XP - Q2 2024

Transcript

André Parize (Head of Investor Relations)

Good evening, everyone. I'm André Parize, IRO at XP Inc. It's 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 our 2024 second quarter earnings call. This quarter, the results will be presented by our CEO, Thiago Maffra, and our CFO, Victor Mansur, who will both be available for the Q&A session right after the presentation. 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. 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 filing section of the IR website. So now, I will turn it over to Thiago Maffra. Good evening, Maffra.

Thiago Maffra (CEO)

Thank you, André. 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 dedication to all shareholders. I would also like to extend a warm welcome to Victor Mansur, 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 BRL 1.2 trillion.

More importantly, we have observed a re-acceleration in our client net inflow this quarter, details of which we will elaborate on during the presentation. 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 4.6 million active clients, marking a 16% increase year-over-year. We had our all-time high in revenue, EBT, and net income. Gross revenue was BRL 4.5 billion for the quarter, up 21% year-over-year, an EBT of BRL 1.4 billion, 43% higher year-over-year, and BRL 1.1 billion in net income, with a margin of 26%.

This result reinforces and gives us comfort that we are on track to deliver our gross revenue and EBT margin guidance in 2026. We will go into more details on the financials later on. In terms of balance and profitability, we closed the quarter with a return on tangible equity of 27.2%, the highest in the past 2.5 years. XP's Managerial Basel was at 20.5% level. The EPS for Q2 2024 was 2.03 BRL per share, a 10% increase year-over-year, partially reflecting the share buyback that we have completed in the second quarter, 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 strict cost control, as it has been the case, we are expecting improving results for the second half. Moving on to the next slide, we'll look at our strategy tracker, reminding here the main levers of business growth. We'll dig deeper in each of them. Also, we'd like to highlight our gross revenue and EBT margin. If you remember our Investor Day back in December, we have shown our last twelve months gross revenue as BRL 14.8 billion, and since then, we have increased our gross revenue to BRL 17.4 billion LTM, with an implied 25% CAGR. In order to reach the top of the guidance, we need, from now on, a 19% CAGR until 4Q 2026.

Regarding our LTM EBT margin, we have reached 28.1%, a 180 BPS expansion compared to our third quarter 2023 LTM figures, indicating that we are in the right pace to reach the 30%-34% target range in 2026. 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 BRL 32 billion in net new money for the quarter, with BRL 24 billion coming from Retail. This means that in Retail, we nearly double quarter-over-quarter. 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, first, 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 protagonism 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. Second, diversification and expansion of channels. Few years ago, we launched the internal advisors model, becoming a dual distribution channel business. And today, as we speak, we evolved to a multi-channel 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, already represents 10% or more than BRL 100 billion of our total client assets. All the new channels combined represent around 50% of our total Retail client assets. Third, focus on productivity. 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... Another business that presents an opportunity ahead is insurance. We are currently less than 2% penetrated, and we expect to grow 3-4 times over the next years.

Still, our total written premiums have seen a 52% increase year-over-year, reaching BRL 307 million in the quarter. On retirement plans, we keep presenting market share gains, growing our client assets by 18% year-over-year, but a 5% market share and also a 5% penetration. Combined FX, Global Investments and Digital Account grew 51% year-over-year, with BRL 104 million in revenues this quarter, and we have a clear plan for each one of them to keep growing. 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. 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, second quarter 2024 last twelve months, versus third quarter 2023 last twelve 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. Now, I will hand it over to Victor, so he can discuss this quarter financials. Thank you.

Victor Mansur (CFO)

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 second quarter numbers, I think it would be interesting to share three pillars we are focusing on for the years to come. First, a short-term objective, our Corporate restructuring. 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 bank in our 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 as expected, and we should have it completed by the end of the year. Second, a midterm objective, our guidance delivery. EBT 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 profits to grow. Capital allocation decisions are based on, on ROE, profitability, and connection for long-term strategy. The combination of these initiatives should lead to higher returns going forward.

