Rating: Buy; SBI Card – Raising EMI mix in focus

Despite the strong traction in UPI, the growth of industry card spending has held up well. SBI Cards has experienced robust growth in spending. The mix of revolvers is expected to stabilise around the levels observed in Q4. With interest rates reaching their peak, we anticipate that net interest margins (NIMs) are nearing a trough. While stress in legacy accounts is a concern and could result in high credit costs in the near term, we believe this situation will eventually normalise. Profit is projected to grow at a CAGR of 26% from FY23-FY26E. We anticipate an expansion in ROE from the trough experienced in FY24. SBI Cards is one of our top picks in the NBFC sector.

Industry card spending growth healthy, despite UPI growth: Retail digital spending (ex NEFT) grew at a 47% CAGR in FY20-23. Share of UPI in retail digital spending rose to 56% in FY23. Share of credit card spending in retail digital spending is down from 15% in FY18 but has stayed stable at 6% for the past 3 years. Industry card spending grew at a 25% CAGR in FY20-23 and should grow at a 21% CAGR in FY23-26E, in our view.

Strong spending & card net adds outlook. For SBI Cards, spending growth has been healthy. Card additions (net) were weak in April on weaker banca sourcing, which should normalise. Penetration of SBI’s addressable customer base is low. Integration of SBI Cards with SBI’s Yono platform could accelerate penetration by making onboarding of pre-approved banca customers seamless. SBI Cards has 1.7million RuPay cards and, with 35-40% share of total RuPay cards outstanding, it could gain from linking RuPay cards to UPI.

Margins nearing a bottom: Revolver mix has stabilised in the past few quarters and should stay stable at 24% in FY24. SBI Cards is now focused on raising EMI mix (37% in Q4) rather than boosting revolver mix. A lending rate hike on EMI receivables taken during last year could lift average yield as mix of new book rises.

The average cost of funds (CoF) has increased by 180 bps since Q4FY22 and is expected to continue rising in 1H, primarily due to the rate hike in Q4. However, considering that the rate cycle is reaching its peak, we believe that the CoF is approaching its maximum level. Any cuts in rates should boost earnings as 65% of its liabilities are short duration. A 50 bps lower CoF could lift FY24 EPS by 5%. We expect margins to trough in 1HFY24 and slowly inch up in FY24-26.

SBI Cards is seeing some pressure on asset quality from the pool of customers that originated in 2019. This could keep credit costs elevated near term. As per management, portfolio behaviour of customers originated after ’19 has been better and credit costs should normalise in 2H. We lift FY24-26E EPS by 3-5%, on higher NII, peaking rates, higher fee income, and higher credit costs. We expect profit to grow at a 26% CAGR in FY23-26 and ROE to expand to 26% by FY26 from a FY24 trough of 24%.