XP Inc. (XP) CEO Thiago Maffra on Q2 2021 Results - Earnings Call Transcript

XP Inc. (NASDAQ:XP) Q2 2021 Earnings Conference Call August 3, 2021 5:00 PM ET

Company Participants

Andre Martins - IR

Thiago Maffra - CEO

Bruno Constantino - CFO

Conference Call Participants

Jorge Kuri - Morgan Stanley

Otavio Tanganelli - Bradesco BBI

Tito Labarta - Goldman Sachs

Neha Agarwala - HSBC

Andre Martins

Good evening, everyone. Welcome to XP Inc.'s Earnings Call for the Second Quarter of 2021. I am Andre Martins, Head of Investor Relations. And on behalf of the company, I would like to thank you for your interest in our webinar. We hope everyone is safe, everyone is healthy. It's always good connecting with you I mean not necessarily on a quarterly basis, but today we have with us Thiago Maffra, our CEO. We also have Bruno Constantino, CFO and the IR team myself and Antonio Guimaraes and Marina Montemor. We will be available for the Q&A session right after the presentation and you can raise your hand on the Zoom tool to ask questions.

Before begin the presentation, please refer to our legal disclaimer on the earnings presentation. That's the section where we clarify forward-looking statements and their definition. All of the documents that explain why the forward-looking statements might differ from the actual results. They can be found on the SEC filings section of our website. Again thank you very much for the interest. We will show a brief video of the first half of the year and then I'll pass the word to Maffra to deliver the opening remarks.

[Video Presentation]

So with this I mean as you saw very special first half of the year for us with this very upbeat message right and song and this Olympic mood. I'll pass the word to our CEO, Thiago Maffra for the first time here as a CEO participating on the call.

Maffra, the floor is yours, as we project our presentation.

Thiago Maffra

Okay. Thank you, Andre.

First thank you all for participating our earnings call. This is my first time here as Andre mentioned as the company's CEO. I'm very happy to be here and I expect to be in touch with you for many years to come. Can you move to the first slide. One more. That's it.

Well the aim of the slide is to show how our business model has evolved during the last few years. As you all know XP has completed 20 years last May and for the first 18 years we have been very focused on the investment business.

However, in the last two years, we have expanded our products and service far beyond the investments. On the left box, we show how we started from the most difficult segment to penetrate with high switching costs and great need for a trusted brand.

The current satisfaction level of our clients translated by the 76 NPS that we achieved this quarter tells us that we are in the right direction. Currently on the center blocks, we are preparing the company to successfully deliver our ambitious goals, which involves entering new verticals and expanding our TAM from 110 billion today to 350 billion on the next three years.

It's worth mentioning that the market will generate almost 800 billion in 2021. Of which we have about only 1%. Additionally, in order to intensify the disruption that we have been engaging in Brazil. One of the main enablers that we will allow us to enter new markets is the digital transformation that we have been doing in the last few years.

Our goal is to have a scalable tech platform that will allow us to have lower cost to serve and faster time to market. On that context new vertical such as banking, insurance and solutions for companies from SMBs to corporate are quickly advancing.

We are doing substantial investments on these new verticals and we expect to see a huge increase in our financials down the road. Finally on the right box TAM gained by embracing universal Brazilian individuals and companies. We would take XP to a new level of reach, always focus on clients and their needs.

We will keep transforming the financial markets in Brazil beyond investments should become the one-stop shop for all the financial service. Being the number one service provider to millions and millions of clients.

Now I'll pass to Bruno. He will show of our financial KPIs.

Bruno Constantino

Thank you, Maffra. Good evening, everyone. Great pleasure to be here with all of you one more time. And I will start with the main highlights of the quarter. I will try to be brief, so we can go to the Q&A session, which is much more interesting.

So the highlights as you probably can see a very strong quarter, again a strongest ever and I'm going to go through the numbers in the following slides. Also as the video showed the M&As that we announced recently and that we expect to keep doing the partnership model with our main IFA offices as a broker-dealer we closed four deals also the independent asset manager business which something connected into our ecosystem.

