XP Inc.

Good evening, everyone. I'm António Guimarães, Investor Relations and XP. It is 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 the 2023 Sturdy Quarters earnings call. This quarter, we had a strong set of results, which will be presented by our CEO, Thiago Mafra, and our CFO, Bruno Constantino, who will also be both available for the Q&A session right after the presentation. If you want to ask a question, you can raise your hand on 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, so there's a button on the Zoom if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on page two, on which we clarify forward-looking statements. Additional information on forward-looking statements can be found on the SCC filing section of the IR website. So now I'll turn it over to Thiago Mafra. Good evening, Mafra.

Thanks, Antonio. Good evening, everyone. Thank you for joining us today on our 2023 third quarter earnings call. It's a pleasure to be here with you tonight. I will start with a brief introduction to this quarter's highlights and key updates. In the third quarter of 2023, we had a strong quarter with increased top line growth and profitability across different metrics. This quarter, despite the tough macroeconomic conditions that led to weaker organic net new money, we ended the quarter with 1.1 trillion in client assets, reaching all-time high records in most of our investment KPIs. For this quarter, as a result of our continuous focus in executing our strategy, we achieved the highest net income in our history at 1.1 billion up 11% quarter-over-quarter and 5% year-over-year. Our discipline in cost control has reflected in the best efficiency ratio in the last three years, at 37.3%, down more than 400 bps year-over-year and 100 bps quarter-over-quarter. As a result of our efforts, ROE rose 58 bps quarter over quarter, reaching 22.6%, the highest during the year. At last, but not least, our diluted earnings per share increased 7% quarter over quarter to 1.96 reais, also the highest in our history. Moving to the next slide, I want to reinforce our three focus points. first, leadership investments by protecting and expanding our core business. In this quarter, we have incorporated Modals Financials and Operations, which should be fully integrated in 2024. At the same time, we have reached an all-time high in different investment KPIs, enhancing our capacity to reap the benefits of our leadership position hand-in-hand with more positive market conditions. Second, superior product offering. translated into the continuous improvement of our new verticals performance. New verticals revenue grew three times in the last two years and now represents 11% of our total last 12 months revenue. We are certain that expanding the product offering into new verticals was the right decision, enabling us to diversify our revenues and deliver growth even in a tough environment for the investment market. This evolution confirms our initial thesis of the importance of having clients' investments first. For example, in credit cards, we estimate we have 50% of principality out of our total cardholders base. This is a clear example of many opportunities we will explore ahead in the proper time. Lastly, client focus. High quality and excellence in everything we deliver is a key pillar to achieve our long-term goals. We remain focused on that, maintaining the NPS above 70 at the top of the industry once again this quarter. High NPS directly translates into high share of wallet and we see this consistently in our client base. High NPS directly translates into high share of wallet and we see this consistently in our client base our strategy is centered on providing advisors with the best tools technology and products so they can better serve our clients in this direction we have evolved our incentive plans to advisors providing them with more intelligent models and systems in order to improve clients asset allocation resulting in superior experience for retail investors moving to the next slide as i mentioned earlier we are happy to see improved profitability in our financial results for the quarter while we have made progress on models integration Following an initial recovery in capital markets activity in the second quarter, GCM volumes have continued to increase in the third quarter, with all-time high revenue in corporate and issuer services. As we said in the last quarter, a faster recovery in retail revenue and net inflows may take more time as it depends on better performance in riskier assets, which is tougher due to high interest rates. On the profitability front, we have increased three key metrics for XP. 74 bps in ebt margin quarter over quarter with higher operating leverage plus 58 bps on roe quarter over quarter one of the main metrics we look going forward plus 13 cents in diluted eps despite the issuance of 18.7 million shares related to modal succession in the quarter Talking about Modal, we already have fully consolidated Modal's financials into our third quarter results. In this first quarter of integration, Modal has accounted for $161 million in top line and $111 million in SG&A. Lastly, in accordance to what we have been saying about returning more capital to shareholders, we just announced an additional dividend of $0.73 per share to be paid in December 22nd, contributing to the optimization of our capital structure. Now, I will hand it over to Bruno so he can discuss this quarter's financials.

