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Velocity improves and asset quality normalizes, but competitive and regulatory risks stay

Our view

SBI Cards’ performance in Q3 FY22 was characterized by further pick‐up in business momentum/matrices, continuance of elevated cost‐income ratio and a material improvement in asset quality (accelerated write‐offs). Card acquisitions and spends were best‐ever, receivable accretion was strong yet again, revolver mix stabilized (likely troughed) and RE portfolio share halved, buoyancy in fee income continued and opex jumped on higher acquisition and spend related costs (partially reflecting sustained competitive intensity). Underpinned by substantial write‐offs and better collection/resolutions, there was a healthy sequential reduction in Stage 2 & 3 assets.

Key management commentary included a) confidence to largely mitigate the impact of any proposed MDR reduction through reduction in benefits offered to card holders (assuming industry would move together on this), b) gradual recovery in share of revolvers with dissolution of RE portfolio and partial normalization of acquisition filters in recent months, and c) reduction in credit cost over coming quarters with Stage 2 & 3 assets having reverted to BAU levels, about 70% of RE portfolio below 30 dpd and collection environment having improved significantly.  

The recent stock price decline represents overstretched concerns around MDR reduction and lack of flexibility to recoup it, fee waivers offered by another other large issuer, structural pressure on cost‐income/profitability from increased competitive intensity and impact on growth from rising scale of new‐age card cos. and BNPL. In our view, the impact of MDR reduction can be partially mitigated, fees waivers (subscription/instance‐based) has been a feature of the industry and card acquisition/spend growth will remain strong due to under‐penetration and market expansion. We retain franchise growth estimates, but earnings get cut by 10%+ on higher cost‐income as we pencil in some MDR reduction, higher opex/investment intensity and a gradual recovery in portfolio yield. Our structural BUY remains intact, but with a lowered 12m PT of Rs1210.  

Key Result Highlights

* Highest‐ever card acquisitions at 1000K+ (953K in Q2). Sharp and pervasive improvement in spends, with spend market share recovering to 19% as of November.   

* Overall spends in Q3 FY22 at 553bn (up 27% qoq/46% yoy); retail/corporate spends up 21%/52% qoq and 36%/59% yoy. Buoyancy in retail spends across categories except for broader Travel & Entertainment (still below pre‐Covid)  

* 30‐day active rate improved and stood above pre‐Covid level at 52% (2% rise qoq). Average annualized spend per card jumped 20%+ qoq and was higher 30% yoy.  

* Significant accretion in receivables to Rs291bn; up 9% qoq for second consecutive quarter. Arrest in decline of Revolvers’ share (steady at 27% of receivables). RBI RE comes down to 2% from 4% as of Q2 FY22.   

* Substantial increase in fee income (higher 17% qoq/32% yoy) due to sharp spend recovery. Fee income formed 55% of core income.  

* Reduction in Gross NPL and stressed pool (Stage‐3 declined from 3.4% to 2.4% and Stage‐2 fell from 11.2% to 9.4%). Total write‐offs (incl. early write‐off) remained elevated at Rs8.1bn with higher‐than‐expected flow from RBI RE.

* Gross credit cost was at 9%. ECL cover on Stage 2/3 has come‐off to 8%/66%. However, 70% of RE portfolio (part of Stage‐2) is <30 dpd.   

* Cost/income ratio rose to 60% as the operating cost swelled 24% qoq/28% yoy on the back of higher acquisition & spend activity. Portfolio yield and NIM were stable as Revolver share did not decline further.

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