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Spending growth remains healthy

SBI Cards (SBICARD) reported another muted quarter as PAT missed our estimate by 8% due to high provisions (14% higher than our estimate). PAT declined 9% QoQ to INR5.49b in 3QFY24. NII grew 7% QoQ (largely inline).

Margin was flat QoQ at 11.3% as an increase in yields was largely offset by an increase in CoF. The share of revolver further moderated, while EMI mix was stable. Spending growth was healthy at 41% YoY/22% QoQ, with retail spending up 35% YoY and corporate spending up 64% YoY.

Asset quality remained under pressure, with GNPA/NNPA ratios increasing 21bp/7bp QoQ to 2.64%/0.96%. RoA/RoE too moderated to 4.1%/19.2%. Further, the increase in risk weights impacted CRAR by ~400bp to 18.4%.

We further cut our FY24E/FY25E EPS by 2%/3%, factoring in higher credit costs. While we expect SBICARD to deliver healthy earnings CAGR over FY24-26 however the disappointing earnings run-rate over past several quarters which has driven consistent cut in our estimates along with limited near term earnings visibility keeps us watchful. We downgrade our rating to Neutral with a revised TP of INR850 (premised on 21x Sep’25E EPS).

Cost ratios to remain elevated; credit cost rises further

SBICARD posted an 8% miss on PAT at INR5.49b (down 9% QoQ), as provisions came in 14% higher than our estimate at INR8.8b. Gross credit costs/ECL stood elevated at 7.5%/3.5% in 3QFY24.

NII rose 21% YoY/ 7% QoQ to INR13.9b (in line). Margins stood flat QoQ at 11.3% as the cost of funds rose 50bp QoQ to 7.6%, while the mix of revolver declined marginally to ~23%. CoF is expected to stay elevated in 4Q as the impact on funding costs from the revision in risk weight will reflect fully.

Fee income grew by a healthy 37% YoY/16% QoQ and formed 57% of total income. While Opex grew 23% YoY/17% QoQ to INR24.3b (9% higher than our estimate). Thus, PPoP rose 33% YoY (in line). The C/I ratio inched up to 60% vs. 57% in 2Q and 56% in 1Q.

Cards-in-force rose 16% YoY/3% QoQ to 18.5m in 3QFY24. New card sourcing declined marginally by 4% to ~1.1m (-33% YoY/-4% QoQ), as the company follows a cautious approach, with the open market channel now contributing 51% to total sourcing (58% on an outstanding basis).

Overall spending jumped 41% YoY/22% QoQ, with retail/corporate spending rising 35%/64% YoY. The share of online retail spending was steady at 57% in 3Q. Receivables grew at a healthy pace of 8% QoQ (+26% YoY).

GNPA/NNPA ratios inched up marginally by 21bp/7bp QoQ to 2.64/0.96%. PCR was broadly stable at 64.1% in 3Q.

Highlights from the management commentary

Despite the impact of the revision in risk weight, SBICARD has a comfortable level of Tier-1 capital. The company raised tier-2 capital in Jan’24 and will be looking to raise more Tier-2 capital.

From 2QFY25, the cost of funds is expected to stabilize. The credit cost guidance was 6% in 1QFY24, but now the company is already at 7.5%, amid the RBI’s caution on rising delinquencies in unsecured retail.

Valuation and view

SBICARD reported a sub-par quarter, characterized by elevated provisions. The outlook on margins remains weak due to a sharp rise in funding costs. The mix of revolvers and EMI loans remains stable, while the management indicated that the recent hardening of interest rates, along with the impact of risk weights, will exert pressure on funding costs in the coming quarters. As a result, margins should remain muted in 4Q and 1HFY25. The outlook on any increase in the mix of EMI and Revolver loans remains uncertain, while the asset quality stress is likely to drive provisions high in the coming quarters as well. However, on the positive side, spending growth remains healthy and the company sees healthy traction in new card additions. The reversal in the rate cycle and lagged improvements in revolver mix remain the key triggers, though they appear to be few quarters away from now. We further cut our FY24E/FY25E EPS by 2%/3%, factoring in higher credit costs. While we expect SBICARD to deliver healthy earnings CAGR over FY24-26 however the disappointing earnings run-rate over past several quarters which has driven consistent cut in our estimates along with limited near term earnings visibility keeps us watchful. We downgrade our rating to Neutral with a revised TP of INR850 (premised on 21x Sep’25E EPS).

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