On Monday, UBS issued a downgrade for SBI Cards and Payment Services (SBICARD:IN), changing its stock rating from Neutral to Sell. The firm also reduced the price target to INR620 from the previous INR805. The adjustment comes in the wake of SBI Cards’ first-quarter financial year 2025 (Q1FY25) performance, which revealed a profit after tax (PAT) of INR5.9 billion.
This figure was in line with UBS’s estimates (UBSe), bolstered by steady net interest income (NII) and lower operating expenses, despite a significant rise in credit costs to 8.5%, compared to 7.6% in the fourth quarter of financial year 2024 (4QFY24).
The company’s NII saw a year-over-year increase of 20%, matching UBS’s expectations, with margins remaining stable at 10.9% quarter-over-quarter. However, spend growth showed a weakness, registering a 4% year-over-year increase and a 3% quarter-over-quarter decline. Fee income experienced a marginal 2% year-over-year rise, attributed to weak corporate spending.
UBS’s analysis of industry data and statements from other lenders indicate a deteriorating trend in the unsecured credit segment. Given SBI Cards’ full exposure to this segment, the firm is expected to be significantly affected.
The management of SBI Cards anticipates that credit costs will stay high in the near term. UBS has accordingly adjusted its credit cost forecasts to 8.0% and 7.6% for FY25E and FY26E, respectively. Return on assets (RoA) and return on equity (RoE) are projected to moderate to 4% and 20% by FY26E, a decrease from the three-year average of 5.2% and 23.6%.
In terms of valuation, SBI Cards is currently trading at 4.8 times and 4.1 times the estimated price to book value (P/BV) for FY25 and FY26, respectively, and at 28 times and 23 times the estimated price to earnings (PE) for the same periods.
UBS considers these valuations to be high, particularly in light of the worsening credit quality and the premium valuation when compared to peers like Bajaj Finance, which trades at 24 times and 20 times the FY25/26 P/E.
The firm anticipates that downward revisions in consensus earnings per share (EPS) estimates, due to increased credit costs and a slowdown in loan growth, will act as a catalyst for further downside.
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