XP Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 11 speakers on the call.

Operator

Good evening, everyone. I'm Andre Prezi, RRO at XP Inc. It's a pleasure to be here with you today. On behalf of the company, I would like to thank you all for the interest and welcome you to our 2024 Second Quarter Earnings Call. This quarter, the results will be presented by our CEO, Thiago Maffre and our CFO, Victor Mansour, who will both be available for the Q and A session right after the presentation.

Operator

If you want to ask a question, you can raise your hand at 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. There is a button below 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 also be found on the SEC filings section of the IR website.

Operator

So now, I will turn it over to Thiago Maffra. Good evening, Maffra.

Speaker 1

Thank you, Andre. Good evening to all. I appreciate everyone joining us for our 2024 Second Quarter Earnings Call. It's a pleasure to be here tonight. Let's delve into our quarterly performance and discuss the strategic steps we are undertaking to ensure our continued growth and education to all shareholders.

Speaker 1

I would also like to extend a warm welcome to Victor Mansour, our new CFO, as this is his first earnings call with us. We are excited to have him on board and look forward to his contributions to our financial strategy and operations. This quarter has been positive for XP. We have showcased our ability to generate alpha and achieve growth with profitability by managing several business levers independently from the challenging conditions. Our total client assets have increased by 14% year over year, reaching $1,200,000,000,000 More importantly, we have observed a reacceleration in our client net inflow this quarter, details of which we will elaborate on during the presentation.

Speaker 1

We have also set a new record in the total number of advisors, reaching 18,300 and continued to expand Brazil's largest investment specialized sales force, growing 11% year over year. Finally, we ended with 4,600,000 active clients, marking a 16% increase year over year. We had our all time high in revenue, EBT and net income. Gross revenue was $4,500,000,000 for the quarter, up 21% year over year and EBT of $1,400,000,000 43 percent higher year over year and $1,100,000,000 in net income with a margin of 26%. This result reinforce and gives us comfort that we are on track to deliver our gross revenue and EBIT margin guidance in 2026.

Speaker 1

We will go into more details on the financials later on. In terms of balance and profitability, we closed the quarter with an return on tangible equity of 27.2%, the highest in the past two and

Speaker 2

a half

Speaker 1

years. XP's menagerobasel was at 20.5% level. The EPS for Q2 2024 was BRL2.03 per share, a 10% increase year over year, partially reflecting the share buyback that we have completed in the Q2, aligned with our capital return plan to create value to shareholders. On the back of so many levers that we have been implementing for growth and with extreme cost control, as it has been the case, we do are expecting improving results for the second half. Moving on to the next slide, we will look at our strategy tracker, reminding here the main levers of business growth.

Speaker 1

We will dig deeper in each of them. Also, we would like to highlight our gross revenue and EBT margin. If you remember our Investor Day, back in December, we have shown our last 12 months gross revenue as $14,800,000,000 and since then, we have increased our gross revenue to $17,400,000,000 LTM, with an implied 25% CAGR. In order to reach the top of the guidance, we need from now on a 19% CAGR in Q4Q 'twenty six. Regarding our LTM EBITDA margin, we have reached 28.1%, a 180 bps expansion compared to our 3rd quarter 2023 LTM figures, indicating that we are in the right pace to reach the 30% to 34% target range in 2026.

Speaker 1

Now, starting with retail investments. In this slide, our goal is to establish ourselves as leaders in investments, which is our core business. As highlighted in the first slide, a key achievement this quarter was the improvement of net new money. We record BRL32 1,000,000,000 in net new money for the quarter with BRL24 1,000,000,000 coming from retail. This means that in retail, we nearly doubled quarter over quarter.

