In XP vs Itaú, XP is an archetypal David

The awkward truce in Brazil between XP Inc and Itaú broke down in a very public way in June.

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Ever since 2016, when the then Itaú CEO – and now chairman of the board – Roberto Setubal agreed to buy into then privately held XP Investimentos (now Nasdaq-listed XP Inc), there had been an unsustainably quiet approach to their increasingly fierce competition.

In June, Itaú bared its teeth. Brazil’s biggest private-sector bank launched an advertising campaign that seeks to retain its mass-affluent clients within its own investment platform by alleging an inherent conflict of interest between the autonomous agents that bring the majority of assets under custody (AuC) to the XP Inc platform.

XP responded by pointing out Itaú’s self-interest in keeping its clients buying its own investment products – with higher fees and lower returns than XP's digital platform thay has quickly been making the industry standard. 

It has also been quick to highlight Itaú’s own conflict of interest: its decision to buy into XP, for example. 

“Actions speak louder than words,” said XP’s founder and CEO, Guilherme Benchimol, in an acerbic response on social media. 

He even stated that Itaú was free to divest its XP stake if it didn’t like its business model.


The deal to which Benchimol was alluding insulates Itaú’s senior management – as leading shareholders – to a certain degree. After all, Itaú now owns 46% of XP (it had 49.9% of the upstart until its stake was diluted through the IPO), and the value of this participation has been offsetting its own share-price decline. 

Shares in XP have risen by more than 50% in local currency terms this year, while Itaú’s have fallen by more than 25%.

However, it has been lower down in the organization that the bitterness has been growing in recent years. 

Those tasked with growing revenues within Itaú’s mass-affluent Personnalité brand have suffered the demoralizing impact of the flow to digital platforms. 

It’s a fact that Itaú has been bleeding clients and assets under management to XP – R$150 million ($27.6 million) a day is the size of that flow, according to XP’s Gabriel Leal, partner and head of commercial and customer relations. 

Leal took the war of words back to Itaú by predicting that Personnalité could be defunct within three years.

The problem for Itaú is that Brazil seems to have reached a digital tipping point. The banks have long milked their customers, and the latter kind of knew it

And now, Itaú’s once-dominant private bank is also seeing negative flows to XP’s private bank. It’s becoming an existential problem for a lot of Itaú’s traditional businesses.

The problem for Itaú is that Brazil seems to have reached a digital tipping point. The banks have long milked their customers, and the latter kind of knew it. But with double-digit sovereign bonds to buy, those juicy margins were palatable – just about. 

Now, with interest rates at 2.25% and potentially going lower, it’s all about low costs, low fees and the full power of selection and management that is characteristic of new digital banks.

To be fair, it’s not just Itaú that’s feeling the heat. Credit Suisse is spending R$5 billion on 35% of Modalmais, a platform with R$10 billion of AuC. 

That’s expensive by any metric, but Credit Suisse is banking on this giving it a chance to still be a relevant player in five years’ time.

BTG Pactual is doubling down, too, announcing a R$2.5 billion follow-on to fund the organic and acquisitive growth of its digital platform.


The plurality of aggressive digital plays has led to a conspiracy theory that the Itaú advertising campaign is a phoney war, a strategy to drown out the competition. 

There is an alternative viewpoint.

I think that Setubal made the most lucrative deal of his life when he bought into XP. Since 2017, XP’s market cap has grown by more than 10 times – and Itaú also has the right to buy an additional 12.5% by 2022 at 19xPE21, mostly from General Atlantic. XP currently trades at around 59xPE21. 

Itaú is forbidden by the central bank from building a majority participation but it can go back to 49.9% and will be able to meet this limit and exercise those hugely in-the-money options by selling some of its existing stake.

Setubal’s decision has also protected Itaú’s downside risk from the direct competition that comes from XP. But that won’t stop Itaú fighting tooth and nail to protect its own business, and taking XP head-on is the beginning of a genuine counterattack. 

Itaú needs to be aggressive, driven by pride, but more in recognition that momentum in business is hard to arrest and rot can be an existential issue for any organisation – no matter how big, profitable and diversified.

For his part, Benchimol told me that his move to sell to Itaú in 2017 instead of pursuing an IPO was his biggest-ever business decision. It gave his business money but, most importantly, the “seal of approval” from a bank like Itaú that enabled its growth to continue.

I don’t think he regrets selling a minority stake to Itaú. But it’s my hunch that agreeing to the phased deal that’s taken Itaú to a post-IPO stake of 46% – and probably back to 49.9% in 2022 – stings, as does the billions Itaú has made from his company since.

And that’s only one of the reasons why my money would be on XP in its fight with Itaú. It’s getting personal.

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