IPO review: SBI Cards and Payment Services

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

The initial public offer of SBI Cards and Payments is slated to be huge, aiming to mop up over Rs 10,000 crore. A subsidiary of State Bank of India, the company issues and runs SBI’s credit cards business. SBI Cards is the second largest credit card player in India after HDFC Bank. The IPO is primarily an offer for sale by SBI and PE investor CA Rover Holdings, with Rs 500 crore being a fresh issue of shares.

SBI Cards, a systemically important NBFC, represents a unique franchise because NBFCs in India are not allowed to issue credit cards and banks have this business as one of the many in their fold. We have therefore evaluated this offer on the premise that this is a retail lending business housed in an NBFC.

SBI Cards: Positives

Direct consumption play:  SBI Cards’ NBFC business is a direct play on India’s booming consumption economy. First, the company has a 18% share in credit cards by volume, the biggest after HDFC Bank’s 27% share. ICICI Bank and Axis Bank each have a 13%-14% share. However, SBI Cards has clocked the fastest growth among these – between FY-16 and FY-19, its credit cards issued jumped from 3.6 million to 8.3 million, a CAGR of 32%.

Second, the company’s credit card spends grew at a much faster pace than card volumes at 52% annually. Of the total spending by the top 5 card players, SBI Card’s share has jumped to 23% in FY-19 from 16% in FY-16. Market leader HDFC Bank has lost share in spends while ICICI Bank and Axis Bank have only maintained share.

sbi cards growth

Third, the market is under-penetrated and SBI Cards has the ability to widen reach by piggybacking on its parent SBI’s massive country-wide bank network into newer Tier II and Tier III markets. Organised retail and e-commerce are simultaneously reaching out to these areas which can spur spending. SBI Cards is also a leader in co-branding with established brands in retail outlets, travel, fuel, e-commerce, and entertainment, which drives customer acquisition.

Company aside, the industry itself faces a large addressable market. Card usage in India has historically been dominated by debit cards and for ATM withdrawals, but this is now changing. Credit card swiping at point-of-sales terminals has more than doubled from Rs 24,840 crore a month in 2016 to Rs 54,477 crore now, going by RBI data.

Growing spends

Retail lending focus: Having burnt their fingers at wholesale lending, most lenders in India are now turning to retail lending which offers low loan book concentration with high yields. SBI Cards is firmly rooted in this segment with a loan book that is virtually entirely retail with limited corporate clients. This brings low client concentration with single borrower exposure as on December 2019 standing just 2.8%.

SBI Card’s loan growth has been impressive from an annual 34% between FY-17 and FY-19, to 38.8% in the first nine months of FY-20 over the year-ago period. Loans are split into EMI-based loans where cardholders convert purchases into EMIs and revolving credit on unpaid card balances. EMI loans account for about 32% of the total, and are generally more manageable  and less susceptible to default than revolving credit.

SBI Card’s delinquencies have been well under check with Gross NPAs at 2.47% in December 2019, a level it has more or less remained at since FY-17. Strong provision coverage of nearly 67 per cent has led to net NPAs being at 0.83 per cent, a comfortable level.

High net interest margins: A key indicator of profitability in a lending business is the Net Interest Margin (NIM). As credit card debt is among the most expensive there is, SBI Cards scores high on this parameter with NIMs of 15-16%.

key metrics

Average yields for SBI Cards ranged between 21.3% to 22.2% since FY-17 while cost of funds ranged between 7.2% to 8.1% over the years, thanks to the strong parentage and  AAA and A1+ credit rating. While cost of funds may rise should rates increase, NIMs may continue to remain strong given the high lending rates. Interest income grew 33% for the first nine months of FY20 (9MFY20) over the year ago period and at a similar pace in the earlier fiscal years.

