SBI Card: Competition from personal loans a drag on interest spreads

SBI Cards and Payment Services Ltd’s shares are up about 10% so far in September. While there is general optimism about wholesale funding costs peaking for non-banking financial companies (NBFCs), SBI Card got an additional boost from a rating upgrade from ‘sell’ to ‘buy’ by Goldman Sachs. The brokerage firm raised the stock’s target price from ₹652 to ₹913, citing an expected pickup in loan growth from FY26 and an improvement in credit costs from the September quarter (Q2FY25). SBI Card shares now trade close to ₹800.

Still, faster loan growth may be tough. Card companies are facing increased competition from unsecured personal loans priced at 15-20% versus credit card interest rates on revolvers at 30%-35%. Revolvers are cardholders who carry balances over from one month to the next and pay interest on those revolving balances. Customers can choose to take a personal loan at a much lower rate to repay their expensive credit card dues if they so wish. 

The share of revolvers in the receivable mix has been trending downward to 24% in Q1FY25 from 38% in Q1FY20, barring the RBI dispensation-related spike during covid-19. This could also be why the interest spread (the difference between the rate of lending and borrowing) fell to 9.6% in FY24 from 14.3% in FY20.

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On credit costs, there is no clear indication so far that delinquencies have started trending lower. In its Q1FY25 commentary, management pointed out that delinquencies are shifting across segments with no identifiable cohort. Accounts that performed well over the past four to five years are now becoming delinquent, and recoveries are rare. Defaults are seen across various employment types and city tiers, and appear to result from customers' inability to pay. Thus, an immediate positive change in the next couple of quarters seems difficult.

High risk, low reward

Even if SBI Card performs better than it did in Q1FY25, one cannot lose sight of the valuation. The company’s likely return on assets (RoA) of 4.2% for FY25, earned from the relatively riskier business of unsecured lending, is in line with that of companies such as Aadhar Housing Finance, which have a similar return ratio from the much safer mortgage business. However, SBI Card is trading at a price-to-earnings (PE) multiple of close to 30x while Aadhar’s is below 20x.

SBI Card’s PE multiple of 22x based on estimated FY26 earnings may appear reasonable, but the assumptions in these estimates seem lofty. For instance, Motilal Oswal Financial Services estimates the total number of cards will grow to 26.5 million from 22.5 million, an increase of four million. The best year for SBI Card in terms of card additions in recent history was FY23, when it grew by three million. Also, new additions fell by 18% year-on-year and 12% sequentially in Q1FY25, which indicates that achieving these high estimates won’t be easy.

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SBI Card’s market share in terms of cards in force dropped 110 basis points (bps) year-on-year and 10 bps sequentially to 18.5% in Q1FY25. This seems to be a result of careful sorting of customer profiles before issuing new cards, as management says there’s much interest from prospective customers, of which 60% are existing cardholders and the remaining aren’t. So, the issuance of fresh cards is not a growth constraint, but the problem is that customer behaviour changes post-onboarding as there is a tendency to over-leverage.

To be sure, there are concerns about unsecured lending in the system owing to increased household leverage. Motilal Oswal’s analysts believe the reversal of the interest rate cycle and an improvement in the revolver mix are key triggers, though these are still a few quarters away.

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