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Credit cost normalization elusive

Largely in-line numbers

SBI Cards delivered an in-line NII, PPOP and PAT in Q2 FY24, and the performance was characterized by 1) steady card addition and CIF growth (up 3% qoq/20% yoy), 2) sustained strong growth in Retail spends (up 5% qoq/20% yoy), 3) jump in Corporate spends (up 14% qoq/55% yoy), 4) healthy fee income growth (up 4% qoq/23% yoy), 5) an expected NIM decline (14 bps decline in portfolio yield), 6) controlled opex growth (cost/income was 57%) and 7) continuance of elevated write-offs/credit cost (6.7%). RoA/RoE were marginally lower than preceding quarter at 4.9%/22%.

Clarity on credit cost normalization elusive

After attributing higher credit cost in preceding quarters to the originations of 2019, management associated recurrence of elevated credit cost in Q2 FY24 to generic stress in portfolio (in-line with unsecured loans in the system). The stress seen was not related to any cohort/vintage, profile, demography, etc. The share of 2019 cards has now declined to 14% in receivables and it is behaving well due to targeted portfolio actions. The newer acquisitions of 2021, 2022 and 2023 are showing relatively benign early delinquency trends, manifesting better quality of onboarding. While the sourcing share of self-employed customers and Tier-3/Tier-4 markets has been increasing, these portfolios are depicting stable delinquency trends. Though reasonably confident about quality of newer onboarding, the generic stress in the industry precludes management from calling out moderation of credit cost in coming quarters.

NIM could remain under pressure in near term

Portfolio yield decline of 14 bps qoq came as a negative surprise and was driven by change in product mix within EMI/TL portfolio. There was a shift towards relatively lower-yielding subvention product in the quarter. While the subvention book has largely repriced to rate hikes taken over the past few quarters, there is some residual re-pricing left in flexi-pay portfolio. Management expects funding cost to marginally rise in coming quarters. At an overall level, the share of interest earning assets (EMI/TL + Revolvers) was stable on sequential basis.

Cut earnings by 5-6%; downgrade to ADD

Our earnings estimates undergo 5-6% cut mainly on raising of credit cost assumptions. We estimate 20%/25%/20% CAGR in CIF/Spends/Earnings over FY23-25. Stock trades at 5.1x P/ABV and 23x P/E on FY25 estimates. While valuation is not demanding in the context of being a credit card pure-play, leading market share and good franchise growth/RoE, it lacks triggers for re-rating. Hence, we expect stock’s underperformance versus the sector to continue for a while and downgrade rating to ADD from BUY. Factors which can re-rate valuation would be 1) uptick in spends’ market share, 2) normalization of credit cost and 3) softening of interest rates.

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