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Q4 2023 XP Inc Earnings Call

Participants

Andre Parize; Head of Investor Realtions; XP Inc.

Bruno Constantino Alexandre dos Santos; CFO & Director; XP Inc.

Thiago Maffra; CEO; XP Inc.

Daer Labarta; VP; Goldman Sachs Group, Inc., Research Division

Gabriel Gusan; Research Analyst; Citigroup Inc., Research Division

Jorge Kuri; MD; Morgan Stanley, Research Division

Mario Lucio S Pierry; MD in Equity Research; BofA Securities, Research Division

Neha Agarwala; Analyst, LatAm Financials; HSBC, Research Division

Renato Meloni

Ricardo Buchpiguel; Research Analyst; Banco BTG Pactual S.A., Research Division

Thiago Bovolenta Batista; LatAm Equity Research Analyst of Banks; UBS Investment Bank, Research Division

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Yuri Rocha Fernandes; Analyst; JPMorgan Chase & Co, Research Division

Presentation

Andre Parize

Good evening, everyone. I'm Andre Parize, Head of Investor Relations at XP Inc. It's a pleasure to be here with you today. On behalf of the company, I would like to thank you all for the interest and welcome you to our 2023 Fourth Quarter Earnings Call. This quarter, along with 2023 results will be presented by our CEO, Thiago Maffra, and our CFO, Bruno Constantino, 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. And additional information on forward-looking statements can also be found on the SEC filings section on the IR website. So now I'll turn it over to Thiago Maffra. Good evening, Maffra.

Thiago Maffra

Thanks, Andre. Good evening, everyone. Thank you for joining us today on our 2023 Fourth Quarter Earnings Call. It's a pleasure to be here tonight. I will start with a brief introduction to this year's highlights and key updates. As I mentioned in my annual letter, 2023 was both a challenging and a transformative year for XP. Despite these 2 difficult macro environment, we remain committed to better serving our clients through innovation, high-quality service and growth. In this slide, I would first like to talk about our financial performance for the year, marked by the resilience of our business model. I will leave for Bruno to talk about the fourth quarter's financials.
In 2023, we celebrated the milestone of surpassing the BRL 1 trillion mark in client assets with a market share at still less than 12% in investments for individuals in the country. This shows the large potential growth with still ahead of us. Despite the macroeconomic condition I just mentioned, we were able to achieve a 12% growth year-over-year in top line and 10% growth year-over-year in bottom line with approximately 100 bps growth in our EBT margin. This year was also marked by a strong focus on efficiency and cost discipline through the whole company as we achieved an efficiency ratio of 36%, the lowest level since our IPO. Our diluted EPS increased 16% year-over-year, reaching BRL 7.22 per share. Also in 2023, we returned almost BRL 4.5 billion in capital to our shareholders both in dividends and share buybacks, totaling a payout ratio of 114%.
Lastly, I would like to talk about our guidance. We prefer midterm guidance than annual guidance, but at the start of 2023, we opened an exception aiming to better guide investors about 2023 in the context of an unusual weak results for the fourth quarter of 2022. We gave 2 annual guidance SG&A and net income, as you can see on the right-hand side of the slide, happily, we delivered on both metrics, even adding more down SG&A, what had not been considering in our guidance at the beginning of 2023. Back in 2022, we also gave the market a medium-term EBT margin guidance from 26% to 32% from 2023 to 2025. We closed 2023 with an EBT margin at 26.8% within our medium-term guidance. We expect to see our annual EBT margin improving on the next couple of years.
Moving to the next slide. I would like to give you all an update on our strategy tracker for 2023, in line with what we talked about on our Investor Day last December. First, leadership in retail investment by which we aim leadership in our core business. This year, we estimate we have gained approximately 66 bps in market share for individuals. This is yet another sign of client recognition and trust in our service. Yet we have much to do with still less than 12% market share. Also in retail investments, I would like to highlight how we have managed to position ourselves as a premier hub for entrepreneurs by consistently pioneering in our distribution channel efforts to IFAs, consultants, wealth managers, among others.
Second, in relation to our retail cross-sell, which we talked a lot about in our Investor Day, we aim to continuously grow together with our clients' needs, clients adherence to new products and service shows a strong bond of relationship. When we consider everything beyond investments, new verticals plus corporate and SMB ex-investments, we have seen an increase in the represent achievements from 2.6% of our total gross revenue in 2019 to 17.5% in 2023, bringing more resilience to our model. Besides, in 2023, we improved our service specifically in FX and insurance and both are responding with strong growth. During the year, we also had relevant product launch in our platforms like our global account which allows clients to spend and invest internationally, providing them with a seamless experience within the app.
Third, in Corporate and SMB, I believe we have a unique competitive advantage in wholesale banking due to our sophisticated retail investors' client base and large distribution channel. Because of our singular distribution to the sophisticated clients, we are able to provide corporate and SMBs broader access to capital, creative product structuring and tailored solutions. Although we are still in the very beginning of our wholesale franchisee, I believe this is a large untapped opportunity, which we will continue to focus on the next years.
Lastly, central to this pillars is our commitment to a culture of quality and our client focus. We have talked a lot about this on our Investor Day last December, and I strongly believe this is the new true differential we will have in the years to come. Quality isn't just a word for us at XP Inc. It's a commitment to excellence that permeates everything we do. Today, I want to go deeper into what quality means for us and how it shapes our long-term strategy.
When we talk about quality, we envision putting our clients at the heart of everything we do. It's about understanding their needs, anticipating their objectives and delivering solutions to exceed their expectations. From that, we organize our value proposition with precision, ensuring that it resonates with the diverse and evolving needs of our clients. But quality doesn't stop at words and promise. It's about tangible results. We believe in delivering concrete outcomes that make a difference in our clients' lives. Take, for example, our strategic initiative to offer a comprehensive financial planning serves rooted in asset allocation discipline.
By centralizing asset allocation under a single Chief Investment Officer, or CIO, and tailoring our services to individual needs through financial planning, we aim to ensure that every client receives personalized attention and optimal investment strategies. We have had major success in the past on democratizing access to top-tier investment products to high-income clients. Now we aim bigger. We are democratizing access also to premium services to a broader audience, services that were previously only available to private clients.
Moreover, we are committed to maximizing value for both our clients and our shareholders. We recognize that even in the simple act of correction access allocation, there is a large opportunity for revenue generation and increased LTV. This is just one small example of how our dedication to quality translates into tangible benefits for both our clients and our business. In essence, quality isn't just an end goal for XP. It's a mindset that drives us to constantly innovate, improve and surpass our clients' expectations. As we move forward, we will continue to uphold the highest standards of quality in everything we do, because that's what sets us apart and propels us towards sustained success.
Now I will hand it over to Bruno so he can discuss this quarter and annual financials. Thank you.

