XP(XP) - 2023 Q1 - Quarterly Report

Independent Auditor's Report Opinion PricewaterhouseCoopers issued an unqualified opinion, affirming the fair presentation of XP Inc.'s 2022 consolidated financial statements under IFRS - The auditor's opinion is unqualified, stating that the consolidated financial statements for the year ended December 31, 2022, are fairly presented in accordance with IFRS[4][5] Basis for Opinion The audit adhered to Brazilian and International Standards on Auditing, with auditors maintaining independence and sufficient evidence - The audit was performed in line with both Brazilian and International Standards on Auditing, and the auditors maintained independence as per the Code of Professional Ethics[6] Key Audit Matters Two Key Audit Matters identified were the IT environment due to dependency and control risks, and revenue recognition for its materiality Key Audit Matters and Audit Response | Key Audit Matter | Why it is a KAM | How the matter was addressed in the audit | | :--- | :--- | :--- | | Information technology environment | The company's operations are highly dependent on its technological structure. Deficiencies in IT controls could lead to incorrect transaction processing, improper access, and errors in automated controls | The audit team, with IT specialists, tested general technology controls, including change management, access security, and system operations. They also performed additional documentary testing and unpredictability tests to ensure the integrity of system-generated information | | Revenue from services rendered | Revenue, mainly from brokerage commissions, securities placement, and management fees, is a material component of the financial statements. The recognition process requires significant management controls to ensure accuracy | The audit team understood and tested internal controls over revenue recognition. They performed tie-outs between operational systems and the accounting ledger, inspected supporting evidence on a sample basis, and recalculated selected revenue transactions | Responsibilities of Management and Auditors Management ensures fair financial statement presentation and going concern, while auditors provide reasonable assurance against material misstatement - Management is responsible for the fair presentation of financial statements and assessing going concern, while auditors are responsible for obtaining reasonable assurance about the absence of material misstatement and issuing an opinion[19][20][22] Consolidated Financial Statements Consolidated Balance Sheets Total assets increased to BRL 192.0 billion in 2022, with liabilities rising to BRL 175.0 billion, leading to BRL 17.0 billion in total equity Consolidated Balance Sheet Highlights (in thousands of BRL) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | 192,034,613 | 139,340,402 | | Financial assets | 177,681,987 | 127,745,263 | | Total Liabilities | 174,992,403 | 124,920,773 | | Financial liabilities | 127,708,578 | 91,358,151 | | Retirement plans liabilities | 45,733,815 | 31,921,400 | | Total Equity | 17,042,210 | 14,419,629 | Consolidated Statements of Income and Comprehensive Income Total revenue reached BRL 13.35 billion in 2022, with net income remaining stable at BRL 3.58 billion and basic EPS at BRL 6.4438 Consolidated Income Statement Highlights (in thousands of BRL, except EPS) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenue and income | 13,347,390 | 12,077,112 | 8,151,605 | | Net revenue from services rendered | 5,940,456 | 6,196,465 | 5,016,488 | | Income before income tax | 3,444,656 | 3,815,174 | 2,421,413 | | Net income for the year | 3,580,211 | 3,592,460 | 2,081,489 | | Total comprehensive income | 3,795,924 | 3,045,662 | 2,102,568 | | Basic earnings per share (BRL) | 6.4438 | 6.4211 | 3.7597 | | Diluted earnings per share (BRL) | 6.2461 | 6.2588 | 3.7138 | Consolidated Statements of Changes in Equity Total equity grew to BRL 17.04 billion in 2022, driven by net income and share-based plans, offset by BRL 1.81 billion in treasury share repurchases Changes in Total Equity (in thousands of BRL) | Description | 2022 | 2021 | | :--- | :--- | :--- | | Balance at beginning of year | 14,419,629 | 10,897,614 | | Net income for the year | 3,580,211 | 3,592,460 | | Other comprehensive income, net | 215,713 | (546,798) | | Share based plan | 584,772 | 561,457 | | Treasury shares | (1,814,823) | (171,939) | | Balance at end of year | 17,042,210 | 14,419,629 | - In 2022, the company executed a significant treasury share repurchase program, acquiring BRL 1.81 billion in shares[32] Consolidated Statements of Cash Flows Net cash from operations recovered to BRL 1.80 billion in 2022, with cash and equivalents increasing to BRL 4.97 billion despite significant treasury share acquisitions Consolidated Cash Flow Summary (in thousands of BRL) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from (used in) operating activities | 1,803,885 | (4,020,329) | 1,510,728 | | Net cash used in investing activities | (371,280) | (1,150,727) | (582,010) | | Net cash from (used in) financing activities | (200,302) | 6,639,262 | 788,711 | | Cash and cash equivalents at end of year | 4,967,480 | 3,751,861 | 2,660,388 | - A major use of cash in financing activities for 2022 was the acquisition of treasury shares, amounting to BRL 1.81 billion[34] Notes to Consolidated Financial Statements Note 1. Operations XP Inc. operates as a leading Brazilian financial services platform, executing a BRL 2.0 billion share buy-back program with BRL 1.14 billion repurchased in 2022 - XP Group is a technology-driven financial services platform in Brazil, offering products like securities brokerage, retirement plans, and banking services through its brands and IFA network[39] - In May 2022, the Board approved a share buy-back program, later increased to BRL 2.0 billion in November 2022, valid until May 12, 2023[44][45] - As of December 31, 2022, the company had repurchased 11,920,051 shares for BRL 1.14 billion (US$218 million) at an average price of US$18.31 per share under the buy-back program[46] Note 2. Basis of Preparation Financial statements are prepared under IFRS in Brazilian Real (R$), with the Group operating as a single reportable segment - The financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB[51] - The functional and presentation currency for the Group is the Brazilian Real (R$)[54][73] - The Chief Operating Decision Maker (CODM) considers the entire Group as a single operating and reportable segment, reviewing financial data on a combined basis[69][70] Note 3. Summary of Significant Accounting Policies Key accounting policies cover business combinations, financial instrument classification (FVPL, FVOCI, amortized cost), ECLs, revenue recognition, leases, and annual goodwill impairment testing - Financial assets are classified at initial recognition based on the Group's business model for managing them and the asset's contractual cash flow characteristics (SPPI test)[87][88] - The Group recognizes Expected Credit Losses (ECLs) for all financial assets not held at FVPL, using a three-stage model based on changes in credit risk since initial recognition[108] - Revenue from contracts with customers is recognized when control of services is transferred, following a five-step model. Main revenue streams include brokerage commission, securities placement, and management fees[192][193][196] Note 5. Group Structure The Group's structure includes subsidiaries and 2022 acquisitions like Habitat Capital Partners for BRL 65.4 million, with a pending agreement to acquire Banco Modal S.A - In February 2022, the Group agreed to acquire 100% of Habitat Capital Partners Asset Management, a real estate fund manager. The transaction closed in May 2022[222] Habitat Acquisition Details (in thousands of BRL) | Description | Amount | | :--- | :--- | | Total identifiable net assets at fair value | 5,316 | | Goodwill arising on acquisition | 60,037 | | Purchase consideration transferred | 65,353 | - On January 6, 2022, the Group entered a binding agreement to acquire up to 100% of Banco Modal S.A. The acquisition is pending approval from the Brazilian Central Bank (BACEN) and the SEC as of year-end 2022[233] Note 7. Securities Total securities held