Credit card company posts strong earnings, but analysts split on whether the good times can last amid 19% stock correction
SBI Cards and Payment Services delivered a sparkling 45% jump in profit for the October-December quarter, but the celebrations may be premature. India’s second-largest credit card issuer is grappling with slowing loan growth and shrinking profit margins.
No surprise, the company’s shares have taken a beating falling 19% to Rs 755 from Rs 937 in October 2024.
The Numbers That Matter
SBI Cards reported a profit of Rs 5.6 billion for the third quarter, up 25% from the previous quarter. “PAT was up 45% year-on-year, aided by in-line net interest income as well as in-line provisions,” says Motilal Oswal in its research note.
But here’s the catch: the company’s loan book actually shrank 4% during the quarter, even as people swiped their cards more vigorously than ever. Spending jumped 33% year-on-year, driven largely by corporate credit cards that saw a whopping 329% surge.
“Strong spend-based fees and moderating provisions helped SBIC clock in-line PAT,” notes Emkay Global, highlighting how the company is making money from transactions rather than lending.
The Margin Squeeze
The company’s profit margins—a key measure of profitability—contracted by 0.20 percentage points to 11%. This happened even as borrowing costs have eased.
“Most of the benefit from lower cost of funds has already been realized, while yields carry a mild near-term downside bias, which could keep margins under check,” warns Motilal Oswal.
The management has indicated that margins will remain range-bound unless India’s central bank cuts interest rates further—something that’s far from certain given persistent inflation concerns.
Why the Loan Book is Shrinking
SBI Cards added just 864,000 new cards during the quarter, below its target of 900,000 to 1 million. The company is being deliberately cautious, focusing on quality over quantity.
This strategy stems from earlier asset quality concerns. However, there are signs of improvement. “The improvement in fresh stress flow is a result of consistent multi-quarter efforts and should continue going forward,” says Emkay Global, citing management commentary.
Bad loans as a percentage of total loans remained stable at 2.86%, while provisions for potential losses moderated to 8.3% from 9% in the previous quarter. The Stage 2 assets—loans showing early signs of stress—improved by 0.30 percentage points to 3.9%, “reflecting the easing of new stress flow,” notes Emkay.
The Bear Case
But has the recent stock-price correction make the risk-reward more favorable? At current levels, the stock trades at 4.5 times its December 2027 book value and 25 times estimated earnings.
Motilal Oswal is cautious. “We reduce our earnings estimates by 4%/6.5% for FY26/FY27, considering a contraction in margins and a decline in receivables,” the brokerage states, cutting its profit forecasts for the coming years. The firm expects SBI Cards to post a return on assets of 3.85% and return on equity of 17.9% by FY27.
The Verdict
SBI Cards finds itself at an inflection point. The company has successfully navigated asset quality concerns and is generating healthy profits from transaction fees. But slower loan growth and compressed margins raise questions about future earnings potential.
Motilal Oswal says it is maintaining its neutral stance until the company demonstrates it can grow its loan book while maintaining profitability. “Reiterate Neutral with a revised TP of Rs 875,” the brokerage notes.