Speaker 1

We attribute this improvement to several factors, but primarily, we believe this improvement is a result of effectively executing the levers we control. These levers include: 1st, product platform, the largest investment platform in Brazil, which continues to be a major differentiator through our constant innovation. And in this environment, our fixed income platform is expected to maintain its protagonist in the market, and part of this competitive edge is related to our efforts in structuring and warehousing new assets for retail distribution through our wholesale banking. 2nd, diversification and expansion of channels. Few years ago, we launched the internal advisors model, becoming a dual distribution channel business.

Speaker 1

And today, as we speak, we have evolved to a multichannel distribution with IFAs, internal advisors, consultants through our RIA channel and the digital channel. At the same time that we have been growing our IFA channel, we already have around 2,000 internal advisors and 1,000 RIAs. Our RIA channel, for example, red represents 10% or more than $100,000,000,000 of our total client assets. All the new channels combined represent around 50% of our total retail client assets. 3rd, focus on productivity.

Speaker 1

Through our empowering tools for advisors such as the Hub, XP Academy and the provision of data and intelligence to the sales force, ensuring their long term success. Lastly, it's worth mentioning the continuous evolution of the company's mindset, transitioning from a product distribution firm to a service provider. This shift permeates all areas, including the entire sales force, aligning with our quality initiative and financial planning, catalyzed by open investments, and now our cross selling initiatives. We are leading

Speaker 3

to to and

Speaker 1

Another business that presents an opportunity ahead is insurance. We are currently less than 2% penetrated and we expect to grow 3 to 4 times over the next years. Still, our total written premiums had seen a 52% increase year over year, reaching BRL307 million in the quarter. On retirement plans, we keep presenting market share gains, growing our client assets by 18% year over year, with a 5% market share and also a 5% penetration. Combined, FX, global investments and digital account grew 51% year over year with $104,000,000 in revenues this quarter, and we have a clear plan for each one of them to keep growing.

Speaker 1

And finally, the corporate and SMB. We have been able to maximize our corporate and SMB clients by leveraging the relationship built with our network of advisors and our investment banking business. We have reached more than 60,000 active clients. It's important to highlight that corporate and SMB client base grew 22% year over year. And we continue to improve penetration with FX, derivatives and loans.

Speaker 1

It's worth mentioning that in derivatives, we improved from 10th to 5th position during the last 2 years. And on FX, we also improved, moving from 41st to 16th ranking position during the last 4 years. As a result, we have been able to grow corporate gross revenue by 50% CAGR 2nd quarter 24 last 12 months versus Q3 20 3 last 12 months when we held our Investor Day. We have just launched the corporate digital account in August and we will launch trade finance soon, reinforcing our cross sell opportunities for the next years. Victor will give more details about the revenue growth.

Speaker 1

Now, I will hand it over to Victor so he can discuss this quarter financials. Thank you.

Speaker 3

Thanks, Maffra. Good evening, everyone. It's a pleasure to be here with you. As this is my first earnings call, before I go to the 2nd quarter numbers, I think it would be interest to share 3 pillars we are focused on for the years to come. First, a short term objective, our corporate restructuring.

Speaker 3

As you know, we have a bank in our ecosystem and having a bank can provide us higher leverage and lower costs. At the same time, we can structure new products. To get all the benefits of having a banking in the ecosystem, we have started a corporate reorganization last year to have XP Bank as the parent company in Brazil when completed. This will provide lower cost of capital by increasing our ability to issue Tier 1 and Tier 2 debt. The process of the Central Bank is flowing is expected and we should have it completed by the end of the year.

Speaker 3

2nd, a midterm objective, our guidance delivery. EBIT margin expansion should come through new products increasing profitability as they evolve in the ecosystem coupled with a strict cost discipline without harming innovation, which is part of our DNA And third, our long term objective, capital allocation. We understand that having a continuous capital management through disciplined capital allocation and return capital to shareholders is key for our long term goals. XP is a profitable company, generates cash and does not need to reinvest 100% of its profit to grow. Capital location decisions are based on ROE, profitability and connection for long term strategy.

