During a recent interview with Brazilian financial services group XP’s chief executive Guilherme Benchimol, I joked about a quote I read as part of my research that was attributed to him in 2017.
He had gone on the record as saying XP could become bigger than Itaú. But, I said, with Itaú holding a 49% stake of XP, that wasn’t possible if Itaú didn’t sell its shares.
Still, I noted, it was amazing that Itaú’s stake in XP was now worth about 10% of the market capitalization of Brazil’s biggest private bank, especially as that market cap is a mighty R$315 billion ($73 billion).
It wasn’t until I had left and was reviewing my notes that I realised the weight of his response.
“Itaú has 49% of XP,” he said. “XP’s [market cap] is 100% of XP. So just do a mathematical exercise: if XP is worth R$1 trillion and Itaú has half of that, it has R$500 billion. If Itaú is worth less than R$500 billion, then XP is worth more than Itaú. It is mathematically possible.”
I think that what I took from “mathematically possible” was that Benchimol was talking purely theoretically. Is what I heard (I was distracted, thinking of what to ask next): “mathematically possible”.
What I didn’t miss at the time was the lack of incredulity in Benchimol’s voice that had been behind my half-joke. He didn’t share my underlying assumption that Itaú (minus its XP stake) could never be worth less than half of XP.
It was another reminder that I constantly underestimate the unfettered vision of successful entrepreneurs.
I once amused a trader who was berating me for not having bought bitcoin when we’d first discussed it.
“Your initial investment would be up 40 times if you’d bought it then,” he said.
“It wouldn’t,” I replied honestly, “because I would have undoubtedly sold it and cashed in when it had doubled.”
Now, I believe that Benchimol’s “mathematically possible” really means plain “possible” in his mind.
As he is a runner, I asked him how far he thought XP was in its marathon to maturity. His prompt reply was that the race was about 10% run.
And the more I think about XP and the future of Brazil’s financial system, the less sure I am of the underlying assumption that there are certain hierarchical truths – essentially that Itaú (or Bradesco, if pushed for a plausible challenger) – will always and necessarily be at the top.
It’s not just that XP’s growth as an investment platform has so far to run – though Goldman Sachs’ Tito Labarta thinks XP could hit R$1.1 trillion of assets under custody by 2022, and the company has been outperforming the most optimistic analysis in recent quarters – it’s that XP’s gain will be the traditional bank’s’ losses. And not just in the competitive field of investments – including private banking, in which it is already a force.
XP could build a corporate and wholesale business from its investment bank, rather than vice versa
Investment management is the first and obvious area of competition – and the banks are losing. The top five banks’ market share is down to under 60% from 65% in 2015, and the pace of market erosion is increasing. But the self-reinforcing nature of XP’s business model points to rapid expansion in market share in other areas – at a direct cost to the banks.
Take its trading business. According to Bloomberg, XP has a market-leading 20% share in equities in 2020 so far. As the collapse in local interest rates makes capital markets financing more local than ever before – and more popular than bank loans – then this distribution is an unmatchable foundation on which to build a securities placement business.
It seems likely XP will be a top-five player in both debt and equity capital markets this year – possibly a record one for both – and may climb higher still.
Unlike the balance-sheet banks, XP could build a corporate and wholesale business from its investment bank, rather than vice versa.
It will also be able to capture flow business – FX, rates and derivatives – while a recently opened offshore desk is already generating 40% of XP’s institutional revenues.
Then there are the broader banking products. XP has 1.7 million individual accounts – (again) growing fast. Analysts are right to ask: what happens if XP starts offering cards? Or current accounts? Or mortgages? Benchimol appears uninterested in such additional services, while analysts aren’t factoring this upside in to their valuation models – for now at least. But, as he says, he is just a tenth of the way into his marathon.
XP’s growth, tech-heavy-and-cost-light and self-reinforcing business model will likely make the logic of such extensions – and expansions into other Latin America markets – irresistible.
All these advantages make XP’s ascent to the top of Brazil’s financial system not just ‘mathematically possible’, but actually possible.