Thank you. Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you again. Starting with our gross revenue on the left part of the slide. This quarter, we reached record quarterly revenue in our history, 4.4 billion reais, a 17% growth quarter over quarter, and 14% growth year over year. After discounting Modal's revenue contribution of R$ 161 million, XPX Modal revenue would be R$ 4.2 billion, 10% higher than our previous record of R$ 3.8 billion reached on Q3 2022. The sequential growth in gross revenue was mainly led by retail, which was responsible for 45% of the growth quarter over quarter, and corporate and issuer services, representing 37% of the growth quarter over quarter. Both retail and corporate and issuer services benefited from capital markets activity, especially in DCM, which we will explore in detail on the next few slides. On the right, in terms of revenue mix between segments, the highlight is corporate and issuer services with the strongest growth quarter over quarter, increasing its relevance by 57% from 7.6% in second quarter to 11.9% in third quarter. On the next couple of slides, we are going deeper into retail revenue. First, focus on retail core. and then on new verticals. Moving to the next slide. When we look at our core equities fixed income and funds platform, the main highlight for the quarter is fixed income. We had a strong sequential improvement to 718 million reais, all time high fixed income quarterly revenue, representing a growth of 24% quarter over quarter. Our previous record was in second quarter 22 when fixed income revenue reached 580 million reais. As you know, fixed income revenue has two main components, secondary trading and distribution of primary offerings. The later had a growth of 100% quarter over quarter and was five times the revenue of first quarter. when we experienced a dysfunctional corporate bond market due to the impact of Americanas. We underwrote some offerings during this turbulent moment, aiming to distribute them whenever conditions returned to normal. This had an important contribution to the record quarter. We continue to see a healthy DCM pipeline, but we expect the third quarter fixed income revenue to be the best quarter for the year. Funds platform had a slightly decrease of 5% quarter over quarter, reaching 323 million reais as expected, considering the second quarter had performance fees, which is seasonal and recognized at the end of every semester. Excluding revenue from performance fees from second quarter results, third quarter was 8% higher quarter over quarter. And lastly, equities revenue increased 6% sequentially to 1.1 billion reais, positively impacted by modal, approximately half of the growth, and a continuous gradual improvement over time in equities. Moving to slide nine, Our new verticals continue to grow well, reaching a total of R$442 million in third quarter. plus 52% year-over-year and 11% quarter-over-quarter, enhancing our diversification and cross-sell opportunities. The main highlight of the quarter has continued to be cards revenue, reaching R$ 259 million, a growth of 12% quarter-over-quarter and 77% year-over-year. When we compare our quarterly growth in TPV with the market, based on recent data released by ABEX, XP grew 11% quarter over quarter compared to 7% from the market. We expect cards to remain outperforming the other new verticals in the following quarters. Moving to slide 10, coming back to total retail revenue. We have updated this slide to include third quarter results. The two key messages we delivered last quarter still stand. Number one, XP is a cyclical grower company. Corn retail revenue is the best demonstration of this cyclicality. The peak of 8.3 billion reais in revenues in 2021 has not been reached yet again. Third quarter 23 last 12 months core retail revenue improved from last quarter to 7.6 billion reais, reducing this gap that was 1 billion last quarter to 740 million reais this quarter. It is worth remembering that in 2021 our clients' assets were 815 billion reais, our active clients were 3.4 million and our IFAs were 10.3 thousand. As of third quarter this year, the same KPIs are 1.1 trillion reais of clients' assets, 4.4 million active clients and 14.3 thousand IFAs. The development of the main KPIs in investments fostered a way for potential upside as the market recovers. And number two, new verticals continue to help offset macro headwinds, diversifying our business and increasing the resilience of our model. If we compare the last 12 months revenue with 2021 revenue, new verticals have increased approximately 182%. In summary, there is potential for growth as the market recovers, although we expect a more gradual recovery considering the pace of interest rate cuts, the terminal interest rate debate, and the impacts for riskier assets. And we keep increasing the resilience and diversification of our business model. Moving to slide 11, corporate and issuer services together with retail fixed income were the highlights of third quarter 23 results. This shows the importance of our strategy