Imagine that you want to start your own NBFC & operate in the highly competitive Consumer Loan segment. You would be competing with India’s largest consumer credit players like Bajaj Finance & HDFC Bank. In order to succeed you should be able to address the 3 points mentioned below-
1. Raise money at a cheaper cost than your competitors
2. Find & lend to the safest customers
3. Lend money to these customers at a higher rate than your competitors
Enter SBI Cards. What makes SBI Cards stand out. Simple… Its Parent-State Bank of India (SBIN)
Let’s look at how SBIN takes care of some of the issues listed above for its child SBI Cards.
1. Raise money at a cheaper cost than your competitors
SBI, India’s largest bank is promoted by the Indian Government & it has the highest credit rating, equivalent to sovereign rating. This SBI “tag” is sufficient to be the lowest cost borrower in the market. All SBI Cards has to do is flaunt the SBI tag & it suddenly gets to borrow at the cheapest rate despite under writing 100% unsecured retail loans. This in itself is a huge MOAT, which gives it a head start against its competitors.
2. Find & lend to the safest customers
Since SBIN is India’s largest Government run bank, a large number of PSU’s have their salary accounts with them. SBI Cards gets access to a large pool of government employees, which have a better credit profile than private sector employees. Apart from this they also have tied up with Central Bank of India & they offer co-branded cards. Around 55% of the new cards sourced during Q1FY21 were sourced from SBIN customer base.
3. Lend money to these customers at a higher rate than your competitors
The Advantage of operating purely in credit cards is that you get to make around 40 % income on your assets. (Around 20 % is Interest Income which is a mixture of transactors, revolver & term loans, and the rest 20% is Fee Income, we will look at this high margin income stream in detail later on)
Revolver– Dues which are revolved from the current month by paying the minimum balance due. These loans attract an interest rate between 36-42%.
Transactor– Dues which are paid on time during the interest free duration. The customer doesn’t pay interest however, SBI Cards makes money on the spends via MDR (Merchant Discount Rates)
Term Loan– Dues that are converted to EMI which attract a lower interest rate of around 15-20%.
Market Dynamics
In India only 3 out of 100 people have credit cards. On the other hand, American’s on an average hold 3 credit cards. India is hugely under penetrated & hence there is a huge runway for growth. Also, we have one of the youngest population, with an average age of just 29 yrs, one can expect longevity in credit card spends going ahead.
Source-World Bank
SBI Cards is the second largest credit card player & we see huge room for them to cross-sell credit cards to existing SBI & other PSU account holders.
For a moment let’s just forget that SBI Cards offers loans. Just think of it as a payment processing company that only makes fee income. The income statement would transform in the following manner
Fee Income – The most lucrative segment
We have ignored interest income, Finance cost & Impairment costs (provisioning). Also, we have taken the entire operating costs in the right side income statement. Despite ignoring SBI cards core lending business, it still makes Rs 165 cr in PAT. This shows the resilience of the business model. In stressed times like COVID-19 when credit costs have increased, the Fee Income portion acts like a cushion. Moreover, Fee Income is more secular in nature when compared to credit growth. One must not forget the power of operating leverage in Fee income. Once the digital infrastructure is set up, for every incremental fee, lets say late fee payment there is hardly any incremental cost for SBI Cards.
The million-dollar Question- How do you value SBI Cards ?
We strongly feel that SBI cards is not just a pure lending company. Also, it is the only way to play the digital payment story in India. Recently, SBI Cards has also tied up with Google Pay to offer payments via G-pay (Link) We expect it to always trade at a premium as there is currently no other listed player in India.
Valuing the company on its book might not make a lot of sense given that it has a unique business model & comparing its Price/Book ratio with other NBFC’s will always make it look deceptively expensive.
Current Price/Book- 14x
Here is one more reason why the book value may not be an appropriate metric. SBI Cards earned a Fee Income of Rs. 1301 Cr on spends worth Rs. 1,30,915 Cr. That is almost 1 %. This company is a great proxy for digital spending in India. Also, for Spends worth Rs. 1,30,915 (FY20) the receivable at that time were only Rs. 24,141 Cr. The Spends is 5 times more than the receivables. That is why the book value will never give you the real picture.
Price/Earnings would be a better metric to value the business as the future earnings are more predictable compared to other NBFC’s or Banks. We do agree that the valuations are not cheap, however we expect this company to always trade at a premium.
Current Price/Earnings- 60x
Final takeaway
State Bank of India’ support to SBI Cards truly makes this company anti-fragile. The Bank provides them with Cheap Money & High-Quality Customers. This Moat cannot be replicated easily.
The quality of earnings is superior as almost half of the income is fee based. Fee based income is highly lucrative as most of it flows down to profits unlike Interest income where Interest expense & provisioning reduce profitability. Hence, going ahead as average cards spends increase, massive amount of fee income would be generated. Scale combined with operating leverage will have a huge positive impact on earnings.
Scarcity Premium– SBI cards is the only standalone credit card player apart from Bank of Baroda. RBI has not issued any new licenses to NBFC’s to offer credit cards.