Interest income accounts for 51% of the revenue for 9MFY20, with most of the remaining from SBI Cards’ share of the interchange fee charged from the merchant and payment network for facilitating credit card transactions. Fee income grew 40% in 9MFY-20 over the year-ago period. Fee income allows SBI Cards to earn revenue from a customer’s entire spend on credit cards – interest income, on the other hand, is earned only on that portion which converts into lending.

SBI Cards: Risks

Consumption slowdown: The credit cards business is a direct play on consumer confidence and income prospects in the economy which if weak can lead to slower growth and higher delinquencies. Here, the lack of available track record for SBI Cards across an entire economic cycle for say 5 to 10 years makes an assessment of its vulnerabilities difficult. While SBI Cards and other credit card players have seen growth in spending, the pace of growth slackened in FY-19 in line with the consumer slowdown.

SBI Cards’ focus on a single lending product, while aiding its scorching growth, can render it more vulnerable to trouble in its target segment compared to banks or NBFCs which cater to multiple borrower segments.

SBI Cards splits its book into three buckets (“stages”) based on its assessment of borrower credit risk. These classifications show that the share of Stage 2 and 3 loans in its gross exposure stood at 10.63% for December 2019, up from the 9.11% in FY-17. These are loans where SBI Cards sees heightened credit risk with some evidence of impairment, though the problem hasn’t reached the bad loan stage. SBI Cards additionally is targeting new-to-credit and young customers, which pose their own risks.

SBI Cards’ focus on a single lending product, while aiding its scorching growth, can render it more vulnerable to trouble in its target segment compared to banks or NBFCs which cater to multiple borrower segments.  

Regulatory moves: In its eagerness to promote digital transactions, the Government has been rolling out margin-hurting moves for payment ecosystem players. A recent move was the removal of interchange charges on use of RuPay cards. This apart, if innovations in other popular digital payment modes such as UPI allow credit to be offered to users, it could pose a risk to plastic cards. Inroads by other NBFCs into offering their own credit cards either if the RBI allows it or via co-branding with other banks could pose competition especially in Tier II and Tier III markets.

SBI Cards: Valuations

While the business positives of SBI Cards presently outweigh its risks and its IPO can command a scarcity premium by being the only listed credit card provider, expensive valuation is a sticking point with this offer. Going by the post-offer numbers, at the upper end of the price band of Rs 755, the price-to-book value of the offer works out to 13.4 times. Post-issue annualised FY-20 PE multiple works out to 45.5 times. Most NBFCs in contrast trade at 1 to 5 times their book value. Bajaj Finance, a retail NBFC with an impressive track record of delivering growth while weathering economic cycles, currently trades at about 9-10 times book.

In terms of their growth metric and loan book orientation, small finance banks offer a close comparison to the SBI Cards business. Here AU Small Finance Bank trades at about 10.7 times book. With several other small finance banks lined up for listing, these could offer high-growth alternatives to SBI Cards.

Data source: SBI Cards’ filing with SEBI

[Editor’s note: We published an article a few days back on how IPOs have done in the Indian market. If you have not already, please read that essay by Aarati Krishnan to get context today’s IPO]

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

3 thoughts on “IPO review: SBI Cards and Payment Services”

      1. All aspects covered in the post..On a side note Equitas quotes at less than 2 times book! So yes SBI Cards does seem expensive…

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : Redwood Research (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200007478). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information is provided on an ‘As Is’ basis by PrimeInvestor. Information herein is believed to be reliable but PrimeInvestor does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor are on a best effort basis. PrimeInvestor does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor or any other agency appointed/authorised by PrimeInvestor. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Mutual Fund Investments are subject to market risk, read all scheme related documents carefully. As a condition to accessing PrimeInvestor’s content and website, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Redwood Research or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual FundAxis Mutual Fund Baroda Mutual FundBNP Paribas Mutual FundBOI AXA Mutual FundsCanara Robeco Mutual FundDSP Mutual Fund Edelweiss Mutual FundEssel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundPrincipal Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account
OR