SBI Card Q1 Result Review: Outlook Cautious As Asset Quality Woes Drive Rating Downgrades

SBI Cards & Payment Services Ltd.'s rising credit costs and deteriorating asset quality have lead to cautious outlooks and rating downgrades, following its first quarter results.

Both UBS and Bernstein downgraded the stock, with the former slashing its target price as well.

In the first quarter of fiscal 2025, SBI Cards reported profit after tax of Rs 590 crore, aligning with UBS' estimates. The quarter saw stable Net Interest Income and lower operating expenses, though credit costs sharply increased to 8.5% from 7.6% in the previous quarter.

NII grew 20% year-on-year, with margins remaining stable at 10.9% quarter-on-quarter. However, spending growth was weak, with a 4% year-on-year decline and a 3% quarter-on-quarter decrease. Fee income saw a modest rise of 2% year-on-year, impacted by weak corporate spending.

UBS has downgraded SBI Card to 'sell' rating from 'neutral', with a revised price target of Rs 620 apiece, down from Rs 805 per share. It expects cuts in consensus EPS estimates, due to elevated credit costs and slower loan growth, which could act as a downside catalyst.

While, Bernstein noted that certain metrics do not justify SBI Card's 5.4 times price to book value ratio. It gave an 'underperform' rating, with target price of Rs 600 per share.

Industry data and commentary from other lenders suggest worsening trends in the unsecured segment, where SBI Cards has full exposure, UBS said. Management anticipates elevated credit costs in the near term.

Consequently, UBS has raised its credit cost estimates to 8% for FY25E and 7.6% for FY26E, forecasting a moderation in return on assets to 4% and return on equity to 20% by FY26E, down from the three-year average of 5.2% of RoA and 23.6% of RoE.

SBI Cards is currently trading at price to book of 4.8 times FY25 basis and 4.1 times FY26E basis and at a price to earning of 28 times FY25 basis and 23 times FY26 basis. It is deemed expensive, given the deteriorating credit quality.

Bernstein echoed similar concerns about SBI Cards, highlighting a further deterioration in asset quality, with credit costs rising above 8%. Card additions saw a significant slowdown, declining 12% quarter-on-quarter and 18% year-on-year. Spends growth remained weak due to a sharp decline in corporate spending.

Although the share of interest-earning receivables and NIM remained stable at 62% and 10.9%, respectively, the rise in credit costs drove return on asset down to 4.1%, with no immediate relief in sight.

Gross credit costs rose to 8.5%, up by 90 basis points quarter-on-quarter and 165 basis points year-on-year, attributed to a broad deterioration in asset quality across the portfolio, rather than issues in specific cohorts, Bernstein noted.

Management maintained guidance for a full-year credit cost of 7-8%, but Bernstein expressed skepticism, given the systemic deterioration and management's commentary about "upwards of 7%".

The cost of funds rose by 10 basis points, offset by an equivalent rise in yield, keeping NIM unchanged at 10.9%. However, the sharp rise in credit costs led to a decline in RoA to 4.1%, with RoE dropping below 20% and EPS growth remaining flat year-on-year. These metrics do not justify the company's price to book value ration, the brokerage said.

Shares of SBI Cards and Payment Services were trading 2.34% lower, compared to a 0.29% increase in the benchmark NSE Nifty 50.