SBI Cards and Payment Services Limited’s earnings for the quarter ended December 31 were disappointing on many counts. Margin erosion, higher input costs and marginal deterioration in asset quality were some of the issues. Not surprisingly, the company’s shares have declined nearly 7% since the results were announced.
Net profit rose 32% from a year earlier 509 crore, missed analysts’ expectations. The main culprit here is the sharp sequential contraction of 67 basis points (bps) in net interest margin (NIM) to 11.6%. High cost of funds and low revolver mix capped margin. One basis point is 0.01%.
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Card service providers benefit when more users ‘revolve’ their credit or pay off some of their dues in the next billing period rather than paying in one go. For SBI Cards, the recovery in revolver mix has been delayed and is a matter of concern for the stock. In the December quarter, revolver mix was 24%, flat sequentially. “Improving revolver mix is key to profitability growth and we will have to wait for a few quarters before this number picks up,” said Nitin Agarwal, senior group vice president, institutional research, Motilal Oswal Financial. Services.
Hence, the pressure on NIM for SBI Cards is likely to continue due to increased interest rates. Agarwal said margins are likely to remain under pressure in the fourth quarter as well. SBI Cards’ operating expenses increased, leading to an increase in cost-to-income ratio. But the ratio is expected to moderate sequentially due to lack of big festive spending.
However, the company’s focus is on improving EMI transactions to increase interest income and NIM over the next few quarters, which means operating expenses are likely to remain high. Management also expects NIM compression to be lower as the company seeks to offset rising fund costs by repricing new loans.
In terms of asset quality, the company’s GNPA ratio increased by 8bps to 2.22%. “The marginal increase in GNPA ratio is not a cause for concern right now. However, we are looking at the long-term trade-off from incremental card-in-force issuance towards ‘self-employed’ customers with an aim to improve the near-term return ratio,” said Krishnan ASV, Senior Vice President, HDFC Securities, Institutional Research said. In the last one year, SBI Cards shares have declined nearly 16%. There could be a reversal of the declining trend with an improvement in revolver mix, though the timeline for this is difficult to predict .
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