I think it would be interesting to share three pillars we are focusing on for the years to come. 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 Issuer Services. 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 of last quarter, when Corporate Issuer Services increased their participation on total gross revenues. Let's move to the next slide with more details on Retail. Retail revenue achieved is BRL 3.3 billion, 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 credit and structuring notes through primary offerings, and our capacity to provide liquidity in the secondary market, considering our higher than 50% market share in most of securities. Moving on to the next slide, we will talk about Corporate and Issuer Services revenue. Corporate and Issuer Services posted an all-time high revenue, achieving BRL 629 million in the quarter, which represents a 122% growth year-over-year, and 24% growth quarter-over-quarter.

Issuer services continue to present a fast pace of DCM activity, posting higher revenues than last quarter and reaching BRL 384 million, 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, with transactional revenues growing on the back of derivatives and FX. Corporate posted BRL 245 million 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 explain 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 BRL 10 billion in 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. Finally, by having the market making capabilities, we can also recycle this risk and provide liquidity to our different types of clients, maximizing the return of our balance sheet. Moving on to the next slide, we will explore SG&A and efficiency ratios. Cost discipline and efficiency are priority in our business to keep XP competitive. With that in mind, we achieved the best efficiency ratio since the IPO, with 36.1%, 220 basis points better year-over-year, and 40 basis points better quarter-over-quarter.

SG&A incentives reached BRL 1.4 billion in the second quarter of 2024, a growth of 14% year-over-year and flattish quarter-over-quarter. Bear in mind that on the second quarter of 2023, we didn't have Modal SG&A in your financials. The strict cost discipline, along with our innovation initiatives, will allow us to keep expanding our EBT margin in direction of our guidance. EBT achieved the highest level in your history, a combination of a rise in ecosystem revenues and strict expense control, reaching BRL 1.4 billion. This represents a growth of 43% year-over-year and 27% quarter-over-quarter, driving our EBT margin to 32.8%, a 552 basis points growth year-over-year, and a 509 basis points growth quarter-over-quarter.

On a last twelve months basis, our EBT margin reached 28.1%. We expected to improve our EBT margin on an annual basis toward our guidance in 2026. Let's see our net income on the next slide. We also achieved the highest net income in our history, $1.1 billion in the second quarter of 2024, growing 14% year-over-year and 9% quarter-over-quarter. Net margin posted 26.5% in the second quarter, a decrease of 103 basis points year-over-year, and an increase of 110 basis points quarter-over-quarter. As we mentioned in the Investor Day, we expect XP effective tax rate on a last twelve months basis 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. As I already mentioned, an efficient capital management is key to achieve our long-term objectives. During the last 2.5 years, we have distributed over BRL 7.5 billion 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%-19%. Those initiatives together, different net income growth, result in a 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 BRL 2.03, a 10% year-over-year and a 9% quarter-over-quarter.

During the second quarter of 2024, XP posted 27.2% in ROTE, with an increase of 310 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 Maffra for his final remarks.

Thiago Maffra (CEO)

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, first, offering the best product platform in the country, ensuring that our customers have access to an unmatched range of solutions. Second, empowering the largest and best-trained sales force in the industry. Third 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, André Parize will start our Q&A session.

André Parize (Head of Investor Relations)

Okay, thank you, Maffra. We're gonna start the Q&A, and the first question is coming from Antonio Ruette, Bank of America. Antonio, can you hear us?

Thiago Maffra (CEO)

What's my question.

André Parize (Head of Investor Relations)

Thank you, Maffra. Thank you, Maffra. We're gonna start the Q&A session, and the first question comes from Antonio Ruette, Bank of America. Can you hear us, Antonio?

... Okay, we believe we got back here in our Q&A session. The next question is to Jorge Kuri from Morgan Stanley. Hey, we apologize, we are still fixing the Zoom connection. Please hold for one, two more minutes. Thank you. Okay, believe we are back, and the first question is for Antonio Ruette from Bank of America. Antonio, you may proceed.