Bruno Constantino Alexandre dos Santos

Thanks, Maffra. Good evening, everyone. It's a pleasure to be here with you again.
Moving on to Slide 9. Starting with our gross revenue, on the left part of the slide, this quarter, we had a relatively stable gross revenue quarter-over-quarter at BRL 4.3 billion, despite having roughly 6% less business days than the third quarter. On a year-over-year comparison, we had a 29% gross revenue growth in the fourth quarter '23. When we look at the full year, we posted 12% growth in our total gross revenue. Our strategy to go beyond investments with new verticals and corporate and SMB ex-investments has played an important role sustaining our gross revenue growth as the core retail is still impacted by the macro.
Looking to the right side of the slide, in terms of revenue mix between segments, we maintain a relatively stable mix quarter-over-quarter, while year-over-year, we can notice an increment in retail revenue relevance, mainly due to new verticals growth as we are going to see in the next slide.
Before we deep dive in new verticals, it is important to highlight that in this slide, we are only looking at the 4 new verticals we currently disclose, which are retirement plans, cards, credit and insurance, not including FX, digital accounts and global investments as presented in the Investor Day. So new verticals continue to perform in the fourth quarter, reaching a total gross revenue of BRL 491 million, plus 21% year-over-year and plus 11% quarter-over-quarter. The main highlights of the quarter were cards and insurance. Cards reached BRL 306 million, plus 18% quarter-over-quarter and plus 30% year-over-year. And insurance reached BRL 46 million, plus 28% quarter-over-quarter and plus 48% year-over-year. As you know, the fourth quarter has a positive seasonality to cards activity due to the holiday season.
On the right side of the slide, when we look at the full year of 2023, new verticals revenue reached BRL 1.7 billion, a growth of 43% year-over-year. And if we add the other new verticals: FX, digital account, global investments and corporate and SMB ex-investments, in line with our presentation in the Investor Day, the total gross revenue sum up to BRL 2.7 billion in 2023, enhancing our diversification and cross-sell capabilities.
Now let's look on the next slide at our core retail revenue and its potential as the macro improves. Retail revenue reached its all-time high in 2023 at BRL 11.791 billion, helped by new verticals, which grew 3x from 2021, but core retail revenue, which grew 9% year-over-year, reaching BRL 8.073 billion in 2023. This is still 3% lower than the peak of 2021, despite a bigger ecosystem. It is important that we acknowledge the high operating leverage potential, a business like ours has at our core. Equities, fixed income and funds, they all should benefit in a scenario of risk owned, which eventually will happen considering it is cyclical. And then the high operating leverage of our unique ecosystem should kick in.
On the right side of the slide, we brought some data to help envisioning this operating leverage. Even in a tough environment for our core in the last couple of years, we were able to grow our core retail client assets by more than 40% in this period, but the take rate suffered, reducing from 1.5% to 1% in the same period. If we take these 50 bps difference in take rate and apply to today's client assets, just as a math exercise, we would have more than BRL 4 billion in additional revenue. XP's ecosystem gives us a unique position in terms of operating leverage in a bull market for investments. Our market share in retail traded volumes on B3, for example, of 48% is 4x larger than our closest competitor. So in summary, we believe XP is well positioned to benefit from the next positive cycle for investments whenever it comes.
Now moving to Slide 12. Corporate and Issuer Services presented another solid quarter with revenue of BRL 508 million, plus 85% year-over-year and a slightly decrease of 2% quarter-over-quarter, which had a tough comp considering corporate results in the third quarter '23. As we anticipated in last quarter's conference call, the third quarter was the peak for corporate revenue due to increased derivative demand related to DCM activity in the period. But the fourth quarter '23 was the second best quarter for corporate revenues, reaching BRL 177 million, 10% lower quarter-over-quarter, but 31% higher year-over-year.
The main highlight here in fourth quarter '23 was the all-time high issuer services revenue at BRL 330 million, a growth of 3% quarter-over-quarter and 136% year-over-year, boosted by the evolution of our franchise in investment banking with M&A as the main contributor for the growth. These positive numbers are a result of a complete range of products and continue to show the benefits of the increased diversification of our business model, translating on a 22% growth in 2023 compared to 2022.