to keep diversifying our revenue stream, opening new addressable markets as corporate, for example, and connecting everything with our core, retail. This quarter, corporate and issuer services revenue, which reached all-time high record at 519 million reais, grew 83% quarter-over-quarter and 19% year-over-year. Corporate had its better quarter year to date, probably the best quarter for the year, reaching 197 million reais of revenue, benefiting from derivative demand from our corporate clients, also related to DCM activity in the period. Issuer services reached the highest level in 11 quarters, at 322 million reais, a growth of 105% quarter over quarter and 41% year over year. The positive result was led by DCM activity, as already said, rewarding some underwriting we did with good corporate quality names in the first quarter this year, when DCM market became dysfunctional after Americana's events. We do not expect the same magnitude of revenue for corporate and issuer services in the fourth quarter. Moving to slide 12, total SG&A excluding revenue from incentives has increased to 1.5 billion reais as already anticipated in our previous quarter. The main impacts on third quarter were inclusion of modal expenses, which represented R$111 million, and the seasonal expenses related to the expert event, around R$60 million. The ratio between people and non-people expenses were 68% people and 32% non-people, in line with the long-term trend of 70% and 30%, respectively. When we gave our SG&A guidance between 5 and 5.5 billion reais for the year, modal was not being considered. Even including modal in our numbers, the SG&A guidance remains the same. On slide 13, as we said on the last earnings call, We remain focused on cost discipline, keeping both efficiency and comp ratios near all-time lows since our IPO. Last 12 months, efficiency ratio decreased from 38.3% to 37.3% quarter-over-quarter, close to our lowest level since fourth quarter 19, when we reached 37.1% efficiency ratio. Compensation ratio decreased from 26.8% to 25.7% quarter-over-quarter, the best level in 12 quarters sequentially. It is natural to assume higher levels of comp ratio when compared to 2020, when our share-based compensation program was just kicking in. Our cost control discipline is a priority and has played an important role in our operating margins, which we're going to talk on the next slide. EBT, a good proxy for earnings power, reached R$1,157,000,000 this quarter, a 18% growth year over year and 20% growth quarter over quarter. It is our all-time high quarterly EBT, beating the fourth quarter 21 in BT at the peak of the last bull market cycle. Our EBT margin has also improved in the quarter, increasing 86 bps year-over-year and 74 bps quarter-over-quarter, driven by operating leverage. Excluding modal, our EBT margin would have been 28.8%. Our year-to-date EBT margin is in line with our annual guidance between 26% and 32% from 2023 to 2025. Moving to the next slide. Our net income also benefited from operating leverage, reaching 1 billion and 87 million reais this quarter, up 11% quarter-over-quarter and 5% year-over-year. Despite the best quarterly net income in our history, the growth has been lower when compared to EBT growth. We expect this to be the trend, given our accounting tax expenses should be higher going forward in the next years to come. In terms of net margin, third quarter 23 presented a 26.3% margin. a 123 bps decrease quarter over quarter and a 218 bps decrease year over year. Expert, modal and higher tax expenses in the quarter are the main reasons behind lower net margin sequentially. Excluding the impact from both modal and expert in the quarter, net margin would have been around 100 pips higher and flat quarter over quarter. Now moving to the last slide, our return on average equity has continued to grow sequentially. In third quarter 23, our annualized ROE reached 22.6%, increasing 58 base points quarter over quarter, despite Modal's effect, which added 2 billion reais to our equity. Excluding modal, our return on average equity would have been 23.4%, an increase of 143 bps quarter over quarter. At XP, we have a conservative approach towards our balance sheet. But when we look at our capital ratio, plus our capacity to continue generating healthy profits over time, plus the lack of need to retain too much capital to grow, it is our desire to gradually reduce the level of our capital ratio at XP Inc. level. In second quarter 23, our capital ratio was 24.2%. We ended third quarter 23 with a capital ratio of 22.1%. The reduction, quarter over quarter, was mainly driven by the dividend payment of $320 million in September. Looking forward, We expect to end next year with a capital ratio below 20%, to a very conservative level. To get there, we need to continue expanding our net income and returning capital to shareholders. In that context, we have decided to pay an additional dividend on December this year of 73 cents per share, around 400 million US dollars. Now both Mafra and I will be happy to take your questions.

