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Home / Markets / Mark To Market /  SBI Card Q2 gives a shock on asset quality even as spends revive fast

SBI Cards and Payments Services Ltd gave a rude shock to investors on Thursday as the September quarter metrics showed a big blow to asset quality.

India’s unique standalone cards and payments company saw its gross bad loans jump to 4.29% of its total book, a massive surge from 1.4% in the June quarter. As a result, it had to set aside more money to provide against these and impending risks.

The company provided 862 crore, which resulted in a 46% drop in its net profit for the September quarter. The provisioning is more than double of what was made in the June quarter.

Graphics: Sarvesh Kumar Sharma/ Mint
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Graphics: Sarvesh Kumar Sharma/ Mint

What’s more, the bad loans are suppressed due to the effect of forbearance given by the Supreme Court. An ongoing petition on compound interest at the apex court has put a standstill on bad loan recognition and lenders cannot label loans as bad even if there is a default. SBI Card said that in the absence of this standstill, its gross bad loans would have jumped to 7.46%.

Investors punished the stock, driving it down over 7% after the results were released. The question is, should investors be wary of SBI Card now?

True, the stress on its portfolio is palpable. It is clear that the management underestimated the stress on asset quality in Q1 while making provisions. As pointed out earlier in this column, the outlook on asset quality was uncertain and is still so.

The hit on asset quality has emerged from the self-employed segment of customers, the management said. The one-time restructuring allowed by the regulator is available until December. SBI Card restructured 9% of its portfolio under this leeway by September end and this could increase further. In an analyst conference call, the management assured that the bulk of the stress is from the moratorium book. That said, analysts expect credit costs and provisioning to stay elevated in FY21.

Amid asset quality worries, the recovery in average card spends didn’t give comfort to investors. Retail spends bounced back to 90% of pre-pandemic levels. The company’s bet on small ticket-sized essentials and utilities for spends seems to have paid off. Some of the discretionary spends such as apparel, jewellery and consumer durables have also picked up, which indicate that the ongoing festival season may give some growth boost to SBI Card.

Even as Indians may be back to spending, they are not really able to honour their past card swipes. That brings back the worry on asset quality. High-risk revolving credit was 34% of total receivables in Q2. Revolving credit is where a borrower pays the minimum amount, mostly 5% of the outstanding, and postpones the payment of the remaining amount over to the next cycle.

SBI Card’ stock is still 25.9% up from its listing price of 658 on 16 March, a reflection of expectations on its growth. But for its valuation to sustain, the company needs to turn around its asset quality.

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