On Slide 13, our SG&A expenses continue to be under control as cost discipline is a priority for us. SG&A, excluding revenue from incentives, totaled BRL 1.5 billion, 2% lower quarter-over-quarter and 10% higher year-over-year, considering we didn't have more down in fourth quarter '22. Looking at the full year, our SG&A was BRL 5.3 billion in 2023 compared to BRL 5.6 billion in 2022, a result of strict cost control with our efficiency ratios improving substantially year-over-year as we are going to see in a while on the following slide. Those numbers consider a one-off adjustment of BRL 44 million write-offs in the fourth quarter due to an impairment related to the termination of XTAGE and one investment asset.
One year ago, when we first gave our SG&A guidance between BRL 5 billion and BRL 5.5 billion, Modal was not being considered. Even after including Modal in our numbers, we were able to deliver the BRL 5.3 billion within the range. If we exclude Modal, we would be closer to the bottom of the guidance. For 2024, cost discipline continues to be one of our top priorities within the company, as Maffra mentioned in his letter.
Now let's look at our efficiency ratios on the next slide. Efficiency ratio is at its all-time low since IPO, reaching 36.3% in fourth quarter '23 or 36% if you adjust for the one-off event of the quarter. Compensation ratio decreased once again from 25.7% to 25.1% quarter-over-quarter, the lowest level in 13 quarters sequentially. Our cost control discipline has played an important role in our operating margin, which we are going to talk on the next slide.
Moving to EBT. Adjusting for the one-off event, this quarter's EBT was BRL 1.039 billion, down 10% quarter-over-quarter and up 41% year-over-year. Also, considering the adjustments, EBT margin was 25.7%, plus 245 bps year-over-year and minus 233 bps quarter-over-quarter. Revenue mix was the main driver for quarter-over-quarter margins decreased, impacting COGS and our gross margin, which decreased from 70.1% in third quarter '23 to 68.1% in fourth quarter '23. When we look at the full year with adjustments, EBT totaled BRL 3.98 billion, up 16% year-over-year with an EBT margin of 26.8%, up approximately 100 bps year-over-year.
On Slide 16, our net income for the fourth quarter '23, considering plus BRL 31 million from the one-off event, totaled BRL 1.071 billion, down 1% quarter-over-quarter and up 37% year-over-year. Net margin was 26.5%, up 18 bps quarter-over-quarter and up 184 bps year-over-year.
Looking at the annual metrics, on the right side of the slide, net income increased 10% year-over-year to BRL 3.9 billion in 2023, with net margin slightly decreasing 38 bps year-over-year to 26.4%. In 2023, we've continued distributing capital to shareholders, returning BRL 4.5 billion in buybacks and dividends, representing a payout ratio of 114% for the year. We kept a solid and comfortable balance sheet with our managerial this ratio ending the year around 20%, impacted by the dividend distribution on fourth quarter '23 and Modal acquisition.
We also announced a new buy-back program of 2.5 million shares, which aims to neutralize 2024 shareholder dilution due to the vesting of share-based compensation from the company's long-term incentive plan. We expect to return more capital to shareholders throughout the year in line with our intention to reduce our managerial lease ratio between 16% and 19% over the next years.
Finally, on my last slide, I talk about a metric which has become more relevant to us since the IPO and the growth of our bank. Return on equity or return on tangible equity. We believe the return on tangible equity is even a better metric than accounting return on equity. But we look at both. Why return on tangible equity is important in our case, especially if you want to compare XP with Brazilian peers. First, we believe a metric closer to our marginal return on equity or closer to our return on capital employed, which, by the way, we used to decide how to allocate capital.
Second, return on tangible equity excludes intangibles and goodwill, which makes it a metric more comparable to Brazilian GAAP, which amortize goodwill differently than IFRS. Return on tangible equity has slightly decreased quarter-over-quarter by 19 bps to 25.6%, while increasing 570 bps year-over-year from 19.9% in fourth quarter '22. Annual return on tangible equity slightly decreased by 21 bps to 25%. Important to remind that this return on tangible equity at 25% has been achieved in an environment where our core has not benefited from the operating leverage, which our ecosystem provides, highlighting the resilience and sustainability of our business model independent on where we are in the cycle. When we get the positive part of the cycle for investments, we expect to see our operating leverage kicking in and benefiting our return on tangible equity as well.
Now I will hand over to Maffra for his final remarks.