Speaker 3

The combination of these initiatives should lead to higher returns going forward. I think it would be interesting to share 3 pillars we are focusing on for the years to come. And now let's go to the numbers. Total gross revenue grew 21% year over year and 5% quarter over quarter. Once again, XP posted positive performance in capital markets, reflected both in retail, especially fixed income and corporate issued services.

Speaker 3

Institutional revenue was slightly lower quarter over quarter. On the right hand side of the slide, we can see our gross revenue breakdown, And the trend is still the same as last quarter when corporate issued services increased their participation on total gross revenues. Let's move to the next slide with more details on retail. Retail revenue achieved $3,300,000,000 a 14% growth year over year and a 5% growth quarter over quarter. Fixed income was the main highlight with a 42% growth year over year and a 17% growth quarter over quarter, which was driven by our capacity to develop new products, including corporate credits and structuring notes through primary offerings and our capacity to provide the liquid in the secondary market, considering our higher than 50% market share in most of the securities.

Speaker 3

Moving on to the next slide, we will talk about corporate and interest services revenue. Corporate and issue services posted an all time high revenue, achieving $629,000,000 in the quarter, which represents 122% growth year over year and 24% growth quarter over quarter. Issued services continue to present a fast pace of DCM activity, posting higher revenues than last quarter and reaching $384,000,000 a 145% growth year over year and a 37% growth quarter over quarter. By having a consolidated investment banking business with solid credentials, we can reach our corporate clients to cross sell. In that sense, corporate presented the same trend of last quarter if transactional revenues growing on the back of derivatives and FX.

Speaker 3

Corporate posted $245,000,000 in the quarter, a 94% growth year over year and a 7% growth quarter over quarter. On the right hand side of the slide, we're explaining a little better the cycle I'm referring to, which connects both our retail and corporate and investment banking business. XP loan book is primarily focused on supporting our warehouse business, making sure it's paving the way to our retail distribution. In this quarter, we originated $10,000,000,000 new corporate securities warehoused in our balance sheet. In time, those securities will be sold to our retail clients, and this revenue will show as fixed income.

Speaker 3

Finally, by having the market making capabilities, we can also recycle this risk and provide a liquid to our different types of clients, maximizing the return of our balance sheet. Moving on to the next slide, we will explore SG and A and efficiency ratios. Cost discipline and efficiency are priorities in your business to keep XP competitive. With that in mind, we achieved the best efficiency ratio since the IPO if 36.1 percent, 220 basis points better year over year and 40 basis points better quarter over quarter. SG and A ex incentives reached BRL1.4 billion in the Q2 of 2024, a growth of 14% year over year and flattish quarter over quarter.

Speaker 3

Bear in mind that on the Q2 of 2023, we didn't have modal SG and A in your financials. This strict cost discipline along the 4 innovation initiatives will allow us to keep expanding our EBIT margin in direction of our guidance. EBIT achieved the highest level in our history, a combination of a rise in ecosystem revenues and strict expense control, reaching 1,400,000,000 This represents a growth of 43% year over year and 27% quarter over quarter, driving our EBITDA margin to 32.8%, a 5.52 basis points growth year over year and a 50 9 basis points growth quarter over quarter. On a last 12 months basis, our EBIT margin reached 28.1%. We expect to improve our EBIT margin on an annual basis toward our guidance in 2026.

Speaker 3

Let's see our net income on the next slide. We also achieved the highest net income in year history, BRL1.1 billion in the Q2 2024, growing 14% year over year and 9% quarter over quarter. Net margin posted 26.5% in the 2nd quarter, a decrease of 103 basis points year over year and the increase of 110 basis points quarter over quarter. As we mentioned in the Investor Day, we expect XP effective tax rate on our last 12 month basics to gradually increase over time due to revenue mix since cross sell and corporate SMB business keep evolving and present a higher tax rate. Let's move on to the next slide to talk about capital management.

