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Cashing in on the cashless surge!

SBI Cards & Payment Services (SBICARD), with an outstanding card base of ~11.8m, offers a diverse product portfolio of premium, classic, shopping and travel, and exclusive and corporate cards to cater to individual and corporate needs.

Strong parentage + open market sourcing to enable robust growth:

SBICARD has strengthened its position as the second largest card player in the country, with market share of ~19% in o/s cards and ~20% in overall spends. It enjoys SBI’s strong parentage, with an extensive network of ~22k branches and a vast customer base of ~450m. It has doubled its card base over FY17–20 at an average incremental market share of 23% (~32% over FY21YTD).

SBICARD is also the market leader in terms of open market sourcing and the largest co-branded card issuer in India. The customer acquisition rate has reverted to normal levels as the impact of COVID-19 has waned. Given its robust distribution and co-branded channels, it is wellplaced to capitalize on growth opportunities in a significantly underpenetrated market. As per the management, incremental sourcing is likely to be higher from the banca channel, which provides better risk underwriting and enables lower opex.

Growth momentum to accelerate – COVID impact waning steadily:

The Credit Cards industry has demonstrated a strong resilience as both card spends and new customer acquisitions have reached near pre-COVID levels. SBI Cards’ spend rate has reached pre-COVID levels (>100% in retail spends), while it has gained ~50bp market share in outstanding cards. We believe a gradual uptick in the economy, along with a higher mix of online/retail spend, would accelerate the growth momentum. Thus, we expect o/s credit card/spend CAGR of 20%/21% over FY21–23E; SBICARD numbers would see a higher CAGR of 25%/26%.

Underlying profitability strong enough to absorb credit shocks:

We believe the underlying business profitability remains strong, allowing the absorption of asset quality shocks. We note that despite elevated credit cost of ~11% over FY21, RoA/ROE was healthy at 3.8%/16.9%. The GNPA ratio stood at 5.0% (v/s proforma GNPA of 4.51% in 3QFY21), while the NNPA ratio improved to 1.15%. The restructuring book also declined to ~8%.

We expect delinquencies to moderate gradually. On the other hand, a higher PCR of 78% and additional management overlay provisions of INR2.97b would keep credit costs in check. We expect GNPA/NNPA of 3.9%/1.0% by FY23E, while PCR would sustain at ~74%. A higher proportion of interest earnings book and an increase in fee income, coupled with moderation in credit cost, would remain the key earnings drivers – we expect an earnings CAGR of 60% over FY21–23E.

Valuation and view:

SBI Cards has demonstrated a strong track record of growing its cards book/earnings. It delivered average RoA/RoE of ~5%/29.5% over FY18–20. While COVID has disrupted the growth trajectory, recovery has been fairly sharp, with retail spends exceeding preCOVID levels. Corporate spends are also back at pre-COVID levels. Gradual decline in the RBI RE book and an increase in the revolver mix, along with controlled funding cost, would support margins over the medium term. We expect a loan book / earnings CAGR of 24%/60% over FY21–23E. We estimate RoA/RoE to improve to 6.8%/28% in FY23E. We maintain Buy, with unchanged TP of INR1,200.

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