Credit Cards Spell Cash For Private Banks

The credit card business is set to emerge as a significant contributor to the earnings of private banks -- especially ICICI Bank and HDFC Bank -- in the next two to three years, Merrill Lynch's latest survey on the sector said.

On an incremental basis, by fiscal 2005 revenues from credit cards could account for over 12 per cent of ICICI Banks' pre-tax earnings and 11 per cent of HDFC Banks'. The contribution is further likely to increase to 20 per cent by fiscal 2006.

V Vaidyanath, country head, retail assets, ICICI Bank Ltd, said: "In absolute terms, the credit card business will be a good revenue earner for the bank in the coming years."

He, however, was unable to quantify the sector's contribution in the total revenues of the bank. He said it was a good business and had good profitability prospects.

"Retail business is a strong and significant contributor to the earnings of the bank," he said, adding that the credit card business would also get a good thrust in the coming years.

According to the study, for a public sector bank such as the State Bank of India, the percentage contribution (to revenues) is likely to be lower at 5 per cent owing to the significantly higher base. On an outstanding basis, the proportion is likely to be much lower at below four per cent.

The Indian credit card industry, currently estimated at around Rs 3,000 crore ($0.6 billion) in outstandings and with an annual spend of close to Rs 10,000 crore ($2 billion), is expected to grow between 25-30 per cent over the next four-five years.

A banking analyst from a foreign brokerage said, "In the current fiscal itself we expect the growth to be closer to 35 per cent as more banks join the credit card industry in an attempt to grab a slice of the fast growing segment. This is notwithstanding the higher credit risks associated with the sector."

It is also expected that the card holder base will more than double by fiscal 2005. More importantly, the quantum of revolve (currently at around Rs 3,000 crore) is expected to almost triple during the same period owing to an increase in the card holder base and the rising proportion of revolve.

The impressive growth trajectory and the wide interest spreads in this product segment help to explain why banks are clamoring to get a foothold in the credit card industry despite margin pressures and high credit costs.

Banking analysts say that the credit card market is likely to become more fragmented with most banks foraying into the market. This, a purely temporary phenomenon, should help provide the extra thrust to expand the market size.

Market shares are expected to be concentrated with top players such as Citibank, Standard Chartered Bank HSBC, HDFC and ICICI.

According to the study, these banks are expected to corner nearly 85 per cent of the credit card market in the next three years.