XP Inc.

Good evening, everyone. I'm Andre Prezi, RO at XP, Inc. It's 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 our 2024 second quarter earnings call. This quarter, the results will be presented by our CEO, Thiago Mafra, and our CFO, Victor Mansur, who will both be available for the Q&A session right after the presentation. If you want to ask a question, you can raise your hand at 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. There is a button below if you want to turn on the translation. And before we begin our presentation, please refer to our legal disclaimers on page 2, on which we clarify forward-looking statements, additional information on forward-looking statements, can also be found on the SEC filing section of the IR website. So now I will turn it over to Thiago Mafra. Good evening, Mafra.

Thank you, André. Good evening to all. I appreciate everyone joining us for our 2024 Second Quarter Earnings Call. It's a pleasure to be here tonight. Let's delve into our quarterly performance and discuss the strategic steps we are undertaking to ensure our continued growth and dedication to all shareholders. I would also like to extend a warm welcome to Victor Massoud, our new CFO, as this is his first earnings call with us. We are excited to have him on board and look forward to his contributions to our financial strategy and operations. This quarter has been positive for XP. We have showcased our ability to generate alpha and achieve growth with profitability by managing several business levels independently from the challenging conditions. Our total client assets have increased by 14% year over year, reaching 1.2 trillion. More importantly, we have observed a re-acceleration in our client net inflow this quarter, details of which we will elaborate on during the presentation. We have also set a new record in the total number of advisors, reaching 18.3 thousand, and continue to expand Brazil's largest investment specialized sales force, growing 11% year-over-year. Finally, we ended with 4.6 million active clients, marking a 16% increase year-over-year. We had our all-time high in revenue, EBT, and net income. Gross revenue was $4.5 billion for the quarter, up 21% year-over-year. of 1.4 billion, 43% higher year-over-year, and 1.1 billion in net income, with a margin of 26%. This result reinforces and gives us comfort that we are on track to deliver our gross revenue and EBT margin guidance in 2026. We will go into more details on the financials later on. In terms of balance and profitability, we closed the quarter with a return on tangible equity of 27.2%, the highest in the past two and a half years. XP's managerial Basel was at 20.5% level. The EPS for Q2 2024 was R$ 2.03 per share, a 10% increase year over year, partially reflecting the share buyback that we have completed in the second quarter, aligned with our capital return plan to create value to shareholders. On the back of so many levers that we have been implementing for growth and with strict cost control, as it has been the case, we do are expecting improving results for the second half. Moving on to the next slide, we'll look at our strategy tracker, reminding here the main levers of business growth. We'll dig deeper in each of them. Also, we'd like to highlight our gross revenue and EBT margin. If you remember our investor day, back in December, we have shown our last 12 months gross revenue as 14.8 billion. And since then, we have increased our gross revenue to 17.4 billion LTM, with an implied 25% CAGR. In order to reach the top of the guidance, we need from now on a 19% CAGR until 4Q26. Regarding our LTM EBT margin, we have reached 28.1%, a 180 bps expansion compared to our 30 quarter 2023 LTM figures. indicating that we are in the right pace to reach the 30% to 34% target range in 2026. Now, starting with