by Welcome back to Traders Ideology, In this article, we’ll do the Fundamental Analysis of SBI Cards Ltd where we’ll cover its business profile leadership key strengths competitors, and future growth and then we’ll cover the financials of the company, finally we’ll conclude if SBI cards is fundamentally strong or not.
India’s financial sector is about to be seriously disrupted. Especially because of the massive disruption in the digital payments ecosystem, India has come a long way from a cash-based economy to the stage today where even the local Kiran shop nearby accepts digital payments.
Today, I will discuss the business opportunities of a company that dominates the Indian credit card market and is the only public sector credit card company in India. Remember this article is for educational purposes only, please do your research before investing.
Fundamental Analysis of SBI Cards & Payment Services Ltd
Fundamental analysis of SBI Cards & Payment Services Ltd are as follows:
Business Model
The biggest selling point of SBI Cards IPO before COVID 2020 was the untapped potential of the Indian credit card market, with some reports saying that India’s credit card users were 3,100 people, compared to 3 per 100 in the US. 32 credit card users per capita, so India has the potential to grow more than 10 times.
In fact, the credit card industry is expected to grow at a CAGR of 25% between 2020 and 2025. There are various factors including the growth of the e-commerce sector, people’s preference for online payments, and the increasing use of credit cards by the youth of India.
Of course, there has been a huge shift from saving to spending, where people have started going out and splurging on expensive smartphones or spending more and more money on travel and dining. So, everyone expects the debit and credit card industry to grow exponentially as the Indian economy embraces more and more digital payments.
In this case, pure operating credit card companies like SBI cards look attractive, but multiplying SBI cards is not easy. Launched in 2016, UPI payments faced serious threats and UPI payments quickly became a popular choice for sending and receiving money.
The popularity of UPI payments can be gauged from the fact that since its launch in 2016, UPI payments have grown from 5 crore transactions in FY19 to 46 crore transactions in FY22, a growth of 9% in the last 3 years. In Q1FY22, UPI settled over 14.55 billion transactions worth Rs 26.19 trillion.
All this happened within just 6 years of the launch of UPI. The impact of UPI is so great that even fruit and vegetable vendors are now accepting UPI payments. To compare credit card and Unified Payment Interface payments in January 2022, credit cards accounted for less than 2% of digital retail payments, while UPI’s share of digital retail payments was 18%. The question is why? Why is it so hard to grow a credit card industry that looks so attractive? And UPI payments have grown exponentially since its launch in 2016?
Shares of SBI Card, which started its IPO at 755 in 2020 and quickly jumped to the 1,000 level, have struggled with growing uncertainty over the rise of credit cards but fell to the 500 level on the impact of COVID-19. However, it bounced back to a high of 1,165, before falling 40% to 655 in June 2021. However, the stock is up nearly 20% in the past month to close at 940. What happened last night that caused SBI Card share price to skyrocket? The big question is, is this recovery sustainable? I will try to answer it in this article.
Why UPI Grew Exponentially, But Credit Cards Struggling?
Why is UPI growing exponentially while credit cards are struggling? Before you consider investing in SBI cards, you need to understand the overall macro-level dynamics in India and the credit card industry that is being challenged by UPI payments. The big question is what is driving the exponential growth in UPI payments as the credit card industry struggles to grow? The answer lies in the fee structure.
Try to take a closer look at it, it will also help you understand the business model of the credit card industry and UPI industry. The simple reason UPI payments have grown exponentially is that they charge nothing from merchants, while credit cards charge 1.5% to 2%. This fee is also known as MDR (Merchant Discount Rate). This fee revenue is also the credit card company’s main income. Credit card companies also make money from users’ interests.
So when you swipe your credit card at a POS device, you pay the bank and credit card company a 1.5% to 2% fee at the same time as the paying merchant. While this 1.5% to 2% fee may not sound like much, it is very important, especially for small traders. Instead, UPI charges zero payment fees. This has made UPI extremely popular in India.
Of course, digital payments were boosted by the monetization of D in the past and then by COVID as people prefer contactless or cash payments. Even for a 10 rupee cup of tea, scanning the code to pay is very convenient and you don’t want to swipe your card. In fact, most small merchants don’t even have credit card POS machines.
