Brazil’s digital banking industry is now into full-blown consolidation mode.
Make no mistake about the driver of this deal: it brings zero new functionality to XP and breaks no new ground in terms of products or services. It brings no innovative technology – the platforms will be run largely independently for the foreseeable future – or much-needed management or workforce expertise.
XP points to Modal’s leadership in mini-futures as added capability, but – even generously assuming this is true – such additionally would take a couple of weeks of organic development. It doesn’t warrant a R$3 billion acquisition.
Defensive
No, XP’s strategy is purely defensive. It’s anticipating a potential source of competition and, with depressed share prices in Brazil’s digital banking sector – Modal’s share price had fallen from its R$20 at IPO to R$8.50 just before the acquisition was announced – XP struck.
The price of Modal’s stock may have driven the timing of the deal, but not its logic. XP has already been feeling the heat of being the market leader. The response from competitors has turned the tables on it. BTG Pactual, in particular, has been on a spree of buying minority stakes in large independent financial advisers (IFAs) as a means to tie them to its platform – a tactic XP is itself employing.
From a position of relentlessly taking market share over the company’s short life, XP’s growth has begun to stutter – and quite considerably. In November, its market share fell to 11.5% from 13.5% in July.
The deal also draws a line under Credit Suisse’s plans to plant its own flag in the the growing digital bank market in Brazil
So, this deal will do what it was designed to do: it buys market share and kills off a competitor. Today, it doesn’t make a material difference to XP’s scale: it adds R$30.4 billion to XP’s R$800 billion of AUM; it adds just over 500,000 clients to XP’s 3.3 million and increases its credit portfolio by R$606 million (from R$8 billion). This should help with getting regulatory approval. But it removes one of the better-run and resourced fintech competitors that had been nibbling at XP’s market share.
The deal makes sense for Modal, too. Although its depressed share price was due to negative sentiment on growth stocks in general, its future was, of course, uncertain. Joining with the leading player in the industry brings security – and opportunity. Modal’s CEO Cristiano Ayres hopes it will enable the bank to combine in primary equity issuance and increase the distribution of its financial products to its new parent’s clients.
Swiss bank’s ambition
Credit Suisse is using this logic, too. Its main strategic reason for supporting the deal is the added client base for its wealth management clients – 28 of which are now on offer through Modal and the target is for 40 by the end of the first quarter of this year.
The deal also draws a line under Credit Suisse’s plans to plant its own flag in the the growing digital bank market in Brazil and it will leave a lingering question about the Swiss bank’s ambition. The strategy was a good one: when Credit Suisse bought 35% of Modal in the middle of 2020 it seemed like a good risk/reward play. It also was a continuation of Credit Suisse’s successful strategy of buying strong local businesses and building its local franchise on top: Garantia in 1998 and Hedging-Griffo in 2006.
However, when the Swiss bank allowed itself to be diluted down to a 15% ownership post-IPO, the questions about its commitment to the strategy began to be asked.
The bank’s Brazilian senior management team has been in flux in recent times – its CEO and market stalwart Jose Olympio Pereira has left, as has much of the top tier of its wealth management business Hedging-Griffo. Most recently, the bank lost its chairman, Ilan Goldfajn, to the IMF.
Maybe, amid these changes, selling to the market leader for a profit seemed like an elegant solution.
Does it also demonstrate that Credit Suisse’s latest Brazil strategy was obvious, but not heartfelt? We may never know. Neither will we get to see how the Modal story could have played out given a little more time and energy.
XP’s future, though, is a little more clear: it’s now firmly in the consolidation game.
