Q3 2024 Earnings Summary
- XP expects to improve margins and profitability due to operational leverage, with efficiency ratios at the lowest level ever and expected to keep improving, and the positive contribution from previously loss-making verticals like credit cards and internal sales force now moving into positive margins and becoming accretive to earnings before tax (EBT).
- XP plans to maintain high payout ratios of 50% or more of net income in 2025 and '26, aiming to return significant capital to shareholders through dividends and share buybacks.
- XP is optimistic about continued strong performance in their Debt Capital Markets (DCM) and fixed income lines due to a robust pipeline, strong demand from retail and institutional channels, and increased competitiveness from their corporate restructuring, allowing them to originate more deals and warehouse more fixed income.
- Intensifying competition from large incumbent banks could impact XP's growth and profitability. XP's CEO, Thiago Maffra, acknowledged that while incumbent banks haven't significantly improved their investment offerings, they benefit from "high interest rates, tax-exempt products," making it "a little bit harder to compete with the incumbent banks in this environment."
- Commission costs paid to Independent Financial Advisors (IFAs) are growing faster than retail revenues, potentially pressuring margins. Despite efforts to expand their internal salesforce, XP has not yet realized a reduction in commission expenses. Maffra noted that "it's really hard to see change in COGS from a quarter to the next one" due to revenue mix changes, and substantial benefits from shifting to internal advisors may only be evident over a longer period.
- Sustainability of credit revenue growth is uncertain given a flat credit book. While credit revenues increased from BRL 71 million to BRL 113 million year-over-year, this was largely due to "the beginning of margin loan operations" and existing loans being renewed at higher interest rates. However, XP does not intend to "pile up credit" and expects only nominal growth in its credit portfolio, which may limit future credit revenue growth.
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Dividend Payout Outlook
Q: What dividend payout can we expect in the next two years?
A: Management expects to pay out 50% or more of net income in dividends over 2025 and 2026 to achieve their BIS ratio guidance. After that, the payout ratio should stabilize near 30%. , -
Margin Improvement Drivers
Q: How will margins improve to meet guidance?
A: Margin expansion will come from operational leverage, with the efficiency ratio at its lowest ever and expected to keep improving. Additionally, verticals like credit cards and the internal sales force, which previously lost money, are becoming profitable this year, contributing positively to earnings before taxes (EBT). , -
Credit Revenue Growth
Q: Why did credit revenues increase despite flat loan growth?
A: Credit revenues grew due to the start of margin loan operations, which are more profitable than conventional lending. Also, maturing loans with lower net interest income (NII) were renewed at higher rates under the new pricing environment, boosting revenues. -
Fixed Income Revenue Sustainability
Q: Can fixed income revenues continue to grow?
A: Yes, demand for fixed income from retail and institutional channels remains very strong. Management is optimistic about sustained growth, supported by a robust pipeline and corporate restructuring that enhances competitiveness in originating and warehousing fixed income deals. -
Take Rate Outlook
Q: Will the fixed income take rate remain elevated?
A: Management expects the take rate to be stable or slightly higher in coming quarters, driven by strong fixed income performance and potential shifts towards higher return-on-asset products. -
Competition from Incumbent Banks
Q: How is increasing competition from large banks affecting the business?
A: While incumbent banks are active, the main challenge is the macro environment with high interest rates and tax-exempt products, making competition slightly tougher. However, management does not rely on macro improvements for their guidance and views the competitive landscape as manageable. -
BIS Ratio Impact and Capital Allocation
Q: How do dividends and buybacks affect the BIS ratio?
A: The BIS ratio was 21.5% at quarter-end. After accounting for dividends, it reduces to 19%, and with the buyback, it further decreases to 18.3%. This aligns with the strategy of paying over 50% of earnings in the next two years. -
Commission Costs and Internal Sales Force
Q: When will lower IFA commissions impact costs?
A: Changes due to shifting towards internal salespeople will be evident over a longer period, not quarter to quarter, because of revenue mix effects. The full benefits should become apparent over a year or two. -
Credit Growth Strategy
Q: Will credit growth accelerate?
A: XP does not aim to significantly expand its credit portfolio. The focus is on recycling capital quickly and providing collateralized lending rather than accumulating a large credit book. Nominal growth will occur as the wholesale bank grows, but not at the same rate as overall business growth. -
Other Income Variations
Q: What caused fluctuations in other operating income?
A: Variations were due to recurring one-off incentives from partners accessing XP's distribution network, a BRL 42 million provision reversal related to the Aqua payment, and reorganizations affecting minority interests, which are expected to stabilize and increase next year.