Antonio Ruette (Equity Research Analyst)

Hi, good evening, guys. Can you hear me?

André Parize (Head of Investor Relations)

... Yes, we can.

Antonio Ruette (Equity Research Analyst)

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 across inflows and also outflows? Also in terms of mix, and is it coming from other players? Is it new money? So, a deep dive here on net inflows. And my second question, on headcount. We noticed that headcount increased in the quarter, and, if you could explore a little bit here, this team, it would be great. Thank you.

Thiago Maffra (CEO)

Hello, Antonio, this is Thiago Maffra. 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 the money comes from. So what I can tell you, there is nothing not organically here in the number, 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 BRL 13 billion, BRL 12 billion as the last quarters.

So that's, 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 open 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 advisors. So that explains a good part of the number here. Of course, we have some other like hirings. We had internship program with 200 interns, so that's the number.

Antonio Ruette (Equity Research Analyst)

All right. Thank you.

André Parize (Head of Investor Relations)

Okay, the next question is from Jorge Kuri, Morgan Stanley. Jorge, you may proceed.

Jorge Kuri (Analyst)

Hi, everyone. Thanks for the opportunity to ask questions, and congrats on the numbers. Sorry to re-ask the previous question again, but I do think it's important. The... On the inflows, I mean, I appreciate the explanation that Maffra gave about some of these competitive advantages 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, you know, all of those things, you know, were in place, you know, a year ago and certainly a quarter ago. Like, you know, your multi-channel distribution, your product capabilities, your digital capabilities, your robust IFA network. I don't know that there is any material difference in the last three months on any of those items.

It feels to me that, you know, maybe there is a cyclical component here on the recovery of net inflows. So, to the extent that you can help us understand better, you know, 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. Thank you.

Thiago Maffra (CEO)

Yeah. Yeah, 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 one month to the other or from one quarter to the other. They're maturing. And of course, we have some other levers that helped us to increase the number. 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 CDs from the banks, the changing regulation, all this 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? That, so then in Q3, we are going back, like, to 13, 12 from Q4 and Q1. It's more like a normal level. Of course, there are volatility, which can be slightly lower or 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.

Jorge Kuri (Analyst)

All right. Great. Thank you, Maffra.

André Parize (Head of Investor Relations)

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

Renato Meloni (Equity Research Analyst)

Hi, everyone. Can you guys hear me?

Thiago Maffra (CEO)

Yes, we can.

Renato Meloni (Equity Research Analyst)

Thanks for the space here for questions, and welcome, Victor, to your first call here with the team. So, just like following up on that new money, on the last call, you said, Maffra, 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 view, from the last quarter? And what's the sustainable level of net new money for the upcoming quarters? And just, secondly, quick question: What drove the increase in the effective tax rate that was much higher this quarter? Thank you.

Thiago Maffra (CEO)

Okay, I can take the first part, and then Victor take the ETR question. So again, the normal level was not the BRL 13 billion and BRL 12 billion from Q3, from Q4 and Q1. That was not normal, okay? So... And when I say that going back to normalized levels is more like to what we have been doing in 2021, early 2022, that we are doing, like, BRL 30 billion, okay, per quarter. That's what I said, that it may take some time to go back there. But again, the levels that we are delivering right now, more, can be a little more or a little less, BRL 20 billion, BRL 20-plus billion against BRL 13 billion. That's more a 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 model, 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. 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 these new levels, of course, we are not happy with the 2024 that we deliver right now. We are working very hard, like, to go back to higher levels, but it may take some time.

Renato Meloni (Equity Research Analyst)

Okay. Thank you.

Understand.

Victor Mansur (CFO)

Thank you. Sorry, Renato, you were saying? The HR.

Renato Meloni (Equity Research Analyst)

You know, 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 if maybe nothing changed?

Thiago Maffra (CEO)

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

Renato Meloni (Equity Research Analyst)

Okay. Thank you.