Speaker 3

As I already mentioned, an efficient capital management is key to achieve our long term objectives. During the last two and a half years, we have distributed over $7,500,000,000 through dividends and share buybacks. Those distributions are connected to our strategy to return part of the excess capital at XP Inc. Level to shareholders, while keeping a conservative Basel index. As we mentioned in our Investor Day, we intend to reduce it across the years between 16% to 19%.

Speaker 3

Those initiatives together for net income growth result in higher returns going forward as we are going to see in the next slide. You can see the evolution of our earnings per share posting a solid growth and achieving BRL2.03, a 10% year over year and a 9% quarter over quarter. During the Q2 of 2024, XP posted 27.2% in RoTE with an increase of 3 10 basis points year over year and 108 basis points quarter over quarter. We believe that RoTE presents a better comparison to peers in Brazil due to BR GAAP and IFRS differences. Now, I turn over to Mafra for his final remarks.

Speaker 1

We had a solid quarter with revenue growth and operating leverage. This combination gives us confidence that we are on track to deliver our 2026 guidance. All initiatives from distribution channel diversification to sales force expansion are proving that we are in the right direction to deliver our higher level of net new money compared to last year. Finally, we believe that we are keeping and enhancing our moats by: 1st, offering the best product platform in the country, ensuring that our customers have access to an unmatched range of solutions 2nd, empowering the largest and best trained sales force in the industry 3rd and last, evolving our company's value proposition to a new level of service excellence, moving beyond the traditional product distribution model to a far more sophisticated and value driven approach through financial planning. Now Andre Parisi will start our Q and A session.

Operator

Okay. Thank you, Mafra. We're going to start the Q and A. And the first question is coming from Antonio Roach, Bank of America. Antonio, can you hear us?

Operator

Thank you, Mafra. We're going to start the Q and A session. And the first question comes from Antonio Huat, Bank of America. Okay. We believe we got back here in our Q and A session.

Operator

The next question is to Jorge Curi from Morgan Stanley. We apologize. We are still fixing the Zoom connection. Please hold for 1, 2 more minutes. Thank you.

Operator

Okay, I believe we are back. And the first question is for Antonio Poet from Bank of America. Antonio, you

Speaker 4

may proceed.

Speaker 2

Hi, good evening guys. Can you hear me?

Operator

Yes, we can.

Speaker 2

All right. All right. So two questions on my side. So first, on net inflows, if you could please explore a little bit the consistency and the quality of these net inflows. So how do you break down in terms of gross inflows and also outflows?

Speaker 2

Also in terms of mix and is it coming from other players? Is it new money? So deep dive here on net inflows. And my second question on headcount. We noticed that headcount increased in the quarter.

Speaker 2

And if you could explore a little bit here this time, it would be great. Thank you.

Speaker 5

Hello, Antonio. This is Thiago. So first of all, sorry to everyone that is here on the call for the problems we have. So we never open outflows and inflows, okay, and not even where demand comes from. So what I can tell you, there is nothing not organically here in the number.

Speaker 5

So it's 100% organically. And as we mentioned, it's more related to the levers that we have been working on in the past quarters that they are maturing and starting to bring more net new money. So yes, we believe the worst is behind us. We are not going to give short term numbers for next quarter or the next quarters. But what I can say is we do not expect to go back to $13,000,000,000 $12,000,000,000 as the last quarters.

Speaker 5

So that's basically what we believe. So we expect good levels of retail net new money going forward. For headcounts, basically what we have been hiring people is especially as we opened last quarter that we have almost 2,000 internal advisors. So we have been, I would say, increasing the number around 80, 100 per month, okay, so internal advisers. So that explains a good part of the number here.

Speaker 5

Of course, we have some other like hirings. We had the internship program with 200 interns. So that's

Speaker 6

the number.

Operator

Okay. The next question is from Jorge Cui, Morgan Stanley. Jorge, you may proceed.

