XP Inc. (XP) Q2 2024 Earnings Call Transcript

XP Inc. (NASDAQ:XP) Q2 2024 Earnings Conference Call August 13, 2024 5:00 PM ET

Company Participants

Andre Parize – Head, Investor Relations
Thiago Maffra – Chief Executive Officer
Victor Mansur – Chief Financial Officer

Conference Call Participants

Antonio Huet – Bank of America
Jorge Kuri – Morgan Stanley
Renato Meloni – Autonomous Research
Daniel Vaz – Banco Safra
Tito Labarta – Goldman Sachs
Olavo Arthuzo – UBS
Neha Agarwala – HSBC

Operator

Good evening, everyone, I’m Andre Parize, IRO 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 Maffra; and our CFO, Victor Mansur, who will both be available for the Q&A session right after the presentation. [Operator Instructions]

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 filings section in our IR website.

So now, I’ll turn it over to Thiago Maffra. Go evening, Maffra.

Thiago Maffra

Thank you, Andre. 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 education to all shareholders. I would also like to extend a warm welcome to Victor Mansur, 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 levers independently from the challenging conditions. Our total client assets have increased by 14% year-over-year, reaching BRL1.2 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 continued 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, EBITDA and net income. Gross revenue was BRL4.5 billion for the quarter, up 21% year-over-year. And EBITDA of BRL1.4 billion, 43% higher year-over-year, and BRL1.1 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 EBITDA 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] (ph) Basel was at 20.5% level. The EPS for Q2 2024 was BRL2.03 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 a 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 EBITDA margin. If you remember our Investor Day, back in December, we have shown our last 12 months gross revenue as BRL14.8 billion and since then we have increased our gross revenue to BRL17.4 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 4Q 2026.

Regarding our LTM EBITDA 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 BRL32 billion in net new money for the quarter with BRL24 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 protagonism 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 evolved 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 BRL100 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 [Technical Difficulty] another business that presents an opportunity ahead is insurance. We are currently less than 2% penetrated and we expect to grow 3 times to 4 times over the next years. Still, our total written premiums have seen a 52% increase year-over-year, reaching BRL307 million in the quarter. On 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, FX, global investments and digital account grew 51% year-over-year with $BRL04 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 loans. It’s worth mentioning that in derivatives, we improved from 10th to 5th position during the last two years. And on FX, we also improved, moving from 41st to 16th ranking position during the last four years.

As a result, we have been able to grow corporate gross revenue by 50% CAGR second quarter 2024 last 12 months versus third quarter 2023 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.

Victor Mansur

Thanks, Maffra. 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 focusing on for the years to come.

First, a short-term objective, our corporate restructuring. As you know, we have a bank in our ecosystem, and having a bank can provide us higher leverage and lower costs. At the same time, we can restructure new products. To get all the benefits of having a bank in the ecosystem, we have started a corporate organization 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 debt. The process if the Central Bank is flowing is expected and we should have it completed by the end of the year.

Second, a midterm objective, our guidance delivery. EBITDA 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 returning 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 with our 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 & Issuer 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 & Issuer Services increased their participation on total gross revenues.

Let’s move to the next slide with more details on retail. Retail revenue achieved is BRL3.3 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 structured motes through primary offerings and our capacity to provide the 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 & Issuer Services revenue. Corporate & Issuer Services posted an all-time high revenue, achieving BRL629 million in the quarter, which represents 122% growth year-over-year and 24% growth quarter-over-quarter. Issuer Services continue to present a fast pace of DCM activity, posting higher revenues than last quarter and reaching BRL384 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, with transactional revenues growing on the back of derivatives and FX. Corporate posted [BRL204.5] (ph) million in the quarter, a 94% growth year-over-year, and a 7% growth quarter-over-quarter.

On the right hand side of the slide, we’re explaining a little better the cycle I’m 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 BRL10 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 our 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 of 36.1%. 220 basis points better year-over-year and 40 basis points better quarter-over-quarter.

SG&A ex-incentives reached BRL1.4 billion in the second quarter of 2024, a growth of 14% year-over-year and flatish quarter-over-quarter. Bear in mind that, on the second quarter of 2023, we didn’t have Modal’s SG&A in your financials. The strict cost discipline along with innovation initiatives will allow us to keep expanding our EBITDA margin in direction of our guidance. EBITDA achieved the highest level in our history, a combination of a rising ecosystem revenues and strict expense control, reaching BRL1.4 billion. This represents a growth of 43% year-over-year and 27% quarter-over-quarter, driving our EBIDA margin to 32.8%, a 552 basis points growth year-over-year and a 509 basis points growth quarter-over-quarter. On a last 12 months basis, our EBITDA margin reached 28.1%. We expected to improve our EBITDA 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 our history, BRL1.1 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 basis points year-over-year and an increase of 110 basis points quarter-over-quarter. As we mentioned in the Investor Day, we expect XP effective tax rate on a last 12 month basis to gradually increase over time due to 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 BRL7.5 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 our Investor Day, we intend to reduce it across the years between 16% to 19%.

