Brazil’s XP Beats Bear Market and Hits Record Revenue in Q2

The brokerage had revenues of $705 million; CFO Bruno Constantino says XP wants to buy company’s shares owned by Itaú

XP's quarter's  biggest impact was on investments in new initiatives such as cards, bank accounts, overseas investment platforms, and XTAGE, for investments in crypto.
August 09, 2022 | 07:20 PM

Bloomberg Línea — Brazil’s XP Inc. (XP) reported record revenues of R$3.618 billion ($705 million) in the second quarter, a growth of 13% over the same period last year, even with the “bear market” that impacted the investment business. The increase was driven by fixed-income products for retail investors.

Adjusted Ebitda was R$ 1.2 billion ($234 million), down 2% year on year. The adjusted Ebitda margin was 35.4%, down from 41.3% a year earlier, according to XP, due to increased administrative and general expenses related to new verticals and investment advisors.

According to CFO Bruno Constantino, the biggest impact was on investments in new initiatives such as cards, bank accounts, overseas investment platforms, and XTAGE, for investments in the cryptocurrencies Bitcoin and Ether.

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“We expect these businesses to scale. The margins are healthy and show the resilience of the business,” the CFO said during a video conference call with investors on Tuesday night.

The scenario in which new Brazilians opened accounts and invested ceased to exist with the turnaround of the market due to the increase in interest rates, according to Constantino, but the company intends to engage the customers it already has and gain a larger share of the portfolio of assets of these customers - who today are in other institutions. The adjusted revenue margin was above 30%.

Gross profit was R$ 2.5 billion ($488 million) in the second quarter and gross margin was 72%, 1.5 percentage points above the same period of 2021. Credit card revenue was R$116 million ($22.6 million).

“We have a bank now because we saw that we need to go beyond investments to serve our clients. We are an investment platform that bought a bank,” Constantino said. XP bought Banco Modal for R$ 3 billion in January this year. The transaction still needs to be approved by the Brazilian Central Bank - which had processes delayed because of the staff strike - and by the SEC (Securities and Exchange Commission). Brazil’s antitrust agency, Cade, has already approved the acquisition.

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“Equities and futures were more than 1/3 of our total revenue and now represent 20%. It is an impact on the macro environment. It affects the business, but we more than offset that with other verticals. However, credit cards have a lower margin. It is a portfolio mix”, he explained to investors in a conference call after the release of the result.

XP’s net income reached a little over R$ 1 billion between April and June, a 6% growth in relation to the first quarter. XP reached R$ 846 billion in assets under custody at the end of June, a 4% increase over the same period in 2021.

XP vs Itaú

During a conference call with investors on Tuesday morning to report its results, Itaú said it is in no hurry to sell the XP shares it still owns and that the bank has its target price to carry out the transaction. XP shares traded on Nasdaq have fallen about 50% in the last 12 months, in line with the fall of technology companies also because of rising interest rates.

“What I can say is that, based on conversations with investors, there is demand for the shares. It’s not a demand problem,” said XP’s Constantino, responding to shareholders. “I know that some investors have already had direct conversations with Itaú. Our position for Itaú is that, if they want to sell, we are here to help in the best way, and, by the way, we want to buy those shares,” he said.

XP has been doing share buybacks this year and acquired class B shares held by Itaú when the bank decided to dismantle the position to less than 10% of total capital in the company. “We are ready to buy more if they want. We can only buy class B shares in the buyback program. But we rely on Itaú. It’s their shares, not ours, unfortunately.”

About the former controller, Constantino recalled that the bank has just bought brokerage Avenue, increasing its presence in overseas investments for Brazilians.

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“They bought Avenue. But we, everything we did was from scratch. We didn’t buy Mercado Bitcoin to do the crypto platform. We did it from scratch and that goes in line with our DNA, and there are costs. We believe these new businesses will pay off and give us options for the perpetuity of growth”, said XP’s CFO.

For Constantino, these new businesses, in the short term, will generate impacts on the revenue. Despite this, he states that costs “are under control”, even though the company has seen expenses with data processing and personnel grow with new hires.

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