Great. Thanks Bruno. So now we're moving on to the Q&A session. We have many hands raised here. So as usual, we will attend you on a first come first serve basis. The first one today is Mr. Jorge Cury from Morgan Stanley.

Can you hear me? Hello? Can you hear me? Hello?

Hello. Now we hear you, Jorge.

Great. Thank you. Thanks. Sorry for that. And congrats on the results. I wanted to ask, now that we've seen more of the rate cuts this quarter, vis-a-vis the previous quarter how do you see your retail revenues trending in particularly how are you seeing equities and the funds platform behave so far this quarter and and you mentioned something bruno that is evidently super important for um the narrative on xp which is the the debate on the terminal rate for brazil so so the focus survey shows consensus moving rates up by year end 2024. I think now it's at 925. I know some economies are already at 10%. So I wanted to get your reaction on how does the business look again on the retail revenues, particularly equities? How does that look if we cannot go below 10% rates at least during 2024? Thank you.

Hello, Jorge. This is Mafra. Thank you very much for your question. Going straight to your point, we haven't seen yet any big change on the retail clients flow. We have been repeating that in the last calls and meetings with investors. When we are talking about retail clients, they are lagging. They will not move just because we see 100, 150 bps cut on Selic rate. If you look, the level of interest rates is still very high. But more important than that, if you look at the performance of riskier assets in the past 12 or 24 months, almost every asset class is losing to selic rate the only asset class that's that's not losing to select rate it's basically the the the lcis lcas the texas empty cgs from banks when you grow sap it back okay so uh It's very hard to see retail clients moving if we don't see the price action from other assets going up. So that's my view. So we don't see any coming back from retail clients.

If I may add just one data point, Jorge, to what Mafra just mentioned, a moderate portfolio, moderate, not aggressive. in the past two years is probably below 60% of the SELIC rate. So that pretty much the picture that we have right now. And in this environment, it's hard to see the flow coming, although usually in moment like this is especially the good moment to invest in those asset classes. So that's the job that the advisors need to do, but it's hard for the individual to move in that direction. Individuals are being well remunerated to keep their money in cash, 12% per year. So that's the picture.

And thank you for that. And regarding the second part of my question on next year and the current expectations for

uh rates maybe to settle probably not much below 10 how do you envision the retail investor base as such i mean we are positive for you know the the future considering interest rates have already started coming down and we believe that one path to see a riskier assets performing better So whenever the assets are performing better, they tend to attract more individuals and more flow to the assets, to the funds, and so on. If you ask the portfolio managers, we know because we are the largest funds platform in Brazil, if you look at the performance of multi-market funds, for example, everybody's below the hurdle. So whenever you have those funds performing better and interest rates going down again, it's a precondition for that to happen. We believe we're going to see a better market environment. It's more about the performance of riskier assets than the level, terminal level of interest rates by itself.

Great. Thanks for that. Congrats again.

Thanks Jorge. Next one in line is Mario Pierre from Bank of America.

Hey guys, good afternoon. Let me ask them two questions. One is a follow-up to Jorge's question, but if you could discuss a little bit more about the productivity of the IFAs, right? Because we see your inflows on a standalone basis of 14 billion VIs only in the quarter. This is a drop of 60% year-on-year. Or your IFA base expanded by 25%. So can you, you know, I get the high rates, negative impact, but, you know, like the productivity of your IFA network has declined quite a bit. If you can just discuss, you know, what you think is impacting, how can that improve? Also, if you can give us any perspective on the inflows throughout the months of the quarter, were they fairly even or did you see like a drop off in September? And then the second question is a quick one related to Modal. We see that your headcount increased by about 700 people, roughly 600, I think it was about 700 people. even though Modal only brought in about 200,000 clients. So how do you think? Are there any cost synergies to be realized with Modal? Have you already achieved that? If you can give us some color on that, also that would be helpful. Thank you.

Thank you, Mario. This is Thiago. To your first question, for me, it's the same reasons that we already mentioned on Jorge's question about the performance of riskier assets, macro environment, and so on. And of course, The productivity of the IFAs, they're much lower this year than it was in the past for the same reasons we already mentioned. But we are keeping investing on expanding the IFA numbers, the internal advisors, because we believe investments is made by humans, by advisors. And when the market comes back, we are ready to capture investors. market share and growth. But again, for the same reasons, the level of productivity is much lower. On your second question about modal, we received the approval in July, July 1st. So we are at the very beginning of the integration. And for sure, we have a lot of synergies. And probably the easiest way to answer a question we believe already in 2024 uh the geo will be a creative on on uh earnings per share based okay so on earnings uh we are we will already be a creative in 2024.

Yeah, for that to happen, we need Modal and Modal's clients because we have already migrated part of the clients to XP and Ricoh brand to deliver a bottom line above 150 million reais. So that's the threshold to make it accretive in EPS base. And we believe we can achieve that next year.

