SBI Card: Holder dilemma

SBI Card and Payments (SBI Card) Monday made a tepid debut at the exchanges by listing at Rs 658 – a discount 12.85% discount over its issue price of Rs 755.

The standalone credit card company (subsidiary of SBI in partnership with Carlyle), the second largest issuer, is the only PSU Bank backed company active in a space dominated by private and foreign banks. It has 17-18% share of cards in use and spends.

Poor listing of the company can be attributed to weak global cues as well as the uncertainty surrounding credit card business.

Let us understand the credit card revenue and valuation model. Typically, half the revenues come from interest on short-term credit (which is inherently cyclical) and the other half comes from card- and spend-related fees (which are more linear).

Let us understand the valuation of card business. This will help discounting businesses on the bourses.

Price-to-earnings (PER) helps capture the growth and compounding better than a Gordon-growth based justified P/BV multiple but does not capture the inherent cyclicality of the credit segment.

Price to book (P/BV) is a more robust measure for cyclical industries especially lenders such as banks and NBFCs, however it tends to under-capture growth potential.

There are no two ways about it – the business is indeed cyclical. Perhaps the choice of methodology depends on a consideration of how imminent one thinks think the next retail credit cycle in India will be.

As for India is concerned the credit card business is relatively young market with 5.3 crore cards across 3.1 crore customers as of 1HFY20 (less than 5% per capita).

Loans outstanding (o/s) have topped Rs 1 lakh crore (less than 1% of system credit), while annual card spends have topped Rs 6 lakh crore (less than 6% of non- cash spends).

The industry went through a long consolidation phase after the GFC (FY08-13), but in the past six years has emerged stronger and entered a new boom cycle. Over FY14-19, cards-in-use grew 20% CAGR while spends and loans o/s grew 30% CAGR.

Usefulness of the Credit cards are the key business driver. It solve two financial needs – non-cash payments and short-term consumer credit.

The payments earn fees on spends (interchange charges) and collect data on the customer, while the credit earns interest from customers opting to either revolve the dues or convert them to an EMI-based loan (20-42% yields).

Companies incentivise customers with reward points / air miles to capture wallet share and earn stable, non-credit linked interchange fees from merchants. The contribution from fees and interest to gross revenue is roughly 50-50.

Meanwhile, SBI Cards is transitioning from being externally focused to more internal sourcing.

Regulatory caps on interchange fees on interest rates on revolver limits, poor underwriting in a retail asset quality bust cycle, and increased competitive intensity, especially with new-age fintechs, are the key risk going ahead.

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