Introduction to XP, the Charles Schwab of Brazil
XP Inc. (XP) is a diversified Brazilian fintech company providing various financial services including investment advisory, brokerage solutions, and capital markets services. In this article, we provide a review of its recent 1Q24 results. Despite a slowdown in growth, our analysis below suggests that XP is a solid high-yield issuer for investors hunting for attractive risk-adjusted yields.
XP’s revenue streams are diverse and are reported in several segments including (i) Retail; (ii) Institutional; and (iii) Corporate & Issuer Services, with the Retail segment as its largest by a considerable margin (Chart 1).
For the Retail segment, XP provides access to a variety of investment products (e.g. equities, fixed income, funds) as well as other financial services (e.g. insurance, retirement plans, cards). Its retail clients can come from different channels including IFAs, internal advisors, family offices, and self-directed clients.
For the Institutional segment, XP also provides access to different investment products, including derivatives and commodities. Clients include asset managers, pension funds, and family offices.
For the Corporate & Issuer Services segment, XP provides capital market solutions to corporate clients, including issuer services like Debt Capital Markets (DCM), Equity Capital Markets, and Mergers & Acquisition.
Chart 1: XP has multiple revenue streams with focus on retail
Revenue and operating highlights
(Note: Unless otherwise stated, dollar amounts are in Brazilian Real expressed as R$, growth rates are YoY and data as of 1Q24.)
XP’s revenue growth remained healthy (Chart 2). Top-line (gross) revenues grew by +28% YoY to R$4,270m in 1Q24, helped by a (slight) low base from 1Q23. This growth was driven by two segments: Retail, and Corporate & Issuer Services. We cover the former (Retail) in greater detail below, while the latter (Corporate & Issuer Services) saw a +91% revenue growth to R$509m led by stronger DCM activity in Brazil.
Retail did well, delivering a +22% YoY revenue growth (Chart 3). This is important considering Retail is a core segment which contributed to 73% (R$3,131m) of XP’s 1Q24 gross revenues. Within Retail, the Fixed Income sub-segment saw one of the strongest growth rates, as revenues grew by +112% YoY to R$704m. The ‘new verticals’ sub-segment within Retail (i.e. more newly launched initiatives) also saw revenues increase by +35%, even before including even newer segments (e.g. digital account) which accounted for about another R$100m.
Apart from revenue, XP also reported several operating metrics for the company (not within the income statement) (Table 1). Total client assets (under custody) and the number of active clients under XP both saw decent gains YoY, while total net inflows remained positive at R$15b in 1Q24 (though the rate of inflows technically slowed from R$16b in 1Q23).
Despite the positive results above, we highlight that growth appears to have slowed recently, particularly when viewed on a QoQ basis. For instance, (gross) revenue contracted very slightly at -1% QoQ (Chart 4), while some operating metrics like net inflows and retail take rates also slowed from 4Q23 to 1Q24. In all, we think that XP’s 1Q24 results were positive. While there are certainly signs of a slowdown in the past quarter, we like that its results remain stable, and the company continues to see growth.
Chart 2: XP continued to see positive YoY revenue growth, despite slowdown QoQ
Chart 3: Fixed Income and 'new verticals' were main drivers within Retail
Table 1: XP's selected operating metrics
| Operating Metrics | 1Q23 | 4Q23 | 1Q24 |
| Total Net Inflow (R$b) | 16 | 19 | 15 |
| Active Clients ('000) | 3,966 | 4,531 | 4,587 |
| Total Client Assets (R$b) | 954 | 1,122 | 1,141 |
| Retail Take Rate (%) | 1.21% | 1.27% | 1.24% |
| Retail Daily Average Trades (m) | 2.4 | 2.2 | 2.2 |
| Source: XP, Bloomberg, iFAST compilations. Data as of 1Q24, as reported by XP. Note: Take rate is a profitability metric calculated by dividing revenues by average assets under custody (last 12 months). | |||
Profit highlights
Turning to costs, XP’s expenses broadly increased in double-digit percentage terms YoY. Reported operating costs grew by +20% to R$1,219m, primarily driven by higher commission and incentive costs. Meanwhile, our estimates indicate that SG&A expenses grew by +33% to R$1,382m – this was mainly due to higher personnel expenses in 1Q24 (especially considering low-base effects in 1Q23 post-layoffs), though non-personnel expenses especially data-processing costs also played a role (likely a result of XP’s recent acquisition of Banco Modal in Jul 2023) (Table 2).
Nonetheless, profits remained decent as the effect of revenue growth broadly outpaced that of cost increases in 1Q24 on a YoY basis (Table 3). Reported earnings before tax (EBT) grew +33%, reported net income came in at R$1,030m in 1Q24 compared to R$796m in 1Q23 (+29%), while EBT margins saw a sizeable improvement of +81bps to 26.9%.
