Thread by @Mjkfinvestment

1. A detailed thread of SBI Cards and Payments services:

💳Market share of ~19% in o/s cards and ~20% in overall spends;

📈Doubled its card base over the past 3 years at an average incremental market share of 23%;

📊Delivered average ROA/ROE of ~5%/29.5% over FY18-20.

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The country's credit card base has increased at 22% CAGR over the past 5 years.

The credit card penetration to banks' internal customers stands at a meager ~7% (the lowest for SBI Cards at 3.8%);

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Ample cross-sell opportunities;

The company has grown its outstanding cards at a 27% CAGR over the past 5 years;

Despite elevated credit costs of ~9% over FY20, ROA/ROE came in strong at 5.5%/28%;

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Over FY15-20, SBI Cards reported a PPoP/PAT CAGR of 49%/36% and an average ROA/ROE of ~5%/29%;

Asset quality is likely to remain under pressure with a higher proportion of the book under restructuring;

Therefore, credit costs likely to remain elevated in the near-term.

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Riding the cashless wave! :

Post the IPO, SBI & Carlyle hold 69.4% and 15.9%, respectively;

SBI Cards caters to the 2 main financial needs of its customers- transactional needs and short-term credit;

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Hence, it primarily has 2 sources of income- a) interest income on its credit card receivables, and b) non-interest income, comprising various forms of fee-based income (evenly split);

The company has a comprehensive product suite that offers ~45 different categories of cards;

It is the largest player in terms of co-branded cards- it has 18 card offerings across various categories.

How to make money?

Revolver receivables: Cardholders have the option to 'revolve' their balances or repay their obligations over a period of time at a fixed interest rate;

Term loan receivables usually carry lower interest rates (15-24%) than revolving credit card balances (36-42%);

Interest income constituted ~52% of the total revenue from operations in FY20 (55% in 9MFY21), against ~56% in FY17;

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As of FY20, revolver receivables constituted ~33% of the total receivables and term receivables formed ~32% with the balance being transactor receivables.

Income from fees and services comprises ~43% of the total revenue from operations for the period ended FY20 (40% in 9MFY21);

How it earns money?

Subscription-based fees comprised ~16% of the total fee income for FY20 (17% for 9MFY21);

Spend-based fees comprised 51% of the total fee income in FY20 (45% in 9MFY21);

Instance-based fees comprised ~32% of the total fee income in FY20 (38% in 9MFY21);

Growth?

Sourcing from internal customers increased credit cards at a 57% CAGR over FY17-FY20 v/s a 29% CAGR seen in other sourcing channels;

Credit card penetration to internal customers remains lowest in SBI Cards(%).

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Industry growth,

While the no. of credit cards grew at a 20% CAGR over FY14-19, credit card spends grew at a much higher pace of 31% of INR 7.4T in FY20;

No. of transactions has grown at a 28% CAGR over FY14-19.

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This suggests the increased use of credit cards by existing customers and a higher acceptance of credit cards as a mode of payments;

The no. of transactions per card per month increased multifold to 3.5x in FY20 from 1.5x in FY12.

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India-one of the lowest card penetration rates globally.

The penetration level in India remains far lower at 3.8% of the total population (per 100 people)- compared with global peers such as the US(320%), Hong Kong(265%), Singapore(155%), and Japan(214%);

Huge opportunity!

The % of transactions occurring through the digital mode increasing to 65% in FY20 from 25% in FY14.

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From where does SBI Cards source its customers?

The proportion of new accounts sourced from SBI's existing customer base increased to ~50% in FY20 from ~35% in FY17;

New accounts sourced from open market channels stood at ~50% in FY20 v/s ~64% in FY17.

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SBI Cards saw robust traction in fee income at a 42% CAGR over FY15-20, comprising ~43% of total revenues;

Supported by higher spend as spend-based fees grew 43% over FY17-20;

Instance-based fees grew 47% and subscription-based fees grew 46% over FY17-20.

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Operating expenses grew at a CAGR of 36% over FY15-20, leading to an increase in cost to assets to ~21% in FY20 from ~19% in FY15;

Sales promotion cost is a major component of OPEX, accounts for ~31% of total expenses followed by reward point redemption cost ~12%;

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Underlying profitability strong enough to absorb credit shocks:

NNPA declined sharply to 0.66% in FY20 from 1.5% in FY16;

This was enabled by a sharp rise in PCR to 67.2% in FY20 from 25% in FY16;

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After reporting a sharp deterioration in asset quality in 2QFY21, the GNPA ratio improved to 1.61% in 3QFY21 v/s 4.29% in 2QFY21, with the restructuring book stable at ~9%;

Despite elevated credit cost of ~9% over FY20, ROA/ROE came in strong at 5.5%/28%;

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Under the RBI restructuring scheme, the customer has the option to pay their dues within 12-24M duration with an interest rate of 14-19%;

Under the Easy Payment Plan scheme, the customer may opt to pay their dues within a 3-18M duration with an interest rate of 12-20%.

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Capitalization levels remain strong:

SBI Cards has strong capitalization levels, with a tier-1 ratio of 19.8% and a total CAR of 23.7% (against the regulatory requirement of 15%).

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Key risks:

Indian regulations currently do not impose any limit on interest rates charged to cardholder or MDR charges;

Nevertheless, regulations could change, and a cap may be placed on interest rates / MDR charges in the future.

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The credit cards market is highly concentrated with the top 5 players - HDFCB, SBI, ICICIBC, AXSB, & Citi -which together constituted ~77% of the total o/s cards.

HDFCB commands market share with ~15.3m cards (25.3%), followed by SBI Cards with ~11.5m cards (19%).

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Rising discretionary spending augurs well for the credit card industry:

Over FY14-19, retail credit increased at a 17% CAGR to reach INR 25.5t in FY20;

Retail credit grew at 17%, growth in unsecured loans was much higher at 24% over FY14-19;

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