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In-line earnings; asset quality continues to improve

Spending growth robust; revolve rate bottoms out

* SBICARD reported in-line performance, characterized by sharp growth in spending (47% YoY), while PAT grew 84% YoY to INR3.86b (MOSLE: INR4b). PPOP grew 23% YoY, aided by steady revenue growth (5% beat).

* Margins stood at 14% (14.1% in 2QFY22), and the management indicated the revolve rate has bottomed out. Retail and corporate spending grew robustly at 36% YoY and 93% YoY, respectively.

* The GNPA ratio moderated 96bp QoQ to 2.4%, while NNPA declined 8bp QoQ to 0.8%. PCR declined 780bp QoQ to 66%, with the RBI-RE book declining to 2% (v/s 4% in 2QFY22 and 6% in 1QFY22). 3QFY22 RoA stood at 5%, while RoE stood at 21.2%. We estimate the company to deliver a 51% earnings CAGR over FY22–24E, leading to RoA/RoE of 7.2%/30%. Maintain Buy.

Loan book grows 10% QoQ; RBI-RE book declines to 2% (4% in 2QFY22)

* SBICARD reported PAT of INR3.86b (up 84% YoY and 12% QoQ), supported by steady revenue growth. Provisions stood higher at INR6.25b on elevated write-offs and management overlay provisions of INR760m towards COVID. Net credit costs declined to 7% (v/s 7.4% in 2QFY22), while gross credit costs stood at 9% (v/s 9.3% in 2QFY22).

* NII grew 10% YoY to INR9.96b (4% beat), while margins moderated 10bp QoQ to 14%. The revolver mix stood stable at 27%; however, the management indicated the same has bottomed out and would improve gradually. Other income grew 36% YoY, supported by healthy spends and provision write-backs of INR1.08b (due to GST refunds).

* Opex growth stood higher at 28% YoY on an increase in business volumes, festive offers / promotion campaigns, and continuous investment in the business. Thus, PPoP grew 23% YoY. The cost-to-income ratio rose to 60% (up 340bp QoQ).

* Cards-in-force grew 15% YoY to 13.2m. New account sourcing stood at ~1m (up 10% YoY), with the open market channel contributing ~49.3% to the total sourcing (~57% on an outstanding basis).

* Overall spends grew 47% YoY, within which retail/corporate spending rose 36%/93% YoY, boosted by festive spends and other marketing offers. Online spends constituted ~54% of the total retail spend.

* The GNPA ratio moderated 96bp QoQ to 2.4%, while NNPA declined 8bp QoQ to 0.8%. PCR declined 780bp QoQ to 66%, with the RBI-RE book declining to 2% (v/s 4% in 2QFY22 and 6% in 1QFY22). ECL declined to 4% (v/s 5% in 2QFY22). The company holds management overlay provisions of INR1.62b.

Highlights from management commentary

* The discussion paper from the RBI is still awaited on MDR. If there is any change in the MDR, various levers are in place to offset the impact.

* The revolve rate bottomed out in Oct'21 and started to improve from Nov'21. It is expected to pick up gradually and would take 3–4 quarters to normalize.

* ECL provisions, excluding management overlay provisions, stand at 3.4% – almost near pre-COVID levels.

* ~70% of the RBI-RE book is below 30DPD.

Valuation and view

SBICARD reported in-line performance as spending growth has revived sharply, but the static revolver mix continues to drag down margin recovery. Spending growth is likely to remain healthy as economic activity picks up, while improvement in the revolve rate would gradually aid margin recovery. The gradual decline in the RBI-RE book and improved slippage trajectory would enable a sustained reduction in credit costs. We expect the company to deliver a 51% earnings CAGR over FY22–24E, leading to RoA/RoE of 7.2%/~30%. We maintain a Buy rating, with revised TP of INR1,120 (35x 1HFY24E EPS).

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