The stock of SBI Cards and Payment Services (SBI Cards) has been underperforming for a long while now, after a brief run up to ₹1,150-levels in August 2021 since listing at ₹661 in March 2020, just at the onset of Covid-19. It has been a classic case of richly-valued companies getting punished for weak financial performance. The weak performance can largely be attributed to the worsening asset quality, as the company is no exception to the early stages of crisis in unsecured lending. Gross NPA ratio is at its weakest in 12 quarters and credit costs, too, have shot up. Though the management sees early signs of improvement in delinquencies, the macroeconomic outlook remains bleak for the cards segment and is expected to remain so for at least a couple of quarters, as voiced by the managements of other lenders.
This apart, growth in corporate spends has significantly come down, after a regulatory diktat in February. This has impacted the growth in spends, an eventual loss of market share and a poorer growth in fee income.
SBI Cards saw its IPO (in March 2020) subscribed 27 times, buoyed by bullish sentiments surrounding India’s growing consumption. Even then the issue was priced expensively at around 12.5 times price to book value. RoE and GNPA ratio then were 28.4 per cent and 2.4 per cent respectively. Even after the pandemic (FY22 and FY23), the company maintained decent RoE between 22 per cent and 25 per cent with a similar asset quality. However, the RoE stands at 12.5 per cent (Q2 FY25 annualised) and GNPA ratio at 3.3 per cent now, while P/B multiple is 5.1 times. Though the P/B multiple has corrected, it is still high, especially when you consider the worst may not be behind and also on comparison with quality private lenders with higher RoE and a positive outlook on asset quality and earnings growth. Given the above factors, we recommend investors to sell the stock.
Delinquency woes
The credit card industry has continued to witness an increase in delinquency levels, largely driven by macro environmental factors such as increase in household debt and excess leverage, which have impacted the repayment capacity of borrowers. This has led to a rise in delinquent customers with the GNPA ratio rising to 3.3 per cent. Credit cost, too, has risen in line with rise in NPAs, denting profit.
The management is seeing a drop in early delinquencies of new customers acquired. Also, the Stage-2 accounts (30-90 days past due) have declined to 5.7 per cent from 6.2 per cent in Q1 FY25. Nevertheless, the management has recused itself from guiding credit cost going forward, owing to uncertain macro factors.
Meanwhile, underwriting has been tightened and the sequential growth in cards-in-force (number of live cards at a given point of time) has declined to 1.7 per cent and 2 per cent in Q1 and Q2 of FY25 respectively from an average of 4 per cent seen through FY22 to FY24. Credit limits of about a million customers have been cut short. Having onboarded more disciplined customers, there has been a fall in the proportion of revolver and EMI customers, who bring in interest income.
Spends, fee income
The revenue composition (based on FY24) stands as – interest income - 47 per cent, fee and commission - 48 per cent and other sundry revenue - 5 per cent. While interest income is charged on unpaid card dues, the company derives fee income from late-payment fees, membership fees and interchange fees, among others. An interchange fee is a small fee paid by a merchant’s bank to the cardholder’s bank (SBI Cards here) when a customer uses a credit card to make a purchase. This fee, which depends on spends by customers (both retail and corporate), is a significant contributor to the growth in fee income. An analysis of year-on-year growth in quarterly spends and quarterly fee income reveals a perfect correlation.
Retail spends have been strong with the introduction of RuPay UPI cards and festival season spends. However, since an RBI diktat (RBI restrained B2B card transactions routed through unauthorised intermediaries by a card network such as Visa) in February (Q4 FY24), the corporate spends have been faltering. This has a bearing on the growth in overall spends. FY22 through Q3 FY24, the average year-on-year growth in quarterly fee income was a robust 31 per cent, when corporate spends as a percentage of overall spends remained at an average 22 per cent. In Q4 FY24, corporate spends de-grew 35 per cent causing overall spends growth to fall to 12 per cent. Corporate spends growth has worsened since. The management in a con-call had expressed expectation of a normalisation in corporate spends by July this year. However, that has not played out (see chart) and so overall spends have grown at a slower pace in FY25 so far, with only one cylinder firing (retail). This along with tight underwriting has resulted in loss of market share spends-wise, even as peer Kotak Mahindra Bank struggles with an embargo.
Further, due to the correlation between spends and fee income, year-on-year growth in fee income in the first two quarters of FY25 has been 1.6 per cent and -0.9 per cent. Fee income as a percentage of average assets has fallen from 17-20 per cent levels seen in FY22-24 to 14.3 per cent for H1 FY25, causing RoA (return on average assets) decline from about 5-5.5 per cent in FY22-24 to 3.4 per cent for H1 FY25. That said, the management expects corporate spends to go up only slightly, going forward.