retail investments. In this slide, our goal is to establish ourselves as leaders in investments, which is our core business. As highlighted in the first slide, a key achievement this quarter was the improvement of net new money. We record 32 billion in net new money for the quarter with 24 billion coming from retail. This means that in retail we nearly doubled quarter over quarter. We attribute this improvement to several factors, but primarily we believe this improvement is a result of effectively executing the levers we control. These levers include, first, product platform, the largest investment platform in Brazil, which continues to be a major differentiator through our constant innovation. And in this environment, our fixed income platform is expected to maintain its protagonist in the market. And part of this competitive edge is related to our efforts in structuring and warehousing new assets for retail distribution through our wholesale banking. Second, diversification and expansion of channels. Few years ago, we launched the internal advisors model becoming a dual distribution channel business and today as we speak we have moved to a multi-channel distribution with IFAs, internal advisors, consultants through our RIA channel and the digital channel. At the same time that we have been growing our IFA channel We already have around 2,000 internal advisors and 1,000 RIAs. Our RIA channel, for example, already represents 10% or more than $100 billion of our total client assets. All the new channels combined represent around 50% of our total retail client assets. Third, focus on productivity. through our empowering tools for advisors, such as the Hub, XP Academy, and the provision of data and intelligence to the sales force, ensuring their long-term success. Lastly, it's worth mentioning the continuous evolution of the company's mindset, transitioning from a product distribution firm to a service provider. This shift permeates all areas, including the entire sales force, aligning with our quality initiative and financial planning, catalyzed by open investments, and now our cross-selling initiatives. We are leading... Another business that presents an opportunity ahead is insurance. We are currently less than 2% penetrated and we expect to grow 3 to 4 times over the next years. Still, our total return premiums have seen a 52% increase year over year, reaching R$ 307 million in the quarter. retirement plans we keep presenting market share gains growing our client assets by 18% year-over-year but a 5% market share and also a 5% penetration combined effects global investments and digital account grew 51% year-over-year with 104 million in revenues this quarter and we have a clear plan for each one of them to keep growing. And finally, the corporate and SMB. We have been able to maximize our corporate and SMB clients by leveraging the relationship built with our network of advisors and our investment banking business. We have reached more than 60,000 active clients. It's important to highlight that corporate and SMB client base grew 22% year over year. And we continue to improve penetration with FX, Derivatives and Lowlands. It's worth mentioning that in Derivatives we improved from 10th to 5th position during the last 2 years. And on FX we also improved, moving from 41st to 16th ranking position during the last 4 years. As a result, we have been able to grow corporate gross revenue by 50% CAGR second quarter 24 last 12 months versus third quarter 23 last 12 months when we held our investor day. We have just launched the corporate digital account in August and will launch trade finance soon, reinforcing our cross-sell opportunities for the next years. Vitor will give more details about the revenue growth. Now, I will hand it over to Vitor so he can discuss this quarter financials. Thank you.