Those initiatives together, if our 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 BRL2.03, a 10% year-over-year and a 9% quarter-over-quarter. During the second quarter of 2024, XP posted 27.2% in ROTE, with an increase of 310 basis points year-over-year and 108 basis points quarter-over-quarter. We believe that ROTE presents a better comparison to peers in Brazil, due to BR GAAP and IFRS differences.

Now, I turn over to Maffra for his final remarks.

Thiago Maffra

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 sales force 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 modes 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 Andre Parize will start our Q&A session.

Question-and-Answer Session

A – Andre Parize

Okay. Thank you, Maffra. We’re going to start the Q&A. And the first question is coming from Antonio Huet, Bank of America. Antonio, can you hear us?

Thank you, Maffra. 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?

Okay, we believe we are back. And the question is for Antonio Huet from Bank of America. Antonio, you may proceed.

Antonio Huet

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

Thiago Maffra

Yes we can.

Antonio Huet

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.

Thiago Maffra

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 short-term numbers for next quarter or the next quarters. But what I can say is, we do not expect to go back to BRL13 billion, BRL12 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 hiring, we had internship program with 200 interns, so that’s the number.

Antonio Huet

All right, thank you.

Andre Parize

Okay. The next question is from Jorge Kuri, Morgan Stanley. Jorge, you can — you may proceed.

Jorge Kuri

Hi, everyone. Thanks [indiscernible] opportunity to ask questions and congrats on the numbers. I’m 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 Maffra gave about some of these competitive advantage that you have. And if you go back to that slide where you showed them next to the inflows, I mean, it feels to me that all of those things were in place a year ago and certainly a quarter ago like 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 maybe there is a cyclical component here on the recovery of net inflows. And so to the extent that you can help us understand better 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 more color on these, very notable, and I think, important increase in inflows would be helpful. Thank you.

Thiago Maffra

Yes, for sure, Jorge. 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 being 1% a month. When you compare that like to the CDs 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 then a macro environment, okay. So — and again it’s not something that it’s specifically to this quarter. So then in Q3 we are going back to BRL13 billion, BRL12 billion from Q4 and Q1. It’s more like a normal level. Of course there are volatilities that 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.

Jorge Kuri

All right, great. Thank you, Maffra.

Andre Parize

Okay. Next question comes from Renato Meloni from Autonomous. Renato, you may proceed.

Renato Meloni

Hi, everyone, can you guys hear me?

Thiago Maffra

Yes we can.

Renato Meloni

Thanks for this space here for questions and welcome Victor here for this call here with the team. So just like following up on new money. On the last call you said, Maffra, 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 wonder here what changed from your view from the first quarter and what’s the, I would say, sustainable level of net new money for your coming quarters?

And just secondly, quick question, what drove the increase in the effective tax rate that was much higher this quarter? Thank you.

Thiago Maffra

Okay. I can take the first part and then Victor take the HR question. So again, the normal level was not the BRL13 and BRL12 billion from Q3, from Q4 and Q1. That was not normal. Okay. So — and when I say that going back to normalizes levels is more like true, what we have been doing in 2021, early 2022 that we are doing like BRL30 billion per quarter. That’s what I said that it may take some time to go back there. But again, the levels that we are delivering right now can be a little more, a little less. $20 billion, $20 billion plus against $13 billion. That’s more a 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 BRL30 billion, BRL40 billion, because we believe that our mote, 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.

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 will revert that, I believe, that’s the beginning. So of this new levels, of course, we are not happy with the 2024 that we deliver right now. We are working very hard to go back to higher levels, but it may take some time

Renato Meloni

Okay, thank you. [Multiple Speakers] I got it, but just to stay on that point, I think part of the question is like what changed from your view in the previous quarter or maybe nothing changed?

Thiago Maffra

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

Victor Mansur

Okay. Thank you, Renato. Thank you. It was a pleasure to be here for you all for the first time. Moving to the ETR question. Basically, the ETR is a result of revenue mix, as we commented before. The Corporate & Issuer 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 metric because it’s considered the tax paid [indiscernible] funds and moves the impact of the quarter revenue mix variation. And this number was BRL18.5 million from this quarter, and we can expect this number should be around that over the year.

Renato Meloni

That’s very clear. Thank you.

Andre Parize

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

Daniel Vaz

Hi, guys. Hi, Maffra. Hi, everyone. So yes, your distribution capabilities are indeed very strong. So you have this 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 profit 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.

Victor Mansur

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

Thiago Maffra

Just a moment here. When we said — if you can move back to my slide about the new money, the first point was the broader platform, okay? Victor just mentioned the integration between DCM 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 BRL2 billion, okay? So what we saw in the first quarter and then also on the second one is the appetite for, I would say, more diversified products compared like to last year that people are only looking for CDs — tax-exempt CDs from the banks, okay?

