Growth, asset quality expectations may limit downside for SBI Card

SBI Cards and Payment Services reported numbers that met Street expectations in the first quarter of the 2023-24 financial year (Q1FY24). The net profit came in at Rs 590 crore, while pre-provision operating profit grew 17 per cent year-on-year (YoY) (a little better than expectations). But provisions were hiked due to surprise stress from pre-Covid-19 period of 2018-19, and that dragged earnings. Margin was stable at 11.5 per cent and the revolving loan mix was stable at 24 per cent.

Growth in spends was healthy with retail spending up 28 per cent YoY while corporate spends rose 10 per cent YoY in Q1FY24. The gross non-performing assets (GNPA) and net NPA ratios expanded 6 basis points (bps) and 2 bps, respectively, quarter-on-quarter (QoQ) to 2.41 per cent and 0.89 per cent.

The provisioning coverage ratio was stable at about 64 per cent while the return on assets and return on equity for the quarter stood at 5.1 per cent and 23.3 per cent, respectively. Analysts’ expectations are optimistic with expected compound annual growth rate (CAGR) of above 25 per cent plus for FY23-FY25.

The provisions were 15 per cent higher, at Rs 720 crore. The gross credit costs and expected credit loss stood at 6.9 per cent and 3.4 per cent, respectively, which indicates some continuing stress. The net interest income rose 14 per cent YoY to Rs 1,230 crore. Fee income rose at 24 per cent YoY and formed 49 per cent of the total revenue.

The operating expenses grew 18 per cent YoY to Rs 1,960 crore. The cost-income ratio moderated to 56.4 per cent, down 170 bps QoQ. Cards-in-force rose 21 per cent YoY and 3 per cent QoQ to 17.3 million. New cards growth was strong at 1.1 million (+22 per cent YoY, down 20 per cent QoQ). The open market channel contributed 46 per cent to total card-sourcing.

Overall spends grew 24 per cent YoY and 3 per cent QoQ, with retail and corporate spends rising 28 per cent and 10 per cent YoY, respectively. The share of online retail spends stood at 55 per cent in Q1FY24. Receivables grew at 6.3 per cent QoQ (up 30 per cent YoY).

According to management, the cost of funds (CoF) grew 37 bps YoY to 7.1 per cent due to higher interest rates and increase in long-term borrowings. This CoF is expected to rise 5-10 bps in Q2FY24. However, credit costs are declining on a monthly basis with June 23 and July 23 seeing improvements as proportion of better quality asset increases. Credit costs in the second half (H2) of FY24 would be back in the range between 5.8 per cent to 6.2 per cent. The revolver mix is currently stable at 24 per cent and major changes are not expected in the next year and it could be within 50 bps of the current level.

Strong traction in spends is one reason for optimism. Another good sign is healthy growth in cards and credit costs are expected to decline in H2. The annual earnings growth has been 27 per cent for the last five financial years. Given that this was an extremely challenging period, with higher cost of funds, Covid-19 impact, higher operating expenditure and regulatory challenges, the growth is commendable.

Many of those challenges are over, and net interest margin is also estimated to be near bottoming out. The consensus view of analysts is that high growth rates can be maintained and quality of assets should improve going ahead.