It makes sense to leverage those independent asset managers. It helps the liquidity of the secondary market. The development of the Brazilian capital market itself. And that's key to democratize the access to investments and the growth of the capital markets by itself. So we announced the partnership with Capitania, with Giant Steps and with Jive in the second quarter this year and we are always looking for opportunities like that.

We also entered the bond market first-time. We did the roadshow and closed the deal in the second quarter, but the liquidation only happened in July 1st. So you're not going to see that in our second quarter numbers only in the third quarter, but I think it's important to highlight that to have access to the global bond community as a long-term strategy is something important considering the size of this market and how liquid it is.

And last the brand awareness. We our honored with the award that we received by Euromoney as the Best Bank for Wealth Management this year 2021 in Latin America. Then we think that this business, this segment in XP in five years ago was almost non-existent. So we went from zero from the ground and received these awards this year is something that make us really proud.

And as Andrea mentioned about the Brazilian Olympic Committee, we established these long-term relationship as an investor in the Brazilian Olympic Committee and we also are really happy with this partnership, especially when we think how sports can transform the whole society and we are eager to keep this relationship good.

Now moving to the numbers itself. So the KPIs, you have seen already. The Investment KPIs and the banking KPIs and new here is only the financial KPIs. Going to the left, the investments KPIs, we reached the 817 billion assets under custody as of June 88% increase year-over-year.

Active clients, a growth of 33% year-over-year surpassing the mark of 3.1 million clients in net inflows, a very strong quarter BRL75 billion. We did have some concentrated net inflows. We estimate more than - around 30 billion of these 75 billion in few clients, especially the private banking segment, but as someone asked here in the chat in the Q&A in the last fourth quarters we had these what we call the extraordinary inflows or outflows in the last three.

So if it's you know come in every quarter, it's not extraordinary anymore, it's more volatile, but not extraordinary, but a very strong quarter in terms of net inflow. When we go to the middle, the bank, the main banking KPIs 6.8 billion our credit portfolio. There is not credit part in these numbers.

So low and then - and receivables of the credit card is not included in the 6.8 billion, a strong growth year-over-year. We're very small last year, but growing even when we compare quarter-over-quarter. We ended the first quarter with 4.7 billion and reached almost 7 billion at the end of the second quarter. When we look at the credit card, we are really happy with the results and it's above our expectations.

Our expectation is usually is very high BRL2.1 billion of total TPV. In our first quarter with the credit card officially launched to be launched in March this year. And 0% NPL ratio basically because the - almost everything collateralized and the credit card is the same thing is based on your investments and your plan.

And finally on the right side the financials, we reached record numbers now lines, gross revenue, adjusted EBITDA, and adjusted net income surpassing the mark of BRL1 billion of adjusted net income in one single quarter just to give an example of how important this mark is for ourselves when we think about the year of the IPO 2019.

The whole year we did 1 billion approximately BRL1 billion of adjusted net income and now you fast forward one year and a half and in one single quarter, we were able to keep the same mark in the second quarter, and all of that keeping a high number of NPS, as Maffra mentioned, 76.

So, going to the total revenue growth, we went from 2 billion to 3.2 billion year-over-year to 7% increase. And when we look at the components of the growth, it's very diversified and in my view it's what translates in a very resilient model that we have. So the growth and the revenue is represented by equities and features, fixed income, financial products and much more.

When we look at the net income from financial income. I'm going to let me talk about the net income in - from financial instruments in the retail part before we go there I mean go back here and just mention the fixed income in the institutional part of our business, we always talk a lot about retail. Retail, as you know, is the main component of our results in the second quarter, representing 77% of total revenues, but the institutional business did really well in the second quarter as well.

And I'm going to talk about it in a couple of slides. So moving to the retail revenue. We went from approximately BRL1.5 to almost BRL2.5 billion of total revenue in Retail as 6% increase year-over-year.

And as I was mentioning, the net income from financial instrument, a part of our revenues that you're going to see growing a lot and it's co-related with the flow business that we have and with the development of the Brazilian capital markets secondary trading 82% in the second quarter of the total net income from financial instruments came from this segment, the retail segment, which is very recurrent the way we see.