Speaker 7

Hi, everyone. Thanks for continuing to ask questions and congrats on the numbers. Sorry to re ask the previous question again, but I do think it's important. On the inflows, I mean, I appreciate the explanation that Mafranag gave about some of this competitive advantage that you have. And if you go back to that slide where you show them next to the inflows, I mean, it feels to me that all of those things were in place a year ago and certainly a quarter ago, like your multichannel distribution, your product capabilities, your digital capabilities, your robust IFA network.

Speaker 7

I don't know that there is any material difference in the last 3 months on any of those items. And it feels to me that maybe there is a cyclical component here on the recovery of net inflows. And so to the extent that you can help us understand better, to what extent indeed there is something cyclical, maybe the volatility that happened in the quarter. I mean, the market sold off aggressively in June and then it picked up again, the currency devalued. So any more color on this very notable and I think important increase in inflows would be helpful.

Speaker 7

Thank you.

Speaker 5

Yes. For sure, Jorge, most of these levers, they were in place, but they were not mature if we go back. Of course, they didn't mature from 1 month to the other or from 1 quarter to the other. They're maturing. And of course, we have some other levers that helped us to increase the number.

Speaker 5

For example, if you compare today that we have 11.5% instead of interest rates instead of 13.75% and you have REITs paying 1% a month, when you compare that like to the CGs from the banks, the changing regulation, all the stuff, of course, it helps. But I would attribute more value like to everything that we have been doing, everything that we control than a macro environment, okay? So and again, it's not something that it's specifically to this quarter, okay? So then in Q3, we are going back like to 13, 12 from Q4 and Q1. It's more like a normal level.

Speaker 5

Of course, there are volatility, which can be slightly lower, slightly higher in the next quarters. But there is nothing not organically here, okay? So we expect that the worst is behind us and that we are going to deliver good retail net new money in the next quarters.

Operator

Okay. Next question comes from Renato Meloni from Autonomous. Renato, you may proceed.

Speaker 6

Hi, Harm. Can you guys hear me?

Speaker 5

Yes, we can.

Speaker 6

Thanks for the space here for questions and welcome Victor here for this call here with the team. So just like following up on net new money, on the last call you said, Marco, that you would take some time to return to normalized levels of net new money similar to the previous year. And in fact, the numbers were today much better than any quarter, at least organically last year. So I'm wondering here what changed from your deals from the past quarter? And what's the, I would say, sustainable level of net new money for the coming quarters?

Speaker 6

And just secondly, quick question, what drove the increase in the effective tax rate that was much higher this quarter? Thank you.

Speaker 7

[SPEAKER CANDIDO

Speaker 1

BOTELHO BRACHER:] Okay.

Speaker 5

I can take the first part and then Victor take the each other question. So again, the normal level was not the $13,000,000,000 $12,000,000,000 from Q3 from Q4 and Q1. That was not normal, okay? And when I say that going back to normalized levels is more like true, what we have been doing in 2021, early 2022 that we are doing like $30,000,000,000 okay, per quarter. That's what I said that we it may take some time to go back there.

Speaker 5

But again, the levels that we are delivering right now more can be a little more, a little less, dollars 20, dollars 20 plus against 13%. That's more normalized level for the moment. But again, we are working very hard like to at some point in time in the next years to go back to 30%, 40% because we believe that our mode, our competitive advantage is still in place. That's what we have been talking to all the investors in the past, I would say, almost a year. The question has been always, okay, now the banks or the competitors, they have closed the gaps.

Speaker 5

You guys have lost the competitive advantage. And we always said, no, it's something that's temporary. At some point, with everything that we are doing, we revert that. I believe that's the beginning, okay? So of this new levels, of course, we are not happy with the 2024 that we deliver right now.

Speaker 5

We are working very hard like to go back to higher levels, but it may take some time.

Speaker 6

I got it. But just sorry, just to stay on that point. I think part of the question is like what changed from your view in the previous quarter or maybe nothing changed?

