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Profitability muted; asset quality weakens

SBI Cards & Payment Services Ltd (SBI Cards) is India’s leading issuer of credit cards. The company offers a wide range of value-added payment products and services. It operates in more than 130 cities in the country.

* In Q1FY24, net interest income (NII) grew 19.7% YoY to Rs. 1,476cr; net interest margin (NIM) declined 60bps YoY to 10.9% and remained stable on a sequential basis.

* Asset quality deteriorated, as GNPA and NNPA ratios increased on a QoQ basis. Credit cost expanded 100bps QoQ.

* SBI Card’s slowing growth momentum, decline in corporate spending, rising competition, higher cost of funds and moderating profitability may impact growth. Hence, we retain our REDUCE rating on the stock, with a revised target price of Rs. 651, based on 19x FY26E earnings per share (EPS).

Interest income drives NII; higher provision dents PAT

In Q1FY25, SBI’s card NII rose 19.7% YoY to Rs. 1,476cr, driven by high interest income of Rs. 2,243cr (+24.3% YoY). While NIM dipped 60bps YoY to 10.9%, due to low interest yield (-10bps YoY) and high cost of funds (+40bps YoY). Cost-to-income ratio improved to 48.9% in Q1FY25 from 56.4% in Q1FY24. SBI Cards reported lower staff costs (-7.7% YoY) and other expenses (-7.6% YoY). Provisioning increased by 25.4% YoY to Rs. 1,900cr, because of weaker asset quality. Resultantly, PAT remained flat on YoY to Rs. 594cr in Q1FY25.

Key Concall highlights

* In Q1FY25, new-account acquisition dipped 12% QoQ to 9.04 lakh new accounts, of which 42% were sourced through bancassurance and 58% from the open market and co-branding.

* Card spending totaled Rs 77,129cr, up 4% YoY, despite a 66.3% YoY decline in corporate spending. Retail spending, however, rose 23.2% YoY to Rs. 71,880cr, due to robust growth in the jewelry and consumer durables segments.

* SBI Cards partnered with Apple to provide a discount of Rs. 6,000 for EMI and non-EMI purchases of Apple products by SBI Cards cardholders to improve demand and strengthen the credit card product range.

Asset quality deteriorates; credit costs to remain elevated

In Q1FY25, SBI Card witnessed surge in credit costs to 8.5% (+100bps QoQ) due to escalating slippages across vintage customer segments drive by overheating delinquencies. SBI Cards expects the credit costs to remain higher in the near term. GNPA/ NNPA rose to 3.06%/1.11% versus 2.76%/0.99% in Q4FY24, because of enhanced write-offs (+12% QoQ) and provisioning (+63% QoQ). Further, receivables rose 3.7% QoQ to Rs. 52,705cr, with a 1.8% QoQ increase in receivables per card to Rs. 27,395. CAR stood at 20.6% (+10bps QoQ) in Q1FY25.

Outlook and valuation

Despite a 19.7% YoY increase net interest income and robust growth in retail spending, we remain cautious about the company's ability to sustain its growth momentum in a challenging business environment. The decline in corporate spending and increasing competition in the credit-cards space are key concerns. Additionally, the company's weakening asset quality, rising the cost of funds, and thus limiting its profitability are primary concerns. Hence, we remain cautious about the stock and retain our REDUCE rating, with a revised target price of Rs. 651, based on 19x FY26E earnings per share (EPS).

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