Also the take rates, when we look at the last 12 months, take rates it's pretty much stable. We always get this question about what's going to happen with the take rates, the answer is pretty much the same. It's hard to predict to forecast, but what I can tell is despite losing part of the take rate because for fading some part of the revenue as we did last year with the online brokerage in Rico at XP, we are able to add new products and services that increase the take rates and of course there is a mass component of the growth of the assets under custody, which by itself reduce the take rate everything else constant.

So the take rate has been pretty much stable at 1.3% and we expect to stay like that in the near future, especially with the banking business getting traction in our ecosystem. Going to the institutional revenue. This is the one we decided - in this slide we decided to basically talk about two topics here.

Number one despite the breakdown 12% of total revenue, institutional hit the record market in this quarter, the BRL375 million of total revenue. And the fixed income played an important role here, especially because we are in an environment of increasing interest rates in Brazil. I think it's worth sharing those numbers with all of you.

But when we look at the total revenue growth of excluding the second quarter. Quarter-over-quarter compared to the first quarter this year, our revenue grew 15%, institutional grew more than the average of the company, 27% and inside institutional, the fixed income component grew 39% quarter-over-quarter.

And it's correlated directly correlated with the increased interest rates. In the bottom of this chart, we have selic rate. At the end of each quarter, it went from 2% to 4.5% at the end of the second quarter this year and the expectation of the market about the end of period for 2021 in each quarter. So this steepening of the curve helps the fixed income business not only for institutional segment, but also for retail segment, and I think it's worth sharing those numbers with all of you.

Now going to the EBITDA, adjusted EBITDA and the margin. On the left, we shared the SG&A. The SG&A is going to keep growing as it has and basically because we are investing a lot in our people, in technology, in new verticals and so on. When we look at the second quarter last year, we had BRL765 million of total SG&A ex-share-based compensation this year BRL900 million.

So a growth of 18% and what is important to highlight is the operating leverage that we have in our business despite investing a lot, we're very cost conscious, we pay a lot of attention and understand that we need to control the costs as a competitive advantage going forward.

So we can return that in prices and offers to our clients. And as you can see second quarter last year, our total SG&A as a percentage of net revenues representing 33.2%. Second quarter this year, it went from 33% to less than 30% of total net revenue.

And when we look at the headcount evolution in our company. At the IPO, we had approximately 2,000 people in our company. Since the IPO and till today we have on-board more people than we have built throughout our lifetimes until the IPO moment. That's a very strong number.

We are going to keep hiring at least for the following quarters. As we see a lot of opportunity as Maffra mentioned about the 800 billion revenue pool in the financial industry and we are just increasing from BRL100 billion to BRL350 billion.

There is a lot more to do in XP. When we look at the margins despite all of the investments we have done in our people and headcount growth, we are able to deliver operating leverage.

You can see that through our EBITDA margin going from 36.3% last year to more than 40% in the second quarter of this year. Growth of 77% year-over-year. And lastly, the net income and net income margin. As I said already we went from BRL565 million to more than BRL1 billion of adjusted net income a very important growth year-over-year based on retail business explain most of it.

And on the right parts, it just shows what everything that I said. Revenue growing exponentially 57% year-over-year. Then you go to the EBITDA it grows even more because of the operating leverage despite all the investment, 77% year-over-year and you go to the adjusted net income, it grows even more than the EBITDA because of the corporate structure in place with a lower effective tax rate.

So, with that, I conclude my number presentation here and we are happy to answer any questions you might have. Thank you very much.

Andre Martins

Great. Bruno, thank you. Thank you, Maffra.

Bruno Constantino

Andre, next quarter the video is going to be responsible to make the whole presentation. That's the target, right.

Andre Martins

Yes, definitely. That's the goal. We go directly to the Q&A.

Bruno Constantino

We go straight to the Q&A.

Question-and-Answer Session

A - Andre Martins

Yes, but I mean we - that was concise. That's as concise as it gets. So we will call you - you've been allowed to talk here on a first-come-first-serve basis.

We have the Morgan Stanley team here on the first place. So I believe it's either Jorge Kuri or Dohenia but I think it's Kuri.

Bruno Constantino

Yes, he says here. It's Kuri on the Q&A.