Thanks, Mafra. Good evening, everyone. It's a pleasure to be here with you. As this is my first earnings call, before I go to the second quarter numbers, I think it would be interesting to share three pillars we are focused on for the years to come. First, a short-term objective, our corporate restructuring. As you know, we have a banking ecosystem, and having a bank can provide us higher leverage and lower costs. At the same time, we can structure new products. To get all the benefits of having a banking ecosystem, we have started a corporate reorganization last year to have XP Bank as the parent company in Brazil, when completed. This will provide lower cost of capital by increasing our ability to issue Tier 1 and Tier 2 debit. The process if the central bank is flowing is expected and we should have it completed by the end of the year. Second, a mid-term objective, or guidance delivery. EBT margin expansion should come through new products increasing profitability as they evolve in the ecosystem, coupled with a strict cost discipline without harming innovation, which is part of our DNA. And third, a long-term objective, capital allocation. We understand that having a continuous capital management through disciplined capital allocation and return capital to shareholders is key for our long-term goals. XP is a profitable company, generates cash, and does not need to reinvest 100% of its profits to grow. Capital allocation decisions are based on ROE, profitability, and connection for long-term strategy. The combination of these initiatives should lead to higher returns going forward. I think it would be interesting to share three pillars we are focusing on for the years to come. And now, let's go to the numbers. Total gross revenue grew 21% year-over-year and 5% quarter-over-quarter. Once again, XP posted positive performance in capital markets, reflected both in retail, especially fixed income, and corporate industry services. Institutional revenue was slightly lower quarter over quarter. On the right-hand side of the slide, we can see our gross revenue breakdown. And the trend is still the same of last quarter, when corporate industry services increased their participation on total gross revenues. Let's move to the next slide with more details on retail. Retail revenue achieved 3.3 billion, a 14% growth year-over-year and a 5% growth quarter-over-quarter. Fixed income was the main highlight, with a 42% growth year-over-year and a 17% growth quarter-over-quarter. which was driven by our capacity to develop new products, including corporate credit and structure notes through primary offerings, and our capacity to provide liquid in the secondary market, considering our higher than 50% market share in most of securities. Moving on to the next slide, we will talk about corporate and issue services revenue. Corporate and issue services posted an all-time high revenue, achieving $629 million in the quarter, which represents 122% growth year-over-year and 24% growth quarter-over-quarter. Issue services continue to present a fast pace of DCM activity, posting higher revenues than last quarter and reaching $384 million, a 145% growth year-over-year and a 37% growth quarter-over-quarter. By having a consolidated investment banking business with solid credentials, we can reach our corporate clients to cross-sell. In that sense, corporate presented the same trend of last quarter. If transactional revenue is growing on the back of derivatives and effects, corporate posted to $145 million a quarter, a 94% growth year-over-year and a 7% growth quarter-over-quarter. On the right-hand side of the slide, we explain a little better the cycle I am referring to, which connects both our retail and corporate and investment banking business. XP Loan Book is primarily focused on supporting our warehouse business, making sure it's paving the way to our retail distribution. In this quarter, we originated 10 billion new corporate securities warehoused in your balance sheet. In time, those securities will be sold to our retail clients, and this revenue will show as fixed income. Finally, by having the market-making capabilities, we can also recycle this risk and provide the liquid to our different types of clients. maximizing the return of our balance sheet. Moving on to the next slide, we will explore SG&A and efficiency ratios. Cost discipline and efficiency are priorities in your business to keep XP competitive. With that in mind, we achieved the best efficiency ratio since the IPO, if 36.1%. 220 base points better year over year and 40 base points better quarter over quarter. SG&A X incentives reached $1.4 billion in the second quarter of 2024, a growth of 14% year-over-year and flattish quarter-over-quarter. Bear in mind that on the second quarter of 2023, we didn't have modal SG&A in your financials. The strict cost discipline, along with our innovation initiatives, will allow us to keep expanding our EBT margin in direction of our guidance. EBT achieved the highest level in our industry, a combination of rising ecosystem revenues and strict expense control, reaching $1.4 billion. This represents a growth of 43% year-over-year and 27% quarter-over-quarter, driving our EBIT margin to 32.8%, a 552 base points growth year-over-year and a 509 base points growth quarter-over-quarter. On a last 12 months basis, our EBT margin reached 28.1%. We expected to improve our EBT margin on an annual basis toward our guidance in 2026. Let's see our net income on the next slide. We also achieved the highest net income in your history, 1.1 billion in the second quarter of 2024, growing 14% year-over-year and 9% quarter-over-quarter. Net margin posted 26.5% in the second quarter, a decrease of 103 base points year-over-year and an increase of 110 base points quarter-over-quarter. As we mentioned in the investor day, we expect XP effected tax rate on our last 12 month basics to gradually increase over time due revenue mix, since cross-sell and corporate and SMB business keep evolving and present a higher tax rate. Let's move on to the next slide to talk about capital management. As I already mentioned, an efficient capital management is key to achieve our long-term objectives. During the last two and a half years, we have distributed over $7.5 billion through dividends and share buybacks. Those distributions are connected to our strategy to return part of the excess capital at XP Inc. level to shareholders, while keeping a conservative Basel index. As we mentioned in your Investor Day, we intend to reduce it across the years between 16% to 19%. Those initiatives together for net income growth result in higher returns going forward, as we are going to see in the next slide. You can see the evolution of our earnings per share posting a solid growth and achieving 2.03 reais, a 10% year-over-year and a 90% quarter-over-quarter. During the second quarter of 2024, XP posted 27.2% in ROTE, with an increase of 310 base points year-over-year and 108 base points quarter-over-quarter. We believe that ROTE presents a better comparison to peers in Brazil due to BRGAP and IFRS differences. Now, I turn over to Mafra for his final remarks.

