SBI Cards Headed For A Tough Year As Profitability Likely To Remain Under Pressure, Says Nomura

It’s going to be a difficult year for SBI Cards and Payments Services Ltd., with the potential policy rate cut being the only way to improve profitability, according to Nomura Institutional Equities. 

The brokerage maintained a 'reduce' rating on the stock, and slashed the target price to Rs 625 per share from Rs 700, implying a potential downside of 8.8%. This comes after it reported a 33% decline in its net profit in the September quarter, as per the financial results declared on Tuesday.

Nomura has a cautious outlook for SBI Cards, suggesting that this fiscal may be a difficult year, with challenges ranging from lower retail spending per card to asset quality pressures. 

The brokerage noted that retail spending growth has started to plateau, and with subdued new card additions, future growth in spend and loan metrics could remain under pressure. This shift stems from SBI Cards’ focus on controlling asset quality issues, which has resulted in slower growth.

The management of SBI Cards has acknowledged these issues, expecting elevated credit costs in the coming quarters due to higher levels of debt among various customer segments, particularly those facing repayment challenges. 

Nomura highlighted that 64% of new cards issued in the second quarter were to self-employed or CAT-B segment customers. This, combined with the dip in net interest margins, has impacted profitability, which Nomura expects will remain under strain.

The brokerage suggests that a potential policy rate cut could provide some relief, though it is unlikely to benefit earnings until financial year 2026. Profitability is expected to remain under pressure, particularly in the near term, Nomura noted.

With these pressures in view, the research firm has cut its earnings per share forecasts for SBI Cards by 5% for fiscal 2025 and 15% for fiscal 2027. It now projects compounded annual growth rates of 18% and 13% for pre-provision operating profit and EPS, respectively, over fiscal 2024-26. 

On Tuesday, shares of the company closed 2.64% higher at Rs 685.20 per share, compared to a 0.52% advance in the NSE Nifty 50. The stock has fallen 8.68% year-to-date and 9.8% over the past 12 months.