SBI Cards slips 10% in 2 days on asset quality concerns; should you sell?

Shares of SBI Cards and Payment Services dropped 10.6 per cent in two days — the most in almost over six months — as investors dumped the stock on fears of rising bad loans. The stock recouped some of the losses to end at Rs 807, down 5.4 per cent over the previous day’s close.
 
In the three months to September 2020, gross non-performing assets (NPAs) increased 196 bps to 4.3 per cent, compared to 2.33 per cent in Q2FY20, the company said while annoucing its results for Q2FY21. It has not declared accounts which were not NPA until August 31 due to the Supreme Court's interim order; had it had done so, its proforma gross NPAs would have increased to 7.46 per cent, and net NPAs would have been 2.7 per cent.
 
"Restructured stock under the RBI RE (resolution plan) stood at Rs 2100 crore (9.6 per cent of AUM), EPP (easy payment plan) at 0.07 per cent taking overall stressed assets to 17 per cent of AUMs. While greater part of restructured book customers emerged from self-employed segment and sourced from open market channels, the company had already tightened credit filters as part of underwriting strategy," SBI Cards said.
 
Moreover, the company saw its impairment losses and bad debts rise 162 per cent in Q2FY21 to Rs 862 crore, compared to Rs 329 crore in the same period last financial year. It took an additional management overlay provision of Rs 268 crore in the reporting quarter, thereby taking the total management overlay provision to Rs 758 crore as of September. "Pending disposal of the case, the company as a matter of prudence has, in respect of such accounts, made an additional provision as management overlay, which is included in the overall expected credit loss provision," it added.
 
Consequently, the NBFC's net profit declined 46 per cent on a year-on-year basis to Rs 206 crore compared to Rs 381 crore in the same period last financial year. However, its pre-provisioning profit grew 37 per cent to Rs 1,140 crore in Q2FY21, compared to Rs 831 crore in Q2 of 2019-20 (FY20).
 
What should investors do now?
 
Elevated credit costs, lack of direction on Covid-19 provisions in Q1FY21, but sudden spike in provisioning (Rs 270 crore and overall provision at Rs 760 crore) coupled with severe deterioration in asset quality in Q2FY21 has turned analysts cautious on the stock.
 
Prabhudas Lilladher has downgraded the stock from 'buy' to 'accumulate' and has and pared down their EPS estimates by 36 per cent for FY21 and 5-7 per cent for FY22-23. "Our downgrade stems from our conservative stance on credit costs (12 per cent) and NPA (~8 per cent) for FY21 led by pandemic challenges. While we assess 10 per cent of book net of provisions stands under stress as at Sep’20-end, provision run-rate to stay elevated for H2FY21 (avg. Rs 800 crore)... The recent buoyant stock momentum and near term erratic asset quality picture prompts us to trim our valuation multiple to 44.5x (earlier 47x) on Sep’22 PE basis for a price target of Rs 895," it said in a report dated October 23.

 
Analysts at Nirmal Bang, too, have taken a conservative stance on the stock, assuming the entire restructuring exposure (Rs 1,897 crore unprovided amount) would have to be provided for. However, given that the company has already created a contingent provision of Rs 758 crore, they believe the net exposure that still needs to be provided comes remains around Rs 1,139 crore. They have 'neutral' stance on the stock.
 
On the upside though, analysts at Anand Rathi note that the problem of high NPAs is primarily due to the moratorium stock.
Second, the first month of the RBI RE book started in October and a large proportion of it has been paid up although not entirely. Assuming they pay the first three instalments, the numbers should return to normal levels, they say.
 
"The company is open to settlements and looking at customers who are willing to pay at one go, on which the company might take a hit. Resolution can take time but the situation is in control," it said.
 
H1FY21 net profit slid 17 per cent YoY on an 86 per cent rise in provisions. Together with Rs 490 crore in Q4FY20, additional provisions totalled Rs760 crore. Credit costs were 12.2 per cent at the end of H1FY21. The brokerage maintains 12.4 per cent credit costs for FY21 but could increase to 9 per cent/8.5 per cent for FY22/23.
 
"We have valued the company on a P/E multiple. The stock trades at 43x FY22e earnings and we value it at 50x FY22 earnings. We cut our price target to Rs 985 from Rs 1,021 on concerns of asset quality and higher credit costs. However, we retain our ‘BUY’ rating with a 15 per cent upside from current levels. We remain positive on the long term structural story and the spends inching toward pre-Covid levels," it said.
 
Jaikishan Parmar - Sr. Equity Research Analyst at Angel Broking, meanwhile, says that SBI Cards provisions were a "negative surprise" in this quarter as the company did not take any Covid related provision in Q1FY21 and did not expect deterioration in asset quality. He suggests investor to wait for now and analyse the behavior and slippage from the restructured book and final credit cost for FY21.