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Slower card addition, higher credit cost and lower RoA/RoE

SBI Card delivered an in-line PPOP but 7% miss on PAT owing to higher credit cost. New card addition further moderated to 1.1mn during the quarter and was lower 4% qoq and 33% yoy, driving a significant deceleration in CIF growth to 16% yoy (from 20%+ in preceding quarters). Retail spends growth was robust at 20% qoq/35% yoy owing to strong festive spends and attractive cashbacks/rewards offered by the company. Receivables grew by solid 8.4% qoq/26.5% yoy and share of interest earning balances was stable at 62% (though Revolvers’ share marginally declined within).

Sharp increase in CoF was almost offset by improvement in portfolio yield, and hence NIM was stable. Fee income growth was stronger-than-expected at 16% qoq/37% yoy, and almost mimicked the significant growth in spends. Non-employee opex grew sharply manifesting attractive cashbacks/rewards offered by the company in festive months. Cost/Income ratio rose to 60%. Notwithstanding much lower share of revolvers, the portfolio continued to witness higher delinquencies and flows. GNPLs rose to 2.6% and credit cost for the quarter stood at 7.5% (an eight-quarter high). Higher cost/income and provisions impacted RoA/RoE which stood at 4.1%/19.2%.

Management expects card addition to remain controlled and credit cost to remain elevated

In the light of sustained delinquency flows, the co. has taken requisite corrective actions in certain geographies and customer segments, which would likely keep new card addition run-rate under check for a couple of quarters. It was noticeable in Q3 FY24 that new sourcing was curtailed in Self-Employed customer profile, Category B Govt. Salaried segment, below 30 years age group and Tier-3 locations. As per the management, the increased delinquencies are not coming from a particular channel but from customers having multiple trade lines/loans. Besides abovementioned tightening of acquisition, the co. is also scrubbing credit bureau data of existing customers to take specific actions. With delinquency flow being generalized and not belonging to a particular cohort, the credit cost is expected to remain at current elevated levels for few quarters. CoF is expected to further increase in coming quarters owing to increased RW by RBI and tight liquidity conditions, and thus NIM would likely remain under pressure.

Lowered RoE and potential risk of losing Spends’ market share; Downgrade to Neutral

With sustained moderated card addition (on the back of increased delinquencies), the growth in CIF is anticipated to decelerate further. This could impact future spends growth and co.’s market share, and hence slow the overall income growth. While NIMs should improve when interest rates soften, the extent of recovery could be restricted by limited/slower increase in revolvers’ share. Since delinquencies are coming from across the portfolio, there is no visibility about when the credit cost would start to moderate. We cut FY25 earnings estimate by 6% as the pressure on RoE is likely to persist. Downgrade the Stock to Neutral with a 12m PT of Rs800.

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