XP Inc. (NASDAQ:XP) Q3 2023 Earnings Call Transcript

XP Inc. (NASDAQ:XP) Q3 2023 Earnings Call Transcript November 13, 2023

Antonio Guimaraes: Good evening, everyone. I’m Antonio Guimaraes, Investor Relations at 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 third quarter’s earnings call. This quarter, we had a strong set of results, which will be presented by our CEO, Thiago Maffra, and our CFO, Bruno Constantino, who will also be both available for the Q&A session right after the presentation. [Operator Instructions] And before we begin our presentation, please refer to our legal disclaimers on page two, 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 Maffra. Good evening, Maffra.

Thiago Maffra: Thanks, Antonio. Good evening, everyone. Thank you for joining us today on our 2023 third quarter 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. In the third quarter 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 BRL1.1 trillion in client 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 BRL1.1 billion, up 11% quarter-over-quarter and 5% year-over-year.

Our discipline in cost control has reflected in the best efficiency ratio in the last three years at 37.3%, down more than 400 bps year-over-year and 100 bps quarter-over-quarter. As a result of our efforts, ROE rose 58 bps quarter-over-quarter, reaching 22.6%, the highest during the year. And last but not least, our diluted earnings per share increased 7% quarter-over-quarter to BRL1.96 also the highest in our history. Moving to the next slide, I want to reinforce our three focus points. First, leadership investments by protecting and expanding our core business. In this quarter, we have incorporated Modal’s financials and operations which should be fully integrated in 2024. At the same time, we have reached an 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.

Second, superior product offering translated into the continuous improvement of our new verticals performance. New Verticals revenue grew three times in the last two 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 client 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 the proper time. Lastly, client focus, 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. High NPS directly translates into high share of wallet and we see this consistently in our client base. Our strategy is centered and providing advisers with the best tools, technology and products so they can better serve our clients. In this direction, we have evolved our incentive plans to advisers 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 Modal’s integration.

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Q&A Session

Following an initial recovery in capital markets activity in the second quarter, DCM volumes have continued to increase in the third 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. On the profitability front, we have increased three key metrics for XP, 74 bps in EBT margin quarter-over-quarter with higher operating leverage, plus 58 bps on ROAE quarter-over-quarter, one of the main metrics we look going forward, plus BRL0.13 in diluted EPS despite the issuance of 18.7 million shares related to Modal’s acquisition in the quarter.

Talking about Modal, we already have fully consolidated Modal’s financials into our third quarter results. In this first quarter of integration, Modal has accounted for BRL161 million in top line and BRL111 million in SG&A. Lastly, in accordance to what we have been saying about returning more capital to shareholders, we just announced an additional dividend of $0.73 of per share to be paid in December 22, contributing to the optimization of our capital structure. Now I will hand it over to Bruno so he can discuss this quarter’s financials. Thank you.

Bruno Constantino: Thanks, Maffra. 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. BRL4.4 billion, a 17% growth quarter-over-quarter and 14% growth year-over-year. After discounting Modal’s revenue contribution of BRL161 million, XP ex-Modal revenue would be BRL4.2 billion, 10% higher than our previous record of BRL3.8 billion reached on third quarter ’22. The sequential growth in gross revenue was mainly led by retail, which was responsible for 45% of the growth quarter-over-quarter. Incorporate 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 DCM, 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 second quarter to 11.9% in third quarter. On the next couple of slides, we are going deeper into retail revenue, first, focus on retail core and then on new verticals. 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 BRL718 million, all-time high fixed income quarterly revenue, representing a growth of 24% quarter-over-quarter. Our previous record was in second quarter ’22 when fixed income revenue reached BRL580 million.

As you know, fixed income revenue has two main components. Secondary trading and distribution of primary offerings. The later had a growth of 100% quarter-over-quarter and was five times the revenue of first quarter 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 DCM pipeline, but we expect the third quarter fixed income revenue to be the best quarter for the year. Funds platform had a slightly decrease of 5% quarter-over-quarter, reaching BRL323 million, as expected, considering the second quarter had performance fees, which is seasonal and recognized at the end of every semester.