Speaker 5

Yes, nothing changed. All the work we have been doing in the past quarters.

Speaker 3

Okay. Thank you, Renato. And thank you, Paul. It's a pleasure to be with you all for the first time. And moving to the share question, basically the share is a result of revenue mix as we commented before.

Speaker 3

The corporation services was one of the highlights of the quarter and they are higher tax business as they are in the bank. And what I can say about that, we expect that the tax rate of this quarter to be the highest quarterly rate of this year. But I recommend that you look at the last 12 months normalized share. That is a better metric because it's considered the tax paid in the proprietary funds and this moves the impact of the quarterly revenue mix variation. And this number was in 18.5 from this quarter.

Speaker 3

And we can expect this number should be around that over the year.

Speaker 6

That's very clear. Thank you.

Speaker 1

Thank you.

Operator

Okay. Next question is from Daniela Balas, Banco Sato. Daniela, you may proceed.

Speaker 8

Hi, guys. Hi, Mafer. Hi, everyone. So yes, your distribution capabilities are indeed very strong. So you have these competitive advantages.

Speaker 8

So with strong DCM issuances this quarter, probably it was a key driver, right? So I think nothing has changed, right? So organically, you're still very capable of raising this net new money organically. So I wanted to understand here these robust numbers in distribution, how this have helped the net new money in this quarter? So is the growth more concentrated in bank funding instruments or this taxes and private credit?

Speaker 8

So just a bit to qualify the distribution and the net new money, if you can. And the second question about corporate, if you can give us a little bit more context on that because it was very strong and this is not as mature, right? So it would be good to hear from you. Thank you.

Speaker 3

Hi, Daniel. Thank you for your question. And as we come in the retail, the fixed income was the main highlight in the retail business. And basically, we have a close relation if the retail fixed income and the DCM activity. And as you can see in your balance sheet, we originate a lot of new fixed income instruments over the quarter.

Speaker 3

And of course, this help us to generate fixed income revenues. And this helps a lot if the net new money. And I don't know if that answers your question. If it does, we can move to the next point.

Speaker 5

Just to remind you here, when we said, if you go back to my slide about net new money, the first point was the product platform, okay? Victor just mentioned the integration between GCM and retail distribution, okay? But we go beyond that, okay? So if we get the size that's public. So if you get all the REITs offering that we did this year, we have been able to raise in a single offer almost BRL2 1,000,000,000, okay?

Speaker 5

So what we saw in the Q1 and also on the second one is the appetite for, I would say, more diversified products when compared like to last year that people are only looking for CGs, tax exempt CGs from the banks, okay.

Speaker 8

Okay. Regarding the corporate side, any comments here, please?

Speaker 3

I think the corporate side reflects of what Maher told about the beauty of new products to offer to our corporate and SMB clients. And basically, if you look at the rents, we didn't have any derivatives capabilities 2 years ago. And if you look at our FX ranking, we also didn't have this business 2 to 3 years ago. And basically, as we grow those products in our platform and user relationship, we are capable to do more cross sell for those clients, right have the client and the right have the product. So those business lines should be growing in the pace of our guidance.

Operator

So the next question is from Tito Abadu from Goldman Sachs. Tito, you may proceed.

Speaker 9

Hi, good evening, everyone. Thank you for the call and taking my question. Another question on the inflows, but more how does how do you think that can benefit revenues going forward? We did see a bit of a pickup in retail revenues this quarter of 5%. But in the past, you said your revenues are not that correlated to inflows.

Speaker 9

But just how do you think a nice pickup in inflows, can this translate to a further acceleration in revenues going forward? Just see how you think about that. And then just another question on your EBT margin, right? I mean, big improvement there. How do you think about the sustainability of that margin?

Speaker 9

Anything that was maybe one off that led to the big improvement in the quarter? How do you see it going forward? Thank you.

