XP Inc. (XP) Q3 2020 Earnings Call Transcript

XP Inc. (XP -0.44%)
Q3 2020 Earnings Call
Nov 10, 2020, 6:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Carlos Lazar

Good evening, everybody. Thank you once again for joining us for our third quarter results conference call. For this call, we have Mr. Bruno Constantino, our CFO; Mr.

Thiago Maffra, our chief technology officer, CTO; and the IR team, myself, André and Natali. Well, thank you again for joining us today. We just released our report, our release and presentation. You can find them in our website.

Additionally, let me mention since now that we're going to be having this presentation first, and then later on, we'll be opening a Q&A session. [Operator instructions] So now I would like to pass the word to Mr. Bruno Constantino for him to initiate the presentation. Thank you.

Bruno Constantino -- Chief Financial Officer

Thank you, Lazar. Thank you very much. Good evening, everyone. Pleasure to be here with you all one more time.

Now our fourth quarter results I don't know, Lazar, if we're going to put the presentation or go for the short video. We have prepared a short video. But before we get into to the video, I'd like just to walk you through what we are going to discuss here in terms of the main points of this conference call. So if we can go to the presentation.

Yes. We can move on. So the opening remarks is — I understand that's a good practice of being a listed company. That's something new for us.

But after four consecutive quarters, at the opening remarks, I will talk a little bit about what we have promised during the IPO road show and what we have delivered so far. Then I will pass quickly for the KPIs and financials of the third quarter so we can have more time in the Q&A. And before opening for Q&A, Thiago Maffra, our CTO, is going to talk about our tech-enabled platform and growth strategy through technology. So before we go to the opening remarks, we have prepared a short video we would like to share with you all.

I hope everything goes well. You can play. [Presentation]

OK. Perfect. I hope you enjoyed the video. So let's go straight to the point here in our opening remarks.

As I said, it's more accountability. So what have we promised during the IPO road show? First, no short-term guidance. We like to put the lights in the long term. Considering we have a huge total addressable market to go for, our purpose is a long-term purpose that it's been 20 years to get us here, and it will take more 20 years to probably disrupt the whole financial industry in Brazil.

But when we went for the IPO, we got this recommendation that some guidance we should have, especially being a new company for investors. And we gave two mid, long-term guidance, revenue CAGR of 35% plus and adjusted net margin between 18% and 22%. As you can see in the first nine months of 2020, we have delivered revenue growth of 66% year over year, reaching BRL 6.1 billion, and an adjusted net margin of 26.9% with an adjusted net income of BRL 1.6 billion. This number, in nine months, is 44% higher than the entire year of 2019.

And we have one more quarter to go. We have also expanded our ecosystem through M&A and investments in technology, as we said during our IPO road show as well. When we look at our growth strategies, it is important to understand that everything happens through our tech-enabled platform. 100% focused on customer experience.

We always say we are a client-centric company. And by that, we mean to really do everything on behalf of our clients. That's why, you saw in the video, we took Rico online brokerage fees to 0 and at XP reduced by 75%. That was not market pressure.

Nothing like that. We just — because of the scale we have, because other products we are adding into our ecosystem, anytime we are able to, we are going to give back to our clients that we believe will give back to us, and this creates a very powerful ecosystem and win-win situation for the long term. A couple of years ago, we initiated a process of investments in a model that integrates an agility with strategic initiatives, utilizing data analysis for decision-making and resulting in greater scalability in the future. We're going to talk about that further down this presentation with Thiago Maffra because I think that during our previous quarterly results, we have not highlighted as we could this huge transformation going on in XP platform that I think it's worth showing to investors in the market in general.

Also, we have started — just started to offer some banking products and services. So when we look at the bank in wholesale bank here, a lot of those products, they are able to be offered because of the banking license. Credit card, for example, cash solutions, FX in different scale than we used to do, the SMB market, corporate and etc. And we are just getting started there.

It's more TAM that we are adding to our ecosystem. And finally, when we talk about distribution channels and especially the IFA network, we have decentralized our cash in order to embrace the opportunity the market is offering us. As you all know, the banks, incumbent banks, they are in a huge agenda of cost reduction. And by that, closing branch, it's a must, especially after the pandemic, where a lot of the incumbent banks' clients had to become more digital, and they realize that they don't need as many branches as they have still today.

And that poses a great opportunity for the IFA profession in Brazil. And we, as leaders in that market, we are investing in accelerating the base of investment in that segment. And you can see that it's already generating good results for us. As an example, we had — on a monthly basis, nine months, IFA — gross new IFAs per month of 277.

And only in October, we had more than 500 new IFAs coming to our platform. And that happens organically through our existing IFA network. And that's the record number ever in our history. So we are very positive about the momentum, not only because of our competitors' agenda of cost reduction in closing branch, but also because of the low interest rates that we have in Brazil.

And we believe that it's time to invest more, and we are going to have the benefits of those investments down in the long term. So now moving to our next slide when we talk about the KPIs and financials. I will go a little bit faster here. Assets under custody, you already saw the number, BRL 563 billion, all-time high in our company.

We had a huge net inflow in the third quarter. We had this extraordinary inflows that without these extraordinary inflows, we still have a very healthy pace of net inflows on a quarterly basis, BRL 39 billion compared to BRL 36 billion in the first quarter pre-COVID. So again, despite all this growth, we still have a very low market share compared to the incumbents, and we believe that's a process that will continue through the next quarters and years. When we look at active clients, it's worth highlighting here that through our direct channel, XP Direct, including Rico, Clear and XP itself.

The growth year to date, XP Direct has been responsible for more than 85% of the growth of the number of clients with a special highlight for Clear brand, but all the brands are growing really well. Now moving to our next slide. The DART is the same story we told last quarter. I mean the numbers have stabilized in a very high plateau of 2.7 million trades per day.

And when we look at the market share, in equity retail, we kept our leadership, but not only cap the leadership, but we are able to increase our market share in a very favorable market for newcomers to the stock market in Brazil. And in terms of custody, equity custody, we now are by far No. 1 with 28% of market share in equity custody. And our NPS, around 70, keeping the highest of the industry so far.

