XP Remains Attractive Despite Qualitative Concerns

XP's 3Q25 results showed 16% YoY AuM growth (~R$155bn) with R$30bn net new money in the quarter and management guiding ~R$20bn/qtr on average; client count rose just 2% and retail revenue grew 6% YoY while core equities and fixed income lines contracted and investment banking (Corporate & Issuer Services) grew 30% YoY. Aggregate revenues rose 9%, EBT 10% and EPS 13%; the firm has a 21pp BIS buffer, has executed R$840m buybacks with R$1bn authorized and a R$500m dividend, but would need roughly R$4.5bn to reach ~17pp BIS on RWA of R$108bn — valuation looks attractive (market cap < $10bn, implied <10x) but operational and macro risks keep the view cautious.

Analysis

Market structure: XP is a conditional beneficiary of persistent retail flows into wealth management and higher-margin IB origination; if net new money sustains ~R$20bn/qtr the firm should preserve pricing power in advisory and distribution while legacy equities/fixed‑income trading lines remain cyclical. Rising AuM and buybacks support EPS even if client count growth stalls, but a capital shortfall narrative compresses multiples quickly—expect BRL volatility to move with risk appetite and Brazilian long-end credit spreads to widen on any capital concerns.

Risk assessment: Tail risks include an adverse regulator-enforced capital raise or suspension of buybacks/dividends (high-impact, <12 months) and a rapid dislocation in local rates that materially reduces fee yield (medium-probability, 3–12 months). Hidden dependencies: XP’s leverage to net new money run-rate and IB deal cadence; a single large unwind or quarter with <R$15bn inflows would force visible margin reinvestment. Catalysts: quarterly NNM prints, capital actions (R$1bn+ buybacks remaining), and Central Bank policy shifts within the next 1–3 quarters.

Trade implications: Constructive bias but size constrained—valuation below 10x implies asymmetry if capital optics stabilize; prefer concentrated option-enabled exposure and relative-value against universal banks that lack recurring advisory flows. Use 6–12 month horizon; require stop-loss if NNM <R$15bn or BIS buffer falls toward ~18pp. Sector rotation: overweight fintech/wealth managers, reduce duration-sensitive universal bank trading desks and rate‑sensitive credit exposure in Brazil.

Contrarian angles: Market consensus overweighting capital shortfall risk may be overstated—R$840m executed buybacks + management guidance show intent to prioritize returns, implying a 20–35% upside if buybacks continue and NNM holds. Historical parallels: asset managers post-rate peaks tend to re-rate on normalized flows and buybacks rather than transient trading revenue swings. Unintended consequence: aggressive buybacks before an adverse rate shock could force dilutive raises; price in a 10–20% volatility premium until two consecutive quarters confirm NNM stability.

Key Decisions for Investors

• Establish a 2–3% long position in XP (ticker: XP) on stabilization or a dip up to -10% from current levels; target +30% total return over 9–12 months, hard stop at -15% or if quarterly net new money prints <R$15bn.
• Buy a cost‑effective 12‑month call spread (long 12‑month 20% OTM calls, short 12‑month 60% OTM calls) sized to 0.5% notional to capture asymmetric upside from buybacks/earnings re‑rating while capping premium outlay.
• Implement a pair trade: long XP (2%) / short ITUB (2%) or BBD (2%) to isolate wealth-management alpha; rebalance if the pair’s correlation falls below 0.6 or if Brazilian policy rate expectations shift by >100bps within 3 months.
• Reduce exposure to Brazilian universal-bank rate‑sensitive trading desks by 1–2% and reallocate to short‑duration BRL local currency IG paper or carry strategies if XP’s BIS buffer drops below ~18pp or capital shortfall disclosed >R$3bn in next 60 days.