We had a solid quarter with revenue growth and operating leverage. This combination gives us confidence that we are on track to deliver our 2026 guidance. All initiatives, from distribution channel diversification to Salesforce expansion, are proving that we are in the right direction to deliver our higher level of net new money compared to last year. Finally, we believe that we are keeping and enhancing our moats by, first, offering the best product platform in the country, ensuring that our customers have access to an unmatched range of solutions. Second, empowering the largest and best trained sales force in the industry. Third and last, evolving our company's value proposition to a new level of service excellence, moving beyond the traditional product distribution model to a far more sophisticated and value-driven approach through financial planning. Now André Parisi will start our Q&A session.

Okay, thank you, Mafra. We're going to start the Q&A and the first questions coming from Antonio Huet, Bank of America. Antonio, can you hear us? Thank you, Mafra. Thank you, Mafra. We're going to start the Q&A session. And the first question comes from Antonio Huet, Bank of America. Can you hear us, Antonio? Can you hear us, Antonio?

Can you hear me?

Thank you very much.

Thank you very much, Antonio. Thank you.

Okay, we believe we got back here in our Q&A session. The next question is to Jorge Cury from Morgan Stanley.

Okay.

We apologize. We are still fixing the Zoom connection. Please hold for one, two more minutes. Thank you. Okay, I believe we're back. And the first question is for Antonio from Bank of America. Antonio, you may proceed.

Hi, good evening, guys. Can you hear me?

Yes, we can.

All right, all right. So two questions on my side. So first on net inflows, if you could please explore a little bit the consistency and the quality of these net inflows. So how do you break down in terms of across inflows and also outflows? Also in terms of mix and is it coming from other players? Is it new money? So a deep dive here on net inflows. And my second question on headcount. We noticed that headcount increased in the quarter, and if you could explore a little bit here this team, it would be great. Thank you.

Hello, Antonio. This is Thiago. So, first of all, sorry to everyone that is here on the call for the problems we have. So... We never open outflows and inflows, okay? And not even where the money comes from. So what I can tell you, there is nothing not organically here in the number. So it's 100% organically. And as we mentioned, it's more related to the levers that we have been working on in the past quarters, that they are maturing and starting to bring more net new money. So, yes, we believe the worst is behind us. We are not going to give up. short-term numbers for next quarter or the next quarters. But what I can say is we do not expect to go back to 13, 12 billion as the last quarters. So that's basically what we believe. So we expect good levels of retail net new money going forward. For headcounts, basically what we have been hiring people is especially as we opened last quarter that we have almost 2,000 internal advisors. So we have been, I would say, increasing the number around 80, 100 per month. Okay, so internal advisors. So that explains a good part of the number here. Of course, we have some other like hirings. We had an internship program with 200 interns. So that's the number.

All right. Thank you.

Okay, the next question is from Jorge Cury and Morgan Stanley. Jorge, you may proceed.

Hi, everyone. Thanks for the opportunity to ask questions and congrats on the numbers. Sorry to re-ask the previous question again, but I do think it's important. On the inflows, I mean, I appreciate the... explanation that Mafra gave about some of these competitive advantages that you have, and if you go back to that slide where you show them next to the inflows, I mean, it feels to me that all of those things were in place you know, a year ago and certainly a quarter ago, like, you know, your multi-channel distribution, your product capabilities, your digital capabilities, your robust IFA network. I don't know that there is any material difference in the last three months on any of those items. And it feels to me that, you know, maybe there is a cyclical component here on the recovery of uh net inflows and so to the extent that you can help us understand better uh you know to what extent indeed there is something cyclical maybe the volatility that happened in the quarter i mean the market sold off aggressively in june and then they picked up again the currency devalued so any any more color on on these very notable and i think important increase in uh inflows would be helpful. Thank you.

Yeah. Yeah, for sure. Most of these levers, they were in place, but they were not mature if we go back. Of course, they didn't mature from one month to the other or from one quarter to the other. They're maturing. And of course, we have some other levers that helped us to increase the number. For example, if you compare today that we have 11.5% instead of interest rates, instead of 13.75%, and you have REITs paying 1% a month, when you compare that to the CGs from the banks, the changing regulation, all this stuff, of course it helps, but I would... attribute more value like to everything that we have been doing everything that we control than a macro environment okay so and again it's not uh something that uh it's specifically to this quarter okay that so then in q3 we are going back like to 13 12 from q4 and q1 It's more like a normal level. Of course, there are volatility. It can be slightly lower, slightly higher in the next quarters. But there is nothing not organically here. So we expect that the worst is behind us, that we are going to deliver good retail net new money in the next quarters.

