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NII, PPoP in line; elevated provisioning drags earnings

Spending jumps 27% YoY

* SBI Cards (SBICARD) posted PAT of INR6.03b, up 15% but a 7% miss vs. our expectations. NII grew in line at 16% YoY; however, elevated provisions dragged earnings down.

* Margin contracted 12bp QoQ to 11.3% amid decreasing yield as the mix of EMI and revolver stood broadly stable. Growth in spending was healthy, with retail spending up 21% YoY while corporate spending rose 55% YoY.

* GNPA ratios inched up marginally by 2bp to 2.43%, while NNPA ratio was stable at 0.89%. RoA/RoE stood at 4.9%/22.3% during the quarter.

* We cut our FY24E/25E earnings by 8%/10% to factor in lower margins and elevated credit costs. We also introduce FY26E and estimate SBICARD to deliver 35% earnings CAGR over FY24–26, following a flattish earnings growth in FY24. Reiterate BUY with a revised TP of INR900 (premised on 22x Sep’25E EPS).

Margin moderates 12bp QoQ; credit costs remain elevated

* SBICARD posted PAT of INR6.03b, up 15% but a 7% miss vs. our expectations. Gross credit costs/ECL stood at 6.7%/ 3.4% in 2QFY24.

* NII rose 14% YoY to INR12.9b (in line). Margin contracted 12bp QoQ to 11.3% amid decreasing yield as the mix of EMI and revolver stood broadly stable. Management expects the CoF to increase further in 3Q & 4Q, which could exert further pressure on margin.

* Fee income grew by a healthy 23% YoY and formed 55% of total income. Opex grew 13% YoY to INR20.7b (broadly in line). Thus, PPoP rose 24% YoY (in line), while the cost-income ratio increased to 57.1% in 2QFY24.

* Cards-in-force rose 21% YoY/3.5% QoQ to 17.9m in 2QFY24. New card sourcing was robust at ~1.1m (-12% YoY/4.1% QoQ), with the open market channel contributing 49% to total sourcing (58% on an outstanding basis).

* Overall spending jumped 27% YoY/7% QoQ, with retail/corporate spending rising 21%/55% YoY. The share of online retail spending stood at 57% in 2QFY24. Receivables grew at a healthy pace of 4.2% QoQ (+20% YoY).

* GNPA ratios inched up marginally by 2bp to 2.43%, while NNPA was stable at 0.89%. PCR was broadly stable at 64.1% during the quarter.

Highlights from the management commentary

* Management indicated that the company is experiencing slight stress and that some of the customers are finding it difficult to repay. The mix of 2019 cohort declined to 14% in Q2 from 19% of NEA in Q1.

* Stress levels are likely to remain elevated in 3QFY24 as well. This is not due to any specific cohort, and reflects ongoing systemic trends.

* The CoF was stable at 7.1%, benefitting from the increased long-term borrowings in the previous two quarters. However, management expects the CoF to inch up in the next 1-2 quarters as the rate environment has hardened further.

Valuation and view

SBICARD reported a muted quarter characterized by elevated provisions and further compression in margins. The mix of revolvers and EMI loans remains stable, while management indicated that the recent hardening of interest rates will exert pressure on funding costs in the coming quarters. This could drive further margin compression over 2HFY24 as the outlook on any increase in the mix of EMI and Revolver loans remains uncertain. Management indicated a slight rise in stress levels, which will likely keep credit costs elevated over the near term. However, on the positive side, spending growth remains healthy while the company maintains a healthy traction in new card additions. Reversal in rate cycle, and lagged improvement in revolver mix remain the key triggers. These would support 35% earnings CAGR over FY24-26E while earnings growth for the current fiscal to remain modest. We cut our FY24E/25E earnings by 8%/10% and estimate a RoA/RoE of 5.2%/25.0% for FY25. Reiterate BUY with a revised TP of INR900 (premised on 22x Sep’25E EPS).

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