We can move forward. Here, I would like to highlight the shift to higher-yielding assets we call the equitization process. But it's more than only equitization. We are talking about Brazil that is highly concentrated in fixed income because of the high historical interest rates in our country.

This shifts away from fixed income into higher-yielding assets. It's a process that will take a long time in our belief. We can see here that the growth of fixed income, when we look at December 2017 and compared to September 2020, fixed income is the lowest growth, 16%. But it's still the highest absolute amount of more than BRL 2 trillion.

When we look at equities, 120%; REITs, 127%; alternative, 61%, but from a very low base. So I would like to highlight three markets, pension, alternatives and REITs, because we believe they have a huge potential to grow in the next quarters and years. When we look at REITs, we are talking about BRL 145 billion AUM as of September. That's a fraction of the listed REIT market in the United States, for example.

And we were like pioneer in this market. I remember when we were doing an IPO, and no institutional investor would invest in a listed REIT fund. But we said, no, we have to go and educate those institutional investors because if this market gets liquidity in the secondary trading, it will be another option of investments for portfolio managers in a market where portfolio managers in Brazil don't have that many options because of the underdevelopment of the Brazilian capital markets. And now when we look at 2020, a lot of those institutional portfolio managers, they have bought REIT shares in the secondary trading, and we are by far No.

1 in that market. When we look at alternatives, international funds, we have talked a lot about it. We have reached an AUC of BRL 10 billion out of nothing a couple of years ago. But it's still — it's not a big market compared to the potential, especially when we think about diversification of asset allocation for Brazilians.

And our platform has more than 60 funds offered and grown. Private equity, same thing. We were the first one to democratize that type of investments for retail qualified investors, adding in private equity fund of our own asset management, that raised BRL 1.3 billion, more than 5,000 retail qualified investors. And now one month ago, we did the same thing for other private equity portfolio manager, EB Capital, that raised in the telecom industry almost BRL 800 million among retail investors, again, with more than 5,000 clients.

So we believe we're in the beginning of this journey, open up new options of investments for retail investors. And if this movement shifting away from fixed income into higher-yielding assets is going, we have a long journey ahead of us. Just talk a little bit about the pension industry. It's worth highlighting that back in 2019, we started our own insurance company.

So we founded it a little bit more than one year ago. And it's a very new company. It has BRL 10 billion approximately of AUC as of September, which is from 0 to BRL 10 billion in a little bit more than one year, it's a great growth and achievement, especially when we look at the market share of net inflows. So year to date, our insurance company is able to get 20% of the net inflows in terms of market share.

If we look at the transfer market, because it's like 401(k), we have two types here. You have the investments that you made and then you have the transfer of custody from one insurance company to another that you can do. So it's as if you can take your 401(k) from one platform to the other, and that's a market of some 0, which some players gain, others lose. In that transfer market, year to date, our insurance company has gained 55% of the market share.

So for every BRL 100 that leave one platform, BRL 55 goes to our insurance company. But we still have nothing in terms of total market share. That's BRL 1 trillion market. We have 1%.

The largest player has 30% of total assets under custody in that market. It's a market that has a different pace of growth compared to investments, but it's a very strategic market that we intend to keep growing in the following years as well. So it's just to highlight new markets that we just entered, and we expect to keep growing in the future. Now going to the financials, as you saw in our release, record total gross revenue, BRL 2.2 billion in the third quarter, representing a 55% growth year over year.

Very strong performance in Retail. Retail, representing more than three-fourths of our total revenue. And as you can see in the next slide, the retail revenue year over year represented 80% growth. The main drivers, equities and features and financial products, which is kind of linked to the equity and features market itself and also fixed income.

When we look at our take rates in the third quarter, last 12 months, 1.2%, pretty much stable with what we had in the third quarter last year. This also shows the resilience of our business model and our revenue stream. As we keep adding new products, we are going to have different mix from quarter-to-quarter. It's hard to predict, and the take rate can vary also from quarter-to-quarter.

But at the end of the day, as the ecosystem keeps growing and adding products, we expect this revenue growth to be even more resilient than in the past. So moving to the next slide. I'm speeding up so we can go for Maffra and Q&A. Institutional revenue, a growth of 38%.

That's a more mature market. We keep adding new institutional investors in our platform as we keep fueling the independent asset management industry. But it's a more mature market, so we should expect a lower growth compared to the retail market. In Issuer Services revenue, we had a growth of 18% year over year.

Quarter over quarter was a huge growth because on second quarter this year, we had the pandemic and the market window was closed. But I would like to highlight our growth in the Equity Capital Markets business. We participated in 14 deals this quarter compared to four deals one year ago. And we keep growing our representativeness in the equity business as we did in the fixed income business in the past.

In the REITS, as I said before, we were the pioneers in that market. And with the market window open, a lot of those funds looking for opportunities to increase their portfolio, they are already listed with liquidity. So a lot of follow-ons going to the market, which is very healthy to develop the real estate business in Brazil. On to the cost and structure, the COGS and the SG&A.

As we look at our COGS, there is a slight margin compression compared to one year ago due to product mix and also the investments in the IFA network I mentioned in the opening remarks. When we look at the operating expenses, excluding the share-based compensation, we can see the operating leverage in our platform going from 35.5% in the third quarter last year as a percentage of revenues to 31.9% as of third quarter this year. This year, we had other operating incomes that reduces the SG&A, impacting positively the SG&A because of the incentives that we get on a timely basis from B3 and also some partners' incentives to have access to our platform, the main one being Visa. So moving to the adjusted net margin.

Our adjusted net income, a record one, close to the second quarter, which was a very strong quarter as well, BRL 570 million of adjusted net income without the trading that we had in the first quarter. Again, showing the resilience of our business model. And the adjusted net margin at a very strong pace, 27.1% in the third quarter, much higher than our top range of long-term guidance of 22%. Now we can move one more.

Here, we showed in the video the ESG, the awards that we had. The ESG, I just want to highlight here, we did this financial education journey for women. It's basically connecting women into our education platform to empower women to get education and succeed whatever they are aiming to. Again, linking to our DNA of education since the beginning of our company.