Jorge Kuri

Hi. Hope everyone is doing great. Congrats on the extraordinary quarter. So Bruno, sorry, that was actually my question on the one you were reading in the Q&A.

Bruno Constantino

I didn't know what it is.

Jorge Kuri

You have been delivering inflows that are much better than expected and have called them one-timers, but they keep recurring. And so is it possible that you have now inflected to a much higher level of AUC growth given your larger scale brand awareness.

The IFA network, which is a multiple of what it was a few even a year ago and that a growth over the next 12 to 18 months may continue at this very rapid pace. What would hold you back from saying what they were really one-timers and you shouldn't think of what is growing at this pace over the next 12 months.

Bruno Constantino

Yes, when we think of quarterly basis, it's - the Investment business as Maffra mentioned, it's the hardest to penetrate market. So there is an inertia there that depends on tailwind sometimes to get people out of inertia. So I am always conservative answering that type of question. That's why we say between 10 billion to 15 billion per month and there is volatility there.

But you're right considering the best quarters, as I mentioned, we had strong net inflows in three out of the four past quarters that we showed to the market. So I rather be more conservative here and not taking into account those more concentrated inflows in the private segment or corporate segment. Even without that we hit the market of 15 billion more than 15 billion per month in the second quarter.

So yes I think there is a component of more brand awareness, momentum that you keep adding and despite the interest rates going up as you could see in the graph that I showed in the presentation, the expectation now is what 7.5%, 8% is still below double-digits. When we look at a longer period of history in Brazil, it's not going to stop the financial deepening, the way I see Brazil, it's really underpenetrated in terms of different asset classes. We can see that in our ecosystem in terms of cross-selling for international funds for alternative investments.

We mentioned in the video, the private equity and venture capital access, democratizing access to clients that never invested in that type of our products and we do have the profile to invest in those type of products. So I think there is this momentum that will probably keep going, but it's hard to say that I don't know what the inflection point, what do you mean by the inflection point, Jorge.

Bruno Constantino

All right. Thanks, Bruno, and congrats again on the great quarter and Thiago congrats on the appointment and best of luck in the new role.

Bruno Constantino

Thank you, Jorge.

Thiago Maffra

Thank you, Jorge.

Andre Martins

Thank you, Kuri. We hope to speak to you soon. Next in line we have Otavio Tanganelli from Bradesco BBI.

Otavio Tanganelli

Hi, Andre. Can you hear me?

Andre Martins

Yes, we can.

Bruno Constantino

Hi, Otavio.

Otavio Tanganelli

Thanks for taking my question and congratulations on the very strong quarter. I wanted to understand a little better the revenue trend. So one thing that was particularly impressive for me was the margin expansion especially in such a competitive scenario that we see pressure on the cost base via phase and so on.

So in terms of the mix of revenues I understand that there was a higher share of non-commissionable revenues. I wanted to get your views on that, how should that evolve going forward and whether is it sustainable or not because the gross margin levels that we're seeing here are really positive in such competitive scenario? Thank you.

Bruno Constantino

Look there is the gross revenue was strong. You're correct. And we had these margin, gross margin expansion year-over-year from almost 70% last year to a little bit more than 70% of gross margin in this quarter. But the compression in terms of the investments we have been making in our IFA network is there.

So albeit the investment that we have made and the expense is related to those investments, it's in our commission line in the box that you can see there. So it's more a mix of products and the operating leverage that we have in our business. I don't know I mean I wouldn't say that it's non-commission base as you said about the commission line it grew a lot, but the revenue grew even more and given us an operating leverage there, but it's marginal operating leverage.

I would see gross margins is pretty much flat year-over-year, right, where we have the operating leverage is more in the SG&A and the EBITDA margin because there you have all the structure of the company, the platform to serve all the clients and then of course when revenues keep growing there is an operating leverage much stronger than in the gross margin.

Otavio Tanganelli

Thank you, Bruno. One additional question just if I may here. Yes, I saw that you recently announced acquisition of [indiscernible]. I wanted to get a little bit of your views in terms of the B2C market. How do you see the opportunity is going there. We comment a lot about the B2B stuff, the IFA network, but wanted to get your views on how do you see this market then whether it is a good opportunity going forward or not?

