This Cards’ Company’s Worst Problem Is Getting Better Fast

Credit cost nearly halved year-on-year, PAT up 20%, asset quality visibly improving — but AUM growth remains anaemic and corporate spends are doing the heavy lifting

The SBI Cards investment thesis has always had two sides — the credit quality recovery, and the revenue growth recovery. Q1FY27 delivered convincingly on the first and less convincingly on the second. Credit cost fell sharply to 6.8% from 10.3% a year ago and 8.1% in the prior quarter — a dramatic improvement that drove 20% year-on-year PAT growth to Rs 6.64 billion. But PPoP — the measure of operating profitability before provisions — fell 12% year-on-year as AUM growth remained anaemic at 3% and the quality of spends growth stayed poor.

Emkay Global cuts its target price by 12% to Rs 750 from Rs 850, but retains BUY — arguing that moderated valuations and easing credit costs support a re-rating from here.

The Credit Cost Recovery 

A year ago, SBI Cards was running credit costs of 10.3% — a level that reflected the accumulated stress in the unsecured lending book following aggressive card acquisition in earlier years. The journey from 10.3% to 6.8% in four quarters is not a one-off reversal — it is sustained improvement driven by tightened underwriting, a maturing vintage mix and meaningfully lower incremental stress formation.

The asset quality data reinforces the narrative. The Stage 3 ratio improved sequentially to 2.04% from 2.41% in Q4FY26. Stage 2 also improved marginally to 3.6% from 3.7%. Write-offs declined. “With the sustained easing in incremental stress flow, SBIC’s GS3 ratio improved sequentially,” Emkay notes — and management expects asset quality and credit costs to improve further through FY27, subject to any disruptions from the ongoing West Asia conflict.

Emkay builds FY27-29 credit cost assumptions that are 5-7% lower than its prior estimates — a meaningful earnings tailwind that partly offsets the revenue growth disappointment.

The Spends Picture 

Headline spends growth of 27% year-on-year looks impressive until you look inside the number. Corporate card spends grew 125% year-on-year — accounting for a disproportionately large share of the total growth. Retail spends, which carry higher interchange and revolver monetisation potential, grew a more modest 14% year-on-year.

“The quality of spends growth remained poor with corporate card spends growth driving a large part of the spends growth,” Emkay states directly — a candid assessment that corporate spends, while large in volume, generate lower revenue yield per rupee spent than retail spends.

The distinction matters because corporate spends tend not to revolve — they are typically paid in full at month end, generating no interest income. Retail spends, particularly from customers who carry balances and pay EMIs, are the higher-value revenue source for a credit card company. Until retail spends growth accelerates relative to corporate, the revenue yield on the overall spends base will remain under pressure.

AUM Growth — The Stubbornly Slow Recovery

AUM growth of 2.9% year-on-year is the number that most clearly explains why Emkay has cut its revenue estimates. A credit card company’s revenue is largely a function of its receivables base — and a receivables base growing at 3% year-on-year, in a market where consumer credit is generally expanding, reflects both the deliberate pull-back from risky acquisition and the structural challenge of revolver rate moderation.

Revolver rates — the proportion of customers carrying balances and paying interest — have stabilised at approximately 22%, with management guiding for “broadly stable with a marginal downward bias.” This stability is better than the deterioration seen in prior quarters, but it means the high-interest revenue that makes credit cards structurally attractive as a business is not growing as the card base expands. The EMI contribution in the asset mix — which carries lower yields than revolving credit — has increased, adding another layer of yield compression.

Management’s more constructive view is that receivable growth should accelerate in the second half of FY27, supported by higher customer acquisition — new card additions improved to 1.02 million in Q1, above the recent run-rate of approximately 0.9 million — and festive season demand. The cards-in-force base grew 6.6% year-on-year to 22.6 million.

Net card additions of approximately 0.5 million in Q1 were meaningfully better than the approximately 0.3 million in the prior quarter. If acquisition momentum is sustained, the AUM growth acceleration in 2HFY27 becomes a credible scenario rather than aspirational guidance.

The Estimate Revisions 

Emkay has been disciplined in translating the Q1 developments into revised estimates. Net revenue estimates have been cut 2-3% for FY27-29. PPoP estimates have been cut 4-8%. EPS estimates have been cut 5-7%. The target multiple has been reduced from the equivalent of 22x to 21x FY28 earnings — a modest de-rating that reflects moderation in earnings growth and ROE expectations relative to prior assumptions. The combined effect is a 12% cut in the target price to Rs 750 from Rs 850.

“We change our FY27-29 estimates to reflect 1Q developments and management commentary,” Emkay states — a structured acknowledgement that the quarter changed the near-term trajectory without fundamentally altering the medium-term recovery story.

Scorecard

The BUY retention at 21% upside to target reflects Emkay’s view that the valuation reset — the stock is down 30% over twelve months — has created an entry point where the easing credit cost cycle and eventual AUM recovery justify re-rating from current multiples. At 23x FY27 earnings and 18.5x FY28, the stock is no longer pricing in a recovery — it is priced for continued stagnation.

SBI Cards occupies a structurally attractive position in India’s consumer credit ecosystem — the only listed pure-play credit card company, backed by the country’s largest bank, with a franchise that benefits from SBI’s vast customer base and branch network for distribution. The credit quality cycle that inflicted significant earnings pain over FY25-26 is visibly turning.

The revenue growth cycle — dependent on retail spend acceleration, AUM recovery and revolver rate stabilisation — is turning more slowly. For investors willing to underwrite the 2HFY27 AUM acceleration thesis and the festive season demand recovery, Emkay’s BUY at Rs 750 target makes the case that the stock’s 30% twelve-month decline has created more opportunity than risk at current levels.