Also, in terms of the awards, we are very honored, especially the North American Customer Centricity Awards 2020 in the category of Best Measurement in Customer Experience. That's really honor for us to get these awards, and that's the reason for our existence, our clients. And now moving forward to — before I pass to Thiago Maffra, the reason we brought here this growth strategy through technology is, as I said in the beginning, I think that we have a revolution in our company. We have had a revolution in our company in the last couple of years that I don't know if it's really clear for all investors.

So I think it's worthwhile explaining a little bit more what we have been doing, why we are doing this. The huge total addressable markets that we have in the financial industry, Guilherme mentioned in his letter to shareholders that in the last 12 months, our gross revenue was BRL 8 billion compared to the total gross revenue of 2018, less than two years ago, of BRL 3.2 billion. Almost 150% growth in less than two years in the total gross revenue. But when we think about the financial total addressable market in terms of revenue pool, we are talking probably more than BRL 500 billion.

So we have a teeny market share. We are not present in all verticals of the system. But if we succeed to do everything through our tech-enabled platform with a big dream of having a marginal cost tending to zero as we scale our business model, I think we're going to be in the right direction. So Maffra, please, now it's with you.

And it would be nice for you to present yourself. I don't know if all investors know you already. So it would be great if you talk a little bit about yourself.

Thiago Maffra -- Chief Technology Officer

OK. Thank you, Bruno. Hello, everyone. Good evening.

As Bruno mentioned, I would like to briefly introduce myself as this is the first time I'm speaking to you, guys. You'll see that I have a different background from other CTOs. I have a Bachelor in Business Administration from Insper, an MBA from Columbia University. And I am a CFA shareholder.

I have started my career as a trader in a hedge fund doing high-frequency trading, and I joined XP six years ago. At XP, I have been working different business segments from equity retail, building cryptocurrency trading platform a few years ago. And 2.5 years ago, Guilherme invited me to lead the digital transformation of the company and to lead the technology chain. So as you can see on this slide, we started a huge transformation in the company at the beginning of 2018.

We decided it was time to change our organizational model and our mindset from a financial organization to a technology company. We started by reorganizing our technology teams into its squads with multidisciplinary teams composed of business and technology people working together side by side, changing from a waterfall model to an agile methodology. As you could see, I myself, I am a business guy. And what we have been doing here is to really put technology and business together.

You can see that we have grown from less than 300 people two, 2.5 years ago to about 1,000 people today and from 10 squads to 81 squads today. We have hired people with very different SKU sets from like our traditional employees, from companies like Google, Mercado Livre, Nubank, Magalu, PagSeguro for positions in designing, product, data and engineering. However, we expect lower investment growth rates for the next years because we are capturing gains of scale. We expect to hire about 250 people over the next a couple of years.

Of course, here, I'm considering only the business that are already in the pipeline like digital account, credit cards, margin loan and credit, as Bruno mentioned before. OK. Can you move to the next slide? So we spent the last almost three years building a tech-enabled platform that allow us to provide financial and nonfinancial service to our clients. Through technology, we are able to access different business segments and expand our TAM with very low marginal costs.

By leveraging our tech platform, we have been able to expand to other segments such as education, payments and credit in the last years. Most of these new business lines is still in early stage, but we expect them to mature in the next couple of years. Our goal for the next years is to be recognized as the best technology company in the world and use our tech platform to disrupt other financial segments such as we did with investments. Can you move another? This slide shows only a few numbers.

Choose to go straight. One case. These numbers are like from our XP app. And when we have this multidisciplinary squads working together, they really make incredible things.

As you can see, our NPS for our app is 75. The rating from Apple Store, it was 4.8. When I saw — I saw in the video maybe 4.7, but it's changed every day, but it's the highest financial segment — in the financial segment in Brazil. And our customer engagement is growing month after month, as you can see on the frequency that people access our app.

We are creating a powerful financial ecosystem to our customers in which we have been adding more services and products every month. Can you move to the next? And you may still ask why we have been doing such a huge digital transformation in the company. First, by building a tech-enabled platform, we are able to scale our operation with very low marginal costs. Second, we — for tech ecosystem, we are able to get a lot of data and use them to improve our product and business event further.

Third, faster time to market. We can leverage our platform to launch new products up to 4x faster than other companies. Fourth, it's all about customer experience, as Bruno mentioned. In the long run, our product is going to be the experience we provide, and that's why we have been investing in a customer-centric approach with design and data working together to improve our customer experience.

You all can be sure we are ready for the future. Thank you.

Bruno Constantino -- Chief Financial Officer

Great, Maffra. Thank you. Thank you very much. And before we go to the Q&A, I'd like just to add, as you can see, our — I mean I've been in XP since 2012.

The profile of all our employees has changed a lot, as Maffra explained. What hasn't changed is our purpose, our culture and our driver to go after what we believe to be the right thing, side by side with the client. So that's something that we started the company, Guilherme started this company in 2001, believing that by doing the right thing for the clients and being side by side with the client without shortcuts and hard work, a lot of hard work and a big dream, we would get there. We haven't gotten anywhere yet.

I mean we have achieved a lot, but when we look at the size of the opportunity and the total addressable market of the whole financial industry and beyond the financial industry because we have nonfinancial services and products as well, we think it's a very long journey ahead of us. The IPO, it was important step in that journey. And now I mean we are here with the accountability one year — almost one year after the IPO, being a listed company. Thank you, all the support that we have gotten from all investors that trusted in our business model and in ourselves.

So thank you very much, and now we open for Q&A. I don't know how it's going to work, Lazar. You tell me. It's going to be open or somebody will raise their hands?

Carlos Lazar

Well, thank you, Bruno. Thank you, Maffra. [Operator instructions] I saw some questions already was sent to the Q&A area as well. [Operator instructions] So this time, we're going to be doing something different here.

So the first question comes from Tito Labarta.

Tito Labarta -- Goldman Sachs -- Analyst

Can you hear me OK?

Carlos Lazar

Yes. It's perfect.

Bruno Constantino -- Chief Financial Officer

Yes.

Tito Labarta -- Goldman Sachs -- Analyst

OK. Perfect. Thank you, everyone, for the presentation. Very helpful.

