On Wednesday, BofA Securities adjusted its outlook on SBI Cards and Payment Services (SBICARD:IN), lowering the price target to INR680 from INR695, while reiterating an Underperform rating. The firm noted that SBI Cards reported a quarter with credit costs rising significantly, marking a 12-quarter high. This increase in credit costs, which are a key focus for investors, has been a consistent trend over the past few quarters.
The report highlighted that the Gross Stage 3 (GS-3) delinquencies rose by 24 basis points quarter-over-quarter to 3.27%, due to forward flows from Gross Stage 2 (GS-2). However, GS-2 saw a decline of 50 basis points to 5.7%. The combined GS-2 and GS-3 levels showed a decrease of 30 basis points to 9%, suggesting that the progression into delinquency is slowing, aligning with the company's previous statements.
SBI Cards anticipates that credit costs will likely remain high for several quarters, yet the firm also believes these costs are nearing their peak. The following quarters will be crucial in building investor confidence.
The company also pointed out that the current delinquency trends are not unique to any specific customer group but are indicative of broader trends within the credit card industry, which is experiencing higher customer leverage and stagnant recoveries.
Furthermore, the proportion of receivables as part of interest-earning assets has decreased to approximately 80% from 82% year-over-year, contributing to lower than expected Net Interest Margins (NIMs). Despite these challenges, SBI Cards has experienced robust business growth, with an 18% increase in spending and a 16% rise in receivables year-over-year.
InvestingPro Insights
While SBI Cards and Payment Services faces challenges with rising credit costs, recent data from InvestingPro provides additional context to the company's financial situation. Despite the concerns highlighted in the BofA Securities report, SBI Cards remains profitable, with a reported diluted EPS of $0.28 over the last twelve months as of Q1 2023. This aligns with one of the InvestingPro Tips, which indicates that analysts predict the company will be profitable this year.
However, investors should note that SBI Cards is currently trading near its 52-week low, as pointed out by another InvestingPro Tip. This could be reflective of the market's reaction to the rising credit costs and delinquency rates mentioned in the article. The company's revenue growth has slowed to 1.3% over the last twelve months, which may be contributing to the stock's current valuation concerns.
It's worth noting that SBI Cards maintains a strong position in the Consumer Finance industry, as highlighted by InvestingPro. This could provide some stability as the company navigates through the current challenges in the credit card market.
For investors seeking a more comprehensive analysis, InvestingPro offers additional insights with 8 more tips available for SBI Cards and Payment Services, providing a deeper understanding of the company's financial health and market position.
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