Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the existing debt instruments and bank facilities of SBI Cards and Payment Services Ltd (SBI Cards). Also, CRISIL Ratings has withdrawn its rating on Rs 885 crore of non-convertible debentures as there is no amount outstanding against these instruments. The withdrawal is in line with the withdrawal policy of CRISIL Ratings. (Refer to annexure for details of rating withdrawn.)

 

The ratings factor in the strong support SBI Cards receives from its majority shareholder, State Bank of India (SBI; ‘CRISIL AAA/CRISIL AA+[1]/Stable/CRISIL A1+’) on an ongoing basis as well as in the event of distress. Majority ownership and shared brand imply a strong moral obligation on SBI to continue supporting SBI Cards in meeting the debt obligations in a timely manner.

 

The standalone credit risk profile of SBI Cards is supported by its improving market position. The company is the second-largest player in the credit card industry with 1.59 crore cards-in-force (CIF), and market share of 19.3% as on as on December 31, 2022. Profitability is above average, with calculated return on assets (ROA) of 5.2% in fiscal 2022 and 3.8% in fiscal 2021. Annualised ROA was 5.7% for the nine months ended December 31, 2022, largely due to reduced credit cost. While RoA is healthy, profitability remains susceptible to asset quality challenges because of the unsecured nature of the loan book.

 

The company’s asset quality had deteriorated in fiscal 2021 due to pandemic-led impact on collections, resulting in gross non-performing asset (GNPAs) increasing to 4.99% as on March 31, 2021, from 2.01% a year earlier. However, GNPAs improved to 2.22% as on March 31, 2022, and remained at the said levels as on December 31, 2022. Ability of the company to manage collections and asset quality over the medium term will be a key monitorable.

[1] The ratings pertain to tier-I bonds (under Basel III)

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SBI Cards. Furthermore, the ratings factor in strong support from the parent, SBI, considering the strategic importance of SBI Cards, the parent’s majority shareholding and their common brand

Key Rating Drivers & Detailed Description

Strengths:

* Strong support from SBI

Credit card are an integral part of a bank’s product offerings. SBI Cards houses the credit card business of SBI, and hence, it is strategically important to the parent. The company receives strong financial, managerial, and branding support from SBI on an ongoing basis. It benefits from the strong customer franchisee of SBI, commanding a premium in the co-branded card segment. In the past, SBI has infused growth capital in SBI Cards. As on December 31, 2022, SBI (along with its subsidiaries) held 69.64% stake in the company and will continue to hold majority stake over the medium term. SBI deputes its senior management in SBI Cards, guides strategic decisions and monitors operations. However, the company has substantial autonomy in decision-making because of the dynamic nature of the business. SBI will likely provide strong support to SBI Cards both on an ongoing basis and in the event of distress.

  

* Improving market position

Growth in CIF has been faster than the industry in the past few fiscals; therefore, the market share of the company by CIF had increased to 19.3% as on December 31, 2022, (18.7% as on March 31, 2022), from 15.3% as on March 31, 2017. SBI Cards is the second-largest credit card player by CIF and the third largest by spends. Gross card receivables stood at Rs 38,626 crore as on December 31, 2022, compared with Rs 31,281 crore as on March 31, 2022 (Rs 25,114 crore as on March 31, 2021). The company will continue to benefit from its ability to tap into SBI’s large customer base and its distribution network. Furthermore, its market share will improve over the medium term.

 

* Healthy profitability

ROA (calculated) averaged 5% over the past five fiscals supported by healthy net interest income and strong fee income. ROA (calculated) improved to 5.2% in fiscal 2022 from 3.8% in fiscal 2021, largely on account of lower credit cost. Provisioning cost (calculated) improved to 7.3% in fiscal 2022 from 10.3% in fiscal 2021 as the stress on asset quality from the pandemic subsided. 