Excluding revenue from performance fees from second quarter results, third quarter was 8% higher quarter-over-quarter. And lastly, equities revenue increased 6% sequentially to BRL1.1 billion, positively impacted by Modal, approximately half of the growth and a continuous gradual improvement over time in equities. Moving to slide nine. Our new verticals continue to grow well, reaching a total of BRL442 million in third 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 cards revenue, reaching BRL259 million, a growth of 12% quarter-over-quarter and 77% year-over-year. When we compare our quarterly growth in TPV with the market based on recent data released by ABAX, 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 third quarter results. The two key messages we delivered last quarter still stand. Number one, XP is a cyclical grower company. Core retail revenue is the best demonstration of this cyclicality. The peak of BRL8.3 billion in revenues in 2021 has not been reached yet again. Third quarter ’23, last 12 months, core retail revenue improved from last quarter to BRL7.6 billion, reducing this gap that was BRL1 billion last quarter to BRL740 million this quarter. It is worth remembering that in 2021, our clients’ assets were BRL815 billion. Our active clients were 3.4 million and our IFAs were 10,300.

As of third quarter this year, the same KPIs are BRL1.1 trillion of clients’ assets, 4.4 million active clients and 14,300 IFAs. The development of the main KPIs in investments fostered the way for potential upside as the market recovers. And number two, new verticals continue to help offset macro headwinds, diversifying our business and increasing the resilience of our model. If we can 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 debate 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 third quarter ’23 results. 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 BRL519 million, 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 million 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 million, a growth of 105% quarter-over-quarter and 41% year-over-year.

The positive result was led by DCM activity, as I already said, rewarding some underwriting we did with good corporate quality names in the first quarter this year when DCM market became dysfunctional after Americanas events. We do not expect the same magnitude of revenue for Corporate and Issuer services in the fourth quarter. Moving to slide 12. Total SG&A, excluding revenue from incentives, has increased to BRL1.5 billion, as already anticipated in our previous quarter. The main impact on third quarter were inclusion of Modal expenses, which represented BRL111 million and the seasonal expenses related to the Expert Event around BRL60 million. The ratio between people and non-people expenses were 68% people and 32% non-people, in line with the long-term trend of 70% and 30%, respectively.

When we gave our SG&A guidance between BRL5 billion and BRL5.5 billion for the year, Modal was not being considered. Even including Modal in our numbers, the SG&A guidance remains the same. On slide 13. As we said on the last earnings call, we remain focused on cost discipline, keeping both efficiency and comp ratios near all-time lows since our IPO. Last 12 months efficiency ratio decreased from 38.3% to 37.3% quarter-over-quarter, close to our lowest level since fourth quarter ’19 when we reached 37.1% efficiency ratio. Compensation ratio decreased from 26.8% to 25.7% quarter-over-quarter, the best level in 12 quarters sequentially. It is natural to assume higher levels of comp ratio 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. EBT, a good proxy for earnings power, reached BRL1.157 billion this quarter, an 18% growth year-over-year and 20% growth quarter-over-quarter. It is our all-time high quarterly EBT, beating the fourth quarter ’21 EBT at the peak of the last bull market side. Our EBT margin has also improved in the quarter, increasing 86 bps year-over-year and 74 bps quarter-over-quarter, driven by operating leverage. Excluding Modal, our EBT margin would have been 28.8%. Our year-to-date EBT margin is in line with our annual guidance between 26% and 32% from 2023 to 2025. Moving to the next slide. Our net income also benefited from operating leverage reaching BRL1.087 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. 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, third quarter ’23 presented a 26.3% margin, a 123 bps decrease quarter-over-quarter and the 218 bps decrease year-over-year. Export 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. Our return on average equity has continued to grow sequentially. In third quarter ’23, our annualized ROAE reached 22.6%, increasing 58 basis points quarter-over-quarter despite Modal’s effect, which added BRL2 billion 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, it is our desire to gradually reduce the level of our capital ratio at XP in platform. In second quarter ’23, our capital ratio was 24.2%. We ended third quarter ’23 with a capital ratio of 22.1%. The reduction quarter-over-quarter was mainly driven by the dividend payment of US$320 million in September. 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 US$400 million. Now both Maffra and I will be happy to take your questions.

A – Antonio Guimaraes: Great. Thanks, Bruno. So now we’re moving onto the Q&A session. [Operator Instructions] The first one today is Mr. Jorge Kuri from Morgan Stanley.

Jorge Kuri: Can you hear me? Hello? Can you hear me? Hello?

Antonio Guimaraes: Hello, now we hear you, Jorge.

Jorge Kuri: Great, thank you. Thanks and sorry for that and congrats on the results. I wanted to ask now that we’ve seen more of the rate cuts this quarter vis-a-vis 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 is evidently super important for the narrative on XP, which is the debate on the terminal rate for Brazil. So the focus service 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%. 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 like cannot go below 10% rates, at least during 2024. Thank you.