Thiago Maffra

Do you want me to take the first part, Bruno here.

Bruno Constantino

Go ahead. Go ahead, Maffra.

Thiago Maffra

Yes, how do we see that, we see the financial deepening in Brazil happening and that's accelerating in the next few years. And when we look today, I would say, we have about like 1,100 IFAs in the market. We believe this number can go up to 36,000 IFAs in the next three years.

So we see this financial deepening accelerating and when you look the B2C and the B2B market, we believe there is room to grow both of them because as I mentioned we see the IFA network growing three times in the next few years. So there is a lot of room like to grow and about the [indiscernible] acquisition. For us it's very important.

XP was born as an education company that was the first product that we saw. [indiscernible] was the first teacher, teaching people how to invest in equities in Brazil. So education it's our DNA and we will keep invest in education. And when you think about acquisition, it's very important like to have content and to have solid like a investment information in content to give to our clients. So basically the strategy is true should have very strong content, digital content to help in the execution part of the business. What again we see both of them growing our B2C and B2B.

Bruno Constantino

Yes, and just to you say one more thing about our strategy and [indiscernible], think of XP as an ecosystem for entrepreneurs, right. So we are like magnet that the - our ecosystem attracts a lot of entrepreneurs and we can leverage all those entrepreneurs in their own business using our distribution capability and using ourselves as entrepreneurs as well.

So it's a win-win situation. When we make those acquisitions, minority stakes, so [indiscernible] is going to be - still be in the pavement as the asset managers that we acquired the minority stakes. They are going to be independent. But we can help them through our ecosystem and also profit from the equity stake that we have.

And as I said it's a win-win situation because on their side they can become more successful entrepreneurs. So it makes sense. We have done that in the past as a strategy. It needs to complement our ecosystem and we're going to keep doing in the future considering we have the right price. And just to give to - I was looking at the commission numbers. The commission part only the commission inside COGS went up more than 50% year-over-year. So as I said it's related to the growth of the total revenue that grew 57%, commissions grew like 52%, so it's really related and then the difference is basically mix of product.

Otavio Tanganelli

Super clear, Bruno, Maffra. Thank you guys.

Bruno Constantino

Thank you, Otavio.

Andre Martins

So our next question is from Mr. Tito Labarta from Goldman Sachs.

Tito Labarta

Thanks, Andre. Good evening, everyone. Bruno and Maffra congratulations on the strong results and on your appointment, Maffra. My question on the take rates. I know Bruno you get this question often and it's hard to predict, but more specifically on the credit portfolio and the impact that could have on the take rate. I mean you mentioned a positive impact, but any color you can give I mean like what type of interest rates are you earning on this. I know NPLs is zero, but I assume there's some provisions involved. What type of NPLs would you expect over time and how big do you expect the credit portfolio to get. So just trying to estimate how much would that credit portfolio benefit your take rate and similarly on the credit card TPV, any color you can give on a potential take rate there?

Bruno Constantino

Yes. Sure, Tito. First we do not disclose segregate the numbers of the banking, but what I can tell you, it's a low base, but quarter-over-quarter, the banking relevance, the banking related revenues and by bank related I mean the credit, the credit card and the facts they grew more than 100% quarter-over-quarter. So it's a strong growth. In terms of the whole thing is growing, but the banking is supposed to grow even more than the rest of the products in our ecosystem for obvious reasons. It's a brand new business that we have started here.

So the relevance as the breakdown of the total revenue, it should keep growing as we move further down the road. So that's one thing. And that thing by itself increase the take rates and everything else constant and basically because there is not necessarily a custody associated with that revenue. So we increased some basis points there with these banking services and products. And we do not have yet the full digital bank accounts that we are going to have, we ready have for already employees and few clients, but we're going to roll out as we did with the credit card business to the end of this year, okay.

