As RBI rings in changes, here is why SBI Cards is the darling of analysts

The Reserve Bank of India’s (RBI’s) regulatory stance on prepaid payment instruments (PPIs) favours banks and conventional credit cards (including banks with credit cards) over financial technology.

PPI wallets cannot be loaded by using credit lines tapped from a non-banking financial company, but they can be loaded via debit/credit cards.

The RBI’s Payments Vision 2025 indicates it is aiming at a Unified Payments Interface (UPI)-like system for cards, enabling Internet of Things-based payments and interoperability, and payment systems for merchants.

The RBI targets digital payment transactions growth by 3x, UPI annualised growth of 50 per cent, and an increase in payment transaction turnover versus gross domestic product to 8 per cent, from the current 1 per cent. It expects debit card usage to surpass credit cards, and an increase in PPI transactions by 150 per cent of the current Rs 6,600 crore (2021-22, or FY22).

Given this long-term vision, the attractiveness of banks issuing credit cards improves.

SBI Cards & Payment Services is an interesting play. It has seen recent violent price fluctuations. The stock hit a new low (Rs 655) on June 20 and then bounced to Rs 714. It has, however, lost ground in the longer term - from around Rs 925 in January.  

Credit card spend is rising.

SBI Cards’ market share in terms of the number of credit cards has moderated by around 10 basis points to 19.1 per cent, while its growth in the number of transactions at 15 per cent for March is below the industry growth rate of 18 per cent.

The RBI data suggests daily spends for April-May are 8 per cent higher year-on-year (YoY). On a YoY basis, SBI Cards saw 54 per cent rise in transaction value at point-of-sale versus industry YoY growth of 48 per cent. The average ticket size per transaction was up 6 per cent month-on-month (MoM) and up 34 per cent YoY for SBI Cards, versus industry rise of 5 per cent MoM and 25 per cent YoY.
 

The company has immense reach via its access to SBI’s network. This leads to cheaper customer acquisition cost and strong cross-selling opportunities. The management strategy to expand into tier 2/3 cities should spur growth, given SBI’s reach in those segments.

SBI Cards was generating 15 per cent net interest margin (NIM) until FY22 when NIM contracted to 13 per cent owing to a lower share of revolving accounts (‘revolvers’) in the mix. As economic activity revives, the share of interest-earning equated monthly instalments and revolvers will grow, leading to NIM recovery.

Credit cost shot up to 9.5 per cent and then 11.4 per cent in 2019-20 and 2020-21 (FY21). It has reduced to 8.4 per cent in FY22 and is expected to decline further to 7.7 per cent this fiscal year. Although gross non-performing assets rose to 5 per cent in FY21, they fell to 2.2 per cent in FY22. So a clear improvement in asset quality is also seen in lower credit cost.

Morgan Stanley, in a report last month, has a valuation of Rs 1,100. It sees key upside factors as potentially higher share of revolver balances, leading to higher margins and receivables and improvement in net slippages galvanising lower credit costs.

The RBI regulation, which may cap the merchant discount rate, is a possible negative. There is also a downside risk if economic recovery is weaker than expected and asset quality deteriorates again.

Analysts at BOB Capital Markets are also positive about SBI Cards with an expectation of earnings per share (EPS) growth of 32 per cent compound annual growth rate during FY22 through 2024-25. Its report of June has a price target of Rs 1,137, assuming a valuation of 36x price-to-earnings on the expected 2023-24 EPS.

According to a Bloomberg poll, 25 of the 26 analysts are bullish on the stock, with an average target price of Rs 1,132.3.

The share price trend has been negative, but the bounce from Rs 655 does indicate some value buying. If one agrees with the analysts’ assessments, there’s a significant upside from the current levels.