By Kotak Instituitional Equities
SBI Cards and Payment Services (SBICARD) reported a 5% y-o-y earnings decline as a 17% y-o-y operating profit growth was offset by a significant 60% y-o-y increase in provisions, mainly attributable to cards originated in 2019. Despite this, the overall business performance remains solid, with (i) card growth of approximately 20% y-o-y, (ii) spend growth of around 25% y-o-y, and (iii) loan growth of about 30% y-o-y. The unexpected slippages for the quarter came from a book that was assumed to be resolved, which was surprising. However, the recent originations indicate a lower default risk. As a result, we are maintaining our ‘Buy’ recommendation. SBICARD reported a 5% y-o-y decline in earnings, primarily due to a significant 60% y-o-y growth in provisions, which accounted for 7% of the loans. However, revenues showed promising growth, increasing by approximately 18% y-o-y, driven by a 14% y-o-y growth in NII.
During the quarter, there was a significant increase in loan loss provisions, reaching 7% of loans. This marked the highest provision level observed in the past six quarters. Management attributed this surge to the cards issued in FY2019, which were found to be riskier than initially assessed. It came as a surprise since nearly four years had passed since the origination period. Management highlighted that understanding the true quality of cards issued typically requires a 30-month period.
During this time, continuous actions such as limit reductions and cancellations are necessary to stabilise the book. However, the challenge during this period was the unexpected impact of the Covid pandemic. The ability to build a reliable credit profile for customers was hindered, and it was only in the past year that insights started to strengthen, and the associated risks became apparent.
The management’s ability to articulate this impact in earlier quarters may have been challenging due to the unique characteristics of monoline businesses. Consequently, it is expected that the credit cost will gradually decline from the current levels in the upcoming periods.