Okay. Let me ask a couple of follow up questions then. What was the net impact of Modal this quarter on your bottom line? You talked about revenues and SG&A. What about the bottom line?

Was not relevant. Something around 20 million.

20 million. Okay. And then to go back on the question about the inflows, were the inflows relatively stable throughout the quarter or did you see like a drop in September or an acceleration in September? And also, you know, How do you think about your market share, right? Because the inflows, the organic inflows decelerated quite a bit. We saw data from some of your other peers that show like higher inflows than what you had. So, you know, some people are starting to speculate if you have already reached a mature market share that, you know, it will be very difficult for you to continue to gain share. How do you feel about that?

Yeah, regarding your first part of the question, Mario, we prefer not to answer on a monthly basis. And the main reason is that we believe is misleading for investors. The business has already a lot of volatility on a quarterly basis, imagine on a monthly basis. Regarding your second part of the questions, we still feel confident about the potential. We are planting the seeds. We can talk better about the affluent client where we have the highest share among the segments that we have in terms of client assets in XP platform. uh and uh the affluent client uh it's it's the scenario we describe it already with uh the industry performance uh the funds performance uh and so on and and being well remunerated to stay in cash so we believe it's uh the the cyclical part of our business And we are still investing because it's cyclical. So the tide will turn at some point and we're going to be ready and bigger. The ecosystem now is much bigger. It's that slide that I talked about for the third quarter consecutively that shows the potential of the core in retail that is still not an all-time high in terms of revenues. uh but in terms of the kpis of investments client assets uh active clients and number of advisors all of them are in all-time high so uh we we believe there is room to grow in terms of market share okay thank you very much yeah

Thanks, Mario. And now next one is Chago Bautista from UBS. Bautista, can you hear us? so let's let's move to next one and uh try to get back to batista later next one then is mr titula barrett from uh goldman sachs hi good evening thank you antonio good evening bruno thanks for the call and thanks for my questions

A little bit of a follow-up, but maybe to play a little devil's advocate, Bruno, on that slide you mentioned, slide 12, right, where the core revenues are down despite all the investment rates and understand the cyclicality of the business. But, you know, you can look at this that you've made all these investments and your revenues are down. Right. So aside from interest rates, do you think there's anything else at play there? Maybe competitive environment has gotten tougher, which is also why your revenue is down. And, you know, as rates do come down, you need rates to get below that 9 percent level to go back to those all time highs. Just to understand how sensitive it is to rates. Is there anything else going on in terms of competition or something else that could potentially limit the upside that you potentially see when things improve?

Sure, Tito. First, let me start saying that we invested a lot in the new verticals. And the revenue is up. It's like 182% up when we compare the last 12 months to 2021. The investment that we've made in advisors for the core business We've been innovating in the IFA industry. What we are doing, we are investing in people that are outside the financial industry, that want to make a career change. We use all the education part of our company as an enabler. We started as an education business, as you know. And we have been using all of that through models, training to form new advisors because we strongly believe this is a business of relationship, a human contact. And if we have the right... people with the soft skills and we give the tools so they can understand about the financial market and they can create this relationship and trust with the client, that's a good way to go. So it's not a heavy investment there. And again, we believe whenever the macro helps, we believe there is a huge potential and high operating leverage in that part of the business, the core one. Your second part, I forgot if you can repeat.

You know, I mean, I guess it's just a little bit related to the level of rates. I mean, do you need rates to go below the 9% level to see that inflection or, you know, throughout 2021, right? I mean, rates were coming from as low as 2%, right? So how low do you think rates need to go to get to see the benefits?

It's hard to say a number, honestly, because we don't know if rates are above 10%, but riskier assets are performing really well and delivering returns higher than that. It's a good environment. If we need single-digit interest rates for that to happen, then we will have to wait for single digits. So I don't have a precise answer to your question, but I think we are...

the good trend but at a slower pace than we would like but again we do not control that sure no understood thanks bruno maybe just one quick follow-up on on the inflows i think in the past i know your net inflows are low but you mentioned in the past that your gross inflows actually must much higher right so you are seeing outflows any color you can give on how gross inflows you're doing

Yeah, it's stable. It's not improving, but it's also not deteriorating further. Where we have more volatility in terms of gross inflows and outflows is in the corporate and company clients that, you know, with the threshold of 700 million reais of annual revenue, it's allocated into retail client assets. So there we have more volatility.