I guess my question, looking at the growth that you're talking about, the scalability, the mix in assets can improve and just going back to the initial sort of guidance that you gave at the IPO, the 18% to 22% net margin. Is that still realistic? I mean just given everything that you're saying, I mean, everything is going well. And I know it's a long-term guidance and tax rate can go up, and there's a lot of moving parts. But either — what would it take for that to actually become a reality? Or is there really more upside and like the results that we're seeing today are really maybe more realistic of the growth potential that you're describing?

Bruno Constantino -- Chief Financial Officer

OK. Now to — I mean, Tito, I think there is more upside, OK? We haven't revised the guidance yet because right now, we are in the middle of the process of our budget for next year in our review of long-term numbers internally. So as we finish that, we are going to decide what to do with that long-term guidance. But when we gave that long-term guidance, we hadn't factored in totally the IPO structure that helped to reduce the effective tax rate at the end of the day.

But most importantly, what we had in mind is exactly what Maffra explained here today. We changed the company, and we do everything through technology. And to have a — I mean our investment in technology. If you look at our numbers in terms of people, we are hiring more than 1,000 people this year, most of them in technology, in new verticals.

We entered — we moved from no squad to 81 squads nowadays. And all of that, it's expense that we have in our financials. So basically, our investment is not capitalized. Guilherme also talked about that in his letter.

Most of it, it goes directly into our financials. But at the end of the day, we are talking about investments because think about it, credit card business, for example. We have a lot of people working in this. Well, everything through technology with design, connected business people together, that number of people growing in the future.

Probably some of those people will do other things in the company because when the business matures, that's what technology for, right, to be able to have the scale and to get a lower — decreasing marginal cost, tending to zero in the best scenario.The reason we gave that 18% to 22% in the long term is that our vision during the IPO was, look, we are just at the beginning. There is a huge total addressable market. There are a lot of markets we are not in yet, and we probably will start new businesses in our platform. And then it's hard to predict.

It's hard to forecast how much we are going to have to invest and go to expenses and in the short term, pressure our SG&A and our margins. So that's why we gave that guidance. Having said that, we have not yet revised. We want to wait at least the end of this year, as I said, to revise the whole long-term financials of our company.

But probably there is room for upside there.

Tito Labarta -- Goldman Sachs -- Analyst

Great. That's very helpful. If I can just have one follow-up on that. So in terms of the margins, I guess, do you worry about having to invest more just given the growth potential, right? I mean really, the focus here should be on that revenue growth.

And even with the asset mix maybe potentially benefiting your yield a little bit, right, I think the focus will be on the growth, and you could suffer some margin pressure in the short term. But given the growth potential you have, that's really where the focus is. Is that fair?

Bruno Constantino -- Chief Financial Officer

That's correct. When we decided to list the company last year, we knew we probably would get all kind of investors. The market, I mean, it's — when you become a listed company, there is onus and bonus. The bonus is that you can connect with great investors globally, and they can help you to become more intelligent and have success in your business.

The onus is for those that allow the short-term focus to drive the company. That's not us. We think as owners as we are. And we have to think about the perpetuity of this company.

That's how we think about it. So if we have to invest in the short term to have a slight compression of margin but we believe it's on the benefit of the long term, we are going to do it. Look what we did with the online brokerage fees. We didn't have to.

Some investors asked us, but if there was no market pressure, why have it done then? Because we thought it was the right thing to do. If we are going to do it, you better do it sooner and later and then have the clients recognize the relationship for the long term. That's going to turn into benefits for us much more than what we gave up in terms of revenues in the short term. We did the same thing with Clear back in 2018.

That's the kind of mindset that we have. So you are 100% right in what you just mentioned.

Tito Labarta -- Goldman Sachs -- Analyst

Great. Thanks, Bruno. Thank you, guys. Appreciate it.

Bruno Constantino -- Chief Financial Officer

Thank you.

Carlos Lazar

Next question comes from Thomas Peredo.

Thomas Peredo -- BTG Pactual -- Analyst

Hi, everyone. Good night. Good evening. Very quickly on my side, we noticed that prepaid expenses jumped at almost BRL 1 billion this quarter.

And just wanted to have a sense of how much is there still to come from the — I believe this is connected to the fast addition of IFAs. How much is still more to come for next quarter? And how should we see this impacting COGS going forward in the next quarters? How is the accounting of these prepaid expenses through time? If you could give us a bit more color on that. Thanks.

Bruno Constantino -- Chief Financial Officer

Sure, Thomas. Thank you. So we cannot give numbers for the following quarters how much is yet to come. That number has to do mostly with the investment in the IFA network.

As I mentioned in the beginning of the presentation, we believe we have a unique condition in terms of different variables that justify that kind of investments. In terms of how we recognize that in our P&Ls and our financials, it's based on the contract that we have with that incentive, attached with that incentive. So most of it, we are talking about 10 years. If we would take BRL 1 billion in 10 years, it's going to be BRL 100 million per year.

So that's basically it.

Thomas Peredo -- BTG Pactual -- Analyst

OK. Perfect. Thank you very much.

Carlos Lazar

Next question comes from Christian Bolu.

Chinedu Bolu -- Sanford C. Bernstein & Co., LLC -- Analyst

So apologies for asking a boring accounting question because I do think the operational performance was pretty strong. But I kind of like to get some more color on the balance sheet growth. I mean it's up 126% year over year, I think, up almost 50% quarter over quarter to BRL 88 billion. I don't know what drove that.

Like how does that flow into the P&L? I know we've had this conversation in the past, but it seems to be a pretty significant move in the quarter.And maybe the bigger question over time really is — like is there a — I mean what is the maximum size you can grow your balance sheet or you'd be comfortable to growing the balance sheet? And at some point, does the ability to grow the balance sheet have some constraint on the actual business?

Bruno Constantino -- Chief Financial Officer

No. Great, great. Yes, the balance sheet grew a lot in this quarter. But most of the growth, it's based on government bonds, in repos, on the asset and liability side.

So that's kind of tricky because it seems — if you don't understand the balance sheet, you can look at it and say, OK, you're leveraging the company. That's not it because it's like arbitrage. Most of it is arbitraged opportunities in the fixed income business related to government bonds. If you go in our asset part of the balance sheet, you're going to see that most of the number is related to government bonds.