We observed that XP’s expenses and profits generally fell on a QoQ basis (despite the solid YoY growth highlighted above) – this was in line with what we saw with revenues and operating performance in the previous section. In our view, XP’s earnings remain decent despite the slight moderation on a QoQ basis, The Group continues to be profitable while delivering growth over the longer term.
Table 2: SG&A expenses grew by +33% to R$1,382m
| SG&A Expenses (R$m) | 1Q23 | 4Q23 | 1Q24 |
| Selling Expenses | 15 | 59 | 32 |
| Admin - Personnel Expenses | 760 | 1,022 | 1,007 |
| Admin - Data Processing | 156 | 212 | 211 |
| Admin - Others | 112 | 217 | 133 |
| Admin - Total | 1,027 | 1,451 | 1,350 |
Estimated SG&A Expenses (Selling + Admin) | 1,042 | 1,510 | 1,382 |
| Source: XP, Bloomberg, iFAST compilations, iFAST estimates. Data as of 1Q24. Admin expenses here exclude other taxes, depreciation, and amortisation. | |||
Table 3: XP's profits and margins remained decent
| Profits & Margins | 1Q23 | 4Q23 | 1Q24 |
| EBT (R$m) | 816 | 995 | 1,088 |
| EBT Margin (%) | 26.0% | 24.6% | 26.9% |
| Net Income (R$m) | 796 | 1,040 | 1,030 |
| Net Margin (%) | 25.4% | 25.7% | 25.4% |
| Source: XP, Bloomberg, iFAST compilations. Data as of 1Q24, as reported by XP. | |||
Outlook
Looking ahead, XP’s management has guided for ‘good’ but ‘not spectacular’ growth and maintained their EBT margin guidance at 30% and 34% by end-2026 (1Q24: 26.9%). This guidance appears to be based on expectations of an improvement in the broader macro and market environments, which could help XP on multiple fronts, including greater net new money inflows, and an improved mix of more risk-on products (which typically have higher take rates [revenue divided by assets under custody]). In addition, they highlighted their ‘new verticals’ segment as a potential driver even if the macro situation does not pick up significantly.
We think that XP should continue seeing moderate earnings growth. A higher-for-longer rates environment (with markets no longer pricing any further cuts by the BCB) could help support Fixed Income activity for XP (the second largest sub-segment within Retail). Further upside could also materialise if equity risk sentiment improves, lifting retail equity turnover and Equity Capital Markets activity. Our base case is for inflows to remain positive and client AUC to continue increasing with take rates staying steady. This should help to support continued positive revenue growth for XP in the coming quarters.
Credit highlights
XP’s (financial) assets exposure generally rose on a YoY basis (+41%) (partly due to changes in exposure to domestic Brazil sovereign bonds), while expected credit losses increased too (+97%) (Table 4). Focusing on XP’s exposures from loans and credit card operations (+29% YoY), asset quality again appears to have worsened with Stage 3 loans now at 0.9% of this segment (1Q23: 0.1%), but we think this 0.9% figure looks manageable barring large further deteriorations. We do not see any red flags in asset quality for now but will monitor the macro environment and XP’s financial disclosures for significant deteriorations over the coming quarters.
(Note: XP’s loan book is divided into Stage 1, Stage 2, and Stage 3 loans. Stage 3 loans have the highest credit risk and can be considered credit-impaired.)
In addition, net debt levels increased over time primarily driven by lower cash equivalents (Table 5). While management did not provide specific reasons for the big shifts in certain line items, we observe that XP’s debt figures have generally seen large movements every quarter depending on business requirements and potentially on market movements (e.g. cash equivalents). Hence, we once again think the increase in net debt levels warrants more monitoring for now (rather than being a clear negative development).
XP’s asset-liability profile remains stable from 1Q23 to 1Q24 despite some volatility within this period (e.g. compared to 4Q23) (Table 6). Management has adopted a non-GAAP metric called net asset value (NAV). In essence, this figure represents assets minus liabilities and subtracting ‘float’ or uninvested client deposits (as these are ultimately attributable to clients and not the company). Based on this NAV metric, we observe that the growth in financial assets has slightly outpaced that of financial liabilities over a 1y period, even after excluding client deposits.
Finally, we highlight that XP continues to have a solid and diversified funding profile. Its funding sources have continued to increase despite the uncertain macro backdrop, including its deposit base. Its funding sources are also diverse with a mix of both deposits (mainly time deposits) and non-deposits (e.g. structured notes and financial bills), with over half of all funding sources maturing after 360 days.
To summarise, our take is that XP’s credit profile generally weakened slightly over the past year and the past quarter, though we do not see any structural red flags currently.