Victor Mansur (CFO)

Thank you, Renato, and thank you. Well, it's a pleasure to be with you all for the first time. Moving to the ETR question, basically, the ETR is a result of revenue mix, as we commented before. The Corporate Issuer 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 twelve months normalized ETR. 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.

This number was 18.5 in this quarter, and we can expect this number to be around that over the year.

Renato Meloni (Equity Research Analyst)

That's very clear. Thank you.

Victor Mansur (CFO)

Thank you. Okay, next question is from, Daniel Vaz, Banco Santander. Daniel, you, you may proceed.

Daniel Vaz (Lead Analyst of Equity Research)

Hi. Hi, guys. Hi, Maffra. Hi, everyone. So, yeah, your, your distribution capabilities are indeed very strong, so you have this competitive advantages. So with strong DCM issuance this quarter, probably, it was a key driver, right? So I think nothing has changed, right? So organically, you're still very, very capable of, of raising this net new money, organically. So I wanted to understand here, these robust numbers in distribution, how this have helped the, the net new money, in this quarter. So is the growth more concentrated in bank funding instruments or this, fixed and private, private credit? So just a bit to qualify, the, the distribution and, and the net new money, if you can.

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.

Victor Mansur (CFO)

Hi, Daniel. Thank you for our question. As we come in the Retail, the fixed income was the main highlight in the Retail business. And basically, it's we have a close relation with the Retail fixed income and the DCM activity. And as you can see, in our balance sheet, we originate a lot of new fixed income instruments over the quarter. And of course, this help us to generate fixed income revenues, and this helps a lot with the net new money. I don't know if that answered your question. If it does, we can move to the next point.

Daniel Vaz (Lead Analyst of Equity Research)

Uh, if-

Thiago Maffra (CEO)

What, what, what-

Daniel Vaz (Lead Analyst of Equity Research)

Sorry.

Thiago Maffra (CEO)

Just to comment 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 BRL 2 billion, okay? So what we saw in the first quarter, and also in 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 CDs, tax-exempt CDs from the banks, okay.

Daniel Vaz (Lead Analyst of Equity Research)

Okay, regarding the Corporate side, any comments here, please?

Victor Mansur (CFO)

I think the Corporate sides reflect of what Maffra told about the building of new products to offer to our Corporate and SMB clients. Basically, if you look at the ranks, we didn't have any derivatives capabilities two years ago. If you look at our FX ranking, we also didn't have this business two to three years ago. Basically, as we grow those products in our platform and user relationship, we are capable to do more cross-selling for those clients. We have the client and we have the product, so those business lines should be growing in the pace of our guidance. So the next question is from Tito Labarta from Goldman Sachs. Tito, you may proceed.

Tito Labarta (VP)

Hi, good evening, everyone. Thank you for the call and taking my question. Another question on the inflows, but more, how do you think that can benefit revenues going forward? We did see a bit of a pickup in Retail revenues this quarter, 5%, but, you know, in the past, you said, you know, your revenues are not that correlated to inflows, which is... How do you think, you know, a nice pickup in inflows, can this translate to in a further acceleration in revenues growing forward? Just see how you think about that. And then just another question on your EBT margin, right? I mean, you know, big improvement there. You know, how do you think about the sustainability of that margin?

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

Thiago Maffra (CEO)

Okay. Thank you, Tito, for your question. I will take the first one, and Victor the second one. So about the revenue and, 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, it is small when you compare, like, to the whole way you see that we have. So today we have almost BRL 1.1 trillion of Retail clients, okay? And the, the whole portfolio that we have is much larger than any net new money. So we don't see a big correlation in, in both of them. But yes, what, what... 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 gonna be the company a few years down the road, okay? More than the revenue this quarter or next quarter.

Victor Mansur (CFO)

Hi, Tito. Thank you for the question. I think the EBT margin rationale is the same of ETR. You should look at the last twelve months margin, that is currently at 28%. Looking at that margin, you should see a slight improvement, so toward our guidance levels over time, and that will eliminate some, any variance quarter-over-quarter due to business mix or HR.