So that's about the banking adding services and product, but of course the custody is expected to keep growing and as I mentioned the math of the custody, we have not reached yet the BRL1 trillion of assets under custody. In our custody that's another important thing to mention. In our custody, we do not consider institutional custody from pension funds, RPPS, some institutional clients that we do have custody insight XP, it's not in that number, because they do not talk to the retail revenue, and also we do not consider AUA assets under administration in that custody despite having a business of administration in our broker-dealer as well, but we expect to keep growing the custody and that it's going to reduce.

So the take rate I always answer the same way. It's hard to forecast I would expect it flat and why is that because there is some compression in terms of prices. They do not affect us directly, as I said before, I believe this price compression is much skewed into the fixed income funds from the asset managers of the incumbent banks that's still charge too high management fees. We do not charge those high management fees in our platform and the mix is skewed into more alternatives and multimarket or equity funds in our platform. It's is still under-penetrated in Brazil generally speaking we believe, as you said, the financial deepening is going to be there.

So this movement of asset allocation is positive for the take rates still interest rates going up, fixed income should present a more relevant role in our growth, in our revenues, equities if it's stable, it's not going to have the tailwind that it had in the past, but as I've said I mean it's very resilient business model, no matter what the macro environment is, because of the underpenetrated in the market because of our low relevance in terms of total revenue, when we think about the total revenue pool, we expect to keep growing independently of the macro environment.

Thiago Maffra

Yes, just to add, Tito, asked about the credit card TPV. We are not opening the target, but just to give you a caller to-date, the only client that are out loud or there are credit card with us are XP clients above BRL50,000. So imagine that's less than I would say 20%, 30% of our clients, when you look Rico, when you look the clients we flagged them 50K at XP.

So there is a lot of room like to see growth in the TPV in the next quarters. You can expect the TPV to go up really fast. And as always at XP with [indiscernible] we want to be one of the main players of credit cards in Brazil in the next few years.

Bruno Constantino

And the way we did things here everything is scalable in terms of the technology the factor behind it. So we can use it for all the three brands if we want to. So that's the way we deal things. Of course we need to test, executes and folks deliver get better and listen to the clients and that's exactly what we have been doing, but when we think about the long-term strategy, everything needs to be scalable for many millions of clients in the future.

Tito Labarta

Great. Thanks, Bruno and Maffra. That was very helpful. If I could just ask one follow-up then. You mentioned the addressable market of BRL800 billion, which you had fully servicing yet and you have BRL3.1 million clients today. How do you think about the addressable market for clients I mean I think your client is more on the higher end just thinking about the addressable market for clients.

Bruno Constantino

Yes, that's a good point. When you look XP back two years back as I mentioned in my first talk. We have been very focused on investment products. And when you have only investment products, you need people that are money savers.

So once you start like to moving forward to credit, you will start to move forward like to payments, digital account. Then you can go down the wire and increase your target of clients. So for sure you can expect XP to increase the target of clients when compared to a few years ago.

Tito Labarta

Okay. Thank you and congratulations again.

Bruno Constantino

Thank you, Tito.

Andre Martins

Thank you, Tito. Great to hear from you again. So now [Steffen Gruschka]. I hope I didn't - just one second. Just let me disable. Steffen Gruschka I really hope I'm not mispronouncing your name. Welcome.

Unidentified Analyst

Thank you. Can you hear me?

Bruno Constantino

Yes, Steffen. Please go ahead.

Unidentified Analyst

Well, first of all, you did a great job with my name. It's perfect. It's a Polish name in a German spelling. So you did extremely well. And thank you very much and also congratulations for this great set of numbers. I've got a few smaller questions for you. And the first one being your assets under custody how would they split. I mean which part of it is equities and which part of it is fixed income funds. Can you give us a little color about that?

Bruno Constantino

Yes, Steffen, we do not give the exact breakdown. What I can tell you is equities is the most relevant part of the total, but fixed income and the fund's platform, in general, those three together would be the ballpark of the total custody. And it's not - it depends on because the equity, as you know, it depends on the market prices as well and but so it will vary from quarter-to-quarter. But I would say on the order of relevance, equities, funds and fixed income.

Unidentified Analyst

Okay. Perfect. Thank you very much.

Bruno Constantino

And inside funds you have multimarket equity fund, fixed income funds or the breakdown divestments.

