XP, the Robinhood of LatAm, falls prey to higher rates in Brazil

XP, the Robinhood of Brazil, became increasingly popular in Brazil over the past decade as it offered retail investors an alternative way of allocating savings.

Since its founding in 2001, it has escalated from a small startup offering financial education courses to a multi-billion-dollar company and one of the most disruptive firms in the Brazilian investment sector.

But three years after a successful IPO in U.S. markets, uncertainty pervading global markets has finally taken a toll on the Latin American fintech. A risk-off mode led the fast-growing fintech to a cold case as higher interest rates and uncertainty no longer support its primary line of business.

“The scenario poses a very strong headwind for (attracting) new money,” Bruno Constantino, the company’s Chief Financial Officer, said recently in a call to discuss quarterly results.

XP’s stock, which made a 30% debut on Nasdaq at a $20 billion valuation, has plunged this year. Negative returns have exceeded 50% year to date.

The fall is deeper if compared to highs in 2020 and 2021. Shares of the company, which achieved swift growth in Brazil in the face of ultra-low rates, plummeted from a record of $50 to around $14 today.

Tech stocks affected across the globe

“We are currently in a phase of reassessment of valuations for companies in this segment,” Jihane Halabi, a fintech adviser in Brazil, told Fintech Nexus. “Uncertainty regarding the world economy and the retail crisis due to high inflation demand a faster road to profitability. For this type of fintech, they usually do not prioritize it in their DNA.”

To be sure, XP is not alone. Tech companies’ performance this year has been abysmal across the globe. Yet the company’s core business has been profoundly affected by the new conditions, as a reversal of ultra-low interest rates in Brazil and worldwide undermines the company’s ability to support extraordinary growth rates.

While global uncertainty has spooked investors worldwide, Brazil’s potent monetary tightening in the face of inflation has upended investment trends in the country. In the past years, and more so during the pandemic, the central bank had cut its rate from 14.25% to as low as 2% last year. In this low-rate environment, Brazilians used to attractive returns in fixed income –bearing little risk– were forced to seek new alternatives as those instruments no longer rewarded their investment with double-digit rates.

Equitization trend in Brazil

Hence, companies like XP benefitted from a strong equitization trend, in which retail investors would try out stocks for the first time in a bid to repeat past returns.

But with the monetary rate back up at 13.75%, that trend has been somewhat reversed.

“Higher interest rates coupled with uncertainty (lead) investors to choose daily liquid fixed income instruments instead of allocating capital in anything else,” said Constantino, the company’s CFO. “This risk-off has mainly impacted our retail revenue.”

In the latest report, the company reckoned its ability to attract new money had grown severely affected. The net inflow monthly average from retail investors fell 28% year over year to $11 billion during the third quarter, down from $14 billion in the year-ago period.

Retail investors make up almost 70% of its gross revenue.

AUM near $200 billion

Asset under management stood at 925 billion Brazilian reais, or nearly $200 billion. Its adjusted net income grew to 1.15 billion reais, up 11% from 1.04 billion reais in the year-ago quarter.

Walking away from a period of “equitization” is also reflected in its asset mix. The company reported a yearly fall from 42% to 34% in equity holdings as part of the entire stock, while fixed income grew to 30% from 22% year over year.

Bruno Constantino, Partner & CFO at XP INC.
Bruno Constantino, Partner & CFO at XP INC.

 “A natural consequence of that is a deceleration of our growth pace, but it’s still growth,” Constantino said. The executive underscored the company’s latest efforts to diversify its revenue streams.

“All the new verticals: retirement plans, cards, credit insurance, they all have been helping revenue keep a very healthy number,” he said. “And it’s still growing year-over-year, despite this headwind.”

In the future, Halabi said XP’s profitability is not at risk, yet it is relevant that it focuses on diversifying further its income streams. “They need to expand their business model and invest in new verticals.”

Growing new revenue streams

To that end, the online broker has been popping out its spending to expand its array of products. The company has recently launched a digital content division to attract new clients and is looking to grow beyond the retail base. It has also introduced a digital account and insurance and has launched a card product for its customers.

“We have invested a lot in new verticals,” Constantino said. “Now, it’s time to consolidate those.”

During the quarter, the company also announced a 1 billion reais increase in its repurchase program, bringing total buyback to 1.5 billion reais.

Inquired by analysts whether XP would expect a reversal of headwinds, the executive said at this point; there has been a stabilization in terms of new inflows.

“There is (still) too much uncertainty to see a reversal,” he said. “But the good thing is it has stabilized. I think the worst is behind us. That’s the point.”

  • David Feliba

    David is a Latin American journalist. He reports regularly on the region for global news organizations such as The Washington Post, The New York Times, The Financial Times, and Americas Quarterly.

    He has worked for S&P Global Market Intelligence as a LatAm financial reporter and has built expertise on fintech and market trends in the region.

    He lives in Buenos Aires.