Tito Labarta (VP)

Okay, no, 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, you know, just potential catalysts to sort of accelerate the, the revenues, just thinking of where we are in the cycle and your rates are so high?

Thiago Maffra (CEO)

Yeah, not sure if I understood your question. The revenue for-

Tito Labarta (VP)

On Retail revenue.

Thiago Maffra (CEO)

Can you repeat the question? So-

Tito Labarta (VP)

Sure. Yeah, 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? You know, we still have high rates. How do you see, you know.

Thiago Maffra (CEO)

Okay. Yeah, I got it.

Tito Labarta (VP)

Yeah.

Thiago Maffra (CEO)

Yeah.... As 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 EBT margin going to the range 30%-34%, we should start like to pick up in all these metrics, otherwise, we would not go there.

Okay, but and we just mentioned that we are on track, so you can expect the, 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.

Tito Labarta (VP)

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

André Parize (Head of Investor Relations)

Okay, the next question is from Olavo Arthuzo, from UBS. Olavo, you may proceed.

Olavo Arthuzo (Equity Research Analyst)

Thank you, guys. Thank you for taking my question. I have two, but my first is just a follow-up on 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. But questioning on the other way, I understand the change in taxes and 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.

Then I'll go to my second question.

Thiago Maffra (CEO)

Yeah, Olavo. 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 that new money coming because of fees or because all the other factors. It's not just one factor. I understand that most of the questions here, 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? 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 net new money. So we are not macro dependent. So that, that's the point, and we will not have only one explanation.

Olavo Arthuzo (Equity Research Analyst)

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 monthly spending dropped for the second 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 your clients that use your credit card moving to other banks or fintechs, think that a sort of our credit card offers a similar 1% cashback and several other benefits. Any color on that will be helpful. And thank you again.

Thiago Maffra (CEO)

Okay. Yes, about credit cards. Basically, we have two levers here to work on. First of all, today we have 2 million eligible clients, okay? So out of the almost 5 million clients, only 2 million clients from all the brands are eligible to have our credit card, okay? So if you get the number of issued credit cards around 1 million cards, okay, so it's a 50% penetration. So here we have two 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 card. So we believe we can capture clients that perceive more value added on points than or only Investback. So that's one.

And the second one is how we make the other 3 million 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. So we believe that we can go back on track to capture more growth on credit cards on the next quarters.

André Parize (Head of Investor Relations)

Okay, next question is from, Neha Agarwala, from HSBC. Neha, you may proceed.

Neha Agarwala (SVP)

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 levers did you pull there for such a good control on the cost of services? And my second question is on the loan book. 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.

Victor Mansur (CFO)

Hi, Neha. Thank you, thank you for the question. First of all, the COGS. I think that's a reflection of our operational leverage and our capacity to do more business without increasing, increasing costs. And you can see both of those effects in COGS and SG&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 debenture. And this is part of our risk recycle process, and we should use those, those Corporate bonds as collateral for repo operations against our clients, and eventually to sell those operations in our ecosystem.

Neha Agarwala (SVP)

If I understand, this is new, right? You had not done this in the prior quarters.

Victor Mansur (CFO)

Yes.

Neha Agarwala (SVP)

So what was the motivation regarding doing this?

Victor Mansur (CFO)

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 our loan book. It's the first time, and we keep, we should see that in the future. To seeing that in the future, sorry.

Neha Agarwala (SVP)

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

Victor Mansur (CFO)

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 to our Retail, to our Retail distribution, and basically, that's the... That is the idea.

Neha Agarwala (SVP)

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

Victor Mansur (CFO)

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

Neha Agarwala (SVP)

Okay. Okay, great. Thank you so much.

Victor Mansur (CFO)

Thank you for your question.

André Parize (Head of Investor Relations)

So, okay, we are up on the hour, so thank you, Maffra. Thank you, Mansur. Thank you all of you participants today. I apologize once again for our troubling connections, and we are available, the IR team is available for any further questions. Thank you once again, and we see, or we talk to each other on the, on the next quarter. Thank you.