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Representational Image

SBI Cards had its much anticipated Initial Public Offering (IPO) on March 16 but the response was tepid due to the poor sentiments prevailing in the market.

Company Overview:

SBI Cards cater to individual cardholders and corporate clients including lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate credit cards.

SBI Cards earns its revenue essentially from these two sources: Interest income and fee income.

Interest income is the income earned from cardholders who roll over their outstanding payments. These interest charges can vary anywhere between 36-48%.

Income from fees include interchange fees – charged to merchants for the transaction (usually 2%) and annual fees, membership fees, late fees etc.

Other sources of income include service charges, business development incentive and insurance commission income.

For nine months of FY20, revenues from interest income comprised 51% of total income, whereas revenues from non-interest income comprised 49% of the total income.

Credit Card industry:

Credit cards fall into the unsecured loan category and have grown at a CAGR of 28% over the last five years. Credit card penetration in India is very low as only 50 million credit cards have been issued as against 840 million debit cards that have been issued. To add perspective, only 3 credit cards are issued per 100 people in India as against 42 in China and 320 in the US. This reflects the massive potential that the Indian market offers.

Millennials have been the major users of credit cards in India. Around 65% of the population in India is below the age of 35. The share of customers below the age of 25 has grown 10 times in the last five years.

The top four players – HDFC Bank, Axis Bank, ICICI Bank and SBI Cards – dominate the market with 72% of cards outstanding and around 75% of the total spends. Cards outstanding have grown at a CAGR of 20% from 19 million to 46 million. Total spends have grown much faster at a CAGR of 32%, from Rs 1.5 trillion to Rs 6 trillion.

Company Performance:

SBI Cards has grown at an astonishing pace. Revenues have grown at a CAGR of 44%, whereas Profit After Tax (PAT) has grown at a CAGR of 51% from FY17-FY19. Income from fee & services have grown at a CAGR of 53%, whereas interest income has grown at a CAGR of 38% in the same period. It posted an ROE of 36% and an ROA of 4.5% in FY19.

SBI Cards is the most profitable vertical of SBI and has access to all of SBI’s 22,000 branches and 436 million customers. It also has reputed co-branded credit card partners like Air India, IRCTC, Etihad, BPCL and Ola amongst others.

The company is the second largest credit card issuer in India with a market share of 18%, next to HDFC which has a market share of 27%. SBI Cards has issued close to 9 million cards till date. In terms of transactions, SBI Cards is the second largest player with 280mn transactions in FY19. It has the highest average spend per transaction amongst the top 5 players at Rs 3,708.

Risks:

Amidst the frenzy and speculation, there is a need to step back and look at things more closely.

SBI Cards has shown exponential growth in terms of cards issuance and transaction numbers, but the real challenge remains in getting the money back from cardholders. The company has the second highest average outstanding per card at Rs 22,398 amongst the top 4 credit card players. Its NPA has averaged around 2.5% since 2017, which is quite high compared to that of other competitors. Furthermore, increase in rates of slippages from 0.28% in FY19 to 0.86% in the last nine months indicates stress on its assets.

The number of cards issued has gone up drastically, but most of it has been from “other” geographic category. This is outside the top metro, Tier 1, Tier 2 and Tier 3 cities - in short, the semi-urban and rural areas. People in such areas may not be credit worthy, and it could be a herculean task to recover money from them.

Change in regulations poses a major risk to the industry as any cap on transaction charges (like debit cards) or interest charges will severely impact revenues. Last but not least, new low cost payment methods like UPI and post-paid wallets are fast gaining popularity and could pose a major threat to the lucrative margins and spreads earned by credit card players.

Final thoughts:

SBI Cards has posted very good growth, but its asset quality raises question marks. In terms of valuations, it has an estimated FY20 price to earnings ratio of over 45 times. This is higher than the multiples of Mastercard, Visa and Discover who have comparable price to earnings ratios of 30x, 32x and 7x respectively. To put things in context, Discover with credit cards assets of $74 billion, has a valuation of $20 billion, while SBI cards with assets of $3 billion, has a valuation of $9 billion.

The current market cap is higher than the combined market cap of IndusInd Bank and RBL Bank, two of India’s reputed mid-sized well- capitalised private sector banks (recent concerns around private sector have dented their valuations of late).

What would you buy?Well, the answer would depend on the perspective of the individual investor.

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