Speaker 5

Okay. Thank you, Tito, for your question. I will take the first one and Victor the second one. So about the revenue and correlation with net new money, of course, there is a small pickup, okay, because imagine that we have inflows and outflows, okay? But it's small when you compare like to the whole AUC that we have.

Speaker 5

So today, we have almost BRL1.13 billion of retail clients, okay? And the whole portfolio that we have is much larger than any net new money. So we don't see a big correlation in both of them. But yes, why net new money is so important because that proves that we the mode of the company and the growth, the future growth, it's here. So that's why net new money for us is the main KPI because that dictates how it's going to be the company a few years down the road, okay, more than the revenue this quarter or next quarter?

Speaker 3

Tito, thank you for the question. I think the EBIT margin rationale is the same of DTR. You should look at the last 12 months margin that is currently at 28%. Looking at that margin, you should see a slight improvement. So it toward our guidance levels over time that will eliminate some any variance quarter over quarter how to do business mix or HR.

Speaker 9

Okay. That's helpful. Thank you. And just maybe just in terms of the on the revenue outlook, are you feeling more comfortable with the revenue outlook from here? Any just potential catalyst to sort of accelerate the revenues just thinking of where we are in the cycle if your range is so high?

Speaker 5

Yes, I'm not sure if I understood your question, the revenue for

Speaker 9

On retail revenue.

Speaker 1

Can you repeat the question?

Speaker 9

Sure. Yes, sorry. Just on the outlook for retail revenues, right? I mean, there was the pickup this quarter. I mean, do you think that the outlook is maybe improving to some extent?

Speaker 9

We still have high rates. How do you see Yes. As

Speaker 5

we mentioned in the presentation, we expect the second half of the year to be better than the first half of the year, okay? So again, we are not giving guidance for the next quarter or for the year, but you can have in mind that the second half should be better in terms of revenues, net income and so on. Because again, the guidance for 2026 is still in place, nothing changed. And if you look at the numbers, the CAGRs we have to deliver on revenue for the top of the guidance is 19%, the increasing margin EBIT going to the range 30% to 34%, we should start like to pick up in all these metrics. So otherwise, we would not go there, okay?

Speaker 5

But and we just mentioned that we are on track. So you can expect like all these numbers to improve in the next quarters. Of course, there are volatility. We can go down in some of the quarters until the end of 2026, but the trend is upwards, okay? So you can expect the second half of the year to be better than the first one.

Speaker 9

All right. Perfect. Thank you very much and congratulations on the results.

Operator

Okay. The next question is from our Lobo Artuso from UBS. Lobo, you may proceed.

Speaker 4

Thank you, guys. Thank you for taking my question. I have 2, but my first is just a follow-up of my colleague's question on net new money. And I totally understand the explanation for this performance this quarter. It was related to the leverage you have been working on.

Speaker 4

But questioning on the other way, I understand the change in taxes of instruments had some effect, even a small one. And also the smooth decrease in the policy rate had some effect as well. So could you just please give us a magnitude of these two impacts over the flow this quarter? Basically, just the magnitude like if those two effects had less than 10% effect over the net new money, that would be helpful. Thank you.

Speaker 4

And then I'll go to my second question.

Speaker 5

Yes, Laveau. Yes, for sure, there was a positive impact from the change in regulation for sure. The banks they have less capacity to issue this type of tax exempt products. But it's almost impossible to say how what's the percentage of the increase in net new money coming because of Chisor because all the other factors. It's not just one factor.

Speaker 5

I understand that most of the questions here is they are trying to find one explanation. There's not one. There are many, okay, many combined levers, some or most of them that we control, some of them that is the market. The interest rate 11.5% is different from 13.75%. We always said that, okay.

Speaker 5

So it's important to understand that it's not one point, okay. So again, we always said that we don't need like a much better macro environment and we don't need interest rates like to go to 8%. We don't need like a stock exchange to perform well like to go back to bring that new money. So we are not macro dependent. So that's the point.