increased to BRL 131.3 billion in 2022, primarily classified as FVPL (BRL 87.5 billion) and FVOCI (BRL 34.5 billion) Securities Portfolio by Classification (in thousands of BRL) | Classification | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Fair value through profit or loss (FVPL) | 87,513,004 | 58,179,955 | | Fair value through other comprehensive income (FVOCI) | 34,478,668 | 32,332,377 | | Evaluated at amortized cost | 9,272,103 | 2,238,807 | | Total Securities (Assets) | 131,263,775 | 92,751,139 | | Liabilities | | | | Fair value through profit or loss (FVPL) | 13,529,265 | 2,665,202 | Note 8. Derivative Financial Instruments Derivative assets totaled BRL 9.2 billion (notional BRL 1.34 trillion) and liabilities BRL 8.6 billion (notional BRL 1.02 trillion) as of year-end 2022 Derivative Financial Instruments Fair Value (in thousands of BRL) | Instrument | Assets (Fair Value) 2022 | Liabilities (Fair Value) 2022 | Assets (Fair Value) 2021 | Liabilities (Fair Value) 2021 | | :--- | :--- | :--- | :--- | :--- | | Options | 5,542,340 | 7,086,946 | 6,570,326 | 8,112,055 | | Swap contracts | 2,828,613 | 839,421 | 2,577,311 | 2,561,327 | | Forward contracts | 549,953 | 511,167 | 1,601,167 | 1,057,426 | | Future contracts | 296,249 | 161,574 | 194,910 | 157,710 | | Others | - | 6,301 | - | 19,665 | | Total | 9,217,155 | 8,605,409 | 10,943,714 | 11,908,183 | Note 10. Loan Operations The loan portfolio expanded to BRL 22.26 billion in 2022, with most loans collateralized by client investments, and BRL 49.4 million in expected credit losses Loan Operations Breakdown (in thousands of BRL) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Pledged asset loan | 20,198,764 | 11,789,419 | | Non-pledged loan | 2,061,774 | 1,054,618 | | Total loans operations (Gross) | 22,260,538 | 12,844,037 | | Expected Credit Loss | (49,377) | (24,410) | | Total loans operations, net | 22,211,161 | 12,819,627 | - Loan products are offered through Banco XP and are mostly collateralized by customers' investments on the XP platform, including structured notes[267] Note 14. Expected Credit Losses (ECL) Total ECLs for on-balance sheet exposures increased to BRL 56.8 million in 2022, with significant portions from securities trading and loan operations Total Expected Credit Losses by Product (in thousands of BRL) | Product | ECL 2022 | ECL 2021 | | :--- | :--- | :--- | | Securities (FVOCI) | 8,077 | 7,527 | | Securities (Amortized Cost) | 2,924 | 2,497 | | Securities purchased under agreements to resell | 2,681 | 2,569 | | Loans and credit card operations | 43,149 | 23,396 | | Securities trading and intermediation | 105,179 | 81,988 | | Accounts Receivable | 34,786 | 6,531 | | Other financial assets | 51,109 | 49,666 | | Total on-balance exposures | 247,905 | 174,174 | Note 16. Property, Equipment, Intangible Assets and Leases Net property and equipment totaled BRL 310.9 million, with intangible assets at BRL 844.2 million, including BRL 595.2 million in goodwill, with no impairment recognized Intangible Assets Breakdown (in thousands of BRL) | Intangible Asset | Balance Dec 31, 2022 | Balance Dec 31, 2021 | | :--- | :--- | :--- | | Software | 88,339 | 152,332 | | Goodwill | 595,222 | 542,745 | | Customer list | 61,504 | 92,489 | | Trademarks | 12,540 | 2,567 | | Other intangible assets | 86,577 | 30,842 | | Total | 844,182 | 820,975 | - The annual goodwill impairment test, performed at the single operating level, used value-in-use calculations based on a four-year cash flow projection, resulting in no impairment recognized[289][290][291] Note 25. Equity The company maintains a dual-class share structure, with treasury shares significantly increasing to 19.2 million units (BRL 1.99 billion) in 2022 due to buy-back programs - The company has a dual-class share structure: Class A common shares with one vote per share and Class B common shares with ten votes per share[329] - The Group's holdings of treasury shares increased substantially in 2022 due to a share buy-back program and specific share purchase agreements with Itaú Unibanco and Itaúsa S.A[335] Treasury Shares | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Number