Neha Agarwala: Perfect. Thank you so much.
Andre Parize: Okay. Next one is Mario Pierry from Bank of America. HI, Mario, now you can make your question.
Mario Pierry: Hey, guys. Can you hear me? Parize, can you hear me?
Andre Parize: I can hear you. Can you hear us?
Mario Pierry: Sorry. Perfect. Sorry. My question, let me ask you if you can give us any color on net new money so far in the year, if you can separate that between inflows and outflows? Because I do think you have made comments in the past that inflows remain very high but outflows had also increased. And then related to that question is, when we look at your AUC, it grew 19% year-on-year. But if I take inflows out, your AUC grew only 7%, so which is significantly lower than CDI. So I was wondering how do you see the performance of your clients’ portfolios? How can that improve? Is that something that you think could be hurting some of the inflows that you’re seeing? Thank you.
Bruno Constantino: Okay, Mario. Regarding the explanation about gross inflows and outflows, honestly it hasn’t changed that much about what I’ve already said in the past. So basically – and we monitor that on almost on a daily basis. When we look at the core, the engine of XP being affluent clients, B2B, B2C outflows and compared to the client assets, the percentage of outflows is pretty much stable over, I would say, the past seven, eight quarters. So it has not changed, okay? And the inflows overall, they have increased in 2023 compared to 2022. What has hurt the net new money more is the outflows from companies, corporate, it’s really volatile. But remember that we do have in retail SMBs and corporate clients that have an annual revenue below the threshold of BRL700 million and also the private, but not the engine.
So that scenario has not changed, and we haven’t seen any big change compared to the past quarter. Regarding the remuneration of our clients and the growth of market appreciation, you need to remember that our portfolio overall, on average, when you look at our portfolio and total client assets more diversified. And to be more diversified, it means that you’re going to own more equities, you’re going to own more move-to-market funds, alternatives and so on. In the past year has been tough for all those asset classes, as you probably know. And most of the funds and someone they are below the SELIC rate, for example. So on average, yes, the portfolio has not performed well, but we do not see that impacting outflows. We have the advisers, the clients are aware of the portfolio.
You need to have a longer time horizon in the long-term, it should pay off to have this type of portfolio diversification.
Mario Pierry: Okay. Have you done any exercise where you monitor how well portfolio client – portfolios are doing in other platforms? Do you think the performance from your clients has been worse or not? Or is this something right – is there room for you to improve – because again, like – I think, was up like 20% plus last year. Sure, the book of the performance came in the second half of the year. But I’m just wondering if you think there’s something else you can do, like, I don’t know, training IFAs or getting more involved in client portfolios.
Thiago Maffra: This is Thiago. There is one slide in the presentation and I mentioned, we have a very strong focus on quality and that means for investments being the best financial planning service provider in Brazil. So we have been doing in the past, I would say, 1.5 years a lot of change here in the company, very focused on having the best service to our clients. It’s not only about like having the best portfolios, but goes beyond that, like tax planning, section and all the other stuff that usually only private clients have. So we have been scaling that training, all the IFAs and internal advisers. So we have been doing chains here. Today, we have a new segmentation in the company. We have a new – not a new CIO, but we have – we took the CIO from the private banking and now he manages all the segments in the companies, all the locations.
So, we have changed incentives to our internal advisors. We have changed some of the incentives for their face. So, we have been doing a lot of things like to have them to follow the correct allocation for all the clients. So, yes, we have been doing a lot of stuff on that. To your point about how it’s compared to other companies, I would say that the easiest way to compare because it’s easy to get is if you compare the exclusive funds, okay. If you look the funds that we manage here through Chispa asset, we have been doing, I would say, good compare like to other places. You can compare all the private banks and we have been doing okay, bad – not very good against the Selic rate, as Bruno mentioned, but okay or good when you compare to other portfolio managers for exclusive funds.
So, that’s very easy to check.
Mario Pierry: Okay guys. And just final question, on the NPS score, right, you used to show that. I don’t know if I missed it, but like are you seeing your NPS scores relatively stable?
Bruno Constantino: Yes, was pretty much stable, I believe, it’s 72 in the fourth quarter, Mario.
Mario Pierry: Okay. Thank you. Okay.
Operator: Next one is Tito Labarta from Goldman Sachs. Hi Tito, now you can make your question.
Tito Labarta: Hi. Good evening everyone. Thanks. Good evening Marfa and Bruno. I guess a bit of a follow-up here on the efficiency and margins. Marfa, you mentioned you continue to focus on efficiency and you have operating leverage. But how dependent is that operating leverage on sort of cyclical environment getting better? I mean I understand the cyclicality of the business. But I mean you mentioned that the second half of the year expense is sort of a good base to think about. I mean just annualizing 1Q expenses that would imply your expenses have been going to grow roughly 15%, right? So, to have some operating leverage with that, you need revenues to grow faster. So, how do you just think about that potential improvements in EBT margin to get to the guide, the longer term guidance that you have given, should that be sort of linear improvements?