All right, great. Thank you, Matra.

Okay, next question comes from Renato Meloni from Autonomous. Renato, you may proceed. Hi, Ren. Can you guys hear me?

Yes, we can.

Thanks for this space here for questions. And welcome, Victor, to your first call here with the team. So just like following up on that new money, on the last call, you said, Mafra, that you would take some time to return to normalized levels of net new money similar to the previous year. And in fact, the numbers were today much better than any quarter, at least organically last year. So I'm wondering here what changed from your view from the past quarter and what's the, I would say, sustainable level of net new money for the coming quarters. And just a second quick question, what drove the increase in the effective tax rate that was much higher this quarter. Thank you.

Okay, I can take the first part and then Vitor take the HR question. So, again, the normal level was not the 13 and 12 billion from Q3, from Q4 and Q1. That was not normal. Okay, so, and when I say that going back to normalized levels is more like true. What we have been doing in 2021, 2020, early 2022 that we are doing like 30 billion okay per quarter that's what I said that we it may take some time to go back there but again the levels that we are delivering right now more can be a little more a little less uh 20 20 plus against 13 that's more normalized level for the moment but again we are working very hard like to at some point in time in the next years to go back to 30 40 because we believe that our mode our competitive advantage is still in place that's what we have been talking to all the investors in the past i would say almost a year um The question has been always, okay, now the banks or the competitors, they have closed the gaps. You guys have lost the competitive advantage. And we always said, no, it's something that's temporary. At some point with everything that we are doing, we revert that. I believe that's the beginning. Okay, so of these new levels, of course, we are not happy with the 2021. that we deliver right now. We are working very hard to go back to higher levels, but it may take some time.

Okay, thank you. Sorry, Renato, you were saying?

Nature. I got it, but just to stay on that point, I think part of the question is what changed from your view in the previous quarter, or if maybe nothing changed?

Yeah, nothing changed. All the work we have been doing in the past quarters.

Okay, thank you, Renato. And thank you, Paul. It's a pleasure to be with you all for the first time. And moving to the HR question. Basically, the HR is a result of revenue mix. As we commented before, the corporate industry services was one of the highlights of the quarter. And they are higher tax business as they are in the bank. And what I can say about that, we expect that the tax rate of this quarter to be the highest quarterly rate of this year. But I recommend that you look at the last 12 months normalized ETR. That is a better method because it's considered the tax paid in the proprietary funds and this moves the impact of the quarter revenue mix variation. And this number was in 18.5 from this quarter. And we can expect this number to be around that over the year.

That's very clear. Thank you. Thank you.

Okay, next question is from Daniel Vaz. Daniel, you may proceed.

Hi, guys. Hi, Mafra. Hi, everyone. Yeah, your distribution capabilities are indeed very strong. So you have these competitive advantages. So with strong DCM issuances this quarter, probably it was a key driver, right? So I think nothing has changed, right? So organically, you're still very capable of raising this net new money organically. So I wanted to understand here these robust numbers in distribution, how this has helped the net new money in this quarter. So Is the growth more concentrated in bank funding instruments or this taxes and private credit? So just a bit to qualify the distribution and the net new money, if you can. And the second question about corporate, if you can give us a little bit more context on that, because it was very strong and this is not as mature, right? So it would be good to hear from you. Thank you.

Hi, Daniel. Thank you for your question. And as we come in the retail, the fixed income was the main highlight in the retail business. And basically, we have a close relation if the retail fixed income and the DCM activity. And as you can see in your balance sheet, we originate a lot of new activity. new fixed income instruments over the quarter. And of course, this helps us to generate fixed income revenues. And this helps a lot if the net new money. And I don't know if that answered your question. If it does, we can move to the next point.