And then the remuneration, it's not a huge one because we're talking about a very liquid market. But we have a strong presence in that market, and there is this arbitrate in government bonds, and it's something that we do. So from quarter-to-quarter, you can see a movement that in the picture of the third quarter, you had that balance sheet with BRL 88 billion in total, if I'm not mistaken here. And then you can get a reduction of BRL 10 billion to the next month, for example.

So it doesn't mean that we are leveraging the company or taking more risk. That's important to say. The measure that we look in terms of risk is basically the VaR and the stress test. And for example, we take our net worth of group, XP Inc.

in total, approximately a little bit more than BRL 8.5 billion. And the limit for our VaR of 1 day with 95% of confidence, it's 50 basis points. As of September, we had 22 basis points. And the stress test that in our numbers, the maximum amount is less than BRL 200 million in the worst-case scenario, we had a maximum of BRL 50 million as of the end of September.

So we hedge all the positions that we have. We look at the whole thing on a consolidated basis. And the growth of the balance sheet is tricky because you're going to see in some quarters down the road, the balance sheet shrinking in the other way around. And it doesn't mean that we are paying this or that.

In terms of debt, we had, excluding the bank, approximately BRL 1.2 billion only in financial debt: two bonds issued in the Brazilian market and 1 debt with IFC, basically, OK? And one of the bonds matured in September, and we just paid off BRL 400 million. So we basically reduced our gross financial debt on that perspective. Then you have the bank. The banking business, you're going to see in our liability side the deposits and the structured notes financing the collateralized loan portfolio on the asset part of the bank.

But that's — when we look at the whole group, it's not that much, but it's grown. Our collateralized loan portfolio is above — close to BRL 1.5 billion already.Chinedu BoluGreat. OK. Thank you.

Maybe just a follow-up question to Thiago this time, if you're taking questions. Thanks for the presentation. Maybe just in very simple terms, how do you? How would you describe the competitive advantage in technology that XP has relative to the traditional banks and even the emerging fintechs, right? Like what is it? Why is it sustainable over time? And then maybe the second part of the question is it feels like Bruno is tightening the purse strings here on costs for you. So you're going to have to be more disciplined next year.

But are there other projects you would like to work on going forward? Or if resources weren't a constraint, are there sort of sort of big projects you would like to work on with the team? And kind of what would they be maybe over the next couple of years?

Thiago Maffra -- Chief Technology Officer

OK. Bruno, you want me to take the first part?

Bruno Constantino -- Chief Financial Officer

Yes, yes. Maffra, you can explain.

Thiago Maffra -- Chief Technology Officer

I can the first part, and you can take the second part. Yes. So Christian, I would say that, as you mentioned, how we compare like to the incumbents, like the big banks in Brazil, we have a completely new technology environment. So we don't have legacy systems.

We don't have any mainframe here. So we are like 80% to 90% cloud-based. We use cutting-edge technologies. So all these technology advances make us to have a much faster time to market and a much better product because — to give you an example.

As Bruno mentioned, we are like — we launched our credit card a few months ago. It's still on beta but it's on the street. It took us six months from the conception like to releasing the product. And that's how the tech platform enables us like to have an advantage.

And besides that, the quality of the product that we release is much better. Like if you look — some of the banks, you cannot like — not even like reset your like password for the credit card. You have to go like to the branch physically. And that's insane like in a digital world.

So that's how we differentiate ourselves through technology.

Bruno Constantino -- Chief Financial Officer

Yes. And going to your second question, Christian, about the opportunity next year. First, let me start saying that in terms of cost conscious, I mean we are also fanatic in terms of costs. So we are investing a lot.

We believe we should do it. There is a huge opportunity ahead of us. We got think in the long term, as I said, but we are also cost fanatics here in the company. Everything that we have as an expense should be justified with a short-, mid- and long-term view.

And in terms of the opportunities, I think the main opportunity that we have is with our existing clients nowadays. We keep saying about adding more products and banking services so we can cut completely the link of our clients with the banks. That's probably going to take a while because it's a process, right? And the banks, the incumbents banks, they are good in the banking services business. It's not that the technology, it's not good and so forth.

But we believe that — our mindset, the way the company is structured, as Maffra explained through technology and business people altogether, designers, everything focused on the end-to-end journey of the client can make this process a lot smoother and better for the clients. And when we think about the existing clients, we're using data analytics that we are accelerating, but we still have a long way to go as well. We can do much more in terms of the experience, the product offer for the client, the next product to buy, the better asset allocation. We have a lot of initiatives in that sense.

We have the XP Genius. And I cannot answer in more details here because those are strategic products that we have in our company, and I'm pretty sure if not all, most of our — of the competitors, they are listening to us here. So I cannot answer in details. But existing clients, they offer the best opportunity if we are able to serve them better in everything in terms of experience products and so forth.

We can basically double our assets under custody if we get close to 100% of share of wallet of our clients. So that's an in-house opportunity.

Carlos Lazar

So let's go to the next question. Marcelo Telles, please.

Marcelo Telles -- Credit Suisse -- Analyst

Can you hear me, Carlos?

Carlos Lazar

Yes, it's perfect.

Marcelo Telles -- Credit Suisse -- Analyst

All right. OK. Great. So I have two questions here.

I was wondering if you could — regarding the retention agreements with the IFAs that we engaged in the quarter, I was wondering if you could tell us what was the amount of AUC of those IFAs that you engage in this type of agreements. That's the first question. And the second question, if you can comment a bit on the expectations regarding the public consultation on owner internalization. I know this being a hot topic, I think your manifestation, I think, was very clear, right, where you guys stand.

So if you can comment a bit how — what do you think the potential outcome would be, why do you think it makes sense in your view and how meaningful that could be in terms of earnings for you. Thank you.

Bruno Constantino -- Chief Financial Officer

OK. Thank you, Marcelo. In terms of the IFA, I cannot say the exact number of AUC related to the long-term incentives that we have done so far. But I can tell you that it's a lot, OK? And again, I mean, we are talking about investments in a network that has a huge potential for growth as the October number of new IFAs coming to the platform, if not all, almost all of them through our existing IFA network of more than 500 new IFAs in one single month.

