SBI Card Stock Gains Over 10% In September Alone Amid Strong Loan Growth; Brokerages Optimistic; BUY?

SBI Cards and Payment Services Ltd. (SBI Card) has seen a notable surge in its stock price, rising approximately 10% in September. This rally is driven by growing optimism within the non-banking financial companies (NBFCs) space, particularly as wholesale funding costs appear to have peaked. Adding to the momentum, global brokerage firm Goldman Sachs upgraded SBI Card's rating from 'sell' to 'buy,' further fueling investor interest. The firm also raised its target price for the stock from Rs 652 to Rs 913, pointing to potential improvements in loan growth starting in FY26 and a decrease in credit costs anticipated in the upcoming September quarter (Q2FY25).

With this upgrade, SBI Card's shares are now trading near Rs 800 per share, providing a much-needed confidence boost for investors. However, while the stock's upward movement is encouraging, questions remain regarding the company's ability to sustain rapid loan growth.

Although Goldman Sachs' positive outlook on SBI Card's loan growth trajectory is optimistic, the broader market dynamics tell a more complex story. The credit card business, particularly in India, is facing stiff competition from unsecured personal loans, which are priced considerably lower. Personal loan interest rates, which hover between 15% and 20%, offer a much more attractive option compared to the interest rates on credit card revolvers, which range between 30% and 35%.

Credit card revolvers, or customers who carry forward their balances and pay interest on the revolving amounts, are essential for the profitability of card companies. However, an increasing number of these customers are opting for personal loans to repay their expensive credit card dues, eroding the share of revolvers in the receivable mix. This trend has seen the share of revolvers drop from 38% in Q1FY20 to 24% in Q1FY25.

Such a shift also means that the interest spread for SBI Card has taken a hit. The interest spread, which represents the difference between the rate of lending and borrowing, fell to 9.6% in FY24 from 14.3% in FY20.

While the prospects of improving credit costs provide a glimmer of hope, the reality is more complex. SBI Card's management, in its Q1FY25 commentary, flagged growing concerns about rising delinquencies. Delinquencies, which refer to loans or credit that are overdue, have not shown any clear trend of improvement. Rather, they appear to be shifting across customer segments, with no identifiable patterns or causes.

One worrying aspect highlighted by SBI Card's management is the onset of delinquencies among customer accounts that had previously performed well over the last four to five years. This is especially alarming as recoveries from these accounts have been minimal. Moreover, defaults are occurring across a broad spectrum of employment types and geographical locations, indicating that these issues may be systemic.

Given this backdrop, it is difficult to foresee a positive change in credit costs in the near term. The company's commentary suggests that any material improvement might be several quarters away.

Despite these headwinds, SBI Card continues to be valued at high multiples, which raises concerns about its long-term risk-reward proposition. The company is expected to deliver a return on assets (RoA) of 4.2% in FY25, which is on par with some mortgage lenders like Aadhar Housing Finance. However, while mortgage lending is generally considered safer, SBI Card's business is inherently riskier due to its focus on unsecured lending.

Moreover, SBI Card is currently trading at a price-to-earnings (PE) multiple of nearly 30x, which some analysts argue is overly optimistic given the risks in its core business. In contrast, Aadhar Housing Finance, despite delivering similar RoA, trades at a much lower PE multiple of under 20x, signalling a potential overvaluation in SBI Card's stock price.

The company's PE multiple is expected to drop to 22x based on projected FY26 earnings, which may seem more reasonable at first glance. However, analysts point out that these estimates are based on lofty assumptions. For instance, Motilal Oswal Financial Services forecasts an increase of four million cards, from 22.5 million to 26.5 million, over the next few years. The challenge here is that the best year for SBI Card, in terms of card additions, saw an increase of only three million in FY23. Furthermore, new card additions declined by 18% year-on-year and 12% sequentially in Q1FY25.

Another challenge for SBI Card is its shrinking market share. The company's market share in terms of cards in force fell by 110 basis points year-on-year and by 10 basis points sequentially to 18.5% in Q1FY25. This decline is partly attributed to the company's more cautious approach to issuing new cards. While there is strong interest from potential customers-60% of whom are existing cardholders-the company has been more selective, focusing on issuing cards to those with better credit profiles.

However, once onboarded, customers tend to over-leverage, posing additional risks. Unsecured lending, especially credit cards, has been under scrutiny, with concerns over rising household leverage in India. Analysts at Motilal Oswal believe that key catalysts for improvement, such as a reversal in the interest rate cycle and an uptick in the revolver mix, are still a few quarters away.

The shares of SBI Card were seen trading with gains of nearly 1% at Rs 800 per share as of 11:10 am on the National Stock Exchange (NSE). The stock has delivered negative returns of nearly 7% in the last one year.

*Inputs from Mint*