Is it very dependent on rates coming down, things improving? Just to understand, and particularly in this quarter, right, the margin was a bit lower. I know there were some one-offs – is there just some seasonality in 4Q because 4Q last year, EBITDA margin is also a bit lower, so just to think about how those margins improve from here? Thank you.
Bruno Constantino: Hi Tito. I would say that, yes, it is dependent of the macro part of it to have this operating leverage kick in our business, I mean has been growing at a slower pace than in the periods of bull market, still growing. But with margins healthy, but at the low end of our guidance for EBT margin. And we have said that. We said, look, we expect the margins – annual margins because on a quarter basis, it’s – as I have said, it’s volatile. But on an annual basis, we expect to go from 26% to 32% from 2023 to 2025. And in that assumption, it is embedded in a better environment and scenario for investments as we move forward. We are not there yet. So, we – all of the businesses that we have been growing like cards, for example, it has a lower margin compared to the 26% EBT margin, for example, so of course, as the relevance of this business growth.
And the other part is growing less because of the macro and it’s the most relevant part in our business. EBT margin will struggle to accelerate the pace really faster even with a strict cost control, but – so it’s not a linear. I don’t see this as a linear movement going forward, okay, because we do have – and that’s the point of that slide that I presented regarding the operating leverage of our business. That’s why when we gave the guidance for our net income in 2023, it was a large spread, BRL3.8 billion, with BRL4.4 billion, and we ended delivering the BRL3.9 billion. But why was that, because if the macro change, it is for us another scenario that we do not control in, we do not have a crystal ball to know exactly what it’s going to be.
It could be much higher. That’s exactly the operating leverage of the business that we carry in our ecosystem. So, the macro, it is important to see the EBT margin expanding forward.
Tito Labarta: Great. Thanks Bruno. That’s helpful. Maybe, I guess one follow-up there. In terms of also how you think about maybe the seasonality, if we look at B3 volumes sort of continue to be weak. So, could there be more short-term pressure on that EBITDA margin, at least in the first half of the year because you are not seeing volumes sort of recover yet. Rates are still in the double digits. I know you are not going to give short-term guidance. But just to think about sort of the current dynamics that we are still currently seeing in the markets right now. Is it fair to assume perhaps a little bit of short-term pressure?
Bruno Constantino: I don’t know if a short-term pressure. What I can share here, Tito, are two points. Number one, in terms of – for example, in terms of the efficiency ratio going forward, just remember that when we have the first quarter of 2024, we are going to take out the first quarter of 2023. In the first quarter of 2023, the SG&A was helped by a very low share-based compensation. If you go back there and look at the numbers, it was BRL53 million of share-based compensation in the first quarter 2023 and in the fourth quarter now, BRL166 million. And that BRL53 million was low because we had the impact of the layoffs and so on cancellations, etcetera. That had a positive impact in the first quarter. So, that’s one thing to have in mind for the short-term.
The other point is we do have seasonality in our results. If you go back in the last 5 years and you do an average, you are going to see that the first quarter of the year is always the weakest quarter for the year, okay, because that’s how the business works, especially at our core business investments. So, the last 5 years, the average for revenue for EBT and for net income in the first quarter, 21% of the total of the year, not 25%, so it’s lower. And then second quarter and third quarter tend to be better. Fourth quarter is trickier because we have the performance fees, you might have some capital market activity. But in terms of the investments, business days and holidays and so on, it’s not as strong as the third quarter, for example.
So, we will see. That’s why I always like to guide to look last 12 months, look at the year, look last 12 months, take one quarter and put the other with the same seasonality, because looking on a quarterly basis, you can get it wrong. It can be a very good and you are going to expect to continue, and that’s not what happens or the opposite way around.
Tito Labarta: Great. Thanks Bruno. One quick just clarification, you didn’t really have much incentives from B3 and some of the card companies. Is this a new normal now, should we no longer really expect those incentives going forward?
Bruno Constantino: No. From the Visa and types of things, no, we do not expect to have anything relevant there going forward. From B3, we might. I mean it’s – they have its slot because that’s an annual process. But the main change that you saw, it was related in the fourth quarter this year to the fourth quarter ‘23, sorry, with the fourth quarter ‘22 was due to some incentives that we received from Visa that this last year, fourth quarter ‘23, it didn’t happen. But we are always looking for incentives to value our ecosystem, our [indiscernible] and any player that want to access our ecosystem knows that we have a premium, I would say, type of client because we are focused on the investors.
Tito Labarta: Okay. That’s great. Thank you, Bruno.