OK, great. Thank you, Bruno.

Thanks, Celo. Next question comes from Gabriel Guzan from Citi.

Hey, guys, good evening. So a couple of questions. First, can you remind us what is inside of the revenues and the main contributions there and why we saw such a strong pace this quarter, both in the sequential comparison in year over year? And also, we saw this quarter your effective tax rate come up, both in the accounting and the managerial view. Can you remind us why is that? What's the driver of these ups and downs? Thank you.

I'll take that. Guzan, thanks. Other revenue, by definition, it's everything that we cannot allocate in the other segments, retail, institutional, corporate, and issuer services. The main revenue there, it's the remuneration over our own cash, ALM. asset liability management, but we also have a lot of other stuff that does not fit in the previous segments that I just mentioned. In third quarter, specifically, we had some one-offs impact that made the revenue higher that we do not see happening in in the following quarters like for example we had the termination of this pack there was there was a financial positive in that with an associated expense so net impact for ebt was zero but something around 40 million reais impacted positively the revenue and also negatively impacted the SG&E. And regarding effective tax rate, Third quarter, basically capital market activity. That's what explains the DCM activity, a lot of revenue at the broker dealer level. If you look at securities placement in our accounting income statement, you're gonna see all time high there and broker dealer has a 40% tax bracket. So it pushes up the accounting effective tax rate. When we look with a longer time horizon, it's our expectation that EBT should be growing at a faster pace than net income, exactly because effective tax rates should be higher going forward. But that's on an annual basis. On a quarterly basis, there is going to be volatility.

Perfect. Thank you.

Great. Next one is Eduardo Rosman from BTG.

Hi, everyone. Congrats on the numbers. I have a question on your credit card business. We've been able to see a very strong growth in revenues, but I wanted to know if we should be thinking about this business as an important bottom line contributor in the future or not, right? I ask that because as far as I know, you know, your clients that invest a lot, probably you have to offer like cash back or invest back. You have a lot of benefits, you know, your clients do not go into revolving. So just wanted to try to, to understand if still, uh, if it's possible to, to generate, you know, good amount of bottom line in the future with that business and also trying to understand, you know, your risk appetite, right? Uh, we just, we just saw, let's say the market as a whole going through problems, right? We, I think, uh, Clearly, you didn't face the same headwinds, but just trying to understand if you could increase your risk appetite and eventually attract more clients that don't have a lot of AOC with you, using the credit card to do that. Thanks a lot.

Thanks for the question, Rosman. Well, first, when we look at the bottom line or the contribution margin of credit cards as of today, it's still negative. But we expect that to change, I would say, at the end of this year, beginning of next year. So it will start to be negative. positive uh contributor on on margin for xp okay so as you know the business of credit card there is a j curve uh as we are we are escalating issuing new cards but we are at the point to become positive okay uh when we look at npl uh of course we have us a big part of the our portfolio uh something like 4.5 to 5 billion reais out of 7 billion that's collateralized so the npl is it's very low okay but when we look the whole portfolio it's close to the npl over 90 days is close to one percent okay and when we look the provisions we have today is two percent so we have two times provisions uh over what we are realizing on on npl so That's basically it's because of the profile of the customers we have, of course. OK, so the NPL that we have is much lower than what the market has. OK, so we have been expanding the portfolio at Ricobrand that has a higher NPL, but with a very good portfolio. L.A., Rachel, when you look at the revenues over provision, so they're still very good.

Great, great, Marfa. If I may, just another question here on another topic, right? I think Bruno was talking about, you know, that the company has excess, let's say, capital, right? And you actually paid a lot, right, this year, right? If we add, you know, buybacks, you know, and the dividends, I'm assuming here, let's say 4.5 billion reais, which is more than 100% of the net income, right? Naturally, I don't think that that's sustainable over time, but just trying to understand if it's your idea to over time to keep paying dividends and or kind of buybacks on a recurring basis in the future. Thanks.

