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The Q2FY23 earnings performance of SBI Cards and Payment Services Ltd was unimpressive, led by a subdued net interest margin (NIM) and an unfavourable revolver mix. Card service providers benefit when more users ‘revolve’ their credit, or pay some of their outstandings in the next billing period, rather than pay up all at one go. The stock fell 5.58% on Friday.

As interest rates rise, the cost of funds is bound to increase for the lending industry. As SBI Cards’ loan book is less than 12 months in nature, it is working against the company.

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“Their borrowing from banks is primarily linked to treasury bills and repo rates. We have seen 190 basis point rise in repo rate since May and treasury bills have gone up substantially in the short end of the yield curve," said Abhinesh Vijayaraj, director, equity research, Spark Capital Advisors (India). Though the rise in cost of funds is no surprise, it is worse than what Spark would have estimated three months ago, Vijayaraj said. The SBI Cards management has indicated NIM compression as cost of funds is expected to remain high.

What adds to the disappointment is the stock’s underperformance. In CY22 so far, the SBI Cards stock has declined nearly 13% against positive returns of 2.49% in the Nifty 50 index.

“The stock has not performed well because of continued competitive intensity, as other banks such as HDFC Bank, Axis Bank, and Federal Bank are trying to capture market share. Along with this, the merchant discount rate (MDR) overhang still persists," said Akshay Ashok, research analyst at Prabhudas Lilladher Pvt. Ltd.

The stock may also be losing favour because of availability of bank stocks at relatively attractive valuations. Valuations of public, regional, and tier-2 private banks have seen a sharp recovery given the recovery in return on equity, led by lower credit costs and the convergence in loan growth with frontline banks, said Kotak Institutional Equities in a report on 28 October. “We have seen this underperformance in some of the most expensive stocks with similar characteristics as well, such as HDFC Bank and Bajaj Finance," said the Kotak report.

Given the rapid pace of digital adoption, the credit card industry would see higher growth and profitability. SBI Cards, the only listed company in this space, is a likely beneficiary. However, the concerns listed above are overshadowing this advantage that SBI Cards has. Besides NIMs improvement, a better loan mix is critical for higher fees and net interest income. In short, a lot has to fall in place for the SBI Cards stock to see a meaningful recovery.

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