After high card additions in February, what are the triggers for SBI Card stock?

SBI Cards and Payment Services Ltd has been reporting steady growth in its credit cards outstanding instead of new card additions. Performance in the month of February has been encouraging. According to data from the Reserve Bank of India (RBI), SBI Card saw the highest new credit card additions of around 300,000 in February. Close peers HDFC Bank and ICICI Bank added about 60,000 and 80,000, respectively. In terms of overall credit cards outstanding, SBI Card grew 2% sequentially in February while HDFC Bank and ICICI Bank grew 0.6% and 0.4%.

However, in terms of credit card spends, the overall industry saw a drop of about 7% month-on-month. Analysts expect a bounce back in March. But for the March quarter, a moderation is expected. “Seasonally, Q4 will see moderation, because Q3 is a festive season, which means spending is high in the December quarter,” says Dnyanada Vaidya, research analyst, Axis Securities.

Shares of SBI Card have declined about 28% since the 52-week high in August. A couple of factors have weighed on investor sentiment. One, the pressure on the net interest margin (NIM). In the December quarter (Q3FY23), the company’s NIM fell to 11.6% from 12.3% in Q2 and 13.2% in Q1.

This was largely driven by rising interest rates and decline in the company’s revolver mix. Card service providers benefit when more users ‘revolve’ their credit, or pay some of their outstanding in the next billing period, rather than pay up all at one go. For SBI Card, this mix has been under pressure and is a cause for concern among investors. Analysts from Jefferies India point out that, “Increase in sourcing of customers with higher propensity to revolve (eg. self-employed, tier 2-3 cities) can lift revolver mix slowly by 150 basis points (bps) over FY24-26e.” One basis point is one-hundredth of a percentage point.

To be sure, the high cost of funds is likely to continue to put pressure on the NIM in the coming quarters. According to analysts at ICICI Securities “Cost of funds could increase by more than 30-40bps in Q4FY23.” But these challenges have largely played out and are reflected in valuations, which have halved in the past two years, they added.

Additionally, the anticipated regulatory change regarding merchant discount rate (MDR) is another overhang on the stock. MDR refers to the rate at which the merchants are charged for accepting payments made via credit/debit cards, net banking, and digital wallets. RBI issued a discussion paper last year for a possible change to payments systems. “While it is hard to guess the RBI's stance, a cap on MDR can’t be ruled out,” Vaidya from Axis Securities said. 

This along with NIM improvement are among the key triggers for stock re-rating, she added.