Speaker 5

And we will not have only one explanation.

Speaker 4

Okay. That's great. Understood. So if I may, my second question, and I will shift the discussion to the credit card business, because I saw you continue to expand its active credit card base, but I know that the most expanded drop for the 2nd consecutive quarter here. So guys, I just wanted to understand if this is solely related to the macroeconomic backdrop that we are leaving or if this could be related to clients that use your credit card moving to other banks or fintechs.

Speaker 4

Think that a sort of credit card offers a similar 1% cashback as several other benefits. Any color on that will be helpful. Thank you again.

Speaker 5

Okay. Yes. About credit cards, basically, we have 2 levers here to work on. First of all, today we have 2,000,000 eligible clients, okay? So out of the almost 5,000,000 clients, only 2,000,000 clients from all the brands are eligible to have our credit card, okay?

Speaker 5

So if you get the number of issued credit cards, around 1,000,000 cards, okay? So it's a 50% penetration. So here we have 2 levers. The first one, it's improve the benefits that we or the choice we give to our customers, okay? So we just release the miles points for credit cards.

Speaker 5

So we believe we can capture clients that perceive more value added on points than on invest back. So that's one. And the second one is how we make the other 3,000,000 clients eligible. Of course, working with the right loss absorption, with the right level of risk. So we have been working on increasing the number of eligible clients.

Speaker 5

So we believe that we can go back on track to capture more growth on credit cards in the next quarters.

Operator

Okay. Next question is from Neha Ubersawala from HSBC. Neha, you may proceed.

Speaker 10

Hi, thank you for taking my question and congratulations on the results. On the cost of services, I think the control over COGS was quite impressive, which also led to the gross profit expansion. Could you talk a bit about that, how sustainable that is? What leverage did you pull there for such a good control on the cost of services? And my second question is on the loan book.

Speaker 10

If I'm looking at the correct numbers, the credit portfolio actually went down 14% quarter on quarter. So if you could just explain why the decline in the credit portfolio? Thank you so much.

Speaker 3

Hi, Neha. Thank you for the question. First of all, the COGS, I think that's reflection of our operational leverage and our capacity to do more business without increasing costs. And you can see both of those effects in COGS and SG and A and this trend should go towards the year. And if I may go to the loan book question, basically what we did, we securitized part of our loan portfolio and moved that to our corporate bonds as a financial inventory.

Speaker 3

And this is part of our risk recycle process and we should use those corporate bonds as collateral for REIT operations against our clients and eventually to sell those operations in your ecosystem.

Speaker 10

If I understand, this is new, right? You had not done this in the prior quarters. So what was the motivation regarding doing this?

Speaker 3

It's new. This is the first time that we did that. And the idea is to create a process to recycle the risk in your loan book. And it's the first time and we keep seeing that in the future.

Speaker 10

So was the asset quality worse than expected? What was the reason for this recycling of the loan book?

Speaker 3

No, the quality of the assets are the same as always, low risk, good clients, a good portfolio. And the idea here is create instruments, recycle risk at the same time that we can provide new products to our clients. And by doing that, we can increase our capacity to originate new assets. At the same time that we create new products through our retail through our retail distribution. And basically, that is the idea.

Speaker 10

Okay. And also the provisions this quarter was low. Is this related to this recycling?

Speaker 3

It's partially related to this recycling and partially related to some operations that we cover, credit that we cover from other periods.

Speaker 10

Okay. Okay, great. Thank you so much.

Speaker 3

Thank you for your question.

Operator

It's okay. We are up on the hour. So thank you, Mafra. Thank you, Victor. Thank you, all of you participants today.

Operator

I apologize once again for our troubling connections. And we are available the IRR teams are available for any further questions. Thank you once again and we see or we talk to each other on the next quarter. Thank you.

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Earnings Conference Call
XP Q2 2024
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