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Asset quality pain continues; margins contract further

Guides for elevated credit cost in the near term

* SBI Cards (SBICARD) reported a sharp miss on PAT (31% miss) at INR4.04b.

* Margins contracted 32bp QoQ to 10.6%. The share of the revolver mix declined marginally to 23%, while the EMI mix stood at 37% (38% in 1QFY25).

* Spends grew 3.4% YoY/6.2% QoQ after a 3.2% QoQ dip in 1Q, as corporate spends saw a mild pick-up while retail continues to be healthy at 24% YoY, 6.3% QoQ.

* Asset quality continues to remain under pressure with the GNAP/NNPA ratio increasing 21bp/8bp QoQ to 3.3%/1.2%. Amidst the festive season at the end of 2Q, the opex increased 10.7% QoQ and is expected to remain elevated going forward. RoA/RoE stood at 2.7%/12.5%.

* We cut our FY25E/FY26E EPS by 22.1%/19.1%, factoring in an elevated credit cost and subdued margins. Reiterate Neutral with a TP of INR750 (22x Sep’26E EPS).

NIMs to recover gradually; cost-ratios to stay elevated

* SBICARD reported a 31% miss on PAT at INR4.04b (down 32% QoQ), as other income was lower and higher opex + provisions hurt profitability. Gross credit cost/ECL came in higher at 9%/3.6% in 2QFY25. 1HFY25 PAT stood at INR9.9b (down 16.5% YoY), while 2HFY25 PAT is expected at INR10.4 (down 14% YoY).

* NII grew 15.8% YoY/ 1.7% QoQ to INR15b (in-line). NIMs contracted 32bp QoQ to 10.6%, while the decline in the T-bill rate is expected to aid margins over the coming quarters. The Revolver mix declined to 23% while the share of EMI also declined to 37%, and that of Transactor inched up to 40%.

* CoF declined marginally by 10bp QoQ to 7.4% amid the decline in the T-bill rate. We expect the CoF to start easing out as and when the rate reversal cycle begins.

* Fee income as a proportion of total income stood steady at 52%. Opex rose amid expenses related to the festive season and is expected to remain elevated in 3Q too. Thus, PPoP declined 7.5% QoQ to INR17.6b (9% miss on MOFSLe). C/I ratio inched up to 53.4% vs. 49% in 1Q.

* Cards-in-force rose 9.5% YoY/2.1% QoQ to 19.6m. New card sourcing stood flat in 2Q, with the open market channel’s contribution increasing to 62% on new cards sourcing and 59% on an outstanding basis.

* Spends grew modestly 3.4% YoY/ 6.2% QoQ, while corporate spending, which was laggard, witnessed a pickup and is expected to recover further in 3Q/4Q. Retail spends stood healthy at 24% YoY/6.3% QoQ. Receivables grew 23% YoY/ 5% QoQ.

* GNPA/NNPA ratios increased 21bp/8bp QoQ to 3.27%/1.19%. PCR was broadly stable QoQ at 64.4%, supported by a 50bp QoQ rise in credit cost to 9.0%. Provisioning expenses, thus, increased 63% YoY to INR12b.

Highlights from the management commentary

* The company anticipates credit costs to peak soon, likely within the next one to two quarters.

* Operating expenses typically peak in Q2 and Q3, particularly due to the festive season.

* Corporate spending in Q3 will see a slight increase, though the primary focus remains on the retail side, targeting more profitable retail expenditures.

* Spending growth is projected at 20-25% YoY, with asset growth anticipated at 17-20% YoY.

Valuation and view: Reiterate Neutral with a revised TP of INR750

SBICARD reported another weak quarter, characterized by an earnings miss and high asset quality stress alongside a further contraction in margins. Opex too stood elevated amid the festive season related adjustment; however, the higher credit cost continues to dent earnings. Spending growth was modest while corporate spends witnessed a mild uptick in 2Q, expecting the momentum to continue in 3Q and 4Q. The mix of revolvers declined slightly while the management focused on expanding the EMI mix. The margin witnessed a hit due to the festive season; however, the cost of funds is expected to provide some relief as the rate cuts begin. Credit cost further inched up to 9.0% with the management guiding an elevated credit cost for FY25. The reversal in the rate cycle and improvement in the revolver mix are the key triggers, though they appear to be a few quarters away. We further cut our FY25E/FY26E EPS by 22.1%/19.1%, factoring in an elevated credit cost and subdued margins. Reiterate Neutral with a TP of INR750 (22x Sep’26E EPS).

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