Legacy loans haunt SBI Cards' asset quality
Summary
In an earnings call, the management explained that the covid restructuring had delayed the identification of structural stress in 2019 vintage loans.
SBI Cards and Payments Services Ltd’s results for the three months ended June (Q1FY24) are far from inspiring. Higher provisions meant net profit fell by 5% year-on-year to ₹593 crore. This is mainly on account of stress from a certain customer pool acquired in 2019. While some may consider this as a prudent measure, investors are not particularly thrilled. The stock closed flattish on Monday at ₹855 apiece.
In an earnings call, the management explained that the covid restructuring had delayed the identification of structural stress in 2019 vintage loans. These customers account for about 16% and 20% of SBI Cards loan portfolio and non-performing assets (NPA), currently. Against this backdrop, credit costs inched up from 6.3% in Q4FY23 to 6.8% in Q1FY24.
The company has now taken necessary actions, such as curtailing credit limit, cross-selling products and write-offs. Accordingly, SBI Cards expects credit cost to be at 5.8-6.2% in the second half of FY24. Furthermore, the management indicated that the quality of customer cohorts after 2019 were better. This should aid in reining in the credit costs.
For now, asset quality metrics deteriorated last quarter with gross NPA rising by six basis points (bps) sequentially to 2.41% and net NPA up two bps to 0.89%. Some remain cautious on the asset quality. Analysts from Nuvama Institutional Equities believe high credit cost along with the vintage bad loans is a concern. “Management attributed high credit cost to 2019 customers, a very high vintage for a low tenor product, especially when all other lenders—even those with higher duration loans—have weeded out stressed customers of pre-covid days," they said in a report.
In Q1, SBI Cards also faced headwinds in the form of an increase in the cost of funds, which rose 37 bps sequentially to 7.1% leading to a dip of 8 bps in net interest margin (NIM) to 11.5%. The management expects the cost of funds to increase by 5 to 10 bps in Q2FY24, although NIM is expected to remain stable. Analysts from Jefferies India expect NIM to trough in the first half of FY24 and slowly inch up over FY24-26. “Any rate cuts could boost earnings as 65% of liabilities are short term. A 50 bps lower cost of funds could lift earnings per share by 5%," they added in a report.
To be sure, SBI Cards’ revolver mix, the declining share of which had been a pain point in the past, has stabilized in the past four quarters at 24% of the total receivables mix. Revolving credit facility allows users to pay some of their outstanding dues in the next billing period instead of paying all of it at once. Further, the share of the EMI mix has been slowly rising. In Q1, EMI mix stood at 38%, up from 35% last year.
“While the share of revolvers in the mix is still relatively low for SBI Cards, it is expected to remain stable at current levels in the near term. Any dip here would be a cause for concern," said Dnyanada Vaidya, research analyst-BFSI, Axis Securities.
As such, the improvement in consumption in tier-3 and tier-4 cities bodes well for SBI Cards’ prospects. But how market share pans out would need closer tracking. “With increased competition, especially from private banks, improving market share hereon looks like an uphill task for the company," added Vaidya.
As things stand, SBI Cards shares are down 17% from their 52-week highs seen in August last year. The stock trades at 24.1 times FY25 estimated earnings, show Bloomberg data. In the near term, investors will watch if credit costs taper before allocating brownie points.