Just to comment here. When we said, if you go back to my slide about that new money, the first point was the product platform, okay? Victor just mentioned that. the integration between GCM and retail distribution, okay? But we go beyond that, okay? So if we get the size, that's public. So if you get all the REITs offering that we did this year, we have been able to raise in a single offer almost 2 billion reais, okay? So what we saw in the first quarter and also in the second one is the appetite for, I would say, more diversified products when compared like to last year that people are only looking for cgs tax exempt cgs from the banks okay okay regarding the corporate side uh any any comments here please i think the copper sides uh reflect of what mafia told about the building of new products

corporate SMB clients. And basically, if you look at the ranks, we didn't have any derivative capabilities two years ago. And if you look at our FX ranking, we also didn't have this business two to three years ago. And basically, as we grow those products in our platform and user relationship, we are capable to do more cross-selling for those clients. Where I have the client and where I have the product. So those business lines should be growing in the pace of our guidance.

So the next question is from Tito Labarde from Goldman Sachs. Tito, you may proceed.

Hi, good evening, everyone. Thank you for the call and taking my question. Another question on the inflows. But more, how do you think that can benefit revenues going forward? We did see a bit of a pickup in retail revenues this quarter, 5%. But in the past, you said your revenues are not that correlated to inflows. How do you think a nice pickup in inflows Can this translate to a further acceleration in revenues growing forward? Just see how you think about that. And then just another question on your EBT margin, right? I mean, big improvement there. How do you think about the sustainability of that margin? Anything that was maybe one-off that led to the big improvement in the quarter? How do you see it going forward? Thank you.

Okay. Thank you, Chito, for your question. I will take the first one and, Peter, the second one. So about the revenue and correlation with net new money, Of course, there is a small pickup, okay? Because imagine that we have inflows and outflows, okay? But it's small when you compare like to the whole way you see that we have. So today we have almost 1.1 trillion reais of retail clients, okay? And the... whole portfolio that we have is much larger than any net new money. So we don't see a big correlation in both of them. But yes, what Why net new money is so important? Because that proves that the mode of the company and the growth, the future growth, it's here. So that's why net new money for us is the main KPR. Because that dictates how it's going to be the company a few years down the road. More than the revenue this quarter or next quarter.

Hi, Tito. Thank you for the question. I think the EBT margin rationale is the same of the ETR. You should look at the last 12 months margin that is currently at 28. Looking at that margin, you should see a slight improvement toward our guidance levels over time. And that will eliminate any variance quarter over quarter to do business mix or ETR.

Okay, no, that's helpful. Thank you. And just maybe just in terms of the, on the revenue outlook, are you feeling more comfortable with the revenue outlook from here? Any, you know, just potential catalyst to sort of accelerate the revenues? Just thinking of where we are in the cycle and the range is so high.

Yeah, not sure if I understood your question. The revenue for... On retail revenue? Yeah. Can you repeat the question?

Sure. Yeah, sorry. Just on the outlook for retail revenues, right? I mean, there was the pickup this quarter. I mean, do you think that the outlook is maybe improving to some extent? You know, we still have high rates. How do you see, you know? Yeah. Yeah. Yeah.

As we mentioned in the presentation, we expect the second half of the year to be better than the first half of the year. OK, so again, we are not giving guidance for the next quarter or for the year, but you can have in mind that the second half should be better in terms of performance. revenues, net income, and so on. Because again, the guidance for 2026 is still in place, nothing changed. And if you look at the numbers, the CAGRs we have to deliver on revenue for the top of the guidance is 19%. The increasing margin EBT going to the range 30 to 34 we should start like to pick up in all these metrics otherwise we would not go there okay but and we just mentioned that we are on track so you can expect the like all these numbers to improve in the next quarters of course there are volatility we can uh go down in some of the quarters until the end of 2026 but the trend is upwards okay so you can expect the second half of the year to be better than the first one

All right, perfect. Thank you very much and congratulations on the results.

Okay, the next question is from Olavo Artuso from UBS. Olavo, you may proceed.

Thank you, guys. Thank you for taking my question. I have two, but my first is just a follow-up on my colleague's question on that new money. And I totally understand the explanation for this performance this quarter. It was related to the leverage you have been working on. But questioning on the other way, I understand that the change in taxes of instruments had some effect, even a small one. And also, the smooth decrease in the policy rate had some effect as well. So could you just please give us a magnitude of these two impacts over the flow, the square Basically, just the magnitude, like if those two effects had less than 10% effect over the net new money, that would be helpful. Thank you. And then I'll go to my second question.

