Profits took a massive hit in the September quarter as soaring credit costs and shrinking margins weighed heavily on the company's bottom line
All is not well for SBI Cards and Payment Service. With credit costs hitting a multi-year high and deteriorating asset quality, thanks to customers over-leveraging on debt, the company has reported a massive drop of 33 per cent in its profit figures, which stood at Rs 404 crore.
Adding to the dampening outlook, was the drop in new card additions. The company added only 0.4 million new cards, which is quite low. According to a report by Elara Securities, this is similar to the levels seen during the Covid period. While this number might witness modifications in the coming quarters, what’s really concerning is the rising credit costs, mainly because of high borrowings by customers. The company’s credit cost jumped to nearly 9 per cent, up from 8.5 per cent recorded in the first quarter.
Even during the earnings call, the management mentioned that SBI cards is approaching the peak of its credit costs cycle, and expects the same to remain elevated at current levels in the upcoming quarters. While major brokerage firms have downgraded the company, there is still a glimmer of hope for SBI cards but that remains in the hands of RBI.
Turbulence might continue for SBI Cards in the upcoming quarters due to high credit costs and muted margins. However, a possible rate cut might help the company in mitigating the impact of these headwinds. "We believe FY25F (Forecast) will be a difficult year for SBI Cards, with even visibility on FY26F earnings growth coming under pressure. The only positive catalyst we see is a potential policy rate cut, which if materialises in 2H25F would lead to profitability improvement, but in FY26F only," Nomura said in its earnings report.
From the near-term perspective, the recent festive season might also act as a catalyst and help push the spending growth upward, especially in the retail space which remains a priority for SBI cards. However, the company expects margins to dampen the outlook and remain soft in the third quarter before improving in Q4.
On year-to-date basis, the shares of the company have remained in the negative territory, losing more than 10 per cent. Since its listing, the stock has declined by over 33 per cent.
SBI Cards witnessed a rise in its Gross NPA ratio, which stood at 3.27 per cent. The Net NPA ratio rose to 1.19 per cent, up by 31 basis points in the quarter under review.
While delinquency levels continued to rise, analysts are expecting a decline in this trend
"To ensure lower delinquencies, SBIC has tightened its filters (reduced limits of ~1 Mn card in H1FY25) alongside strengthening underwriting standards and collection mechanisms. The outcome of these efforts is visible in the decline in the early bucket delinquencies of new customers," Axis Securities said in its report.
The management also mentioned that the flow of accounts into early-stage delinquency has slowed down. However, there is still a challenge with customers who are behind on payments and unable to settle their debts. As a result, write-offs may continue to be elevated.
Axis Securities has maintained HOLD recommendation on the shares of the company and has revised the target price to Rs 625 from Rs 750.
Nomura has also cut the target price to Rs 625 and has maintained REDUCE rating.