SBI Cards & Payment Services Ltd’s Q2FY23 earnings performance was not impressive, led by lower net interest margin (NIM) and an unfavorable revolver mix. Card service providers benefit when more users ‘revolve’ their credit, or pay some of their dues in the next billing period, rather than making all payments at once. The stock fell 5.58% on Friday.
As interest rates rise, the cost of funds for the lending industry is bound to rise. Since the loan book of SBI Cards is less than 12 months in nature, it is working against the company.
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“Their lending from banks is mainly linked to treasury bills and repo rates. We have seen a 190 basis point hike in the repo rate since May and Treasury bills at the short end of the yield curve have gone up significantly,” said Abhinesh Vijayraj, director, equity research, Spark Capital Advisors (India). It is no surprise that it is worse than what SPARK had anticipated three months ago. SBI Card Management has indicated NIM compression as the cost of funds is expected to remain high.
The disappointment has been compounded by the poor performance of the stock. SBI Cards stock has lost around 13% in CY22 so far against a positive return of 2.49% in the Nifty 50 index.
“The stock has not performed well due to continued competitive intensity, as other banks such as HDFC Bank, Axis Bank and Federal Bank are trying to capture the market share. Simultaneously, the Merchant Discount Rate (MDR) overhang still remains,” said Akshay Ashok, Research Analyst, Prabhudas Lilladher Pvt Ltd.
Stocks may also suffer due to availability of bank stocks at relatively attractive valuations. Kotak Institutional Equities said in a report on October 28 that valuations of public, regional and tier-II private banks have improved sharply due to improved return on equity, lower credit costs and convergence in credit growth with frontline banks. , “We have seen this underperformance even in some of the most expensive stocks with similar characteristics such as HDFC Bank and Bajaj Finance,” the Kotak report said.
Given the rapid pace of digital adoption, the credit card industry will see higher growth and profitability. SBI Cards, the only listed company in the sector, is the likely beneficiary. However, the concerns listed above are taking a toll on this advantage of SBI Cards. Apart from improving NIM, better loan mix is important for higher fees and net interest income. In short, a lot would have to fall for SBI Cards stock to see a meaningful correction.
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