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Exits co-branded credit card distribution; minimal impact on earnings

Bajaj Finance (BAF) has decided to exit the co-branded credit card distribution business. RBL Bank (RBK) announced that the bank and BAF have mutually agreed to terminate their co-branded credit card partnership. This would also imply that BAF will potentially terminate its co-branded card partnership with DBS Bank (DBS). What is puzzling is that BAF, which had once articulated its aspirations to become one of the largest card issuers in the country, has now decided to exit the co-branded card distribution entirely.

* BAF had earlier reported that it had a total of ~4m co-branded credit cards in force (CIF) as of Sep’24. This included ~3.4m RBK co-branded CIF and ~0.6m DBS co-branded CIF. With BAF’s decision to exit the co-branded card distribution business, it will stop incremental sourcing of co-branded credit cards and cease new customer on-boarding on the platform of the co-branded cards.

* Under these co-branded credit card partnerships, BAF received an upfront fee on sourcing/origination and trail fee income (shared in a certain fee income) on interchange fees and annual card fees. In terms of impact from the termination of this partnership, BAF will no longer receive an upfront fee on co-branded credit card origination. However, trail fee income mentioned above will continue on the co-branded cards in force so long as the cards are in good standing and remain active until the next card renewal, when they will be replaced with the respective bank’s credit card.

* According to our calculations, we estimate BAF’s fee income to decline INR470m and ~INR1.4b in FY25 and FY26, respectively, as a direct impact of no upfront fee on card originations. This translates into ~0.2% and ~0.4% of the PPoP in FY25/FY26, respectively (Refer to Exhibit 8). Income from the trail fee stream will continue to accrue for at least the next 2-3 years as there is no sunset clause in place for the sharing of trail fee income.

* We do not expect any material impact on the profitability of BAF (from its decision to exit the co-branded card distribution business), given that the company will continue to get its share of future revenues from its existing credit card franchise. Moreover, we believe that the company, as in the past, will deploy these resources in some other business segments/revenue streams to continue to augment its fee income stream

Valuation and view

While BAF’s decision has come as a surprise, it is crucial to consider the role played by RBI in influencing RBK-BAF’s decision to terminate the co-branded partnership. While the valuations are attractive at 3.5x P/BV and 19x FY26E P/E, we do not anticipate any significant upside catalysts until it successfully navigates the asset quality challenges in its B2C loan book and makes concerted efforts to improve the proportion of secured loans in its loan mix. Maintain Neutral with a TP of INR7,250 (3.5x Sep’26E P/BV)

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