So that's how we see this profession. Always thinking about not only the number of existing IFAs. This number was basically less than 500 when we started the business. So now it's close to, what, 10,000 getting — I mean you have to discount those IFAs that have the certificate but do not exercise the profession.

But at the end of the day, it's a profession that is growing a lot. And the reason for that is that you have to add to the IFA world the bank managers as well. And there are several of bank managers. And as I said, the market is a huge opportunity because a lot of branches are going to be closed.

Good people spread all over Brazil that have this potential to become entrepreneur and have a chance through our platform in one of our existing offices. So your second question, I'm sorry, I forgot — it was about the internalization.

Marcelo Telles -- Credit Suisse -- Analyst

Yes.

Bruno Constantino -- Chief Financial Officer

Yes. I mean it's something that I believe it makes sense in the United States, for example. I'm here in the United States. Here, you have that kind of competition with broker-dealers being able to internalize orders and so forth.

But I don't know if and when it's going to happen. I think that probably before that — I know there is a discussion going on, but probably, I'm not sure, before that, we can have the facilitation for equities. We only have [ four mini ] contracts. We already have the experience that it's a good thing for retail clients.

They benefit from it, liquidity and so forth in the market, and it's working really well. So why not extend that for equities, liquid equities, for sure. But yes, internalization is on the road map of the regulator as well. So we'll see.

And no, I don't have a number to give right away in terms of the potential revenue that we can have if that internalization idea moves on.

Marcelo Telles -- Credit Suisse -- Analyst

Just one follow-up question regarding the client retention in terms of the IFAs that have left, right, the XP platform. Can you comment a bit what has been your ability to retain those clients, if this is better or worse than you're expecting? Thank you.

Bruno Constantino -- Chief Financial Officer

Yes. Sure, I can. We can — further down the road, we can update that press release that we issued in the past considering IFA office No. 1 or 2 or 3.

But the picture, it hasn't changed on average. Of course, you have offices that have migrated less than 10% and others that have migrated more than 10%. But I would say the worst-case scenario is around 25%, worst-case scenario. Worst case.

So because what we do when something like that happens — and it will happen probably in the future because remember, we built this ecosystem. We were working on it, investing in the IFA profession for 17 years by ourselves. Then when our deal with Itaú became public in 2017, other players realized that the business model was the right one and started to invest. And it's a natural thing to look at XP and the IFA network they have built and try to get some of the IFAs.

But again, the new IFAs coming to the market are many, many new IFAs. And I believe this profession, as I said, will keep growing. So in terms of the numbers of those that have left, that's it. It's nothing really different than what we have already shared with the market.

And when something like that happens, what we do, we just distribute the clients to be served from somebody — for somebody else, either internal advisor or another IFA from a different office. The client has to be the priority. The client cannot — it's — when an IFA leaves the platform — it's not a good experience for the client at the end of the day. So we got to think about the clients, and that's what we do right away.

That's why the retention rate is so high.

Marcelo Telles -- Credit Suisse -- Analyst

Very clear, Bruno, thanks a lot. I appreciate it. Thanks Carlos.

Carlos Lazar

Thank you, Marcelo. Next question comes from Mario Pierry.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Hi there. Thank you for taking my question. I have two questions as well. Bruno, you mentioned that you're seeing faster growth for Clear and Rico clients.

Can you share with us what percentage of the growth then is coming from these two types of clients? And what is the average balance on these accounts? And how could this impact your ability to cross-sell other products in the future? You mentioned on your remarks, right, that the opportunity is to monetize on the existing clients. But I was wondering, what is your ability to monetize on a Rico versus a Clear versus an XP account? And then I'll ask my second question.

Bruno Constantino -- Chief Financial Officer

All right. Perfect, Mario. Thank you. Yes, you're right when you think that this type of clients, on average, they have a lower ticket.

And it should be like that, right? Because, for example, the IFA network, it has to go to justify itself after a higher ticket client. And the number, as I said, including Rico, Clear and XP Direct, B2C as a total, they were responsible year to date of more than 85% of the growth in number of clients, not in assets under custody, OK, number of clients. And the way we monetize those type of clients, I mean every client has a different equation. And that's the beauty of having this tech-enabled platform because the tech-enabled platform, if we tend our marginal cost to zero, that's the goal in the long term.

We are able to add those clients without having the burden of increasing too much the cost to serve that client. It's 100% digitally. I think Guilherme mentioned about the Clear example as one of the achievements. We increased a lot, the Clear clients in our year to date here, basically because of this equitization process.

And it's linked to the number of new individuals in B3 as well. And we have not increased the cost to serve that client, 100% digital. And we increased the volume a lot, and the stability of the platform has improved throughout time with the investments we have made. So the Clear client is a different profile of clients because that's basically for traders, right? The Rico client is a different profile, and XP, a little bit different as well.

And I think the challenge here, Mario, is exactly to keep adding services and products in our platform to — and even nonfinancial products like subscription, courses and so forth that can monetize and help that client to evolve in terms of investments in the journey. Remember that we now are looping the client end-to-end. The whole journey, it's what matters. And for sure, data and technology's going to help us a lot to have a better path side by side with the client.

So that's what, I mean, we've been doing. Different types of clients, different type of products, service experience at a point that we reach individualized experience for each client. That's the goal in the future.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

OK. That's clear. My second question is related. When you mentioned that you reduced some of the trading fees for equities because you wanted to — there was no pressure to do so also.

But when we look, right, you have to have this retention costs for IFAs. So how do you describe the competitive environment, right? We're seeing a lot of consolidation. We're seeing some of — not only competition from the incumbent banks but new players. How would you describe this? Is this as competitive as you have seen? Are you seeing any easing from your competitors?

Bruno Constantino -- Chief Financial Officer

Look, first, we didn't have to, OK? We wanted to. We could just let the IFA to migrate to other platform and fight for the client, as we did with some of the IFAs. So it's not that we had to. We wanted to, of course, because of the competition as well.

But also, we understand it's the right thing to do considering the momentum we are living right now in terms of the opportunities that this investment poses to the whole IFA network as well. The thing is that before, we were not able to make those long-term investments because of the restrictions we have. And we had and we still have. But when — just matching a competitor's proposal, we can do it, and we think it's the right thing.

