Increasing consumer demand, rapid urbanisation, growing middle-class acceptance of loans and growth of e-commerce platforms have led to robust traction in unsecured loans such as credit cards and personal loans over the past four to five years. In fact, even as the overall bank credit growth has been languishing in single digits, credit card (outstanding loan amount) has been growing at 30 per cent CAGR over the past five years.
Riding this spectacular growth, SBI Cards & Payment Services — India’s second-largest credit card issuer — has witnessed a robust growth of 54 per cent (CAGR between FY17 and FY19) in its total credit card spends. SBI Cards and BOB Card are the only NBFC credit card issuers, while others are banks.
After HDFC Bank that commands a market share of 27 per cent in terms of number of outstanding credit cards, SBI Cards ranks second, enjoying an 18 per cent market share. In terms of card spends, SBI Cards has seen a significant jump in market share over the past five years — to 18 per cent in FY19 from 11 per cent in FY14.
A largely underpenetrated market, rise in discretionary spending, robust traction in e-commerce activity and steady improvement in payment infrastructure are likely to keep growth momentum strong for leading players such as SBI Cards over the next three to five years.
Steep valuation
Given the strong growth prospects, there is evidently high expectations from SBI Cards’ ₹10,350-crore IPO (fresh issue of shares worth ₹500 crore and offer for sale of up to 13 crore equity shares). Healthy profitability, strong bank (SBI) lineage and brand, and a focus on open-market channel are key positives that are likely to buoy investor interest in the IPO. With shrinking opportunities in the pure banking space and the once-fancied NBFC sector, investors have been considering other companies (such as insurance and mutual funds) in the financial sector with unique business models.
By that count, SBI Cards’ fairlyone-of-a-kind business model is also likely to catch the fancy of investors. Hence, despite the steep pricing, there could be ample interest in the upcoming IPO. At the upper price band of ₹755, SBI Cards trades at about 45 times (post issue) earnings per share (based on M9FY20 annualised) and 12.5 times price to book.
Since there are no comparable listed players in the Indian market, an apples-to-apples comparison is difficult. But considering players such as HDFC Bank, AU Small Finance Bank and Bajaj Finance that currently trade at hefty valuations (28-50 times PE), SBI Cards’ asking price, though steep, appears to be driven by its robust growth and strong profitability. Hence, retail investors can subscribe to the issue for the long run. But there are several aspects that need attention.
Key risks
One, the scorching pace at which unsecured loans (personal loans and credit cards) have grown over the past four to five years within the banking system, itself, has been a cause for concern. Risks that had emanated from huge unsecured loans during the financial crisis of 2008 could erupt again, if economic growth continues to falter, triggering job losses.
SBI Cards, which unlike its banking peers, has only one business line, would be impacted more by an increase in defaults. Currently the company’s gross non-performing assets ratio is 2.47 per cent (as of December 2019). Between FY17 and FY19, even as revenues grew by about 45 per cent CAGR, impairment losses and bad debts for SBI Cards grew by about 47 per cent.
Two, change in regulations around credit card interchange fees could impact earnings. Credit card interchange fees constitutes 21.6 per cent of SBI Cards’ total revenue from operations. Also, any cap on interest rate charged by credit card-issuing companies from card holders can also impact revenues. (SBI Cards is involved in an appeal against an order given by the National Consumer Disputes Resolution Redressal Commission regarding charging interest rate in excess of 30 per cent per annum from credit card holders).
Three, aside from competition from other card issuers, competition can intensify among other digital payment modes such as UPI (unified payments interface).
Lastly, SBI Cards derives significant benefits from its promoter (SBI currently holds 74 per cent stake). SBI has permitted the company to use ‘SBI’ wordmark and logos, for which SBI Cards pays royalty fees. In FY19, new accounts acquired from SBI’s customer base accounted for 55 per cent of total new accounts. Also, SBI has extended working capital loans and non-convertible debentures to SBI Cards (₹10,256 crore outstanding as of December 2019). Hence, lack of or reduced support from SBI can impact the business.
One or more of the above-mentioned risks playing out can weigh on the growth of the business and on the steep valuations in the long run.
Business model
SBI Cards started operations in 1998. It has a broad portfolio that includes SBI Card-branded credit cards and co-branded credit cards. SBI Cards has about 1 crore cards in force as of December2019. The company follows a multi-channel acquisition strategy — retail open-market channel through retail stores, malls, fuel stations, railway stations and airports, co-brand channel and the SBI Channel.
According to CRISIL, SBI Cards is the leading player in open market (59 percent of total cards outstanding from open-market channels). Of the new accounts SBI Cards acquired in the nine months ended December 2019, 52 per cent was through open market channel. However, the open-market channel carries relatively higher risk of delinquency than the bank channel where you predominantly sell cards to a captive customer base.
The credit card business is based on two major revenues — fee income and interest income. The latter comes into play when customers pay a minimum amount due and roll-over their payment; reduce their lump-sum payment by converting it to EMI; or take loans on credit card. Fee income, on the other hand, includes interchange fee on spends, membership fees and other fees including late payment fee. In the nine months ended December 2019, SBI Cards earned 51 per cent of its revenues from interest income and 44 per cent from fees and services.
SBI Cards’ profitability has been strong — return on asset of 4-4.8 per cent and return on equity of 28-31 per cent between FY17 and FY19. As of M9FY20, it reported an ROA of 6.7 per cent and an ROE of around 36 per cent.