Thiago Maffra

Thanks, Bruno. For my final remarks, I would like to summarize my priorities for this year. First, our people and culture. Our success is linked to the dedication and talent of our team. In 2024, we will keep our focus on nurturing our culture of excellence and innovation.
Second, cost discipline. For 2024, we will maintain the strict cost control and efficiency initiatives that we did company-wide during 2023, as this continues to be one of our top priorities.
Third, our focus on what we believe is the new true differential quality by democratizing access to premium services which were previously available only to private clients. We are breaking down barriers and creating a more inclusive financial ecosystem repeating what we did before product offering. As a result, we expect higher LTV.
Fourth, this year, we continue to focus on increasing penetration and principality of our new products. New verticals should continue to grow strongly, further diversifying our revenues and strengthening our business model.
Lastly, this year, we intend to extend our product suite available to our wholesale clients. Throughout the year, we will roll out our digital bank account for Corporate and SMB clients to further improve their experience with our ecosystem.
Now both Bruno and I will be happy to take your questions.

Question and Answer Session

Andre Parize

So now we're going to start our Q&A session. The first one is going to be Thiago Batista from UBS.

Thiago Bovolenta Batista

I have one question about the potential improvement in the net new money. When we look -- in the last -- a couple of weeks ago, we saw a change in regulation in Brazil with the taxes instruments like the CRI, CRA, LIG, et cetera, become much more tougher to be issued. Can you comment on the possible impact of this change for XP? And also the federal government paid about BRL 90 billion -- 90-odd billion of precatórios in the last couple of weeks. Have you saw any positive impact? Or do you believe those precatórios will have any positive impact on the net new money of XP?

Thiago Maffra

This is Thiago. Thank you for your question. When we talk about the new regulation, we see as positive when you look the long term because you guys saw what happened in the past 2 years, mainly in the past year, the banks raised almost BRL 1 billion -- BRL 1 trillion in taxes and products. So today, we have about 1/3 of the whole AUC in this type of product. So of course, for the long term, as they have like to renew these products to issue new bank products, it's going to be harder for them, but we don't expect like to have a big impact on the short term, okay? So that's one side.
The second side is when you look the secondary market for fixed income, you guys saw the -- what happened with the spreads in the past 2 months, okay? So we saw an increased level of activity on the secondary market on the tax exempt fixed income, so -- and the spreads they closed. So that's also positive for us. So I would say that's positive, but it's not a big change on the short term. So that's my view, okay.
And talking about the precatórios, it's hard to say. It's a big chunk of money, okay? But it's not that related to the individual investors. When you look, we saw more impact mainly on the funds. We saw a lot of the funds receiving cash from this payment. So we believe we can see some of these structured funds with good returns for individual clients on the short term, okay? So it might be positive because, as you know, when investors see the return is increasing, they start to like to invest more on this type of product. So can be positive, but I don't see a big, big change also on that new money on the short term.

Thiago Bovolenta Batista

Can I do more follow-up. You mentioned in the slides that you booked BRL 44 million of one-off expenses. Only to double check. The earnings of BRL 1.040 billion, this was not adjusted by these one-off expenses.

Thiago Maffra

No. It's not adjacent.

Andre Parize

Next one is Yuri Fernandes from JPMorgan.

Yuri Rocha Fernandes

I have a question regarding our results on the COGS line. It was a little bit heavy this quarter. You mentioned in the release IFAs, commissions and higher provisions for credit cards. So if you can explore a little bit what drove it. It was more the commissions. It was more the credit card. And if we should see a normalization of this line for the coming quarters. That's my first one. And then I can do a follow-up. Thank you.

Bruno Constantino Alexandre dos Santos

This is Bruno. I'm going to take that one. The first and biggest impact in terms of the COGS was due to mix, revenue mix in the third quarter, the quarter that we had our highest gross margin in the year. We had part of the revenue with less commissions in the fourth quarter, I would say that kind of normalized because if you look at the gross margin throughout the whole year, which is a better time frame to look at the margins. We do have volatility between quarters, it was 68% all over the year. The gross margin of the fourth quarter was 68.1%. So in line with the margin for the year. So that's the main impact. But we did have, in the fourth quarter, some outliers, I would say, specifically in terms of provisions that we did because of a credit portfolio that came from Modal, nothing big, but in terms of the expected credit loss, it had an impact roughly about BRL 30 million that we do not expect to see going forward.
To talk about normalization, again, is hard because we do have the largest part of our COGS is commissions, and it's related to the mix of the specific quarter.

Yuri Rocha Fernandes

If I may, still on the cost side, but now on financial expenses. It was a bit higher this quarter, and I was checking our gross debt, it was mostly stable around BRL 9.5 billion. For sure, we don't know like the inter-quarter. So just checking if there is anything different on your financial expenses line this quarter. And again, where this should evolve going forward?

