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Asset quality woes continue; credit cost rises further 

NIM stable at 10.9% 

* SBI Cards (SBICARD)’s PAT was 8% below estimate at INR5.9b due to lower revenue from operations and higher provisions. NII inched up 4.4% QoQ.

* Margin was broadly stable at 10.9%. The share of revolver mix was stable at 24%, while EMI mix inched up to 38% (vs. 37% in 4QFY24).  

* Spending growth decelerated 3% QoQ amid a sharp 49.8% QoQ decline in corporate spending. Retail spending, however, grew 23% YoY/3.9% QoQ.

* Asset quality remained under pressure with GNPA/NNPA ratios increasing 30bp/12bp QoQ to 3.06%/1.11%. The drop in corporate spending led to a decline in overall opex, and as a result, RoA/RoE stood at 4.1%/19.1%.

* We further cut our FY25E/FY26E EPS by 8.3%/9.5%, factoring in an elevated credit cost and subdued margins and revenue growth. Reiterate Neutral with a TP of INR770 (premised on 20x FY26E EPS). 

Corporate spending dips sharply; credit cost continues to disappoint 

* SBICARD reported an 8% miss on PAT at INR5.95b (down 10% QoQ), as NII came in line, while other income was lower and provisions stood elevated. Gross credit cost/ECL came in high at 8.5%/3.6% in 1QFY25.  

* NII rose 19.7% YoY/4.4% QoQ to INR14.8b (in line). Margin stood broadly stable at 10.9%, owing to an improvement in yields but offset by the rise in costs. Revolver mix stood broadly stable at 24%, while EMI mix improved to 38%. CoF stood elevated, and it is likely to remain at elevated levels for some time. CoF should start declining once the rate reversal cycle begins to play out, keeping NIM under check.

* Fee income as a proportion of total income declined for another quarter to 52%. Opex too declined amid a decline in corporate spending. Thus, PPoP rose 4% QoQ to INR18.9b (in line). C/I ratio declined to 49% vs. 51% in 4Q.  

* Cards-in-force rose 11% YoY/1.6% QoQ to 19.2m. New card sourcing declined 12% QoQ to ~0.9m (-18% YoY), with the open market channel contributing 58% to total sourcing (59% on an outstanding basis).

* Spending growth moderated to 4% YoY as corporate spending slumped 50% QoQ. This was because the company continued to focus on profitability. Retail spending growth was healthy at 23% YoY. Receivables grew at a healthy pace of 4% QoQ (+22% YoY).

* GNPA/NNPA ratios increased 30bp/12bp QoQ to 3.06%/1.11%. PCR was broadly stable QoQ at 64.4% in 1Q, supported by a 90bp QoQ rise in credit cost to 8.5%. Provisioning expenses thus increased 53% YoY to INR11b. 

Highlights from the management commentary 

* Guidance: Credit cost will be in the range of 7-8% for FY25. Credit cost has increased due to over-leveraging by customers, affecting repayment capacity.

* About 0.5m customers have had their limits reduced by up to 25%; the average limit stood at INR0.1m.

* Delinquency began in the previous fiscal year and is spread across both lower ticket sizes as well as higher ticket sizes of INR0.2-0.4m. 

Valuation and view: Reiterate Neutral with a revised TP of INR770 

SBICARD reported another weak quarter characterized by an earnings miss and increased stress in the system, affecting margins and asset quality. However, opex was lower due to reduced corporate spending, but higher credit cost dented earnings. Spending growth moderated due to a sharp decline in corporate spending, but management expects a near-term recovery. The mix of revolvers remained stable, while management focused on expanding the EMI mix. Margin was stable as funding cost remained elevated, and we estimate a mild recovery from 2HFY25. Credit cost inched up further to 8.5% with management guiding a credit cost of 7-8% 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 sharply by 8.3%/9.5%, factoring in elevated credit cost and subdued margin and revenue growth. Reiterate Neutral with a TP of INR770 (premised on 20x FY26E EPS

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