Want me to take that, Maff? Yes, the answer is yes. We are going to keep returning capital to shareholders through buybacks or dividends. And what I mentioned in the presentation, when we look at our capital ratio at XP Inc. level, we ended this quarter, third quarter, above 22%. So it's too under leveraged. We are conservative in terms of our balance sheet. We are not going to be where the banks in Brazil, for example, that we compete against usually are with a capital ratio around 14 to 15%. but we see room to leverage little bit more especially considering that we have a bank now we are uh under uh corporate restructuring in our group to you know have the bank as the parent company of the prudential conglomerate with the broker dealer below it and that's something ongoing in the central bank and that will give us you know the possibility to use the bank better and by that I mean as the main vehicle for funding instruments because a bank as you know can fund itself at the cheaper and in with a strong depth in terms of market So going forward, we are going to keep our profitability, we expect to keep growing our earnings, and we do not need to retain capital to keep growing. And with that in mind, yes, you can expect us to keep distributing capital to shareholders as we move forward.

Great, great. Thanks, Bruno. Mafra?

Thank you, Osman. Now let's try to connect with Batista again from UBS. Batista, please.

Hi, guys. Are you hearing me?

Yes.

Yes. OK. Sorry for the other time. I have one question about the profitability of XP. You already mentioned in the past that the ROE should achieve 30%. Uh, and, uh, but, but when do you believe this is possible would be a 10 years, five years, or to have a, a time horizon for this? Uh, because when we look for intentional peers, uh, we can see some players, uh, like Finneco that has an ROE of 30%, but we also have, uh, Charles Schwab with ROE of 20%. So, uh, trying to see, uh, when, uh, if, if it's three, five, 10 years, uh, horizon to achieve this, this level. the second question is a follow-up about that new money i know that you answer already a lot of questions about it but how uh negative has been the latest uh lc lca and league how much negative has been uh those instruments for xp and if uh part of the corporate corporate structure that you just mentioned uh is to be able to issue lc lc lc is difficult but at least lca lca so if this is linked with your corporate structure?

Start with the ROE question. We didn't set a target for ROE. The 30% that you mentioned, Thiago, is basically a math equation based on the second quarter earnings result that we said, look, if we take out of the capital the excess capital and we also discount from the 977 million reais of net income in the second quarter the remuneration post tax of that excess capital and we analyze that new net income and divided by the new uh equity uh we would get close to 30 so that was just you know a math calculations to say look we have the potential as we move forward and you know start distributing more capital to shareholders again keeping our balance sheets in a very conservative way in terms of liquidity in terms of leverage and so on we are not going to change that but using better the vehicles that we have in the group, leveraging more and reducing our capital ratio as we move forward. The time horizon for that, I'd rather not answer you directly because Otherwise, it would become a guidance when we are going to achieve the potential 30% in the future. What I can tell you is that there is a plan ongoing in the company in terms of corporate restructuring, in terms of, of course, controlling efficiency ratio. That's a must. We are not going to take our eyes out of the ball in terms of efficiency ratio to keep evolving. uh net income and you know controlling the capital ratio so as I mentioned in the call we want to end next year with the capital ration below uh 20 percent and we only gonna achieve that uh keeping our profitability if we distribute capital uh to to shareholders regard the net income was the the net inflow question right child the the second one yes the second question is about the lc lca and league how bad impact yeah yeah the impact it's hard to say how much right we know there is more than two trillion guys sitting on cash in the system right now more than that uh and we we know that when you have these banking funding instruments being favored because of the macro conditions, it becomes much more a balance sheet business than an investment business by itself. And XP does not have the balance sheet that our competitors have. We do not want to have. And in times like that, we have less products like this one well of course we have a lot of fixed income products with good returns we we try to compensate that with other offers i mentioned in in past uh i don't know if calls or conversation with investors for example we did an agreement with one of the big five banks to buy some lci from them and we could distribute billions in a matter of a few months so there is uptight in our client base to buy that type of product whenever the market is

like the way it is uh right now but we do not have the balance sheet business uh as of the banks that's that's a certainty the last follow-up sorry bruno but uh in your corporate structure to trying to become a bank uh is uh to trying to issue at least lca or or not

not not really that's not the plan the plan again we the strategy started to go beyond the investment so we could have uh other products to make our clients you know get rid of the incumbent banks and and and cut completely the link with the incumbent banks that was the strategy we are following up that strategy as we move forward and by having a bank it gives us the possibility with this corporate restructuring to put the bank as the main entity in brazil for funding purposes and then we can leverage more we can lower the cost of funding just to give an example we have a corporate bond issue at xp investimentos sa roughly 2 billion reais. It doesn't make sense. The bank can issue a financial bill at a cheaper cost and easily. So it makes part of the strategy to have a better corporate structuring, and it's natural. We are moving forward as we develop the bank. It's not to have LLC, because then it becomes a balance sheet business.

