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Business growth tepid; elevated provisioning dents earnings

Coverage ratio improves; retail spends up 13% YoY

* SBI Cards and Payment Services (SBICARD) reported a weak quarter, with sequential decline in receivables/spending. On the other hand, margins declined ~130bp, affected by interest income. Fee income stood stable QoQ (+16% YoY) as spends declined 5% QoQ (+11% YoY). However, decline in opex led to stable PPoP. Retail spends remained higher v/s pre-COVID levels (~113%), while corporate spends reached pre-COVID levels.

* The GNPA ratio increased on higher NPAs from the RBI RE book, comprising ~50% of the total slippages. However, it has provided ~80% on the delinquent RBI RE book; this, along with a strong PCR of ~78% and additional management overlay provisions of INR2.97b, should keep credit costs in check. Maintain Buy.

Weak revenue profile due to slow spending growth, margin decline

* SBICARD reported PAT growth of ~110% YoY to ~INR1.75b, below estimates (MOFSLe: INR2.6b). It was affected by 21% YoY / 8% QoQ decline in interest income and modest fee income. Although, lower opex supported PPoP. For FY21, NII/PPOP was up 9.7%/9.6% YoY, while PAT declined ~21% YoY.

* NII declined 18.3% YoY, with margins down 130bp QoQ to 13.2%. Income from fees and services was stable QoQ at INR11.1b (+16% YoY) as overall spends declined ~5% QoQ. Thus, total income grew 2% YoY to INR22.2b, while opex declined 4.6% QoQ, resulting in stable PPoP (9% miss).

* Cards in force grew 12% YoY to 11.8m. New account sourcing for 4QFY21 stood at 93% of 4QFY20 levels. SBI contributed ~54% to new cards sourced, which accounts for ~44% of the overall card base.

* Overall spends rose 11% YoY (5% QoQ decline), within which retail spends were up 13% YoY (-4% QoQ), while corporate spends declined 10% QoQ (flat YoY). Retail spends remained higher than pre-COVID levels (~113%), while corporate spends reached pre-COVID levels – on the back of new use cases making up for the loss in travel spends. Online retail spends form ~52% of the total retail spends.

* Total receivables grew 4% YoY (2.5% QoQ decline) to INR251.1b. The receivables mix indicated a marginal increase in the number of transactors and decline in revolvers – resulting in moderation in yields and an impact on the margins. Receivables per card continued to decline, reaching ~21k in 4Q.

* The GNPA ratio increased to 4.96% (v/s proforma 4.51% in Dec’20), while the NNPA ratio declined to 1.15% (v/s 1.58% in 3QFY21). Thus, PCR increased to ~78%. ~50% of the slippages were from the RBI RE book, on which the company has made provisions of ~80%. The RBI RE book declined to INR19.1b (8% of loans). The company holds additional management overlay provisions of INR2.97b.

Highlights from management commentary

* Spends across categories, barring Travel and Entertainment, have reached preCOVID levels. Corporate spends have also reached pre-COVID levels, while corporate travel remains impacted. New use cases across corporates have been making up for the loss in travel spends.

* RBI RE book: a) ~50% of the book comprises ‘less than 30-days’ delinquencies, b) ~13% consists of delinquencies ‘between 30–90 days’ – provided at NPA levels, and c) ~36% comprises delinquencies of ‘greater than 90 days’ – on which SBICARD carries provisions of 80%.

* We expect the RBI RE book to decrease by INR3–3.5b in the coming quarter.

Valuation and view

SBICARD reported a weak quarter as slower growth in receivables/spending and elevated provisioning impacted earnings. However, we expect spends to pick up as retail spends have exceeded pre-COVID levels and corporate spends are also back at pre-COVID levels. Gradual decline in the RBI RE book and an increase in the revolver mix, coupled with controlled funding cost, would support margins over the medium term.

We estimate a loan book / earnings CAGR of 24%/60% over FY21–23E – as a strong PCR of ~78%, coupled with additional management overlay provisions of INR2.97b, should keep credit costs in check. We estimate RoA/RoE to improve to 6.8%/28% in FY23E. Maintain Buy, with unchanged TP of INR1,200 (45x FY23E EPS).

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