Q1 2024 Earnings Summary
- XP is successfully diversifying its revenue streams through investments in new verticals and wholesale banking, helping the company grow despite the challenging macroeconomic environment. Management stated that they have been investing in new verticals and diversifying the business, which offsets slower growth in investments due to the tough macro environment.
- Management believes the worst is behind them regarding net new money and is optimistic about future improvement, supported by investments in financial planning and new services. They have been investing in financial planning tools and delivering higher-level services to clients, which they believe will help recover net new money levels.
- Corporate and Issuer Services revenue grew by 91% year-over-year in Q1 2024, reinforcing XP's strategy to diversify revenue streams and positioning the company well to benefit from debt capital markets activity in Brazil.
- Slower growth in investments due to challenging macroeconomic conditions: XP's investment growth has slowed significantly compared to past years, with management admitting that investments will grow at a slower pace if the macro environment doesn't improve. ,
- Net new money is at one of the lowest levels in recent years: The total net new money for the quarter was BRL 15 billion, with BRL 13 billion from retail, which is "probably one of the lowest ever" according to an analyst, indicating challenges in attracting new funds. Management acknowledges that recovering to previous levels will take time.
- Midterm EBT margin guidance may be difficult to achieve in current macro environment: Management stated that achieving the midterm EBT margin of 30%-34% by 2026 will be "really tough to achieve" if the current macro environment persists, suggesting potential pressure on profitability targets.
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EPS Growth in Tough Macro
Q: How will XP grow EPS if the tough macro continues?
A: XP plans to focus on three pillars—investments, cross-sell, and wholesale banking—to drive EPS growth despite the challenging macro environment. Investments are growing slowly due to macro conditions, but cross-sell and wholesale banking are expanding faster. XP is also controlling costs and has prepared for 2024 expecting another tough year. -
EBT Margin Guidance and Rates
Q: Does higher-for-longer rates impact your EBT margin guidance?
A: Achieving the midterm EBT margin guidance of 30%-34% by 2026 will be challenging if current macro conditions persist. However, XP expects some macro improvement and is confident in delivering 2024 targets. The guidance assumes a more normalized capital markets environment, not necessarily low interest rates. -
Effective Tax Rate Outlook
Q: How will the macro changes affect your effective tax rate?
A: The effective tax rate depends heavily on revenue mix and is hard to forecast. In Q1 '24, the effective tax rate was 18%, up from 11% in Q4 '23 and 17% in Q1 last year. If current conditions continue, Q1 '24 rate is a good estimate for the next two years. -
Equity Take Rate Trends
Q: What's causing the decline in equity take rates? Outlook?
A: The marginal decrease in equity take rates is due to product mix and lower market turnover, not pricing changes. No price pressure has been observed. Future take rates depend on market activity; improved turnover could increase take rates. -
Net New Money Recovery
Q: How are net new money trends evolving?
A: XP believes the worst is behind and is more optimistic now than in past years. Recovery to 2020-2021 levels will take time, but investments in financial planning and service differentiation are expected to boost net new money. -
NAV Decline Explanation
Q: What drove the BRL 1.6B decline in NAV this quarter?
A: The NAV decline is mainly due to seasonality—tax and bonus payments (BRL 800M) and cash disbursements for investments made (BRL 700M). These factors total close to BRL 1.5B and explain most of the variation. -
Cost Control and Levers
Q: Are there more levers to reduce the cost-to-income ratio?
A: XP expects to keep costs under control, with some seasonality affecting expenses. The efficiency ratio should remain close to the lowest levels going forward. Investments in technology and advisor training are ongoing but manageable. -
Cards Revenue Decline
Q: Is the decline in card revenues a sign of maturation?
A: The slight decline is due to seasonality common in Q1. While growth may not match past rapid rates, there is still significant room for penetration among the 5 million customers. Future growth may be slower but continues. -
Competitive Advantage in Open Investments
Q: How is the open investments initiative progressing?
A: XP recently launched financial planning and open investments tools, offering private banking services to all clients. Early results are impressive, enhancing client conversations and engagement. XP believes it maintains a service advantage over incumbents, who have yet to replicate this third wave of differentiation. -
Client Growth and NPS
Q: With declining NPS, how will you drive revenue growth?
A: The NPS decline was only 1 point, not strategically significant. XP continues to invest in quality and services, expecting NPS to increase medium term. Revenue growth will come from both market share gains and cross-selling to existing clients.