Operator: Okay. Next one is Renato Meloni from Autonomous. Hi Renato, now, you can make your question.
Renato Meloni: Hi Thiago and Bruno. Thanks for the question here. I wanted to get some more clarity on the Issuer Services dynamics for revenues. So, it came from a very strong 3Q that was affected by particular reasons there. But again, you repeated a very strong quarter, you had higher volumes, but you also mentioned that M&A helped. So, I am trying to understand here to which proportion M&A contributed? And going forward, what’s a recurring level of revenue in this segment that you expect? Thank you.
Bruno Constantino: Yes. The third quarter was really strong because of DCM activity. You are 100% right on that. And – but again, we are growing our investment banking franchise as we move forward. The whole ecosystem, what Maffra mentioned, in terms of the potential for wholesale in our ecosystem, considering we already have the relationship with the corporate clients giving them access to capital markets through our distribution and so on. It’s important. It plays a role. Those things, they take time. So, everything is recurrent, but the point is it’s not a straight line. You have some types of revenue that, by nature, on a quarterly basis, they are more volatile. M&A is one of those. And M&A is a business that takes time to build.
You need to build the portfolio, you need to build the relationship, you need to get the mandates, and that’s a long-term view. And in this fourth quarter, we do not disclose exactly how much was the revenue, but it was relevant in terms of contribution. It was by far the highest growth quarter-over-quarter. And that’s an ongoing business that we are not where we believe we can be in the future. So, we are going to keep investing in our franchise business and the wholesale platform for our clients.
Renato Meloni: And do you think you have a baseline revenues here that you can disclose, or still expected to be volatile?
Bruno Constantino: I can’t disclose a baseline. The baseline that we have, for example, is the DCM business. This is like a very, I would say, I don’t want to use the word, current [ph], but it’s more stable. It’s less volatile. But again, you saw the third quarter, DCM, was the best quarter for DCM activity with some volatility.
Renato Meloni: That’s clear. Thank you.
Operator: Okay. Next one, it’s Jorge Kuri from Morgan Stanley. Hi Jorge, you can make your question.
Jorge Kuri: Hi and good afternoon everyone. Thanks for taking my question. I wanted to go back to Slide 11, where Bruno talked about the potential for unlocking potential for operating leverage. You highlighted Bruno, 1.5% take rate in 2021 versus 1% in 2023 and mentioned that that’s around a $4 billion revenue gap and I just want to understand why are you going back to 2021 to that 1.5%? How is that achievable again? And I mean I am guessing you purposely pointed it out because you do think that that’s something where we could head or the business would head. So, under what circumstances could you be, again, at 1.5% take rate? Does it take a year, 2 years, 3 years? And maybe that’s not the taker that you can get to that was sort of like extraordinary times given where rates were I think is a leak average less than 5% that year, which is just like any possibility for Brazil anytime soon.
So, maybe what do you think is achievable in terms of upside to your take rate, which sat at 1% in 2023, say, over the next 2 years? Thank you.
Bruno Constantino: Hi. How are you? The idea of this slide was not a guidance, anything like that, okay. That’s why I mentioned a math exercise. But was to remind all of us about the business we have in XP because sometimes, we have been through 2 years, very tough 2 years in terms of our core business investments. It’s been really tough for 2 years. And we tend to forget the type of business that we have in our core. When we put the market share of B3 for retail, to remind that, our market share has been pretty much stable around 50%, 48% and in the end of December, 48%, 4x our closest competitor. But that type of business can have a huge operating leverage. If we have, for example, a market where risk unload a lot of IPOs, capital market activity, individuals in Brazil that is sub-penetrated coming to the stock market to invest in equity, so on and so on.
In that type of environment, this operating leverage in our ecosystem can be huge. So, the math exercise is not to say, oh, if we have a risk on mold, we are going to have BRL4 billion additional in revenue without one single real in additional SG&A. That’s not the point. It can be BRL1 billion, can be BRL2 billion, can be the BRL4 billion. I don’t know. I don’t know what the take rate would be in such an environment. And you have a point because in 2021, probably we had very low interest rates in Brazil, 2%. We had the COVID, so different scenario, probably is not going to be like 2021. I don’t know what it’s going to be. But I know or at least I expect that at some point in time, because this business is cyclical, we are going to have or we are going to be in the part of the cycle where it’s going to be a bull market, a risk-on mode, a lot of companies coming back to the market.
And in this environment, our ecosystem as of today is much bigger than what it was back in the last bull market cycle. And we expect our business to really benefit from that scenario. So, that’s the message of this slide. Do not forget this because that’s what XP has in its ecosystem. It’s been dormant for the past 2 years.