Bruno Constantino Alexandre dos Santos

I mean we had in the fourth quarter, there is a line, there is a very cheap line that we have through the Banamex, the Mexican bonds that we carry, and we use them to finance around BRL 2 billion roughly and we were waiting to renew that line. So if you look at previous quarter, you're going to see that part of the debt was reduced in the previous quarter and went up again in the fourth quarter. That's the main explanation for interest rates, interest expenses going up in the quarter.

Andre Parize

So next one is Neha Agarwala from HSBC.

Neha Agarwala

Just wanted to quickly understand how do you see 2024 evolving? What levers do you have in terms of -- on the revenue side, on the cost side, because you've done most of the cost management in 2023. So what would be the drivers for 2024 profitability? Will it be more on the revenue side or more on the cost side? Because net new money, as you mentioned in your last answer that will probably be on the weaker side in the very near term. So any trends of how 2024 should be evolving will be very helpful.

Thiago Maffra

About revenue, as we mentioned in the presentation, we don't have a guidance for revenue or margins, okay? We gave last year more reference because what we just explained about the results of the fourth quarter. So we don't have a revenue guidance for this year. So -- but about costs, as we already mentioned in previous calls and meetings, I would say that the last 2 quarters, they are a good reference of the level of SG&A for 2024. But again, as we already mentioned, we have very strong cost discipline that's still in place on the company. So we expect to keep gaining efficiency throughout the year here.

Neha Agarwala

If I can just follow up quickly. Going forward in '24, is there a mix in terms of capital distributions that we should expect between buybacks and dividends?

Bruno Constantino Alexandre dos Santos

I can take that one. No, we have not decided yet. What we have just announced is a buyback of 2.5 million shares approved by our Board in order to neutralize the dilution expected for this year due to our long-term plan for our partners in our partnership model. So that's something that we want to continue to do to avoid dilution of shareholders. And as I mentioned in my part of the presentation, you can expect more capital to be returned to shareholders throughout the year. We keep generating cash. We have underleveraged, I would say, balance sheet with capacity leverage. If we want, we do carry excess capital. So all the conditions for us to continue distributing capital to shareholders are in place, and we are going to do it. But we have not decided when and how much and if it's going to be buyback or dividends, whenever we do, we are going to announce to the market.

Andre Parize

Next one is Mario Pierry from Bank of America.

Mario Lucio S Pierry

My question, let me ask you if you can give us any color on net new money so far in the year, if you can separate that between inflows and outflows? Because I do think you have made comments in the past that inflows remain very high but outflows had also increased. And then related to that question is, when we look at your AUC, it grew 19% year-on-year. But if I take inflows out, your AUC grew only 7%, so which is significantly lower than CDI. So I was wondering how do you see the performance of your clients' portfolios? How can that improve? Is that something that you think could be hurting some of the inflows that you're seeing?

Bruno Constantino Alexandre dos Santos

Regarding the explanation about gross inflows and outflows, honestly it hasn't changed that much about what I've already said in the past. So basically -- and we monitor that on almost on a daily basis. When we look at the core, the engine of XP being affluent clients, B2B, B2C outflows and compared to the client assets, the percentage of outflows is pretty much stable over, I would say, the past 7, 8 quarters. So it has not changed, okay? And the inflows overall, they have increased in 2023 compared to 2022. What has hurt the net new money more is the outflows from companies, corporate, it's really volatile. But remember that we do have in retail SMBs and corporate clients that have an annual revenue below the threshold of BRL 700 million and also the private, but not the engine. So that scenario has not changed, and we haven't seen any big change compared to the past quarter.
Regarding the remuneration of our clients and the growth of market appreciation, you need to remember that our portfolio overall, on average, when you look at our portfolio and total client assets more diversified. And to be more diversified, it means that you're going to own more equities, you're going to own more move-to-market funds, alternatives and so on. In the past year has been tough for all those asset classes, as you probably know. And most of the funds and someone they are below the SELIC rate, for example. So on average, yes, the portfolio has not performed well, but we do not see that impacting outflows. We have the advisers, the clients are aware of the portfolio. You need to have a longer time horizon in the long term, it should pay off to have this type of portfolio diversification.

Mario Lucio S Pierry

Have you done any exercise where you monitor how well portfolio client -- portfolios are doing in other platforms? Do you think the performance from your clients has been worse or not? Or is this something right -- is there room for you to improve -- because again, like -- I think, was up like 20-plus percent last year. Sure, the book of the performance came in the second half of the year. But I'm just wondering if you think there's something else you can do, like, I don't know, training IFAs or getting more involved in client portfolios.

