SBI Card's credit costs pinch Q3 earnings; analysts in wait-and-watch mode

SBI Card share price: SBI Card's profitability was tepid in Q3FY25, driven by elevated credit costs, subdued margins, weak revolving mix, regulatory headwinds on fee income, and rising delinquencies

SBI Card share price: State Bank of India (SBI)-backed SBI Cards & Payment Services (SBI Card) reported soft financial results yet again, keeping analysts cautious after its October-December quarter (Q3) earnings for 2024-25 (FY25).

 

On the bourses, SBI Card’s share price tumbled 6 per cent intraday to a low of Rs 712.15. However, the stock erased its losses to close at Rs 763, up 0.57 per cent, against a 0.83 per cent gain in the BSE Sensex.

 

According to analysts, SBI Card’s profitability remained weak in Q3FY25, impacted by elevated credit costs, subdued margins, a weak revolving mix, regulatory headwinds on fee income, and rising delinquencies.

 

HDFC Securities downgraded the stock to ‘reduce’ from ‘add’ and lowered its target price to Rs 637 from Rs 690 due to limited visibility on steady-state credit costs.

 

“The management has alluded to a decline in flow rates in delinquencies during Q3FY25 and expects credit costs to moderate from these levels. However, we expect credit costs to remain high (around 7 per cent) compared to pre-pandemic levels,” the brokerage observed.

 

In Q3FY25, SBI Card’s credit costs rose to 9.4 per cent from 9 per cent in the second quarter of FY25, with write-offs at 9.8 per cent. Higher flow rates from Stage II loans persisted. Amid rising credit costs, the annualised return on assets and return on equity hit new lows of 2.4 per cent and 11.5 per cent, respectively. 

 

“The management believes these are early signs of stress largely peaking in SBI Card’s credit card portfolio. However, we prefer to remain cautious and wait for sustained improvement in the fourth quarter (Q4) of FY25 before signalling a trend reversal. Factoring in slower growth and fees, we have cut earnings estimates for FY25/FY26E (E: Estimates) by 14 per cent and 3 per cent, respectively,” Emkay Global Financial Services said while retaining its ‘reduce’ rating. However, the brokerage has raised its target price for Dece­mber 2025 to Rs 750.

 

SBI Card’s customer information file base grew 10 per cent year-on-year (Y-o-Y) to 20.2 million, with a marginal increase in market share to 18.7 per cent. However, its share of total spending continued to slide, falling to 15.6 per cent, mainly due to slower growth in corporate spending. On the upside, new card acquisitions increased 30 per cent quarter-on-quarter (Q-o-Q) to around 1.2 million in Q3, leading to a sharp slowdown in receivables growth at 12 per cent Y-o-Y and 1 per cent Q-o-Q.

 

Looking ahead, the management has guided for a cost-to-income ratio of 52-55 per cent for FY25 and expects loan growth of 12-15 per cent in FY26.

 

Against this backdrop, analysts believe that while SBI Card may be at an inflexion point in its credit cycle, a visible improvement in delinquency flow and write-offs in Q4FY25 would provide greater confidence.

 

They said key triggers for an earnings upgrade and valuation rerating include a quicker-than-expected normalisation of credit costs and a swift decline in funding costs driven by an easing interest rate cycle.

 

Asset quality

 

The management sees a better asset mix emerging, with reductions in Stage II and Stage III loans and improving delinquency trends. This positive trajectory is expected to continue in Q4FY25.

 

Moreover, both 30-day and 90-day delinquencies declined for the first time in several quarters.

 

Gross non-performing assets (NPA) for the quarter declined by 3 basis points to 3.24 per cent, and the management expects further improvement from this level.

 

“The management is confident that credit costs will decline from Q4FY25 as forward flows have reduced in the X bucket (30-90 days past due) and gross NPAs flowing into the write-off pool. We have cut our FY25 earnings per share estimate by 4.3 per cent to factor in the higher credit costs in Q3FY25,” Nuvama Institutional Equities said.

 

While maintaining a ‘buy’ rating, the brokerage noted that the stock’s performance will depend on the pace of credit cost declines, as loan growth has slowed to 13-15 per cent.