Thiago Maffra: Hello, Jorge. This is Maffra. 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. When we are talking about retail clients, they are lagging. They will not move just because we see 100, 150 bps cut on SELIC rate. If you look the level of interest rates still very high. But more important than that, if you look at the performance of riskier assets in the past 12 or 24 months, almost every asset class is losing to SELIC rate. The only asset class that’s not losing to SELIC rate is basically the LCIs, LCAs, the [indiscernible] SMT, CGs from banks, when you grow [indiscernible] to 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. So that’s my view. So we don’t see yet any coming back from retail clients.

Bruno Santos: If I may add just one data point, Jorge, to what Maffra just mentioned, a moderate portfolio, moderate, not aggressive in the past two years is probably below 60% of the SELIC rate. So that pretty much the picture that we have right now. And in this environment, it’s hard to see the flow coming, although usually in moments like this is especially the good moment to invest in those asset classes. 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.

Jorge Kuri: 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 envision the retail investor base as such.

Bruno Santos: 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, 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.

Jorge Kuri: Great. Thanks for that. Congrats again.

Bruno Santos: Thanks, Jorge.

Antonio Guimaraes: Next one in line is Mario Pierry from Bank of America.

Mario Pierry: Hey, guys. Good afternoon. Let me ask then two questions. One is a follow-up to Jorge’s question. But if you could discuss a little bit more about the productivity of the IFAs, right? Because we see your inflows on a standalone basis of BRL14 billion only in the quarter. This is a drop of 60% year-on-year or your IFA base expanded by 25%. So can you — I guess with the high rates negative impact, but like the productivity of your IFA network has declined quite a bit. 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.

It’s a quick one related to Modal. 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? Have you already achieved that? If you can give us some color on that also, that will be helpful. Thank you.

Thiago Maffra: Thank you, Mario. This is Thiago. So to your first question. For me, it’s the same reasons that we already 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 and when the market comes back, we are ready to capture market share and growth. But again, for the same reasons, the level of productivity is much lower. On your second question about Modal. We received the approval in July 1st.

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. Yes. For that to happen, we need Modal and Modal’s clients because we have already migrated part of the clients to XP and Rico brand to deliver a bottom line above BRL150 million. So that’s the threshold to make it accretive in EPS base and we believe we can achieve that next year.

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

Bruno Santos: Was not relevant, something around BRL20 million.

Mario Pierry: BRL20 million. Okay. And then to go back on the question about the 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, right, 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? How do you feel about that?

Bruno Santos: 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 this 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 question, we still feel confident about the potential. We are planting the seeds. 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 fund’s 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 bigger. The ecosystem now is much bigger. It’s that slide that I talked about for the third quarter consecutively. 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 an all-time high. So we believe there is room we to go in terms of market share.

Mario Pierry: Okay. Thank you very much.

Antonio Guimaraes: Thanks, Mario. And now next one is Thiago Batista from UBS. Batistam can you hear us? So let’s move to next one and try to get back to Batista later. Next one then is Mr. Tito Labarta from Goldman Sachs.

Tito Labarta: Hi. Good evening, Antonio. Good evening, Maffra, Bruno. Thanks for the call. Thanks for my questions. A little bit of a follow-up, but maybe basically a little devil’s advocate, Bruno and that slide. You mentioned on slide 12, right, where the core revenues are down despite all the investment that you’re doing. I understand the cyclical in 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, which is also why your revenue is down and as rates do come down, do 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?

Bruno Santos: Sure, Tito. 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, I mean, we’ve been innovating in the IFA industry. What we are doing, we are invest in people that are outside the financial industry that want to make a career change, we use how 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 Modal’s training to form new advisers because we strongly believe this is a business of relationship, a 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. 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, the core one. Your second part, I forgot if you can repeat?

Tito Labarta: I mean, I guess, it’s just a little bit related to the level of rates. I mean, do you need rates to go below the 9% level to see that inflection throughout 2021 rate and rates were coming from as well as 2%, right? So how low do you think rates need to go to get — to see the benefit?

Bruno Santos: 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, it is a good trend, but at a slower pace than we would like. But again, we do not control that.

Tito Labarta: Sure. 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? So you are seeing outflows. Any color you can give on gross inflows you’re doing?