Jorge Kuri: No, I appreciate that I fully understand it. But so just to continue on that thought, I am sure you know what your different business lines can do in a scenario of low rates, risk on volume growth? How prices on an apples-to-apples basis have changed because of competition and how the mix of your business also implies a change in the take rate. Just help us understand what is that attractive upside? Is it 1.1, 1.2, 1.3 take rates in a sort of like blue sky scenario or maybe it’s not, right? I mean maybe it could be 10% because competition just continues to do what it normally does, which is extract excess pricing from the market. So, just help us understand that because that’s obviously a really critical component of how your earnings look in 2024 and 2025, so that would be much appreciated. Thank you.
Bruno Constantino: I hear you, but if I give you a number, it’s going to be like giving a guidance. And honestly, I don’t want to do that. What I can tell you, it’s not about price competition. The price, I mean we – for equities, for example, brokerage commissions, with zero brokerage commissions back in 2018 with clear. We were the first one to do so. So, it’s not exactly about price. Competition can have an impact in terms of market share, in terms of flow and so on, but not about price in my view. So, the potential exists, how much the potential means in the bull market, it will depend. It will depend how strong the bull market is. It will depend on various factors that it’s hard to give you a number right now. But I am pretty sure that whatever the number is, is going to be relevant, considering the size of our ecosystem.
Jorge Kuri: Great. Bruno, thank you. Thanks for that.
Operator: Okay. Next one is Gabriel Gusan from Citi. Hi Gabriel, now you can make your question.
Gabriel Gusan: Hey guys. Good evening. So, we will move from my questions to the answer. One last is about your other operating expenses line. There is lining legal, administrative proceedings and agreements with clients. This line has been growing much quicker than anything else. It was like BRL2 million per quarter last year. It was somewhere around BRL12 million this quarter. And there were several news about like complaints recently in XP possibly having to reimburse those clients. Is this something related to what was mentioned in the news? It is something we should expect to continue growing at a quicker pace? Can you please shed some lines on it? Thank you.
Bruno Constantino: Hi Gabriel. No, I would – I mean it’s mainly – I would say it’s mainly related to Modal acquisition. When we onboarded the whole thing, we might have some part of it related to the cost cuts that we did at the beginning of 2023. Those things, they usually, they take like six months to kick in. So, we would hit in the second semester last year, but we do not expect anything unusual going forward here.
Gabriel Gusan: Perfect. Thank you.
Operator: Okay. Next one is Ricardo Bucio [ph] from BTG. Hi Ricardo, now you can make your question.
Unidentified Analyst: Hi guys. Thanks for the opportunity. I have one question here about credit. We haven’t seen that the unsecured portion of the client portfolio has been accelerating the growth pace, which also has been fallen by a higher loan loss provision, right? So, once you get more color on what we should expect for both of these lines in the following quarters and years? And what exactly is the client profile of the individual taking secured credit line? Thank you.
Bruno Constantino: Yes. Hi Ricardo. We have been growing our credit card business, as you know. And as we move down in XP and Rico, we go to unsecured credit card credit exposure. But with a client that has investments somehow with us can be a low investment, but has investment with us. What we monitor closely also is our loss absorption ratio, which despite the growth in NPL because of this unsecured part, the LA is above 2x for sure, and in a very healthy pace. But as you know, the credit card business, as you grow, it has this impact to recognize the expected credit loss right up front. So, yes, we monitor the economic sense of the business. And if it makes sense, we are going to continue to grow cautiously there, but we are going to continue to grow even if it hurts a little bit in the short-term, for accounting purposes, if it makes economic sense for sure.
Unidentified Analyst: And just a follow-up here, as you go to the lower part of the pyramid in its operation, when you look at cost of risk, that is the provisions divided by the unsecured portfolio, should we expect an increase looking forward because of this mix?
Bruno Constantino: I don’t know. I don’t know if you would see a higher provision ratio because of that. I think we are well provisioned right now. And we intend to continue like that going forward. I don’t know, Maffra want to add something?
Thiago Maffra: Yes. One important point is we don’t have any strategy to go to the bottom of the pyramid or focuses on investor clients, okay. So, that’s why when you look our NPL, it’s much lower than the market. Of course, we have different card segments for different types of clients. What I can say is when you look the collateralized credit card, it’s very low, clients with 50,000 plus invested at XP when you go to clients with less than 50,000 at XP, the NPL more than double. When you go to it triples compared like to the collateralized one, okay. But as Bruno mentioned, there was absorption on the worst cohorts still above two, okay, that’s very high. And when you talk about provisions against the NPL, we have very good provisions today. So, we do not expect like to have any additional provisions. But when you look the card portfolio is growing, so that’s why you can expect the provisions to grow, okay.
Unidentified Analyst: Okay. Thank you.
Operator: Okay. So, this is the end of our conference call. So, thank you very much for attending today. And the IR team is available for any further details that you might need. And we are going to meet you again in the next quarter. Thank you so much.
