Shares of SBI Cards and Payment Services opened 2 percent lower on July 31 after its June quarter numbers were hit by higher provisions attributed to cards originated in 2019.
The company reported a 5 percent on-year fall in its net profit at Rs 593 crore in Q1 FY24 as provision grew 60 percent to Rs 720 crore. The management said in an earnings concall that this increase in provisions was due to cards issued in FY19 that today appear to be far riskier than what was assumed earllier.
At 9:20am, the stock was quoting Rs 839.25 on the NSE, lower by 3 percent from the previous close. Trading volumes at 12 lakh shares were also higher than the 20-day average volumes.
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There is usually a 30-month period before one understands the quality of cards issued. However, the key challenge in this period was Covid and its impact.
"The ability to build the credit profile of the customer was not easily established, and it was only in the past year that the insight was getting stronger and the risks started to emerge," Kotak Institutional Equities said, citing management commentary from earnings concall.
This means that credit costs for the company could remain elevated going forward. In the April-June quarter, credit cost spiked sharply to 6.8 percent, from 6.3 percent sequentially.
The asset quality of the company also deteriorated in the quarter under review with its gross non-performing assets (NPA) rising to 2.41 percent of gross advances as of June 30, 2023, as against 2.24 percent a year back. Similarly, net non-performing assets were at 0.89 percent as against 0.79 percent during this period.
For Nuvama Institutional Equities, the delay in recognising the risk from 2019 cards is a huge negative. It has downgraded the stock to 'reduce' from 'hold' and has cut the target price to Rs 775 from Rs 835.
"Lenders with longer tenor loans and riskier borrower profiles have been successful in weeding out stressed borrowers of pre-Covid days in early FY22," Nuvama noted. In such a situation, it is concerning that SBI Cards’ credit cost have stayed high and stressed borrowers of 2019 are still in the system.
However, foreign broking firms HSBC and Morgan Stanley remain positive on the stock. HSBC has a 'buy' rating with a target of Rs 990 per share. Morgan Stanley has an 'overweight' rating with a target of Rs 1,155.
HSBC has cut EPS (earnings per share) estimates for FY24/FY25/FY26 by 8.1 percent/5.2 percent/1.9 percent. However, it is positive about the company's medium-term outlook on strong AUM growth despite near-term headwinds.
New account volume stood at 10.97 lakh in the quarter gone by, up 22 percent on-year. Moreover, the management has highlighted that the quality of loans acquired after Covid is healthy as the company has tightened credit sanctioning.
Morgan Stanley believes the valuation of the stock was attractive and trailing underperformance should help. The stock is 33-34x one-year forward earnings.
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