Nuvama are upgrading SBI Cards to ‘BUY’ (from ‘REDUCE’) on improving credit cost outlook. Over the last two years, its earnings have missed consensus due to a persistent rise in credit cost and low visibility of a turnaround. Nuvama reckon credit cost peaked in Q2FY25, would remain stable in Q3FY25E and shall start improving in Q4FY25E. While credit card delinquencies are rising for other players, Nuvama expect SBI Cards’ credit cost trajectory to improve because its weak credit cycle set in earlier than peers, and now it has guardrails for better risk assessment.
Our revised and increased TP of INR850 (earlier INR620) is based on 30x PE FY26E (earlier 24x). Potential rate cuts by the RBI over coming quarters shall be an added positive for SBI Cards.
Credit cost has likely peaked
Credit cost, a key driver of frequent earnings misses at SBI Cards, likely peaked in Q2FY25. Credit cost rose consistently from 5.6% in Q3FY23 to 9% in Q2FY25. However, Nuvama expect credit cost to start improving from Q4FY25E as the share of weak customers is declining and management has put guardrails in place to improve risk assessment. In Q3FY25E, Nuvama reckon credit cost would remain flat QoQ, stalling a consistently rising trend of the last seven quarters. During the Q2FY25 earnings call, the CEO had explained that while forward flows of NPLs have eased, write-offs of existing NPLs have resulted in higher credit cost. Write-off accounts for over 90% of gross credit cost and grew 14% QoQ in Q2FY25 while provisions decreased 19% QoQ. Total credit cost increased 10% QoQ to 9% in Q2FY25. Nuvama expect credit cost to decrease by 25–30bp in Q4FY25E and 90–100bp from the Q4 levels in FY26E as write-offs ease. At 9% in Q2FY25, credit cost is higher than peers but, while peers are now seeing high delinquencies in credit cards, SBI Cards shall likely start seeing an improving trend.
Regulatory impact already captured in fees; rate cycle to be beneficial
The Master Direction for credit and debit cards issued by the RBI in Oct-22 came up with a clarification for the benefit of card holders, which negatively impacted the company’s income. Over-limit fees has also been banned. For SBI Cards, the loss of income from over-limit fee is INR4bn for FY25E.
There were media reports that the RBI was concerned about increasing credit card spends for rent payments, though there is no regulation on rent payments via cards. SBI Cards’ share of rent spends has come down from mid-double digits in Q3FY24 to a single digit, implying a YoY decline in fees from the rent spends in H1FY25. With tighter credit card norms stipulated by the RBI, income has been impacted, but the impact has been fully captured in FY25. A cut in policy rate would also benefit SBI Cards immediately given the short duration of its liabilities.
