Credit cards major SBI Cards & Payments Services‘ new MD & CEO Abhijit Chakravorty has quite a challenge on his hands. Chakravorty, who replaced Rama Mohan Rao Amara, as the latter was transferred back to the parent, will have to ensure that the company’s asset quality continues to remain stable as there are worries that its strategy to expand in tier-2 cities will lead to higher credit costs.
Credit cost is the capital lenders set aside for potential bad loans.
The good news for Chakravorty is that SBI Cards is a profitable company. However, its credit cost has already shot up to 6.3% during January-March, higher by 77 basis points (bps) on a quarter-on-quarter (QoQ) basis and 115 bps on a year-on-year (YoY) basis. About 20 bps rise in credit costs, SBI Cards said, was on account of a change in its expected credit loss (ECL) accounting model.
In absolute terms, SBI Card’s credit cost rose 60% YoY and 18% QoQ to Rs 630 crore during Q4FY23. In comparison, RBL Bank’s credit card portfolio’s credit cost halved to Rs 618 crore in FY23 from Rs 1,213 crore in FY22. Most credit card companies do not give this figure as they are not standalone listed companies like SBI Cards.
And there are worries that this may rise further. “SBI Cards is increasing its presence in a lot of tier-3, tier-4 cities and non-category A customers. Therefore, I think credit cost may not have necessarily peaked out yet,” said Kaitav Shah, research analyst at brokerage Anand Rathi Institutional Equities.
Shah’s comments are in-line with trends shared by the company in its Q4FY23 investor presentation. During the course of Q4FY23, SBI Cards lowered its exposure to salaried segment to 61% as of March end as against 66% a quarter ago, while its exposure to self-employed segment rose to 39% during the quarter ended March from 34% a quarter ago.
In terms of geography too, SBI Cards’ customer base shrunk in tier-I cities to 26% as of March 2023 from 28% as of December-end, while its customer base in tier-II cities was flat QoQ at 18%, and in tier-III cities its customer base increased from 31% in December to 32% in March.
“SBI Cards is supremely profitable and utilising these profits in good times to build new growth runways. My sense is they will not go overboard with experimenting,” said Krishnan ASV, institutional analyst at HDFC Securities.
In a note dated June 26, brokerage house Nomura downgraded SBI Card’s stock to “Reduce” with a lower target price of Rs 700. The brokerage noted that incremental sourcing in credit card industry has been largely coming more from non-metro, younger population and self-employed in recent years. Cumulatively, these three segments have up to 1.5 times higher delinquencies in comparison to other segments such as metro, older and salaried population, it said.
SBI Cards, Nomura said, was also increasingly sourcing its customers from riskier segments and hence its gross and net bad loans have increased 38% and 45% YoY in Q4FY23. As of March-end, the credit card issuer’s gross non-performing assets (GNPA) rose 14 bps QoQ and 13 bps YoY to 2.35%. Nomura said going forward, it also expects SBI Cards’ credit cost to remain elevated at 6.5% in FY24, as against 6.2% in FY23.
“We believe profitability of SBI Cards will remain under pressure and expect it to deliver EPS CAGR of 20% during FY23-26F with RoA/RoE of 5.2%/23%. Hence, we downgrade the stock to Reduce with a lower target price of Rs 700,” it said.
Credit cost aside, another problem for SBI Cards is also that their receivable segment is not growing, HDFC Securities’ Krishnan said. SBI Card’s total receivables rose 30% YoY, but only 4% QoQ to Rs 40,722 crore during Q4FY23.
“Generally, cards in tier-2 or lower-tier locations carry lower average spends compared to cards issued in mainstream locations,” Krishnan said. With entry of newer digital savvy fintechs and new-age companies into the credit card space, it remains to be seen whether Chakravorty is able to increase spends from the company’s newly acquired customers.