Unidentified Analyst

Perfect understood. Thank you very much. The second question is the number of IFAs. I think you misspoke I think you meant to say you have 11,000 now, right, and you expect it to continue to grow 30,000 in few years. Is that correct?

Bruno Constantino

Yes, when I said it's 11,000 in the market and 36,000 in the next few years.

Unidentified Analyst

Okay. With 11,000 would you still have a market share of like 80% of IFAs were still kind of?

Bruno Constantino

Yes, roughly. Yes, roughly. The point of the IFAs, the most important at least in my opinion is what Maffra said this profession has grown a lot, it has grown a lot in the past few years. And we expect to keep like that for everything that we have discussed here especially when we think about the incumbent banks needing to cut costs and close branch. So and the financial deepening is going on. And our IFA network hiring and seeking for new IFAs and also other players in the market looking for IFAs. So I think that's a trend that will keep growing into the next years as Maffra mentioned.

Unidentified Analyst

We completely agree with you. That's why I'm asking in a way I liked a slide with that you had around the IPO where you had the chart of how many IFAs you had. So you discontinued that when I was asking about the number. And I have one more question about the profitability of segments. I think if I understood you correctly, 82% of profits come from the retail segment, with 77% of revenues. And can you say a little bit about the profitability of first institutional and then of issuer services, which are the two other kind of relevant parts.

Bruno Constantino

Unfortunately, we do not disclose profitability by the segment, especially because when we think about the SG&A, the infrastructure of our ecosystem is there to serve all of the segment. So either the retail and institutional segments, they are served by the same infrastructure in most of the cases. So we look at the profitability as a whole and is reported in our numbers.

Unidentified Analyst

Okay. I understood. Thank you. Thank you very much. Thank you very much for answering this questions. We are in Germany here. We have to wait until midnight. So it was really late that I have to say. Thank you very much.

Bruno Constantino

Thank you for participating in our call, Steffen.

Unidentified Analyst

Thank you.

Andre Martins

Thank you so much, Steffen. Always good to hear from different countries. And please let us know through our IR context if you need a follow-up call we can we will be thrilled to walk you through some of the dynamics of the company more detail. Thank you.

Bruno Constantino

I would love that. Thank you very much.

Andre Martins

Have a good one. Last but not least we have Neha from HSBC. Good evening, Neha.

Neha Agarwala

Good evening. Can you hear me fine?

Bruno Constantino

Yes, we can. Hi, Neha.

Neha Agarwala

Hi, Bruno, and congratulations to Thiago for the new role and we wish to talk often. Thank you for joining the call today. And congratulations on the blockbuster quarter. I think it was very solid earnings performance. Most of my questions are answered, but I wanted a bit upon the financial income which you said 82% of the financial income related to the retail segment. And if you look at the breakdown of the revenue, the big part of the revenue growth for this quarter has been driven by the financial income and that has becoming more and more relevant for your total revenue. So if we think about projecting that what are the factors that we should continue and how should we think about projecting that line. I know a good part of that is related to revenue, but for us analysts this will be very helpful to understand how do we project it.

And my second question is on Banco XP. I know there's very limited color that you can provide, but the loan portfolio has been growing very well. So if you can give us some sense of what are the kind of rates that you charge for some of the pledged and unpledged loans. What are the rates that you charge for the credit card loans is still small, but what are the rates and what are the cost, what is the cost of risk that you see for the credit card loans that will be also very helpful for us. Thank you.

Bruno Constantino

So, yes, the net income from financial instruments if I understood correct what your question was. It is growing and the way I believe you should think about looking forward is related to the growth of the secondary market. Because that's related to the secondary markets and the growth of new products in business that comes to the market.

So for example I will give you some examples like REITs, the REITs funds and industry that was in the past non-existent in Brazil as well that XP helps to develop not only the primary market, but especially the liquidity of the funds being traded in the secondary market, and by doing that we reinforce also the primary market and that's the beauty of the ecosystem. That's one thing solutions and other you have more offers you have more products to trade.

