SBI Cards’ EMI route for credit-card default may not be the panacea

SBI Cards and Payments Services Ltd’s healthy 25% growth in overall credit card spending in FY24 failed to translate into even a 10% profit increase, disappointing investors. But, the stock still commands a price-to-earnings multiple of 29x based on FY24, reflecting optimism about the future. However, the Q4FY24 trend mirrors the preceding three quarters, with no signs of material improvement in the near future.

SBI Cards’ net profit rose by 11% year-on-year (y-o-y) in Q4 with a huge 60% jump in written-off dues weighing down profitability. The 25% growth in advances, i.e. credit card outstanding amount, compensated for the 60 basis points (bps) shrinkage in the net interest margin (NIM).

Fee income grew by 12% year-onyear to ₹2,000 crore, in line with almost the same growth rate in spending by cards, which was mainly driven by increase in cardholders to 18.9 million. Blended spending per card, which includes corporate and retail, was slightly down. Although the company earns income via interchange fees or merchant discount rate fees, it pays a portion of fees earned on corporate card expenditure as rebates. So, while fees earned grew, less corporate spending meant fees paid fell 36%. This benefit helped SBI Cards.

True, the company is prone to seasonality like festival expenditure in Q3, but there are clues from quarteron-quarter trends that help understand movement in key variables from a near-term perspective. So, while there is some respite due to decline in cost of funds by 20 bps sequentially, impairment or provision may remain higher going forward, too, with stage 3 outstanding dues, or non-performing assets (NPAs), rising 12% sequentially to ₹1,424 crore.

SBI Cards plans to convert outstanding dues to EMI of 12 months or more for some customers. However, while NPA accretion remains high, lower recovery from defaulters is a big disappointment. For instance, the company’s recoveries were ₹491 crore in FY24, down 16% y-o-y. This indicates that credit card defaulters may not have had temporary cash flow problems but it could be a permanent loss of income or unwillingness to pay. So, there are doubts whether allowing EMI option can alleviate the problem.

In terms of growth, the company hopes to maintain new card customer addition at 1 million per quarter, consistent with Q4FY24. Though the numbers for Reliance-SBI Cards, launched in November, are not available separately, it should boost growth, leveraging Reliance’s wide customer base across telecom and retail. The company and the industry should also benefit from credit card spending via Rupay credit card as unified payment interface (UPI) has gained popularity for payments on UPI-enabled apps.

Nevertheless, SBI Cards has not struggled with retail credit card spending growth. But unless it addresses high customer default rates to spur profit growth, investors are likely to adopt a wait and watch approach.