SBI Card share price plunges over 5% as Q3 result misses estimates; should you buy, sell or hold the stock?

SBI Card share price plunged over 5% in the early trade on Monday after the company reported Q3 results below expectations amid a sharp rise in credit cost. SBI Card shares fell as much as 5.89% to ₹715.05 apiece on the BSE.

SBI Cards and Payment Services Ltd, the State Bank of India-backed credit card services provider reported an 8% growth in its net profit to ₹549 crore in the third quarter of FY24, from ₹509 crore in the same period a year ago.

The company’s total income in Q3FY24 rose 30% year-on-year (YoY) to ₹4,742 crore from ₹3,656 crore in Q3 of last fiscal year.

SBI Card’s net profit in Q3 missed consensus by 7% on a sharp rise in credit cost and higher-than-expected opex. Credit cost rose sharply to 7.5% from an already elevated 6.7% QoQ. Net interest margin (NIM) on monthly average balance fell 30 bps QoQ with a rise in cost of funds. 

Read here: SBI Card Q3 results: Net profit rises 8% to ₹549 crore

“The company’s CEO attributed higher credit cost to a sharp 16% QoQ rise in delinquencies in the sector in the 30DPD and 90DPD buckets. With credit cost likely to remain high and a likely increase in CoF, the outlook remains weak,” Nuvama Institutional Equities noted.

Management guided that the increase in credit cost was not one-off and elevated credit cost could persist for the next few quarters. 

“In response to higher risk weights on NBFC, banks have increased their lending rates for SBI Cards by ~30 bps, full impact of which will be seen in Q4FY24. As such, NIM could decline QoQ. With high CoF, elevated credit cost and quarterly addition of new accounts stagnating at 1.1 mn, the outlook remains weak. In addition, capital adequacy for the company has fallen sharply. High delinquencies for the sector are likely to persist till RBI action on risk weights slows growth and forces lenders to weed out defaulters,” Nuvama said. 

It cut earnings estimates sharply by 12% for FY24 and 13% for FY25E. It maintained ‘Reduce’ rating on the stock and cut the target price to ₹700 per share from ₹760 earlier. 

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The company’s asset quality remained under pressure during the quarter, with Gross NPA and Net NPA ratios increasing 21 bps and 7 bps QoQ to 2.64% and 0.96%.

“SBI Card reported a sub-par quarter, characterized by elevated provisions. The outlook on margins remains weak due to a sharp rise in funding costs. The mix of revolvers and EMI loans remains stable, while the management indicated that the recent hardening of interest rates, along with the impact of risk weights, will exert pressure on funding costs in the coming quarters. As a result, margins should remain muted in 4Q and 1HFY25,” said Motilal Oswal Financial Services. 

The outlook on any increase in the mix of EMI and Revolver loans remains uncertain, while the asset quality stress is likely to drive provisions high in the coming quarters as well, it added.

However, on the positive side, spending growth remains healthy and the company sees healthy traction in new card additions. The reversal in the rate cycle and lagged improvements in revolver mix remain the key triggers, though they appear to be few quarters away from now. 

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The brokerage firm downgraded its rating on the stock to ‘Neutral’ and cut the target price to ₹850 per share. It further cut FY24E and FY25E EPS estimates by 2% and 3%, factoring in higher credit costs. 

“While we expect SBI Card to deliver a healthy earnings CAGR over FY24-26, however, the disappointing earnings run-rate over the past several quarters which has driven a consistent cut in our estimates along with limited near term earnings visibility keeps us watchful.

At 9:35 am, SBI Card shares were trading 5.12% lower at ₹720.95 apiece on the BSE.

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