Table 4: Asset exposure of XP
| Gross Carrying Amount of Financial Assets (R$b) | 1Q23 | 4Q23 | 1Q24 |
| Total Exposure | 87 | 111 | 123 |
| Expected Credit Losses (ECL) | 0.3 | 0.6 | 0.7 |
| ECL (% of Total Exposure) | 0.4% | 0.5% | 0.5% |
| Loans | 23 | 29 | 30 |
| Loans - Stage 3 | 0.0 | 0.2 | 0.3 |
| Stage 3 Loans (% of Total) | 0.1% | 0.8% | 0.9% |
| Source: XP, Bloomberg, iFAST compilations. Data as of 1Q24, as reported by XP. Selected figures only. | |||
Table 5: Debt, cash, and gearing profile of XP
| Balance Sheet Figures (R$b) | 1Q23 | 4Q23 | 1Q24 |
| Total Debt | 10.7 | 10.4 | 11.7 |
| Cash | 3.1 | 3.9 | 3.9 |
| Cash Equivalents - Securities Purchased under Resale Agreements | 4.1 | 2.8 | 1.0 |
| Cash Equivalents - Bank Deposit Certificates | 0.2 | 0.1 | 0.1 |
| Cash Equivalents - Other Deposits at BCB | 0.1 | 2.4 | 0.1 |
| Net debt | 3.1 | 1.1 | 6.6 |
| Total capital | 20.2 | 20.6 | 27.0 |
| Gearing (%) | 15.5% | 5.6% | 24.4% |
| Source: XP, Bloomberg, iFAST compilations. Data as of 1Q24, as reported by XP. Selected figures only. | |||
Table 6: Asset-liability profile of XP
| Net Asset Value Calculation (R$b) | 1Q23 | 4Q23 | 1Q24 |
| Financial Assets [A] | 180.7 | 231.9 | 261.9 |
| Financial Liabilities + Gross Debt [B] | -159.3 | -208.0 | -238.6 |
| Float Balance [C] | -9.9 | -9.6 | -11.0 |
| NAV [A - B - C] | 11.5 | 14.4 | 12.3 |
| Source: XP, Bloomberg, iFAST compilations. Data as of 1Q24, as reported by XP. Selected figures only. | |||
Recommendations
To summarise, we think XP’s revenue and profits look solid, based on its latest 1Q24 results and our perception of its outlook. Meanwhile, its credit profile also shows no signs of a structural decline - despite some weakening in the recent 1Q24 disclosure, we don’t see any obvious red flags and prefer to continue monitoring. With this in mind, we consider XP a decent high-yield issuer.
Before we look at XP’s bond profile, we also highlight that XP (as an issuer) has the drawback of concentration risks (into Brazil). It derives about 95% of net revenues from Brazil, and management has said it does not plan on expanding internationally. The company is very dependent on macro and market conditions in Brazil, including the Brazilian interest rate environment.
XP currently only has one (senior unsecured) USD bond outstanding: XP 3.250% 01Jul2026 Corp (USD). The issuer and bond both have ratings of BB from Fitch and Ba2 from Moody’s. The BB Fitch rating also represents a recent upgrade from BB- in Aug 2023, concurrently with Brazil’s recent Sovereign Rating upgrade. The bond comes with a call date 1 month before maturity, and the respective yield-to-call and yield-to-maturity are similar.
Some of its peers like Banco Bradesco and Banco Santander Brasil have bonds available in the secondary market (note: not available on our platform). However, its peer bonds generally have lower yields than XP’s bonds, with the benefit of slightly better credit profiles. We still think XP’s 2026 bonds offer a decent risk-reward proposition for investors looking for high-yielding names.
Table 7: Recommended XP bond
| Bond Name | Call / Maturity Date (Years to Call / Maturity) | Ask Price | Yield to Call / Maturity (%) | Credit Rating (S&P / Moody's / Fitch) |
| XP 3.250% 01Jul2026 Corp (USD) | 01 Jun 2026 / 01 Jul 2026 (2.0 / 2.1) | 94.339 | 6.35% / 6.23% | - / Ba2 / BB |
| BRADES 3.200% 27Jan2025 Corp (USD) | 27 Jan 2025 (0.7) | 98.306 | 5.98% | BB / Ba2 / - |
| BRADES 4.375% 18Mar2027 Corp (USD) | 18 Mar 2027 (2.8) | 96.788 | 5.64% | - / Ba2 / BB+ |
| SANBBZ 5.730% 25Nov2024 Corp (USD) | 25 Nov 2024 (0.5) | 100.007 | 5.70% | Unrated |
Source: Bloomberg, Bondsupermart, iFAST compilations. Data as of 7 Jun 2024. Note: XP's bonds are available on Bondsupermart, all other bonds in this table are not yet available. | ||||
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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