Yeah, yes, for sure. There was a positive impact from the change in regulation, for sure. The banks, they have less capacity to issue this type of tax exempt products, but it's almost impossible to say what's the percentage of the increasing in that new money coming uh because of jesus or because all the other factors is not just one factor i understand that most of the questions here is they are trying to find one explanation there's not one there are many okay many combined levers uh some or most of them that we control some of them that is the market the interest rate 11.5 is different from 13.75 we always said that okay uh so uh it's important to understand that it's not one point, okay? So again, we always said that we don't need like a much better macro environment and we don't need interest rates like to go to 8%. We don't need like a stock exchange to perform well, like to go back to bring that new money. So we are not macro dependent. So that's the point. And we'll not have only one explanation.

OK, that's great. Understood. So I find me on my second question and I will shift the discussion to the credit card business because I saw you continue to expand its active credit card base. But I know that the most we spend it, drop it for the second consecutive quarter here. So, guys, I just wanted to understand if this is solely related to the macroeconomic backdrop that we are living, or if this could be related to the clients that use your credit card moving to other banks or fintechs. Think that a sort of credit card offers a similar 1% cashback and several other benefits. Any call on that will be helpful. Thank you again. Thank you.

Okay. Yes. About credit cards. Basically, we have two levers here to work on. First of all, today we have 2 million eligible clients. Okay. So out of the almost 5 million clients, only 2 million clients from all the brands are eligible to have our credit card. Okay. So if you get the number of issued credit cards, around a million cards. Okay. So it's a 50% penetration. So here we have two levers. The first one, it's improve the benefits that we, or the choice we give to our customers. Okay, so we just released the miles points for credit cards. So we believe we can capture clients that perceive more value added on points than only invest back. So that's one. And the second one, It's how we make the other 3 million clients eligible. Of course, working with the right loss absorption, with the right level of risk. So we have been working on increasing the number of eligible clients. So we believe that we can go back on track to capture more growth on credit cards in the next quarters.

Okay, next question is from Neha Agarwala from HSBC. Neha, you may proceed.

Hi, thank you for taking my question and congratulations on the results. On the cost of services, I think the control over COGS was quite impressive, which also led to the gross profit expansion. Could you talk a bit about that? How sustainable that is? What levers did you pull there for such a good control on the cost of services? And my second question is on the loan book. If I'm looking at the correct numbers, the credit portfolio actually went down 14% quarter on quarter. So if you could just explain why the decline in the credit portfolio. Thank you so much.

Hi, Niha. Thank you for the question. First of all, the COGS, I think that's a reflection of our operational leverage and our capacity to do more business without increasing costs. And you can see both of those effects in COGS and SG&A, and this trend should go towards the year. And if I may go to the loan book question, basically what we did, we securitized part of our loan portfolio and moved that to our corporate bonds as a financial debenture. And this is part of our risk recycle process. And we should use those corporate bonds as collateral for repo operations against our clients and eventually to sell those operations in your ecosystem.

If I understand, this is new, right? You had not done this in the prior quarters. So what was the motivation regarding doing this?

It's new. It's the first time that we did that. And the idea is to create a process to recycle the risk in your loan book. And it's the first time. And we should see that in the future. Keep seeing that in the future. Sorry.

So was the asset quality worse than expected? What was the reason for this recycling of the loan book?

No, the quality of the assets are the same as always. Low risk, good clients, a good portfolio. And the idea here is create instruments to recycle risk at the same time that we can provide new products to our clients. And by doing that, we can increase our capacity to originate new assets at the same time that we create new products to our retail distribution. And basically, that is the idea.

Okay, and also the provisions this quarter was low, is this related to this recycling?

It's partially related to this recycling and partially related to some operations that we cover, that we cover from other periods.

Okay. Okay, great. Thank you so much.

Thank you for your question. It's okay. We are up on the hour. So thank you, Mafra. Thank you, Victor. Thank you, all of you participants today. I apologize once again for our troubling connections. And we are available, our team is available for any further questions. Thank you once again. And we see or we talk to each other on the next quarter. Thank you.