevant one and it was more relevant than primary in the Q3 this year. But when we compare to previous quarters, the primary component of revenue in 3rd quarter compared to 2nd quarter, for example, was approximately double. So yes, we did have Some very good offers in terms of channel fees that helped fixed income to reach this historical revenue in a quarterly basis of CHF 718 million has.

Speaker 6

Okay. Thank you. And then just a quick clarification. The capital adequacy ratio at XP Inc. You've been discussing of 22 percent just over 22%.

Speaker 6

Do you disclose the numerator and denominator on that anywhere?

Speaker 2

Yes. Basically,

Speaker 10

our total RWA,

Speaker 2

As we calculated, it would be around BRL 78,000,000,000. So basically, we have Balance sheet's north BRL230 billion. So onethree of our balance sheet is assets with risk. The other parts, basically no risk assets.

Operator

No worries, Jeff. And now the last question from Yuri Fernandes from JPMorgan.

Speaker 10

Thank you, Bruno, and Marcia. I will limit myself to one question just on expenses here. This This quarter was a little bit confusing, right? You had Modal, revenues were super strong and I think these also usually trigger higher expenses. But you are Even if we assume another 4Q similar to the Q3, you still will be able to deliver your SG and A guidance Even with Model.

Speaker 10

So just some qualitative things from you guys. How do you see expenses? Do you believe expenses should, I don't know, Accelerate because for some reason you need to invest more or you need to normalize, I don't know, compensation for XP or no? Or do you see more room for operating leverage and having expenses growing below revenues for 2024? Anything you can share on expenses, I think, will help us understand a little bit the outlook, because you already made it clear during the call that Revenues are not totally there yet on retail.

Speaker 10

Like there are some improvements here, some improvements there. But revenues are still, for my take here, a little bit challenging. [SPEAKER CANDIDO BOTELHO BRACHER:] But on expenses, you are doing a good job. So I would like to hear from you, your take on expenses. Thank you.

Speaker 1

Thank you, Yuri. Going to your question, as Bruno already mentioned, this quarter, we have Some impacts, okay? The first one is expert. We have the revenue and we have the expense. We have the SPAC that Bruno mentioned.

Speaker 1

And of course, we have modal that we consolidated number that we opened that It was BRL 100,000,000 and BRL 11,000,000, okay? So If we sum up all these effects, it's above EUR 200,000,000, okay? So when we look The year, the projection for the year, we will be delivering the target that we mentioned. The guidance that we gave We'll be there. Remember that the guidance we gave was excluding Model and now we are including Model in the number.

Speaker 1

And for next year, we don't need to do any big investment, okay, to grow. That's why we have been saying about the operational non leverage that we have. We don't need more investments to do more revenues on the core business investments. Of course, for all the reasons we mentioned here about the market, the riskier assets performance and so on. We don't know when we'll see this recovery on the retail revenues.

Speaker 1

But once it happen, We expect to have gains of margin here. And what I can tell you is For next year, we will continue to pursue better efficiency ratios. Of course, we cannot guarantee and we will not give Any guidance for that for next year, as we already mentioned, but you guys have our commitment that we are going to pursue even better efficiency ratios in 2024.

Speaker 10

Super clear, Matt, and congrats on the quarter.

Operator

Thanks, Yuri. Thank you for your question. It was the last one. So we would like to Thank you all for participating in the call. We will be available with the IR team to discuss the results with you later.

Operator

And have a good night, everyone.

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Earnings Conference Call
XP Q3 2023
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