Of course, we know all the numbers. And some of them, we do not do. So that's one important thing to mention. In terms of the competition, Mario, yes, it's — I mean the investments, we see a lot of news, right? But we got to think about the profile of the client.

We still look at the main competitors being the incumbent banks. That's where our competition really is because the incumbent banks, if you look at what they have, they have the most variable asset, which is the client. The banks is where everything happens. And they already have the clients, right? So we need to convince the clients to migrate to our platform.

The clients that are here, we need to convince, look, experiment the platform. And as you can see in our cohorts chart, as the experiment, the platform, the engagement increases over time, and then they bring more money. Great. Now we have to accelerate that and bring more new clients into our platform.

That's the game. That's what we've been doing. Other competitors that do not have what the banks have, which is the client, it's a different profile of clients or different competition. I think the real competition is with the incumbent banks.

And if you look at everything that happened in our numbers and in our market share in retail, for example, with the competition intensifying, and I always say, look, the competitive landscape is going to be intense for the next years because there is a trend in terms of investments in Brazil that it's a separate growth trend. That's the way we see it. This shift away from fixed income into higher-yielding products, it's going to happen. And people are trying to accelerate.

But at the end of the day, when we look at the numbers of market share that we have, for example, I gave the equity retail market share. We started the year, we also say above 50% market share. We ended October with — in equities with a 58% market share. We increased our market share in this competitive environment that you just mentioned, and it is true.

So competition is good. Competition is good for the client. It's good for the customer. We have to be better.

We have to have better prices. We have to have better services, and that's our life. So that's it.

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

OK. If I can follow-up here. So it's kind of related question. As you mentioned, so much competition from the incumbent banks.

We had Itaú announced recently, right, that they are planning on spinning off the stake that they have on XP. What do you think that can change in terms of your relationship with the bank and how it could impact your operations?

Bruno Constantino -- Chief Financial Officer

OK. Yes. I saw the announcement and I listened to part of the earnings call led by Candido Bracher. Yes.

First, I mean, what I can say, it's — I mean it's important to highlight, as we have always said, that Itaú's deal announced in 2017 and executed in 2018 was an important move for XP's long-term value creation. We understood at that time it was the best move that we could do, and Itaú gave us a credibility — an important credibility stamp at that time. Our main competitor recognizing the business model we have built through our lifetime, very important. And as Candido correctly explained in his call with the market last week, the original deal had the possibility of Itaú acquiring control of XP at some point down the road.

This deal has been modified by Brazilian Central Bank. And Itaú cannot buy XP's control, neither do we want to sell it. And the advanced studies and the reaward announced by Itaú, in my view, it seems a smart move to unlock value for Itaú's shareholders. But at the end of the day, the controlling shareholders of Itaú, they will keep control of this large stake at XP.

So from that perspective, really my — I don't think nothing — anything changed. So my view, nothing changed in that perspective. But now if this reaward comes together with an improvement in XP's corporate governance, can be very positive for our company in the long term. I believe in that.

When Central Bank changed the deal back in 2018 to approve the deal, it didn't change the governance of our shareholders' agreement with Itaú. For example, Itaú has super voting right shares, usually designed only for controlling shareholders, right? They also have some veto rights. They have access to confidential information on a monthly basis that our shareholder agreements — by our shareholder agreements, we have to send to Itaú. And they also have the right to indicate board members, where we discuss the strategic topics for XP and for this competitive landscape we're discussing here.

So most rights that were given to Itaú back in 2017, nowadays, they conflict with the best interest of XP Inc. They also compete with this fair competitive environment that I believe Central Bank is going after. And they also go against the best corporate governance standards. We would like to have a better corporate governance standards in XP Inc., on behalf of XP, which is our life.

So if this reorganization that Itaú announced the intention to do, as I understand, it's not done yet, it's an intention to do, if it comes along with this improvement in the corporate governance of XP Inc., and we believe it's a very good moment to revise all these together in the best interest of the company and the competitive landscape in Brazil, can be very positive for our company in the long run. That's what I think about it. But further than that, I mean, nothing changed.

Mario Pierry -- Bank of American Merrill Lynch -- Analyst

Thank you very much. Thank you.

Carlos Lazar

OK. Domingos, please, next question.

Domingos Falavina -- J.P. Morgan -- Analyst

Thank you, Lazar. So Bruno, thank you for the opportunity. And I have a quick — I guess a little bit of an accounting question. So I really appreciate this balance sheet you guys put, which are just the assets and the liabilities that you obviously have effects — leveraging effects of repos and others.

And this adjusted cash flow, as you present, basically came from BRL 8.9 billion to BRL 7.8 million, let's say, about BRL 7.9 billion, about BRL 1 billion cash burn in the quarter. And my understanding is that this adjustment in cash, this way you present this cash automatically adjusts for a couple of the items you mentioned in the net cash flow used for rating activities. An example, if you get cash and you invest more in treasury funds, like mentioned in here, or other financial assets, you would automatically adjust. You have more assets.

You have more of the liabilities, and in fact, will be close to net 0. A couple of them. And then you mentioned here, growth of our omni-channel distribution network through IFAs, which I believe probably had some impact in this cash outflow. So my question to you is, out of that BRL 1 billion that we've seen there, how much was capex? How much was other things? And how does that transfer to your balance sheet other items? Does it go through accounts payable to everything, including IFAs and go through to property? Like how exactly do you spend BRL 1 billion in the quarter, basically?

Bruno Constantino -- Chief Financial Officer

OK. Yes. First, I mean, the reason to have this table, Domingos, is to explain a little bit about our balance sheet because all the assets and liabilities, as we work a lot in the financial industry, it's different than an industrial company or other sector to understand the cash flow of the business. So here is more trying to net all the assets that we have with the liabilities that are — is not our money and try to see what is the adjusted gross financial assets.

And this quarter specifically, we introduced the bank. And the bank changed a little bit this equation and can be misleading because if you look at the asset part, you're going to see BRL 1.4 billion of loan operations. That's the collateralized loan basically that we are ramping in the bank. If you look at the liability part, you're going to see deposits and structured operating certificates, the COEs that with the bank now, we can issue through the bank our own structured operating certificates.