UPI got a big push from the small merchants and it seems to have completely dented the credit card growth in India. Consequently, even the share price of SBI Card has fallen. The intense competition with UPI payments is one of the main reasons behind the drop in SBI card share price. But credit card usage isn’t going down, it’s going up. Because if you want to make an online purchase even if you don’t have money, a credit card allows you to buy goods on credit and also allows you to buy goods on EMI, which UPI can’t do.
Of course, there are many other benefits, such as bonus points for shopping and purchases, as well as free airport lounge access, free movie tickets, and more. Plus, you can also get great credit card discounts on travel reservations, hotel reservations, shopping services, and more.
Credit cards have their uses, but UPI payments were a drag on growth, especially for small ticket purchases. Additionally, SBI Card’s profitability has declined due to a significant increase in bad loans from credit card companies due to COVID, further weakening SBI Card’s share price.
The next reason is the threat of new fintech companies that are trying to democratize credit payments and offer options like “buy now, pay later, and more” for wallet payments. Because of all these factors, credit cards have grown relatively slowly. The total number of credit cards in circulation rose from 29 million in FY17 to 676 million on November 21, a compound annual growth rate of 20%. Growth is still good.
This shows the booming space for credit card and UPI payments. However, RBI recently made a major announcement after which the share price of SBI Card rose by 20% in a month. RBI announced UPI linking with credit cards, so far only debit cards linked to savings bank accounts and current accounts are allowed to be linked to the UPI platform so that you can pay with UPI to buy something with your credit card.
RBI’s new move could turn things around for the credit card industry, which is struggling with rapid growth. Imagine being able to make UPI payments using credit. That would be great, wouldn’t it? Of course, you don’t need a plastic card, but you still need a digital copy of your credit card to link it with UPI, and this news is a big boost for SBI cards.
After UPI and credit card link was announced, many brokers have improved the purpose of SBI cards, but there are still major issues related to the link between credit cards and UPI payments. The problem is that as we discussed earlier, credit card companies charge a fee (MDR), while UPI transactions do not. So how will the cost be calculated once the credit card is linked with UPI? Will credit card companies waive the fees and make them free? I don’t think so, since merchant fees are the primary source of income for credit card companies.
In this case, when you pay via the Unified Payments Interface with a credit card, does the merchant get charged? Again, I don’t think merchants are willing to pay if regular UPI payments are free. So RBI needs to reach an agreement with credit card companies on MDR rates which also benefits merchants. But this is a big development and the SBI card could benefit from this RBI move to allow UPI credit payments. So stay tuned for this development. Last month it was reported that credit card linking to UPI could happen within 2 months and NPCI is in talks with SBI, Bank of Baroda, and several other banks.
Competition and Key Risk
Now you might ask what about the competition from the new age BNPL company? So BNPL (Buy Now Pay Later) has grown significantly with new age fintech companies like slice, uni, etc issuing hundreds of thousands of cards per month and looking like a major contender in the credit card industry.
The sudden surge in the BNPL industry was due to the failure of credit card companies to issue credit cards to those earning less than Rs 1.44 lakh. Therefore, credit cards cannot be issued to students or young professionals who have no credit history and no significant income. But these BNPL companies have come up with a model where even students can buy products by dividing the money into 3 equal installments with 0% EMI, which again looks like a big competitor in the credit card industry.
There is another major development in this area where RBI has stepped in and banned all non-bank prepaid payment instrument (PPI) issuers like slice, uni, etc. Load credit limit from. This is a big blow to these BNPL companies and good news for the credit card industry. While credit cards offer a wide range of rewards such as cashback, Airmiles, airport lounge access, special discounts, and more.
A credit card can also be used in case of unplanned emergency expenses. Therefore, there is always room for growth in the credit card industry. Now if you look at the performance of SBI Card, its profitability has increased significantly after the COVID crisis.
Promoter & Leadership
- Dinesh Kumar Khara is the non-executive chairman of SBI Card. Mr. Khara is the chairman of State Bank of India, the country’s largest bank. He has extensive experience in all aspects of the banking industry.
- Before becoming the chairman of the board Mr. Khara held several key positions in SBI such as MD (Global Bank & Subsidiaries), MD (Associates & Subsidiaries), MD & Managing Director (SBI Mutual Funds), and Chief General Manager – Bhopal Circle.
