Stock in Action - SBI Card 06 September 2024

Stock in Action - SBI Card

Highlights

1. SBI Card stock news has been making headlines after Goldman Sachs upgraded its rating, reflecting improved profitability & operational metrics.

2. SBI Card profitability is expected to rise, driven by better cost-to-income ratios & proactive approach in addressing credit challenges early.

3. SBI Card market share analysis shows slight decline, but the overall credit card spending growth remains robust, supported by online transaction surges.

4. Credit card spending trends reveal strong rebound in July 2024, with significant increase in both online & Point-of-Sale (PoS) transactions.

5. Goldman Sachs SBI Cards upgrade highlights the improved visibility in the company’s operational performance & favorable earnings outlook.

6. SBI Cards credit costs are expected to peak soon, with projected decline in credit costs beginning in the second quarter of FY25.

7. SBI Card valuation correction from its previous highs has made the stock more attractive to investors, according to industry experts.

8. SBI Card EPS estimates have been raised by Goldman Sachs for FY25 & FY26, reflecting positive turnaround in operational efficiency.

9. SBI Cards cost-to-income ratio is projected to improve by 430 basis points over FY24 to FY26, enhancing overall profitability.

10. SBI Card loan growth recovery is anticipated from FY26 onwards, further supporting positive outlook for the company’s long-term performance.

Why is the SBI Card in the News?

SBI Card has recently garnered significant attention following upgrade by Goldman Sachs from 'Sell' to 'Buy' rating, alongside raised target price. The global investment bank highlighted several factors, including better profitability visibility, cost-to-income improvements, & more attractive valuation. Moreover, the company has been actively addressing its challenges, particularly around credit costs & customer sourcing quality. These developments, along with strong credit card spending trends, have fueled discussions in the financial community, making SBI Card stock to watch closely.

Overview of Broker Opinions over SBI Cards

The broker landscape presents mixed outlook on SBI Card. On the positive side, Goldman Sachs has upgraded the stock to 'Buy' based on improving operational metrics & profitability. Key reasons for this upgrade include expectations of credit costs peaking soon & the company being proactive in addressing challenges. Goldman also sees favorable cost-to-income ratio development shortly, reflecting industry consolidation. SBI Card's valuation has corrected, making the stock more attractive from an investment perspective. 

In contrast, InCred Equities remains cautious & maintains ‘Reduce’ rating. They express concerns over the company's market share losses & pressure on its capital adequacy ratio, which could limit future growth. InCred believes that the premium valuation SBI Card once commanded may not be sustainable, given declining return ratios & increase in risk weights. This divergence in broker opinions highlights the differing perspectives on SBI Card's current performance & future prospects.

SBI Cards Business Performance

SBI Card has been showing resilience despite certain headwinds. Credit card spending, which slowed down in Q1 FY25, rebounded in July 2024 with 8.7% month-over-month increase. Online transactions led the way, surging 11% month-over-month, while point-of-sale (PoS) transactions also grew by 4.8%. This uptick in spending is seen as positive sign, especially with the festive season approaching, signaling strong consumer demand for durable goods. Despite this rebound, SBI Card, along with HDFC Bank, lost some market share, while competitors like ICICI Bank & Axis Bank made gains.

Goldman Sachs’ upward revision of SBI Card’s earnings per share (EPS) estimates by 7% for FY25 & 21% for FY26 underscores the company's potential for profitability growth. key driver of this outlook is the anticipated recovery in loan growth & the expected decline in credit costs by the second quarter of FY25. However, InCred Equities remains concerned about SBI Card's capital adequacy & tighter risk weights, which could challenge its ability to maintain market share & profitability.

Outlook

Looking ahead, while challenges remain, the improvement in operational metrics & the strategic efforts to enhance profitability are expected to play crucial role in the company’s growth trajectory. Goldman Sachs’ optimistic outlook, coupled with strong consumer spending trends, paints positive picture, though some brokers remain cautious about potential risks.

Conclusion

SBI Card finds itself at crossroads, with broker opinions split between optimism over improving profitability & caution over market share erosion & capital challenges. The company's recent performance, including rebound in credit card spending & operational improvements, offers strong foundation for future growth. However, managing credit costs & maintaining competitive strength will be key for sustaining long-term growth. Investors should carefully consider these factors when evaluating the stock’s potential, keeping in mind both the opportunities & the risks associated with the current market environment.