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Normalization of growth and profitability soon

* With card acquisition, spend growth, and asset quality matrices having reverted to BAU levels, the growth rate in CIF and receivables should improve over the coming quarters. SBI Cards expects a gradually recovery in revolvers’ share in receivables (following the spend increase), and this should lift portfolio yield, NIM and PPOP margin over the medium term despite sustained franchise investments. Significant provisions on 30+ dpd RE portfolio and GNPLs, and steady improvement in delinquency trends provide credible visibility over credit cost normalization in ensuing quarters.

* We estimate 18%/27%/23% CAGR in CIF/Spends/Receivables over FY21-24. Earnings CAGR will be much stronger at 43% due to decline in credit cost. Both liquidity and capital are not constraints for reverting to the pre-Covid growth trends. The company has substantial unutilized bank lines and a strong capital adequacy of 26%. Key risks to our view would be a) significant tweaking of the MDR by the RBI (recently announced a review of all digital payment charges) and b) spread of the new Covid variant impacting business and asset quality.

* SBI Cards’ performance in Q2 FY22 had multiple structural positives viz. a) highest-ever card acquisitions at 953K (a fair bit above pre-Covid level), b) a sharp and pervasive improvement in spends (retail/corporate spends up 41%/80% yoy), c) significant accretion in receivables (up 9% qoq), d) substantial increase in fee income (higher 13% qoq/22% yoy), e) reduction in Gross NPL and stressed pool (Stage-3 correction from 3.9% to 3.4% and Stage-2 reduction from 12.8% to 11.2%) and f) marginal incremental restructuring of 40 bps (o/s down to 4% of portfolio from 6% in June).

* SBI Cards, a subsidiary of SBI, is the second-largest credit card issuer in India with around 19% market share both in terms of number of credit cards outstanding and spends. The co. has been improving its market share over the years; even during FY19-21 (a period impacted by Covid), the company grew its cards base by 42% and annual spends improved by 18%.

* The large scale of operations, strong brand, deep expertise/focus, robust risk management (incl. collections), access to SBI’s customers/platforms (YONO) and strong open market acquisition channels are structural business moats, which along with increasing adoption of digital payments and credit cards in India represents long-term growth opportunity for SBI cards. Notably, it is the only listed pure-play credit card issuer; thus, would continue to command a much higher valuation than Banks and other NBFCs.

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