And then you help the development of the capital markets itself, as I said, REITs is one example. You have the DDR, you have the fixed income corporate bonds being traded. All of that when - it's a business of flow. So these business of flow we do our active in this business in order to have products to offer for new clients and existing clients that keep bringing more money into our ecosystem as our assets under custody demonstrate, and also it's important to enhance the experience of the clients in terms of liquidity in the secondary trading. And one thing brings the other one.

So the way I'd like to think about it is related to the custody, it's related to the growth of the volume trading and it's related to this business of flow. Having said that there is one additional component that goes into the net income from financial instruments that is directly related to interest rate, which is basically the floating revenues that goes in there. And then if interest rates go up, if the floating balance goes up because it's also related to the custody that by itself should increase the net income from financial instruments. Regarding the credit card in the rates. Right now our profile of clients, they do not use the revolving part of the credit card.

So it's not something that we have considered in our business plan, aiming for the clients that now as Maffra mentioned above only XP brand above BRL50,000 invested, the revolving parts not rather than we have, but of course in the future when and if we decide to accept a broader public other brands then this equation dependent on the profile of the client can change going forward.

Neha Agarwala

Understood. Could you give us share your pipeline on your vision for Banco XP. What other products do we have in the pipeline for the next year or two. I know you mentioned that you will launch the digital bank accounts by the end of this year, but any other products that you have in mind that we should expect for the next year or two?

Bruno Constantino

There is a huge pipeline. When we think about credits, there are different segments and specifics. When we think about individuals it's one thing, when we think about companies, SMBs and other thing. So the pipeline is huge. We are planning to have these strategy day with investors, sell-side analysts.

So we can give a little bit more color. I will keep high level then Maffra can complement if he wants, but the thing is we are going to have full digital account by the end of this year. And that's important to complement the experience with the credit cards and the digital accounts and then as I mentioned before the architecture, the foundation of what we have been doing. It's scalable. We can adopt some different brands if we want to. So it's more about the business decision than anything else, but Maffra.

Thiago Maffra

I would answer like in a different way like we have three main pillars that we are going to explore in the next quarters. The first one is banking services in general and you can include payments include digital account, credit card et cetera. And credit, as Bruno mentioned, we are going to have different credit lines in the next quarters. We are already working on that.

We have been working on that for a few quarters and we are going to announce soon some of them. We have insurance. They just to increase the range of for all this insurance that we have today. And the third one is thinking on companies from SMBs to corporate companies. We are going to develop a lot of like products focus on this company. So it's our upswing for the next quarters that Brent mentioned we are going to give a better color of each product that we are going to launch on the Investor Day, but for sure it's a big roadmap for the next quarters and years.

Bruno Constantino

We have a lot of work to do.

Thiago Maffra

Yes.

Neha Agarwala

Great. Thank you so much. I'm looking forward to your strategy day then and hear more about that.

Bruno Constantino

Thank you, Neha.

Neha Agarwala

Thank you, Bruno. Thank you, Thiago.

Thiago Maffra

Thank you.

Andre Martins

Thank you, Neha. So we don't have any other raised hands here. So with that we conclude our second quarter of 2021 earnings call. Thank you all for the participation. Again the IR team is always available and alert to schedule calls with you whenever is convenient. So, Bruno, would you like to deliver any closing messages and then Maffra.

Bruno Constantino

Yes, just before Maffra close the call. I would like to mention that before our next meeting the next, the following earnings call probably we are going to have already our DDRs being traded in Brazil. It's something important for us because retail investors in Brazil will be able to buy directly through B3 our shares if they may want to and that's a consequence of the deal that Itau already announced to the market of exports. As you know Central Bank has approved.

And now it's a matter of time to have the General Meetings still pending approval by both General Meetings, XP needs and export, but assuming that everything is going to be it's moves and approved in the third quarter at the end of the third quarter this year, we expect to have these transaction completed and DDR is being traded in Brazil. Now Maffra, you can for closing remarks.

Bruno Constantino

Yes, I just would like to thank you all again for being here with us and say that despite the great results that we are delivering this quarter. We only have about 1% of the addressable market that we believe we should pursue in the next years. So as we always say we are only at the beginning here and I'm very excited to be with all you guys for the next year. So thank you very much.

Andre Martins

Thank you.

Bruno Constantino

Take care.