SBI Card: Puzzling investors’ fancy for cards biz

As such, it’s difficult to comprehend why SBI Card's valuation is on par with that of Bajaj Finance. Based on Bloomberg consensus estimates for FY26, both quote almost 4x their respective book value and a price-to-earnings multiple of around 21x.

However, SBI Card's return on assets stood at 2.7% for the September quarter (Q2FY25) vis-à-vis 4.5% for Bajaj Finance. Both companies essentially earn money from loans, but unlike SBI Card, Bajaj Finance has a much more diversified loan book with a presence in pure mortgage through Bajaj Housing Finance.

After the results, SBI Card announced an increase in monthly interest rates from 3.5% (annual rate of 42%) to 3.75% (annual rate of 45%) effective November. Perhaps the Street perceives the move as positive. But the bigger problems for the company lie elsewhere. The first one is the high credit cost for four successive quarters now, and the second is a fall in fee and other revenue.

Credit costs

A look at the data for the last four quarters, from Q3FY24 to Q2FY25, shows that the gross credit cost as a percentage of loans has been steadily rising, from 7.5% to 9%. Recoveries from past dues are not that robust, meaning net credit cost also soared from 6.5% to 8%. Therefore, the solution is to keep delinquencies in check.

Cardholders are choosing to default rather than revolve or roll over the dues by paying minimum dues. During the post-earnings conference call, the management attributed the high default rate to “ecosystem problems" such as the increase in household debt and excess leverage, as per the recent study of the RBI.

SBI Card's management has tightened the underwriting standards or financial checks before issuing the new cards. Though the management states that the company is closer to the peak credit costs, it could take at least a couple of quarters before the light at the end of the tunnel is visible.

Also Read: Private lenders see stress in credit cards, personal loans in Q2

Fee and other revenue

The company’s fees and other revenue fell 2% year-on-year to ₹2,131 crore in Q2FY25. Fees and other revenue include interchange fees/merchant discounting rates earned from shopkeepers and sellers, which are directly correlated to the spending on cards. Retail spending surged by 24% to ₹76,398 crore.

Commenting on the decline in fees, the management said while the interchange fee has grown, other card fees including late fees have fallen. Card fees have fallen even as cards in force grew by 10% year-on-year and 2% sequentially to 19.6 million.

The company’s interest income grew by 20% year-on-year to ₹2,290 crore in Q2FY25, in tandem with nearly 20% growth in interest-earning receivables to ₹33,400 crore. However, the fall in fees and high credit costs meant that net profit fell by almost one-third to ₹404 crore.

Going forward, the outlook for cost of funds is likely to be lower if RBI decides to cut repo rate. Consequently, there is hope for net interest income and profit to rise in future. For now, the premium valuation compared to other NBFCs such as Bajaj Finance, looks difficult to justify.

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