Thiago Maffra

This is Thiago. There is 1 slide in the presentation and I mentioned, we have a very strong focus on quality and that means for investments being the best financial planning service provider in Brazil. So we have been doing in the past, I would say, 1.5 years a lot of change here in the company, very focused on having the best service to our clients. It's not only about like having the best portfolios, but goes beyond that, like tax planning, section and all the other stuff that usually only private clients have. So we have been scaling that training, all the IFAs and internal advisers. So we have been doing chains here.
Today, we have a new segmentation in the company. We have a new -- not a new CIO, but we have -- we took the CIO from the private banking and now he manages all the segments in the companies, all the locations. So we have changed incentives to our internal advisers, we have changed some of the incentives for the IFAs. So we have been doing a lot of things like to have them to follow the correct allocation for all the clients. So yes, we have been doing a lot of stuff on that.
To your point about how it's compared to other companies, I would say that the easiest way to compare because it's easy to get is if you compare the exclusive funds. If you look the funds that we manage here through (inaudible) asset we have been doing, I would say, good compare like to other players. You can compare all the private banks and we have been doing okay, bad -- not very good against the SELIC rate, as Bruno mentioned, but okay or good when you compare to other portfolio managers for exclusive funds. So that's very easy to check.

Mario Lucio S Pierry

And just final question. On the NPS score, right, you used to show that. I don't know if I missed it, but like are you seeing your NPS scores relatively stable?

Bruno Constantino Alexandre dos Santos

Yes, was pretty much stable, I believe, it's 72 in the fourth quarter, Mario.

Andre Parize

Next one is Tito Labarta from Goldman Sachs.

Daer Labarta

I guess a bit of a follow-up here on the efficiency and margins. Maffra, you mentioned you continue to focus on efficiency and you have operating leverage. But how dependent is that operating leverage on sort of cyclical environment getting better? I mean, I understand the cyclicality of the business. But I mean you mentioned that the second half of the year expense is sort of a good base to think about. I mean just annualizing 4Q expenses that would imply your expenses have been going to grow roughly 15%, right? So to have some operating leverage with that, you need revenues to grow faster. So how do you just think about that potential improvements in EBT margin to get to the guide, the longer-term guidance that you've given? Should that be sort of linear improvements? Is it very dependent on rates coming down, things improving? Just to understand -- and particularly in this quarter, the margin was a bit lower, I know there were some one-offs. Is there just some seasonality in 4Q because 4Q last year, EBT margin is also a bit lower. So just to think about how those margins improve from here?

Bruno Constantino Alexandre dos Santos

I would say that, yes, it is dependent of the macro part of it to have this operating leverage kick in our business, I mean, has been growing at a slower pace than in the periods of bull market still growing, but with margins healthy, but at the low end of our guidance for EBT margin. And we have said that. We said, look, we expect the margins -- annual margins because on a quarter basis, it's -- as I said, it's volatile. But on an annual basis, we expect to go from 26% to 32% from 2023 to 2025. And in that assumption, it is embedded in a better environment and scenario for investments as we move forward. We are not there yet.
So we -- all the businesses that we have been growing like cards, for example, it has a lower margin compared to the 26% EBT margin, for example. So of course, it's the relevance of this business growth. And the other part is growing less because of the macro and it's the most relevant part in our business.
EBT margin will struggle to accelerate the pace really faster even with a strict cost control but -- so it's not a linear. I don't see this as a linear movement going forward, okay? Because we do have -- and that's the point of that slide that I presented regarding the operating leverage of our business. That's why when we gave the guidance for our net income in 2023, it was a large spread, BRL 3.8 billion with BRL 4.4 billion, and we ended delivering the BRL 3.9 billion. But why was that? Because if the macro change, [this ways] another scenario that we do not control and we do not have a crystal ball to know exactly what it's going to be. It could be much higher. That's exactly the operating leverage of the business that we carry in our ecosystem. So the macro, it is important to see the EBT margin expanding forward.

Daer Labarta

Maybe, I guess 1 follow-up there. In terms of -- also how you think about maybe the seasonality, if we look at B3 volumes sort of continue to be weak. So could there be more short-term pressure on that EBT margin, at least in the first half of the year because you're not seeing volumes sort of recover yet. Rates are still in the double digits. I know you're not going to give short-term guidance. But just to think about sort of the current dynamics that we're still currently seeing in the markets right now. Is it fair to assume perhaps a little bit of short-term pressure?

Bruno Constantino Alexandre dos Santos

I don't know if a short-term pressure. What I can share here, Tito, are 2 points. Number one, in terms of -- for example, in terms of the efficiency ratio going forward, just remember that when we have the first quarter of 2024, we are going to take out the first quarter of 2023. In the first quarter of 2023, the SG&A was helped by a very low share-based compensation. If you go back there and look at the numbers, it was BRL 53 million of share-based compensation in the first quarter '23 and in the fourth quarter now, BRL 166 million, and that BRL 53 million was low because we had the impact of the layoffs and so on, cancellations, et cetera, that had a positive impact in the first quarter. So that's 1 thing to have in mind for the short term.
The other point is we do have seasonality in our results. If you go back in the last 5 years and you do an average, you're going to see that the first quarter of the year is always the weakest quarter for the year, okay? Because that's how the business works, especially at our core business investments. So the last 5 years, the average for revenue for EBT and for net income in the first quarter, 21% of the total of the year, not 25%. So it's lower. And then second and third quarter tend to be better. Fourth quarter is trickier because we have the performance fees, you might have some capital market activity. But in terms of the investments, business days and holidays and so on, it's not as strong as the third quarter, for example. So we will see. That's why I always like to guide to look last 12 months, look at the year, look last 12 months, take 1 quarter and put the other with the same seasonality because looking on a quarterly basis, you can get it wrong. It can be a very good and you're going to expect to continue, and that's not what happens or the opposite way around.

