SBI Cards: A Mixed Bag for Investors
CLSA has upgraded SBI Cards to Hold from Underperform, citing an improving asset quality outlook but warning that fresh pressures on operating profitability could limit upside from current levels. At its revised target price of Rs 820, the stock trades at around 20x FY28 earnings — levels CLSA considers fair given the balance between improving asset quality and structural profitability headwinds.
Asset Quality Improvement: A Positive Sign
In a recent note, the brokerage said SBI Cards is likely to see a gradual moderation in credit costs over the next few quarters as asset quality stabilises. However, it cautioned that the benefit from lower provisions is increasingly being offset by rising pressure on pre-provision operating profit (PPOP). For more information on pre provision operating profit, visit our website.
Loan Growth Assumptions Revised
Despite the earnings downgrades, CLSA believes the recent 8–9% underperformance in SBI Cards’ stock over the past three months has reduced downside risks. Industry-wide credit card spending growth has slowed sharply, falling from the high-20% range in FY24 to low-teens levels. CLSA believes SBI Cards is not immune to this trend and has cut its FY26–28 loan growth assumption from 14% to 11%. To learn more about credit card spending growth, click here.
Net Interest Margins Under Pressure
While growth could recover modestly from a low base, CLSA does not expect a return to mid-teens growth. The brokerage added that loan growth remains sluggish across the sector, limiting operating leverage. Net interest margins are also likely to come under pressure. CLSA expects NIMs to start declining from the fourth quarter of FY26, driven by lower yields. Unless there are further rate cuts by the Reserve Bank of India, margin compression is likely to persist. For an in-depth analysis of net interest margins, visit our website.
Fee Income: A Concern for SBI Cards
Beyond margins, fee income is emerging as another area of concern. CLSA expects lower rental spending and reduced instance-based fees, such as late payment charges, to weigh on fee income. Late fees, which account for a significant portion of total fees, are already coming under pressure due to better asset quality and improved customer underwriting. To mitigate some of this impact, CLSA expects SBI Cards to trim customer rewards, though it believes this will only partially offset the decline. To know more about fee income, click here.
Consensus Estimates and PPOP
CLSA stressed that the expected improvement in asset quality is already reflected in consensus estimates. Credit costs are forecast to moderate from 9.2% in FY26 to 6.7% by FY28, but the brokerage does not see scope for a positive surprise on this front. As a result, CLSA has cut its FY26–28 PPOP estimates by 2–11% and reduced PAT estimates by 10–14%. For more information on consensus estimates, visit our website.
Conclusion: A Balanced View
In conclusion, while CLSA has upgraded SBI Cards to Hold from Underperform, the brokerage has also warned of fresh pressures on operating profitability. The improving asset quality outlook is a positive sign, but the loan growth assumptions have been revised, and net interest margins are under pressure. Fee income is also a concern, and the consensus estimates have been factored in. As an investor, it is essential to have a balanced view of the stock and consider all the factors before making a decision. To stay updated with the latest stock market news, visit our website regularly.