of shares held | 19,203,135 | 726,776 | | Value (in thousands of BRL) | 1,986,762 | 171,939 | Note 27. Provisions and Contingent Liabilities Provisions for probable losses totaled BRL 43.5 million, while contingent liabilities with possible loss significantly increased to BRL 893.7 million, primarily from tax matters Provisions for Probable Losses (in thousands of BRL) | Type | 2022 | 2021 | | :--- | :--- | :--- | | Tax contingencies | - | 10,374 | | Civil contingencies | 20,419 | 12,539 | | Labor contingencies | 7,908 | 6,395 | | Other provisions | 15,214 | - | | Total provision | 43,541 | 29,308 | Contingent Liabilities with Possible Loss (in thousands of BRL) | Type | 2022 | 2021 | | :--- | :--- | :--- | | Tax | 543,463 | 228,602 | | Civil | 335,644 | 232,775 | | Labor | 14,638 | 25,744 | | Total | 893,745 | 487,121 | Note 28. Total Revenue and Income Total revenue and income reached BRL 13.35 billion in 2022, with net revenue from services at BRL 5.94 billion, and Brazil as the primary revenue source Net Revenue from Services Rendered by Line (in thousands of BRL) | Service Line | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Brokerage commission | 2,102,878 | 2,465,217 | 2,139,985 | | Securities placement | 1,631,399 | 1,917,403 | 1,429,824 | | Management fees | 1,580,770 | 1,489,736 | 1,224,125 | | Insurance brokerage fee | 153,230 | 133,070 | 112,802 | | Commissions Fees | 563,987 | 192,923 | 90,804 | | Total Net Revenue from Services | 5,940,456 | 6,196,465 | 5,016,488 | Total Revenue and Income by Geography (in thousands of BRL) | Geography | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Brazil | 12,855,909 | 11,723,976 | 7,454,304 | | United States | 449,447 | 332,046 | 655,817 | | Europe | 42,034 | 21,090 | 41,484 | | Total | 13,347,390 | 12,077,112 | 8,151,605 | Note 32. Share-Based Plan The share-based plan, comprising RSUs and PSUs, had 16.2 million units outstanding, with total compensation expense of BRL 793.2 million in 2022 Share-Based Plan Activity (Number of Units) | Activity | RSUs | PSUs | Total | | :--- | :--- | :--- | :--- | | Outstanding, Jan 1, 2022 | 15,153,830 | 2,966,060 | 18,119,890 | | Granted | 814,745 | - | 814,745 | | Forfeited | (1,559,670) | (438,818) | (1,998,488) | | Vested | (724,481) | - | (724,481) | | Outstanding, Dec 31, 2022 | 13,684,424 | 2,527,242 | 16,211,666 | - Total compensation expense related to the share-based plans was BRL 793.2 million in 2022, which includes BRL 189.3 million in tax provisions[373] Note 35. Management of Financial Risks The Group manages credit, liquidity, market, and operational risks through policies and monitoring, with a 50% adverse market shock potentially leading to a BRL 1.23 billion loss - The Group's risk management structure is designed to identify, analyze, and control credit, liquidity, market, and operational risks, with policies and systems reviewed regularly[389][391] - Credit risk on loan operations is mitigated by using clients' investments as collateral, resulting in high credit quality and low provision ratios[397][398] Market Risk Sensitivity Analysis - Impact on P&L (in thousands of BRL) | Scenario | 2022 Potential Loss | 2021 Potential Loss | | :--- | :--- | :--- | | Scenario I (1bp/1% shock) | (13,770) | (8,618) | | Scenario II (25% shock) | (447,576) | (279,158) | | Scenario III (50% shock) | (1,231,925) | (153,306) | Note 36. Capital Management The Group manages capital to optimize its structure, with net debt at BRL 5.14 billion and the gearing ratio improving to 23.18% in 2022, while subsidiaries met regulatory capital requirements Gearing Ratio Calculation (in thousands of BRL) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total debt | 10,108,959 | 9,488,421 | | Less: Cash and cash equivalents | (4,967,480) | (3,751,861) | | Net debt | 5,141,479 | 5,736,560 | | Total equity | 17,035,735 | 14,416,836 | | Total capital | 22,177,214 | 20,153,396 | | Gearing ratio % | 23.18% | 28.46% | - Certain subsidiaries are subject to local regulatory capital requirements from BACEN and SUSEP, and all were in compliance as of December 31, 2022[428][429][430]