Daer Labarta

One quick just clarification. You didn't really have much incentives from B3 and some of the card companies. Is this a new normal now? Should we no longer really expect those incentives going forward?

Bruno Constantino Alexandre dos Santos

No. From the Visa and types of things, no, we do not expect to have anything relevant there going forward. From B3, we might, I mean, it's -- they have its slot because that's an annual process. But the main change that you saw, it was related in the fourth quarter this year to the fourth quarter '23 -- sorry, with the fourth quarter '22 was due to some incentives that we received from Visa that this last year, fourth quarter '23, it didn't happen. But we are always looking for incentives to value our ecosystem, our balcony and any player that want to access our ecosystem knows that we have a premium, I would say, type of client because we are focused on the investors.

Andre Parize

Next one is Renato Meloni from Autonomous.

Renato Meloni

I wanted to get some more clarity on the Issuer Services dynamics for revenues. So it came from a very strong 3Q that was affected by particular reasons there. But again, you repeated a very strong quarter, you had higher volumes, but you also mentioned that M&A helped. So I'm trying to understand here to which proportion M&A contributed? And going forward, what's a recurring level of revenue in the segment that you expect?

Bruno Constantino Alexandre dos Santos

The third quarter was really strong because of DCM activity. You are 100% right on that. And -- but again, we are growing our investment banking franchise as we move forward. The whole ecosystem, what Maffra mentioned, in terms of the potential for wholesale in our ecosystem, considering we already have the relationship with the corporate clients giving them access to capital markets through our distribution and so on, it's important. It plays a role. Those things, they take time. So everything is recurrent, but the point is it's not a straight line. You have some types of revenue that, by nature, on a quarterly basis, they are more volatile. M&A is 1 of those. And M&A is a business that takes time to build. You need to build the portfolio, you need to build the relationship, you need to get the mandates. And that's a long-term view.
And in this fourth quarter, we do not disclose exactly how much was the revenue, but it was relevant in terms of contribution. It was by far the highest growth quarter-over-quarter. And that's an ongoing business that we are not where we believe we can be in the future. So we are going to keep investing in our franchise business and the wholesale platform for our clients.

Renato Meloni

And do you think you have a baseline revenues here that you can disclose? Or still expected to be volatile.

Bruno Constantino Alexandre dos Santos

I can't disclose a baseline. The baseline that we have, for example, is the DCM business. This is like a very, I would say, I don't want to use the word current, but it's more stable. It's less volatile. But again, you saw the third quarter, DCM was the best quarter for DCM activity with some volatility.

Andre Parize

Next one is Jorge Kuri from Morgan Stanley.

Jorge Kuri

I wanted to go back to Slide 11 where Bruno talked about the potential for -- unlocking potential for operating leverage. You highlighted Bruno, 1.5% take rate in 2021 versus 1% in 2023 and mentioned that -- that's around a BRL 4 billion revenue gap. And I just want to understand why are you going back to 2021 to that 1.5%? How is that achievable again? And I mean I'm guessing you purposely pointed it out because you do think that that's something where we could had or the business would had. So under what circumstances could you be, again, at 1.5% take rate? Does it take a year, 2 years, 3 years? And maybe that's not the take rate that you can get to that was sort of like extraordinary times given where rates were I think is a leak average less than 5% that year, which is just like any possibility for Brazil anytime soon. So maybe what do you think is achievable in terms of upside to your take rate, which sat at 1% in 2023, say, over the next 2 years.

Bruno Constantino Alexandre dos Santos

The idea of this slide was not a guidance, anything like that, okay? That's why I mentioned a math exercise. But was to remind all of us about the business we have in XP because sometimes we've been through 2 years, very tough 2 years in terms of our core business investments. It's been really tough for 2 years. And we tend to forget the type of business that we have in our core. When we put the market share of B3 for retail, to remind that our market share has been pretty much stable around 50%, 48% in the end of December, 48% 4x our closest competitor. But that type of business can have a huge operating leverage.
If we have, for example, a market where risk unload a lot of IPOs, capital market activity, individuals in Brazil that is sub-penetrated coming to the stock market to invest in equity, so on and so on. In that type of environment, this operating leverage in our ecosystem can be huge. So the math exercise is not say, "Oh, if we have a risk on mold, we're going to have BRL 4 billion additional in revenue without 1 single Real in additional SG&A. That's not the point. It can be BRL 1 billion, can be BRL 2 billion, can be the BRL 4 billion, I don't know. I don't know what the take rate would be in such an environment.
And you have a point, because in 2021, probably we had very low interest rates in Brazil, 2%. We had the COVID. So different scenario, probably is not going to be like 2021. I don't know what it's going to be. But I know or at least I expect that at some point in time, because this business is cyclical, we are going to have -- or we are going to be in the part of the cycle where it's going to be a bull market, a risk-on mode, a lot of companies coming back to the market. And in this environment, our ecosystem as of today is much bigger than what it was back in the last bull market cycle. And we expect our business to really benefit from that scenario. So that's the message of this slide. Do not forget this because that's what XP has in its ecosystem. It's been dormant for the past 2 years.