Daniel Vaz

Regarding the corporate side, any comments here, please?

Victor Mansur

I think the corporate side reflects what Maffra talked about that, bringing new products to offer to our Corporate & SMB clients. Basically if you look at the ranks, we didn’t have derivatives capabilities until two years ago. And if you look at our FX ranking, we also didn’t have this business two to three years ago.

Basically, as we grow those products in our platform and user relationship, we are capable to do more cross-sell to introduce those clients, the right kind of client and the right kind of product. So those business lines should be growing in the base of our guidance.

Andre Parize

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

Tito Labarta

Hi. Good evening everyone. Thank you for the call and taking my questions. Another question on the inflows, but more how does — how do you think that can benefit revenues going forward? We did see a bit of a pickup in Retail revenues this quarter of 5%. But in the past, you said your revenues are not that correlated to inflows. But just how do you think a nice pickup in inflows, can this translate to a further acceleration in revenues going 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 was a big improvement in the quarter. How do you see it going forward? Thank you.

Thiago Maffra

Okay. Thank you, Tito, for your question. I will take the first one and Victor 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 BRL1.1 trillion 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 we — the moat of the company and the growth, the future growth, it’s here. So that’s why net new money for us is the main KPI because that dictates how it’s going to be the company a few years down the road, okay, more than the revenue this quarter or next quarter.

Victor Mansur

Tito, thank you for the question. I think the EBT margin rationale is the same of 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 towards our guidance levels over time. And that will eliminate any variance quarter-over-quarter how to do business mix or ETR.

Tito Labarta

Okay. That’s helpful. And just maybe just in terms of the — on the revenue outlook, are you feeling more comfortable with the revenue outlook from here? Any just potential catalyst to sort of accelerate the revenues, just thinking of where we are in the cycle given your rate is still high.

Thiago Maffra

Yes, I’m not sure if I understood your question, the revenue for this year?

Tito Labarta

On Retail revenues.

Thiago Maffra

Can you repeat the question?

Tito Labarta

Sure. Yes, 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, we still have high rates. How do you see…

Thiago Maffra

Yes. As we mentioned in the presentation, we expect the second half of the year to be better than the first half of the year, okay? 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 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 increase in margin EBT going to the range of BRL32 million to BRL34 million, we should start like to pick up in all these metrics. So otherwise, we’d not go there, okay? But — and we just mentioned that we are on track. So you can expect like all these numbers to improve in the next quarters. Of course, there are volatility. We can go down 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.

Tito Labarta

All right. Perfect. Thank you very much.

Andre Parize

Okay. The next question is from Olavo Arthuzo from UBS. Olavo, you may proceed.

Olavo Arthuzo

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 net 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 the change in taxes of instruments had some effect, even a small one, and also this move 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 this quarter? Basically just the magnitude, like if those two effects had less than 10% effect over the net new money, that would be helpful. And then I’ll go to my second question.

Thiago Maffra

Yes, Olavo. 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 how — what’s the percentage of the increase in that net new money coming because of change or because all the other factors. It’s 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. 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? So 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 net new money. So we are not macro-dependent. So that’s the point. And we will not have only one explanation.

Olavo Arthuzo

Okay. That’s great. Understood. So if I may, on my second question, and I’ll now 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 monthly spend dropped 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 leaving or if this could be related to the clients that use your credit card moving to other banks or fintechs. I think that sort of other credit cards offer a similar 1% cash back and several other benefits. Any color on that will be helpful.

Thiago Maffra

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 1 million cards, okay? So it’s a 50% penetration. So here, we have two levers. The first one is 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 cash back. So that’s one.

And the second one is 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 on the next quarters.

Andre Parize

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

Neha Agarwala

Hi. Thank you for taking my question and congratulation on the results. On the cost of services, I think the control over COGS is 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.

Thiago Maffra

Hi, Neha. Thank you for the question. First about 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. This is part of our risk recycled process, and we should use those corporate bonds as collateral for repo operations against our clients and eventually, to sell those operations in our ecosystem.

Neha Agarwala

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

Thiago Maffra

It’s new. This is the first time that we did that. And the idea is to create a process to recycle the risk in our loan book the first time, and we keep — we should see that in the future. You’ve seen that in the future, sorry.

Neha Agarwala

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

Thiago Maffra

No. The quality of the assets are the same as always: low risk, good clients, a good portfolio. 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 for our retail distribution. And basically, that is the idea.

Neha Agarwala

Okay. And also, the provision this quarter was low. Is this related to this recycling?

Thiago Maffra

It’s partially related to this recycling, partially related to some operations that we recovered — credit that we recovered from other periods.

Neha Agarwala

Okay. Great. Thank you so much.

Andre Parize

Okay, we are up on the hour. So thank you, Maffra, thank you, Victor. Thank you all of you participants today. I apologize, once again, for our troubling connections. And we are available, the IR 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.