Thank you. Very clear.

Thank you, Batista. And now we have Neha from HSBC. Hi, Neha.

Hi, congratulations on the results and thank you for taking my question. Just had a quick clarification on what you mentioned about the modal transaction. So what was the impact this quarter and when do you expect the transaction to be accretive and what is the level that is required to be accretive? Just some clarification of that is not very clear. Thank you so much.

As Bruno mentioned, and thanks for your question, Niha. As Bruno mentioned, the net income impact was close to 20 million reais, positive. Okay. And we expect the deal to be accretive in 2024. As Bruno mentioned, to be accretive, we'll have to make 150 million net income or more. Okay. So that's what we expect for 2024.

Perfect. Super clear. Thank you so much, Kevin.

Thanks, Neva. And now we have Jeffrey from Autonomous Research.

Hello, thanks very much for taking the question and apologies for the background noise here. Quick one on the DCM. revenues. Clearly, there were some big DCM deals in the quarter. Was there also an impact to retail revenues from those, I guess, on the distribution side? And could you help us quantify it? Thanks.

Yeah, DCM, as you know, there is a secondary trading part and the primary issuance part, that is the channel fees. In this quarter, we do not disclose, Jeffrey, exactly the numbers between secondary and primary. what I can tell you is that secondary is still the most relevant one, and it was more relevant than primary in the third quarter this year. But when we compare to previous quarters, the primary component of revenue in third quarter compared to second quarter, for example, was approximately double. So, yeah, we did have some Some very good offers in terms of channel fees that helped fixed income to reach this historical revenue in a quarterly basis of 718 million reais.

Okay, thank you. And then just a quick clarification. The capital adequacy ratio at XP Inc. you've been discussing of 22, just over 22%. Do you disclose the numerator and denominator on that anywhere?

Yeah, basically our total RWA as we calculated it would be around 78 billion reais so basically we have a you know balance sheets north 230 billion so one third of our balance sheets is uh assets with risk the other parts basically no risk assets all right thanks very much and apologies again for the background noise

no worries jeff uh and now the last question from yuri fernandez fernandez from uh jp morgan uh i will limit myself to one question just on expenses uh here uh this quarter was a little bit confusing right you had modal uh revenues were super strong and i think this also usually trigger higher expenses, but you are within your guidance, right? Even if you reassume another forfeiture similar to the third quarter, you still will be able to deliver your SG&A guidance even with modal. So just some qualitative takes from you guys. How do you see expenses? Do you believe expenses should, I don't know, accelerate because for some reason you invest more or you need to normalize, I don't know, compensation for XP or no? Or do you see more room for operating leverage and having expenses growing below revenues for 2024? Anything you can share on expenses I think will help us to understand a little bit the outlook because you already made it clear during the call that revenues are not totally there yet on retail. Like there are some improvements here, some improvements there. But revenues are still, from my take here, a little bit challenging. But on expenses, you are doing a good job. So I would like to hear from you, your take on expenses. Thank you.

Thank you, Yuri. Going to your question, as Bruno already mentioned, this quarter we have some impacts, okay? The first one is expert. We have the revenue and we have the expense. We have the SPAC that Bruno mentioned. And, of course, we have modal that we consolidated the number that we opened that it was $100 million and $11 million. uh million Reais okay so if we sum up all these effects it's uh above 200 million okay so when we look the year the projection for the year will be uh delivering the target that we mentioned, the guidance that we gave will be there. Remember that the guidance we gave was excluding modal, and now we are including modal in the number. And for next year, we don't need to do any big investment okay to to grow uh that's why we have been saying about the operational no leverage that we have we don't need more investments to do more revenues on the core business investments uh of course for all the reasons we mentioned here about the market the risker assets performance and so on uh we don't know when we'll see this recovery on on the retail revenues but uh once it happened uh we expect you to have gains uh of margin here and what i can tell you is for next year, we will continue to pursue better efficiency ratios. Of course, we cannot guarantee and will not give any guidance for that for next year, as we already mentioned, but you guys have our commitment that we are going to pursue even better efficiency ratios in 2024.

Super clear, Mafra, and congrats on the quarter.

Thanks, Judy. Thank you for your question. It was the last one. So we would like to thank you all for participating in the call. We'll be available with the IR team to discuss the results with you later. And have a good night, everyone.