And that together add BRL 2.7 billion in the liability part, and that explains a little bit the reduction of the adjusted gross financial assets. But going to your question about the BRL 1 billion, yes, the BRL 1 billion is capitalized because of the investment in the IFA network. And you're going to see that, as I explained, through the next quarters in COGS as all the expenses with IFAs, those two amortize through the time of the long-term contracts that we have with them, OK? More than that, we also had a reduction in the cash that it doesn't appear in the liability part here because we paid off our debenture, our bonds issued in 2018. And as I said, we decided not to roll over.

So together with interest, it's BRL 432 million in the quarter. Other than that, we had the investments in the fintechs we acquired. Also, the deal with the ex bankers from Crédit Suisse, and that's the investments we are doing as well. And there was a cash disbursement there.

So it's basically investments in the business, new business, fintechs and the deal with the high net worth segments, IFAs, the bond being paid off and the cash generation of the business itself.

Domingos Falavina -- J.P. Morgan -- Analyst

Very detailed, Bruno. Just one very small follow-up. Are any of these contingent on the specific goals and metrics? Or like those 100% like capitalized is going to be depreciated no matter what?

Bruno Constantino -- Chief Financial Officer

Oh, no, there is parts contingent on — there is an earn-out in the balance sheet.

Domingos Falavina -- J.P. Morgan -- Analyst

That's what I'm asking.

Bruno Constantino -- Chief Financial Officer

Yes, there is. There is. Continuing to perform that I hope it's amortized throughout time that we pay that, but the businesses, they have to perform for us to pay. But I hope that we do.

Domingos Falavina -- J.P. Morgan -- Analyst

Thank you very much.

Bruno Constantino -- Chief Financial Officer

Thank you.

Carlos Lazar -- Head of investor Relations

Thank you, Bruno. Well, we did receive also some questions here through the Q&A. So I'd like to provide you one question from Jorge Kuri. Bruno, could you please provide how inflows you see in revenue that are trending so far in the fourth quarter?

Bruno Constantino -- Chief Financial Officer

AUC, net inflows and take rates.

Carlos Lazar

Take rates. Yes.

Bruno Constantino -- Chief Financial Officer

Take rates, I mean, it's gone well, excluding the extraordinary in the third quarter. So the pace of net inflows, it's going well. AUC, we have a large portion of our AUC in equities not only because of the profile of the investors we have in our platform. But as you saw during the presentation, the equity custody in retail, we are — by far, we have more than 10 percentage points, 100 basis points of leadership compared to the next competitor that one year or 1.5 years ago, we were the second one, not the first one in retail equity custody in the market.

So the growth has been really exponential there. And because of this equity custody, of course, there is a fluctuation of the AUC depending on what happens with the equity prices. But having said that, Jorge, I mean it's business as usual, OK? So things are going well. In terms of net new money, in terms of AUC and take rate, I would guess stable, OK? It's — because it depends on the fluctuation of the denominator, it's hard to predict.

But what I can tell you, it's stable.

Carlos Lazar

OK. Next couple of questions here from Neha. How should we think about the evolution of banking services over the next two to three years? How will XP's product suite look like? And in terms of M&A, are there any specific business areas that would make sense for XP?

Bruno Constantino -- Chief Financial Officer

OK. The banking service and products, we are developing all of them. It's a continued process. So the collateralized loan is something that we have invested in, and we still have more to go.

They're marginal one, another one. The issue and substructure notes in the link with the secondary market trading, it's also important. Derivatives with institutional clients is something that also we can sure increase the revenue pace there. FX, another one, either corporate clients or retail clients.

And in the credit card, it's on beta tests, increasing every day the number of clients there. And the digital bank account, it's going to be the next phase together with payment. So I think that by beginning of next year, first semester, we're going to have the whole suite of banking service products. And the improvement, it's going to be on a continuous base, as it is in investments noways.

It's not because we are leaders in as independent platform in investments that we rely on that, and we do not work hard to get better because we always have to get better. So the banking service product is going to be the same kind of journey ahead. The other question, Lazar, I don't...

Carlos Lazar

About M&A, what would make sense.

Bruno Constantino -- Chief Financial Officer

Oh, no. M&A, we are always looking for M&A opportunities. So yes, we do have, I mean, our pipeline, it doesn't mean that we're going to close any of them. But I will not get into specific details about what complements our ecosystem and what we are actually looking at right now.

But we are always looking at opportunities and working in a very healthy pipeline, I would say.

Carlos Lazar

Well, that concludes, I think, the Q&A session. Thank you for everybody participating until this one hour and 30 minutes call. Bruno, just your final comments, please. Thank you.

Bruno Constantino -- Chief Financial Officer

No. My final comment is to thank you, all the investors that have believed in us so far. I know it's very short term, but we are getting close to one year of IPO. It feels great to be able to deliver a lot more than what we said in the long term.

I know it's only a short-term horizon here, but it feels great, especially considering the tough environment that we faced this year with this pandemic that nobody saw it coming for sure. I hope every quarter and as the time goes by, the investors and the analysts, they realize what is the what we believe to be the real competitive advantage that we have in our business, which is our culture, our people. We talk a lot about that. We believe in that.

I think the pandemic demonstrated that for ourselves at least, the way we were able to adapt and overcome the challenges and the way the company as a whole did the impossible, become possible. And I hope you enjoyed knowing a little bit more about an important partner that we have, a leader in our company, Thiago Maffra, our CTO. And hopefully, you're going to be able to meet, so you don't get bored about listening only from myself here, other players and partners of our company. And we are all together in this long journey.

And thank you very much for your time. Thank you.

Carlos Lazar

Thank you. Thank you, all.

Duration: 84 minutes

Call participants:

Carlos Lazar -- Head of investor Relations

Bruno Constantino -- Chief Financial Officer

Thiago Maffra -- Chief Technology Officer

Tito Labarta -- Goldman Sachs -- Analyst

Thomas Peredo -- BTG Pactual -- Analyst

Chinedu Bolu -- Sanford C. Bernstein & Co., LLC -- Analyst

Marcelo Telles -- Credit Suisse -- Analyst

Mario Pierry -- Bank of America Merrill Lynch -- Analyst

Domingos Falavina -- J.P. Morgan -- Analyst

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