Bruno Santos: 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 million of annual revenue, it’s allocated into retail client assets. So there we have more volatility.

Tito Labarta: Okay. Great. Thank you, Bruno.

Antonio Guimaraes: Thanks, Tito. Next question comes from Gabriel Gusan from Citi.

Gabriel Gusan: 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. Can you remind us why is that? What’s the driver of the ups and downs. Thank you.

Bruno Santos: I’ll take that. Gusan, thanks. Other revenue, by definition, it’s everything that we cannot allocate in the other segments, retail, institutional, corporate and insurer 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 third quarter, specifically, we had a some one-offs impact that made the revenue higher that we do not see happening in the following quarters. Like, for example, we had the termination of this pack. There was a financial positive in that with an associated expense. So net impact for EBITDA was zero, but something around BRL40 million impacted positively the revenue and also negatively impacted the SG&A.

And regarding effective tax rate, third quarter, basically capital markets 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 40% tax bracket. So it pushed up the accounting effective tax rate. 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 higher going forward. But that’s on an annual basis — on a quarterly basis, there is going to be volatility.

Gabriel Gusan: Perfect. Thank you.

Antonio Guimaraes: Great. Next one is Eduardo Rosman from BTG.

Eduardo Rosman: 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 asked that because as far as I know, your clients that invest a lot, probably you have to offer like cash back or invest back. You have a lot of benefits. Your clients do not go into revolving, so I just wanted to try to understand this 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, 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 attract more clients that don’t have a lot of AUC with you using the credit card to do that, right?

So thanks a lot.

Thiago Maffra: Thanks for the question, Rosman. 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 should 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 at NPL, of course, we have a big part of the — our portfolio, something like BRL4.5 billion to BRL5 billion out of BRL7 billion, that’s collateralized. So the NPL is very low, okay? 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, it’s 2%. So we have two 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? So we have been expanding the portfolio at Rico brand that has a higher NPL, but with a very good LA ratio when you look at the revenues over provisions. So these two are very good.

Eduardo Rosman: No. Great, Maffra. 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 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% the net income, right? 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. Thanks.

Bruno Santos: You want me to take that, Maffra? Yes, the answer is yes. We are going to keep returning capital to shareholders through buybacks or dividends. And what I mentioned in the presentation, when we look at our capital ratio at XP Inc. level, we ended this quarter, third quarter above 22%. So it’s too under leverage. We are conservative in terms of our balance sheet. We are not going to be where the banks in Brazil, for example, that we compete against usually are with capital ratio around 14% to 15%. 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 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. And with that in mind, yes, you can expect us to keep distributing capital to shareholders as we move forward. Great. Thanks, Bruno and Maffra.

Antonio Guimaraes: Thank you, Rosman. Now let’s try to connect with Batista again from UBS. Batista, please.

Thiago Batista: Hi, guys. Can u hear me?

Bruno Santos: Yes.

Antonio Guimaraes: Yes.

Thiago Batista: Okay. Sorry for the other time. Yes. I have one question about the profitability of XP. You already mentioned in the past that we should achieve 30%, but when do you believe this is possible, would be 10 years, five years, I want to have a time horizon 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 [indiscernible] ROE of 20%. So trying to see when — if it’s three, five, 10 years or so to achieve this level. And the second question is a follow-up about that new money. I know that you answered already a lot of questions about it. But how negative has been the latest, let’s say, LCA, LCI, LIG. 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, LCA is difficult, but at least LCA. So if this is linked with your corporate structure?

Bruno Santos: I’ll start with the ROE question. We didn’t set a target for ROE. The 30% that you mentioned, Thiago, is basically a mass equation based on the second quarter earnings results that we said, look, if we take out of the capital the excess capital, and we also discount from the BRL977 million of net income in the second quarter, the remuneration post tax of that excess capital and we annualize that new net income and divide it by the new equity, we would get close to 30%. So that was just a 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.

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 — we are not going to take our eyes out of the ball in terms of efficiency ratio to 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. Regarding the net income, was the net inflow question, right.

Thiago, the second one.

Thiago Batista: Yeah, the second question is about the LCA, LCI and LIG. How bad things —

Bruno Santos: Yes, the impact. It’s hard to say how much, right? We know there is more than BRL 2 trillion sitting on cash in the system right now, more than that. 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 itself. And XP does not have the balance sheet that our competitors have. We do not want to have — and in times like that, we have less products like this one. Of course, we have a lot of fixed income products with good returns. We try to compensate that with other offers I mentioned in past, I don’t know, in calls or conversation with investors. For example, we did an agreement with one 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 bank. That’s a certainty.

