Target: ₹500

CMP: ₹800.10

SBI Cards (SBIC) has been witnessing a volatile trend in asset quality and a rise in credit costs for the past few quarters. It has lost its second position to ICICI Bank in card spending by losing about 290 basis points (bps) of its market share since August 2023. The market share loss in online spending had been even steeper at about 410 bps, whereas for the offline mode, the loss is about 50 bps. For cards in force (CIF), SBIC lost market share of about 100 bps, though it remained the second-largest issuer. We believe that the softening of the capital base has affected the growth, which will continue in the coming quarters too.

About 40 per cent of the CIF for SBIC is from tier-III cities and beyond as of June 2024-end, with about 50 per cent new sourcing from similar geographies. We are witnessing rising EMI payment bouncing and stickier defaults, especially in semi-urban/rural areas amid over-leveraging as well as weak income growth. Thus, elevated NPAs and credit costs are here to stay.

As almost 100 per cent of SBIC’s advances are fixed-rate ones, the margin trajectory is expected to witness an improvement during monetary easing. Though the quantum of working capital loans, typically linked to the external benchmark, has remained flat year on year at about 63 per cent, SBIC has increased its term loan exposure from about 13 per cent in Q1FY24 to about 20 per cent in Q1FY25, which may get repriced gradually. We also believe that the quantum of margin gains would be lower compared to previous cycles, as the cost of funds for NBFCs has increased due to the increase in risk weights for banks.

We believe the consistent deterioration in return ratios does not justify the premium valuation. We retain our High Conviction Reduce rating on SBIC with a target price of ₹500 or about 3x FY26F BV. Superior growth or lower NPAs remains a key downside risk.

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