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Growth in spends healthy; margins moderate slightly

Provisions to remain elevated

* SBI Cards and Payment Services (SBICARD) reported a steady quarter as its PPoP delivered a healthy beat of 10% YoY supported by higher other income even as NII was in line. PAT grew 3% YoY to INR6.0b (8% beat) in 4QFY23.

* Margin contracted 10bp QoQ to 11.5% in 4QFY23 due to lower revolver mix (24%) and a higher cost of funds. Growth in spends was healthy at 4% QoQ, with retail spends up 33% YoY while corporate spends rose 32% YoY.

* GNPA/NNPA ratios expanded 13bp/7bp QoQ to 2.35%/0.87%. PCR was stable at ~64%. RoA/RoE came in at 5.0%/24.6% during the quarter.

* We cut our estimates slightly to factor in higher provisions. We estimate SBICARD to deliver 28% earnings CAGR over FY23–25, leading to an RoA/ RoE of 5.9%/26.4%. Reiterate BUY with a revised TP of INR930 (premised on 27x Sep’24E EPS).

Growth in spends healthy; other income strong

* SBICARD reported a PAT of INR6.0b (+3% YoY), beating our estimate by 8% primarily due to higher other income even as provisions were elevated at INR6.3b. Gross/net credit costs stood at 6.3%/4.8% in 4QFY23. For FY23, NII/PPoP/PAT grew 17%/17%/40% YoY to INR45.1b/INR51.9b/ INR22.6b.

* NII rose 17% YoY to INR11.6b (in line). Margin declined 10bp QoQ to 11.5% due to a stable revolver mix at 24% and a higher cost of funds, which rose 40bp QoQ to 6.7%. Fee income grew by a healthy 25% YoY.

* Opex grew 26% YoY to INR19.8b. Thus, PPoP rose 22% YoY (10% beat), while the cost-to-income ratio moderated to 58.1% (-380bp QoQ).

* Cards-in-force rose 22% YoY/6% QoQ to 16.8m. New cards sourcing was robust at ~1.4m (+37% YoY/-16% QoQ), with the open market channel contributing 44% to total sourcing (58% on an outstanding basis).

* Overall spends grew 32% YoY/4% QoQ, with retail/corporate spends rising 33%/32% YoY. The share of online retail spends stood at 57% in FY23. Receivables grew at a healthy pace of 5.4% QoQ (+30% YoY).

* GNPA/NNPA ratios deteriorated 13bp/7bp QoQ to 2.35%/0.87%, with a stable PCR at ~64%. ECL was also stable QoQ at 3.3%.

Highlights from the management commentary

* Cost of funds is expected to increase by another 10-15bp in 1QFY24. If there are no further hikes, cost of funds could see some moderation over 2HFY24.

* Margins are likely to stabilize in 1HFY24 and could see some expansion in 2H.

* The company revised its ECL model that resulted in an additional credit cost of 20bp (INR200m). Excluding that, credit cost was as per guided basis of ~5.8-6.2%. Overall, the company expects credit cost to moderate gradually over the next few quarters.

Valuation and view

SBICARD reported a mixed quarter as higher other income drove earnings despite elevated provisions. Margin contracted QoQ due to a lower revolver mix of 24% and a higher funding cost. We expect the revolver mix to improve gradually; however, margin could remain under pressure as the borrowing cost is expected to increase further. Spends growth remained healthy, and we expect the traction to continue, which is likely to drive loan growth. The moderation in ECL will keep credit cost under control. We cut our estimates slightly to factor in higher provisions. We estimate SBICARD to deliver 28% earnings CAGR over FY23–25, leading to an RoA/ RoE of 5.9%/26.4%. Reiterate BUY with a revised TP of INR930 (premised on 27x Sep’24E EPS)

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