SBI Cards: Credit Suisse initiates outperform rating with price target of Rs 1250

Credit Suisse believes that there is a large untapped opportunity for SBI Cards in India. It says SBI Cards is seeing strong growth here. India has seen a strong rise in digital adoption in the past few years and post COVID-19, we expect this to accelerate. Credit card penetration remains low at 4%, with credit card debt to GDP at 0.6% and spends at < 4% of GDP, significantly lower vs other countries. SBI Cards has seen strong market share gains, with the share of spends and cards in force now 20% vs < 15% in FY16. Credit Suisse initiates outperform rating with price target of Rs 1250. SBI Cards share price today is Rs 1089, down Rs 18 or 1.7%.

Credit Suisse expects growth to remain strong (> 30% CAGR in spends) as it raises penetration within SBI customers, and with the rising proliferation of buy now, pay later, as fintech players are helping expand the market, we believe this should aid medium-term growth for credit cards. SBI Cards has among the lowest loans per card and rising focus on EMI conversion should aid strong asset growth.

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SBI Cards strong core profitability; expect RoAs to trend up:

SBI Cards has seen a strong improvement in pre-provision profitability over the past few years, with PPoP RoA >15%. Even as there is likely to be some impact on yields given the increased share of restructured loans (10%), with the cost of funds declining 200bp over the past two years, NIMs will likely hold up. As the benefits of operating leverage play out, Credit Suisse expects cost to income to continue moderating and RoAs improving to 7% in FY23E.

SBI Cards Asset quality stress has peaked:

SBI Cards has seen an increase in stress post COVID, with pro-forma slippage of 8% and 10% of loans being restructured. Given strong pre-provision profitability, while it has provided 65% on pro-forma NPAs as well as 35% on restructured loans, FY21E RoAs are likely to 4%. While 4Q may still see elevated provisioning, slippages have peaked and even as Credit Suisse builds in 30% of the restructured book slipping, FY22E RoAs are likely to recover to 6.3%.

Credit Suisse Initiates Buy with an OUTPERFORM rating on SBI Cards:

Given strong profitability (FY23E RoA at 7%) and a robust medium-term growth outlook (30%+ CAGR), Credit Suisse initiates coverage on SBI Cards with an OUTPERFORM rating and target price of Rs 1250 (based on 40x FY23E EPS), implying 14% upside.

SBI Cards Key risks:

(1)    Regulations imposing caps on MDR or interest rates on revolvers
(2)    rising competition on EMI loans, resulting in slower growth or lower interest rates