Jorge Kuri

No, I appreciate that I fully understand it. But -- so just to continue on that thought, I'm sure you know what your different business lines can do in a scenario of low rates, risk on volume growth, how prices on an apples-to-apples basis have changed because of competition and how the mix of your business also implies a change in the take rate. Just help us understand what is that attractive upside? Is it 1.1%, 1.2%, 1.3% take rates in sort of like blue sky scenario or maybe it's not, right? I mean, maybe it could be 10% because competition just continues to do what it normally does, which is extract excess pricing from the market. So just help us understand that because that's obviously a really critical component of how your earnings look in 2024 and 2025. So that would be much appreciated.

Bruno Constantino Alexandre dos Santos

I hear you, but if I give you a number, it's going to be like giving a guidance, and honestly, I don't want to do that. What I can tell you, Jorge, it's not about price competition. The price, I mean, we -- for equities, for example, brokerage commissions, with 0 brokerage commissions back in 2018 with clear. We were the first 1 to do so. So it's not exactly about price. Competition can have an impact in terms of market share, in terms of flow and so on, but not about price in my view. So the potential exists, how much the potential means in the bull market, it will depend. It will depend how strong the bull market is. It will depend on various factors that it's hard to give you a number right now. But I'm pretty sure that whatever the number is, is going to be relevant, considering the size of our ecosystem.

Andre Parize

Next one is Gabriel Gusan from Citi.

Gabriel Gusan

So most of my questions were answered. One last is about your other operating expenses line. There is aligning a legal, administrative proceedings and agreements with clients. This line has been growing much quicker than anything else. It was like BRL 2 million per quarter last year. It was somewhere around BRL 12 million this quarter. And there were several news about like complaints recently in XP possibly having to reimburse those clients. Is this something related to what was mentioned in the news. It is something we should expect to continue growing at a quicker pace. Can you please shed some light on it?

Bruno Constantino Alexandre dos Santos

No, I would -- I mean it's mainly -- I would say it's mainly related to Modal acquisition when we onboarded the whole thing. We might have some part of it related to the cost cuts that we did at the beginning of 2023. Those things, they usually, they take like 6 months to kick in. So we would hit in the second semester last year, but we do not expect anything unusual going forward here.

Andre Parize

Next one is Ricardo Buchpiguel from BTG.

Ricardo Buchpiguel

I have 1 question here about credit. We haven't seen that the unsecured portion of the credit portfolio has been accelerating the growth pace, which also has been fallen by a higher loan loss provision, right? So once you get more color on what we should expect for both this line in the following quarters and years? And what exactly is the client profile of this individual taking then a secured credit line.

Bruno Constantino Alexandre dos Santos

We have been growing our credit card business, as you know. And as we move down in [XP Enrico], we go to unsecured credit card -- credit exposure. But with a client that has investments somehow with us can be a low investment but it has investment with us. What we monitor closely also is our loss absorption ratio, which despite the growth in NPL because of this unsecured part, the L.A. is above 2 times for sure, and in a very healthy pace. But as you know, the credit card business, as you grow, it has this impact to recognize the expected credit loss right up front. So yes, we monitor the economic sense of the business. And if it makes sense, we are going to continue to grow cautiously there, but we are going to continue to grow even if it hurts a little bit in the short term, for accounting purposes, if it makes economic sense for sure.

Ricardo Buchpiguel

And just a follow-up here. As you go to the lower part of the pyramid in its operation, when you look at cost of risk, that is the provisions divided by the unsecured portfolio. Should we expect an increase looking forward because of this mix?

Bruno Constantino Alexandre dos Santos

I don't know. I don't know if you would see a higher provision ratio because of that. I think, we are well provisioned right now. And we intend to continue like that going forward. I don't know, Maffra you should add something.

Thiago Maffra

Yes. One important point is we don't have any strategy to go to the bottom of the pyramid or focuses on investor clients, okay? So that's why when you look our APL, it's much lower than the market. Of course, we have different card segments for different types of clients. What I can say is when you look the collateralized credit card, it's very low. Clients with 50,000 plus invested at XP. When you go to clients with less than 50,000 at XP, the NPL more than double. When you go to [Enrico], it triples compare like to the collateralized one, okay? But as Bruno mentioned, there was absorption on the worst cohorts still above too, okay? That's very high. And when you talk about provisions against the NPL, we have very good provisions today. So we do not expect like to have any additional provisions. But when you look the card portfolio is growing, so that's why you can expect the provisions to grow, okay?

Andre Parize

So this is the end of our conference call. So thank you very much for attending today. And the IR team is available for any further details that you might need. And we're going to meet you again in the next quarter. Thank you so much.