- He was also sent to Chicago on foreign assignments. As a managing director, he has led an international banking group, large corporate and treasury operations, and the bank’s non-banking subsidiaries, i.e. SBI Cards, SBIMF, SBI Life, SBI General, etc.
Financial
Let us look at the financials of SBI Cards and Payment Services Ltd as follows:
Revenues
- If you look at SBI Card’s revenue on yearly basis, it has grown from 3347 Crore in March 2017 to 10,679 Crore by March 2022 and is currently at 11,416 Crore in the trailing 12 months.
- Although there was a slight dip in March 2021 due to COVID. But it has been a consistent growth at a CAGR of 26.3%, which is fantastic.
Profit
- If you look at the profit growth, it has consistently grown from 373 Cr from March 2017 to 1938 Cr in the trailing 12 months; at a brilliant CAGR of 36.9%.
- Although there was a slight dip in March 2021 due to COVID. But again the profitability has improved.
ROC
- If you look at the ROE.
- The latest ROE is 23%, which is looking good.
Reserves
- If you look at the reserves, it has consistently increased, it was 664 Cr in March 2017 and currently, it is increased to 6,810 Cr in March 2022.
- Overall the financials are looking very solid.
Breakup
Now if you look at the breakup,
Profitable Operations
- Its PAT has increased by 106% YoY basis.
- Its market share stood at 18.4% in terms of the total number of cards, 18.6% in the total number of spends, and 18.7% in terms of the total number of transactions.
Portfolio
- Its portfolio has grown by a 19% YoY in terms of cards, 79% in terms of spending, and 36% in terms of receivables.
Assets Quality
- Its asset quality stood at a Net NPA of 0.79% in JUN 2022.
Profitability
- If you look at the profitability, its Return on Average Assets stood at 7%, and its Return on Average Equity stood at 30.8% which is one of the best in the industry.
- Apart from this if you look at the total number of cards in force SBI card has 1.43 Crore cards in force which has grown by 19% and its spending has reached 59,671 Cr which is up 79%.
If you look at the share price movement of SBI Cards, it is currently trading at levels of 940 and since its IPO, it has been on the sliding trend, because of COVID but now then there is a jump. If you look at the last 6 months, year to date, it has been on the falling side, it fell down almost 27-28% But since 20 June 2022. it has been on the upward trend and currently, at levels of 1000, it is trading at a PE ratio of 47.
If you look at the shareholding pattern, DIIs shareholding has continuously increased from 3.23% on SEP 20 to 16.24% on JUN 22, and promoter shareholding has slightly increased from 69.46% in SEP 20 to levels of 69.64% by JUN 22, and if you look at the FIIs, they increased their shareholding from 5.93% in SEP 20 to 8.29% by JUN 22 but since the last year, there has been a fall in the shareholding of FIIs. And if you look at the public shareholding, it has actually declined from 21.38% in SEP 20 to levels of as low as 5.83% by JUN 22.
Conclusion
Overall, I believe SBI Cards is a fundamentally strong company with bright growth prospects. The reason is that the huge untapped potential of the Indian credit card industry is just beginning to grow.
India’s consumer sector and those who continue to buy on credit will see significant growth. We have seen this happen in the US and it will happen in India in the next 20 to 30 years. Yes, it is not an easy task for the SBI card which has seen stiff competition from UPI payments as well as new models like BNPL (Buy Now, Pay Later).
The value of credit cards is still intact and given the huge growth potential, I think there is a lot of room for growth in the credit card industry as well as UPI and other payment industries. Given that SBI Card has a strong pedigree in SBI banking and a large branch network, it certainly has an edge over other players in the industry even in rural areas of the country.
I think the current Rs 940 SBI card looks attractive, especially if the UPI link to the credit card is complete. SBI cards could be a big benefit of this activity. The only problem is that the industry is very active. So you cannot predict short-term trends. But in the long term, I think the growth prospects remain intact. Therefore, any lost SBI card will be a systematic buying opportunity.
Now tell me in the comments how you see the future of credit cards in India. Do you think the card is worth adding as a long-term investment? I hope you find this sbi cards article useful.
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