Street positive on SBI Cards despite Q3 miss, on strong growth expectations

Growth and earnings expectations remain strong

SBI Cards and Payments Services registered disappointing results, even as growth remained strong. Most analysts still hold positive views about the stock and have maintained buy/accumulate recommendations.

There are rising receivables and net interest margin (NIM) compression as the cost of funds has risen substantially. Analysts believe the company will be able to shift a larger component of the receivable mix towards equated monthly instalment (EMI) payments, which should help stabilise the NIM.

SBI Cards reported a net profit of Rs 500 crore, down 3.1 per cent sequentially but up 32 per cent YoY. The net interest income (NII) increased 2.5 per cent QoQ and 14.9 per cent YoY to Rs 1,140 crore. Receivables at Rs 38,630 crore saw muted growth of 2.4 per cent QoQ or 32.6 per cent YoY.

The opex (operating expenditure) increased 7. 7 per cent QoQ and the cost-income ratio rose to 61.9 per cent, from 59.4 per cent in Q2FY23. The yield remained stable at 16.4 per cent. Asset quality remained stable with GNPA at 2.2 per cent against 2.1 per cent in Q2. Credit costs dropped sequentially as impairments and losses decreased sequentially by 2.4 per cent to Rs 530 crore. Retail spends were up 7.2 per cent QoQ. Corporate spends grew 25 per cent QoQ after witnessing a 19.5 per cent drop in the previous quarter.

Trends seem strong with credit card spends crossing Rs 1 trillion for every month since March 2022. The linking of the unified payment interface to credit cards may help maintain growth momentum. In terms of strategy, the company is looking to convert revolver transactions into EMI.

The cost of funds increased to 6.3 per cent from 5.4 per cent in a lagged transmission of market rate increases. Company guidance is for a 30-40-basis point rise in cost of funds in Q4, after the RBI hiked policy rates in December 2022.

 

The management expects NIM to stay around the current level of 11.6 per cent, as new loans are repriced, negating the effect of rising interest rates. The opex increase was due to festival season offers, direct sourcing expenses, and increased corporate spends. The company expects higher opex to continue in Q4 as it plans aggressive customer acquisition and new product launches.

The cost-to-income ratio is expected to be below 60 per cent by the end of FY23 as festival spends will be low in Q4. Credit costs in FY23 are expected to be in the range of 5.75-6 per cent.

Management targets to issue 500,000 cards monthly on a gross basis and net issuance of around 1 million per quarter. The company is revising its rewards system and imposing processing charges on spends like rental payments.

In a new partnership with Punjab & Sind Bank, it is launching co-branded cards and hoping to access a potential base of millions.

Analysts have lowered estimates while maintaining “buy” recommendations. They now assume lower growth rates in revolvers and loans and lower fee growth.

Valuation targets are now in the range of Rs 935-960, which is 20 per cent less than the targets of Rs 1,150 which was set after Q2. However, there is a reasonable upside from the current levels of Rs 700.