Neutral SBI Cards Ltd for the Target Rs.950 by Motilal Oswal Financial Services Ltd
In-line quarter; asset quality stress continues
Adjusted margins improve 10bp QoQ
* SBI Cards (SBICARD) reported an in-line quarter, with PAT growth of 4% QoQ (down 6.5% YoY) at INR5.6b (in line).
* Revolved mix stood flat at 24%, with EMI share increasing marginally to 36%. NIMs were stable at 11.2% (improved 10bp QoQ, adjusting for 4Q one-offs). The company expects NIMs to stay healthy as decline in repo rates will bring down the cost of funds (CoF).
* Spends grew at a healthy 21% YoY/5.5% QoQ, led by a revival in corporate spends (up 25% QoQ). Retail growth was up 14.6% YoY/3.4% QoQ. It expects receivable spending growth to sustain at 10-12% (vs. 12-14% earlier).
* GNPA ratio stood at 3.07%, while NNPA ratio improved by 4bp QoQ to 1.42%. ECL increased by 10bp QoQ to 3.5% (based on new classification), while PCR rose 84bp QoQ to 54.3%.
* We largely maintain our earnings estimates and expect SBICARD to post RoA/RoE of 4.4%/20.2% by FY27E. Reiterate Neutral with a revised TP of INR950 (25x FY27E EPS).
Margin outlook positive; estimate calibrated NIM recovery
* 1Q PAT was down 6.5% YoY/up 4.1% QoQ at INR5.6b (in line), aided by inline NII, contained opex and in-line provisions.
* NII grew 14% YoY/3.7% QoQ to INR16.8b (in line). NIMs stood flat QoQ at 11.2% (adj for 4Q one-offs, NIMs improved 10bp QoQ). NIMs are expected to benefit from cost reductions and stable yields going forward. CoF declined 10bp QoQ to 7.1%.
* Revolver mix stood at 24%, while EMI mix improved to 36%. Revolver mix is expected to remain sticky at the same level in the near term, as the new vintages are tilting toward the transacting customers.
* Fee income as a proportion of total income was stable at 52%. Opex was largely contained at 17% YoY/2.4% QoQ due to the reduction in total marketing-related expenses in 1Q. C/I ratio, thus, decreased to 50.3% from 51.4% in 4QFY25.
* Cards-in-force grew 10% YoY/2% QoQ to 21.2m. New card sourcing declined by 21% QoQ to 0.9m, as the company remains cautious here. About 56% of new card sourcing comes from banca.
* Spends grew strongly by 21% YoY/5.5% QoQ, as corporate growth returned (up 107% YoY/25% QoQ), while retail growth remained stable at 15% YoY/ 3% QoQ. SBICARD expects corporate spend growth to continue over the next few quarters.
* GNPA ratio decreased 1bp QoQ to 3.07%, while NNPA ratio declined by 4bp QoQ to 1.42%. ECL increased to 3.5% (amid ECL reset). As a result, PCR stood at 54.3% (up 84bp QoQ) (based on new classification).
Highlights from the management commentary
* With repo rates easing, CoF has declined to 7.1% and is expected to fall further, supporting margins.
* Receivables growth guidance is lowered to 10-12% (from 12–14%) but may improve during the festive season.
* Credit costs are expected to remain within the 9.0-9.6% range, reflecting the updated ECL framework.
* Spending per card is INR17k. On RuPay cards, the average spending is higher at INR3-3.5k per card, above the normal card. RuPay cards’ profitability is largely similar. There is a lower interchange in RuPay cards. For example, the normal card has an interchange of INR100 and the Rupar card has INR70-75. The lower interchange in RuPay is offset by higher-than-average spending in RuPay.
Valuation and view
SBICARD reported a broadly in-line quarter. Provisions were in line with estimates, though they are expected to remain higher in the near term and may ease gradually. Revolver mix should remain steady, with new vintage expected to tilt toward transacting customers. Spends are expected to grow steadily, with a gradual improvement in corporate mix and steady trends in retail spends. Receivables are expected to grow 10-12% YoY (previous guidance 12-14%). Asset quality is expected to improve amid a reduction in forward flows. NIMs may benefit from the declining interest rate cycle, resulting in a decline in CoF. Yields are expected to remain stable. We largely maintain our earnings estimates and expect SBICARD to post RoA/RoE of 4.4%/20.2% by FY27E. Reiterate Neutral with a revised TP of INR950 (25x FY27E EPS).
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