SBI Card Plunge: Q3 Woes – Act Now: Buy, Sell, Hold!

Unleash your investment prowess! SBI Card’s shares plummet over 5% in Q3 miss. Explore strategic moves: buy, sell, or hold.

Dive into the financial pulse with 8% net profit growth to ₹549 crore, though 7% below consensus. Evaluate the impact of credit costs and opex on your portfolio. Stay informed, make informed decisions!

In a volatile start to Monday’s trading session, SBI Card’s share price took a significant hit, plunging over 5% as the company unveiled Q3 results that fell short of expectations. The disappointing performance was underscored by a sharp increase in credit costs, prompting investors to react swiftly.

SBI Card shares experienced a substantial decline, dropping as much as 5.89% to ₹715.05 apiece on the BSE. This downturn reflects the market’s immediate response to the unexpected Q3 figures, highlighting the sensitivity of investors to financial outcomes.

The company’s ability to manage credit costs moving forward will likely play a crucial role in restoring investor confidence and stabilizing the stock’s trajectory.

SBI Cards and Payment Services Ltd, supported by the State Bank of India, revealed notable financial growth. In the third quarter of FY24, the credit card services provider reported an impressive 8% increase in net profit, reaching ₹549 crore. This marks a significant rise from the ₹509 crore recorded in the corresponding period a year ago.

During Q3FY24, the company witnessed a substantial 30% YoY surge in total income, reaching ₹4,742 crore compared to ₹3,656 crore in the corresponding period of the previous fiscal year.

However, SBI Card faced challenges in Q3 as its net profit fell 7% below consensus. This downturn was attributed to a notable increase in credit costs and opex exceeding expectations. Credit costs rose significantly to 7.5%, up from an already elevated 6.7% QoQ. Additionally, the net interest margin (NIM) on monthly average balance experienced a 30 bps decline QoQ, accompanied by a rise in the cost of funds.

“The company’s CEO attributes a higher credit cost to a sharp 16% QoQ rise in delinquencies in the sector’s 30DPD and 90DPD buckets. Nuvama Institutional Equities notes a weak outlook, anticipating sustained high credit costs and a likely increase in Cost of Funds (CoF).

Management indicates that the surge in credit costs is not a one-time event and could persist over the next few quarters. In response to increased risk weights on NBFC, banks raised lending rates for SBI Cards by ~30 bps, impacting NIM in Q4FY24.

Coupled with high CoF, persistent credit costs, and a stagnant quarterly addition of new accounts at 1.1 million, the overall outlook remains weak. Furthermore, the company’s capital adequacy has sharply declined. Nuvama expresses concerns about sector-wide delinquencies persisting until RBI actions on risk weights slow down growth and compel lenders to address defaulters.”

Earnings estimates for FY24 were significantly reduced by 12%, and for FY25E by 13%. The stock’s rating remains ‘Reduce,’ with a revised target price of ₹700 per share, down from the previous ₹760.

The company faced continued pressure on asset quality in the quarter, as both Gross NPA and Net NPA ratios increased by 21 bps and 7 bps QoQ, reaching 2.64% and 0.96%, respectively.

Motilal Oswal Financial Services

“SBI Card’s quarter was below expectations, marked by increased provisions. Margin outlook remains weak due to a significant surge in funding costs. The mix of revolvers and EMI loans remains steady. Management notes that recent interest rate hikes, coupled with the impact of risk weights, will pressure funding costs in the upcoming quarters. Consequently, margins are expected to stay subdued in 4Q and 1HFY25,” stated Motilal Oswal Financial Services.

“The uncertainty prevails regarding the potential increase in the mix of EMI and Revolver loans, while the anticipation is that asset quality stress will continue to elevate provisions in the forthcoming quarters, as per the statement.

On a positive note, spending growth remains robust, and the company observes a healthy uptick in new card additions. The key triggers for change include the reversal in the rate cycle and lagged improvements in the revolver mix, though these developments seem to be a few quarters away.”

The brokerage firm revised its stance on the stock, downgrading the rating to ‘Neutral’ and reducing the target price to ₹850 per share. Additionally, it lowered the FY24E and FY25E EPS estimates by 2% and 3%, considering increased credit costs.

Anticipating a robust earnings CAGR for SBI Card from FY24 to FY26, the consistent reduction in estimates due to disappointing earnings in recent quarters and limited near-term visibility prompts caution. As of 9:35 am, SBI Card shares traded 5.12% lower at ₹720.95 apiece on the BSE.

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Source: Google, Mint

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