Higher credit costs may impact growth of SBI Cards and Payment Services

The RBI’s moves against unsecured credit have contributed to a slowdown in credit cards. Card issuers have suffered higher delinquencies. Personal loan growth dropped to 6.8 per cent (December 2023-July 2024) versus 20.1 per cent (December 2022-July 2023). For the past six months, credit card receivables growth, which was at 23 per cent year-on-year (Y-o-Y) in Q1FY25, has trailed unsecured loans at 26 per cent Y-o-Y in Q1FY25.

The June quarter (Q1FY25) has been challenging for the industry with new card additions at 0.9 million, amid credit quality risks. SBI Cards and Payment Services, the only listed pure-play card issuer, saw weak growth at 3.5 per cent Y-o-Y in July. Yes Bank and ICICI Bank outpaced industry spends.

SBI Card reported net profit in line with expectations in Q1FY25 with a jump in credit costs offset by lower opex. Credit cost for SBI Card has risen every quarter since Q1FY23, from 5.6 per cent to 8.5 per cent in Q1FY25.

Cards in force rose 11 per cent Y-o-Y in Q1FY25 (up 2 per cent Q-o-Q). New accounts declined 12 per cent Q-o-Q. Receivables grew 22 per cent Y-o-Y, (4 per cent Q-o-Q). Growth in retail spends was healthy at 23 per cent Y-o-Y (4 per cent Q-o-Q), but corporate spends were down 50 per cent Q-o-Q. The net interest margin (NIM) stayed broadly stable improving 4 basis points Q-o-Q as yield and cost both rose 12–13 basis points. The net interest income (NII) grew 20 per cent Y-o-Y, 4 per cent Q-o-Q. Fees income declined 4 per cent Q-o-Q. Opex dropped by 7 per cent Y-o-Y and 5 per cent Q-o-Q.

Gross credit cost rose by 90 basis points Q-o-Q to 8.5 per cent due to high delinquencies with incremental provisions and write-offs. Gross net performing loans (GNPL) rose 30 basis points Q-o-Q to 3.06 per cent while return on assets (RoA) fell from 4.7 per cent to 4.1 per cent Q-o-Q. Management has cut credit limits, exited stressed geographies, improved underwriting, and pushed collections.

In FY24, it cut credit limits on 500,000 customers and in Q1FY25, cut credit limits for another 500,000. But defaults are still rising. Other lenders are also suffering high delinquencies.

In FY25 guidance, SBI Card said credit cost will be 7–8 per cent with advances growth of 15–18 per cent. It held a 17.4 per cent market share in net card additions for Q1FY25. It received a positive response for a travel-related card, and has partnered with Apple offering Rs 6,000 discounts on Apple products. About 57 per cent of total spends were online in Q1FY25. Instalment-transactions rose 37 per cent Y-o-Y and it may touch 40 per cent. Corporate spends are expected to recover by Q3FY25. On RuPay cards, spends grew 50 per cent in Q1FY25, with average UPI spends at Rs 12,800 and a monthly run-rate of spends above Rs 1,000 crore.

The cost of funds rose 13 basis points Q-o-Q to 7.5 per cent and cost to income for Q1FY25 was 48.9 per cent (down 753 basis points Y-o-Y, 227 basis points Q-o-Q) due to lower corporate spends. Reduced payment capability is visible. Customers with zero credit lines at the time of card issuance may have 5-10 credit lines at write off. The delinquency levels are in line with industry trends or slightly lower.

Cards-in-force (CIF) for the industry grew at 0.7 per cent month-on-month at 105 million in July 2024, but the yearly run-rate declined to 16 per cent as compared to 17 per cent in June and 21 per cent in January. SBI Card’s run rate at 10 per cent is lower due to its cautious stance. Analysts would have to monitor credit costs carefully since further rise could force SBI Card and other issuers to cut back on growth.