Thiago Batista: Last follow-up, sorry, Bruno. But in your corporate structure to try to become a bank is trying to issue at least LCA or not?

Bruno Santos: 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. And by having a bank, it gives 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 you an example, we have a corporate bond issue at XP Investimentos S.A., roughly BRL 2 billion. It does make sense. The bank can issue a financial bill at a cheaper cost and easily. So it makes part of the strategy to have a better corporate structuring and is natural. We are moving forward as we develop the bank. It’s not to have because then it becomes a balance sheet business.

Thiago Batista: Thank you. Very clear.

Antonio Guimaraes: Thank you, Batista, and now we have Neha from HSBC. Hi, Neha.

Neha Agarwala: HI. Congratulations on the result and thank you for taking my questions. Just had a quick clarification on what you mentioned about the Modal transaction. So what was the impact this quarter? And when do you expect the transaction to be accretive? And what is the level that is required to be accretive? Just clarification of that is on very clear. Thank you so much.

Thiago Maffra: As Bruno mentioned, and thanks for your question, Neha. As Bruno mentioned, the net income impact was close to BRL20 million positive, okay and we expect the due to be accretive in 2024. As Bruno mentioned, to be accretive, we have to make 150 million net income or more, okay? So that what we expect for 2024. Okay. Super clear. Thank you so much, Thiago.

Antonio Guimaraes: Thanks, Neha. And now we have Geoffrey from Autonomous Research.

Geoffrey Elliott: Hello. Thanks very much for taking the question and apologize for the background noise here. A quick one on the DCM revenues. Clearly, there were some big DCM deals in the quarter. Was there also an impact to retail revenues from those, I guess, on the distribution side? And could you help us quantify it. Thanks.

Bruno Santos: Yes. DCM, as you know, there is a secondary trading part and the primary issuances part, that is the channel fees. In this quarter, we do not disclose, Geoffrey, exactly the numbers between secondary and primary. What I can tell you is that secondary is it still the most relevant one, and it was more relevant than primarily in the third quarter this year. But when we compare to previous quarters, the primary component of revenue in third quarter compared to second 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 these historical revenue in a quarterly basis of BRL718 million.

Geoffrey Elliott: Okay. Thank you. And then just a quick clarification. The capital adequacy ratio at XP Inc. You’ve been discussing of 22%, just over 22%, do you disclose the numerator and denominator on that anywhere?

Bruno Santos: Yes. Basically, our total RWA as we calculated, it would be around BRL78 billion. So basically, we have a balance sheet north of BRL230 billion. So 1/3 of our balance sheet is assets with risk. The other parts, basically, no risk assets.

Geoffrey Elliott: Great. Thanks very much and apologize again for the background noise.

Antonio Guimaraes: No worry, Geoff. And now the last question from Yuri Fernandes from JPMorgan.

Yuri Fernandes: Thank you, Bruno, Maffra. I will limit myself to one question just on expenses here. This quarter was a little bit confusing, right? You had Modal, revenues were super strong. And I think this also usually trigger higher expenses. But you are within your guidance, right? Even if we assume another profit similar to the third quarter, you still will be able to deliver your SG&A guidance even with Modal. So just some qualitative tips from you guys. How do you see expenses? Do you believe expenses should, I don’t know, accelerate because for some reason, it invest more or 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 to understand a little bit the outlook because you already made it clear during the call that revenues are not totally there yet on retail, like there are some improvements here, some improvements there, but revenues are still from my take here a little bit challenging. But on expenses, you are doing a good job. So I would like to hear from you your take on expenses. Thank you.

Thiago Maffra: Thank you, Yuri. Going to your question, as Bruno already mentioned, this quarter, we have some impacts, okay? The first one is export. We have the revenue and we have the expense. We have the pack that Bruno mentioned. And of course, we have a Modal that we consolidated number that we opened at it was BRL111 million, okay? So if we sum up as FX, it’s above BRL200 million, 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 will be there. Remember that the guidance we gave was excluding Modal, and now we are including Modal in the number. 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 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 performed and so on. We don’t know when we will see this recovery on the retail revenues. But once it happened, 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.

Yuri Fernandes: Super clear, Maffra, and congrats on the quarter.

Antonio Guimaraes: 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’ll be available with the IR team to discuss the results with you later, and have a good night, everyone.