 

RoA (annualised) further improved to 5.7% over the nine months ended December 31, 2022, on the back of reduced credit cost (annualised 5.3%). Nevertheless, ability to manage credit cost will be closely monitored.

 

Weakness

* Susceptibility to risks inherent in the credit card business

The entire loan book is unsecured; thus, the portfolio is inherently risky. The pandemic adversely impacted asset quality, leading to surge in GNPAs to 4.99% as on March 31, 2021, from 2.01% as on March 31, 2020. However, GNPAs improved to 2.22% as on March 31, 2022 and remained so as on December 31, 2022.

 

In response to the pandemic, the management took several measures, including tighter credit policies, higher sourcing from bank channel, increased income cut-offs for new accounts and lower credit limits to risky customers. The management also made adequate provisions. Nevertheless, the company’s ability to maintain asset quality and profitability will remain a key monitorable.

Liquidity : Strong

The structural liquidity statement dated February 28, 2023, had cumulative positive mismatch in all the time buckets, because of the short tenure of assets. The company had cumulative outflows of Rs 20,832 crore untill May 2023, against expected inflows of Rs 27,092 crore for the said period. Moreover, the company had unutilised bank lines of Rs 4,490 crore as on February 28, 2023. Its commercial paper borrowings are backed by unutilised bank lines. 

 

ESG profile

The Environment, Social, and Governance (ESG) profile of SBI Cards supports its strong credit risk profile.

 

The ESG profile of financial institutions typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on the environment and other sustainability related factors.

 

SBI Cards has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.

 

The key ESG highlights of SBI Cards are as follows:

• SBI Card installed LED lights across 3 lakh square feet of its offices and installed smart printers to limit unwanted prints. Furthermore, it installed sensors to auto control on/ off to optimise energy consumption. The company has adopted paperless communications with customers such as statement on e-mail, SMS and eKits. It has also implemented a process for paperless purchase orders (POs) and issued 9.5 thousand Pos digitally.

 

• The company is actively setting up waste management units and rainwater harvesting systems across the Bank’s various branches, offices and other establishments.

 

• Women comprised 28% of the total employees and 29% of senior management as on March 31, 2022. One board member out of nine is a woman.

 

• The company has 56% of its board members as independent directors, with a split in the chairperson and executive positions, and has an extensive investor grievance redressal mechanism and disclosures in place.

 

There is growing importance of ESG among investors and lenders. The commitment of SBI Cards to ESG will play a key role in enhancing stakeholder confidence, given the substantial share of foreign investors as well as access to domestic capital markets.

Outlook Stable

SBI Cards will continue to benefit from the financial and managerial support of the parent and its strong brand. Its market position will likely improve while maintaining profitability over the medium term.

Rating Sensitivity factors

Downward factors

• Downgrade in the rating of SBI may result in a corresponding rating action on the company
• Material changes in the shareholding (below 50%) or support philosophy of SBI

About the Company

SBI Cards is the second-largest player (by CIF) in the credit card business with 1.59 crore CIF and market share of 19.3% as on December 31, 2022. Total spends for the first nine months of fiscal 2023 were Rs 68,835 crore compared with Rs 186,353 crore in fiscal 2022 (Rs 122,416 crore in fiscal 2021). Receivables stood at Rs 38,626 crore as on December 31, 2022, compared with Rs 31,281 crore as on March 31, 2022 (Rs 25,114 crore as on March 31, 2021). Networth stood at Rs 9,459 crore as on December 31, 2022.

 

Net profit was Rs 1,616 crore on total income (net of finance cost) of Rs 10,274 crore in fiscal 2022, compared with net profit of Rs 985 crore on total income (net of finance cost) of Rs 8,671 crore in the previous fiscal. ROA (calculated) stood at 5.2%, compared with 3.8% during the said period.

 

Over the nine months ended December 31, 2022, net profit was Rs 1662 crore on total income (net of finance cost) of Rs 9,232 crore, and annualised ROA was 5.7%.

Any other information: Not applicable