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SBI Card delivered a 21% lower PAT v/s our expectation on account of 2% income miss, and 4%/12% higher opex/credit cost. Annualized RoA/RoE declined to 5.4%/24% after being at 7%/30% in preceding two quarters. While spend/receivables growth was strong, the decline in overall fee yield, reduction in revolvers’ share, significant NIM contraction, elevated opex intensity and uptick in credit cost underwhelmed. Management outlook on many of these factors was not enthusing too. SBI Cards’ incremental market share in spends/transactions remains a key monitorable since it has come-off in current fiscal (even as CIF share has increased) We cut earnings by 6-8% for FY23/24 and now expect avg. RoA/RoE delivery of 5.3%/24% (have baked some impact of possible MDR reduction). We move recommendation to ADD from BUY as the co. will need to tightly manage spend market share and profitability going ahead. Valuation at 7x FY24 P/ABV leaves little room for any incremental disappointments.

Strong spend/receivable growth; Revolvers’ share declined

Overall spends grew in line with expectations (4% qoq/43% yoy); but retail spends growth was robust (12% qoq/45% yoy). Within retail segment, all spend categories witnessed robust growth including Travel & Entertainment which has come back strongly in past couple of quarters. Corporate cards spend (lower 20% qoq) were impacted by rationalization of less-remunerative portfolio. Receivables grew 14% qoq/41% yoy; share of Transactors increased to 41% (38% as of Q1 FY23) and share of Revolvers declined to 24% (26%). Substantial festive spends towards the quarterend and higher conversion of spends into EMI/Term loans drove revolvers’ share decline. Recovery in revolvers’ share is expected from Nov as the spends momentum normalize and the incremental focus of new sourcing on Tier-3 & beyond locations, self-employed customers, Cat B & C Salaried customers and <30-year age group.

Card acquisition picks pace; retail interchange stable

Overall fee income yield declined due to decline in the share of corporate spends. Retail interchange fee yield improved on strong growth in e-com and travel-related spends. Card addition was substantially higher (44% qoq/36% yoy) and CIF growth was 4% qoq/18% yoy (market share improvement since March) with SBI Cards witnessing much lesser impact of recent regulation on closure of inactive cards.

NIM contraction, higher opex and credit cost were negatives

Reduction in interest income yield (decline in revolvers/interest earning receivables’ share) and increase in CoF (substantial share of Bank & CP funding) drove a sharp NIM contraction. Management expects NIM to remain around current levels as funding cost increases further. Opex intensity was underpinned by higher volume of card acquisition and initiatives to drive spends in festive period. Newly introduced cashback card is witnessing significant traction. Cost/Income ratio is estimated to remain elevated in the near term, but moderate gradually thereafter (increasing digital acquisition reducing overall CoA). Credit cost was higher at annualized 6.1% due to significant increase in receivables; stage-wise portfolio construct and ECL level were stable.

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