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SBI Cards and Payment Services
A fast-growing, higher ROE business
The second largest credit card issuer in India will be the first to list and should enjoy the scarcity premium-led high valuation as long as it maintains high growth with stable asset quality
CM RATING | 58/100 |
The company started operations in 1998 as a joint venture between SBI and GE Capital. It received RBI approval to operate as a non-banking financial institution on 6 October 1998. GE Capital's ownership stake in the company was acquired by SBI and CA Rover Holdings in 2017. The company is one of the major subsidiaries of SBI with 74% shareholding, which is India's largest commercial bank in terms of deposits, advances and number of branches. SBI's parentage and brand has supported the company to quickly establish a strong position in the credit cards business.
The credit cards portfolio of the company is tailored to meet a diverse range of cardholder needs across the entire spectrum of cardholders' income profiles and lifestyles, from the premium cardholder category to the affluent, mass affluent, mass and new to credit categories. The credit cards are issued in partnership with the Visa, MasterCard and RuPay payment networks, and efforts are continuously on to expand payment network partnerships to broaden the reach and functionality of credit card offerings.
A diversified customer acquisition network enables the company to engage prospective customers across multiple channels. The company deploys a sales force of 32,677 outsourced sales personnel end December 2019 operating out of 145 Indian cities and which engages prospective customers through multiple channels, including physical points of sale in bank branches, retail stores, malls, fuel stations, railway stations, airports, corporate parks and offices, as well as through tele-sales, online channels, email, SMS marketing and mobile applications. The company has a total of 3883 employees end December 2019.
The partnership with SBI provides access to SBI's extensive network of 21,961 branches across India, enabling to market credit cards to SBI's vast customer base of 445.5 million customers end December 2019. The company is the leading player in open market customer acquisition in India with a presence in 3,190 open market points of sale across India end December 2019. Further, there are digital sales and marketing capabilities which include website, mobile application and online, email and SMS marketing platforms. The technology systems of the company are scalable, modern and sophisticated, with considerable capacity to support future growth.
The company has a diversified revenue model supporting to generate both non-interest income (primarily comprised of fee-based income such as interchange fees, late fees and annual fees, among others) as well as interest income on credit card receivables. The share of revenue from operations from non-interest income has steadily increased in the past three years, from 43.6% in FY2017 to 48.9% in FY2019, which has helped to improve the efficiency of the capital structure of the company with a relatively stable revenue composition.
The company has maintained stable asset quality with the gross NPA ratio at 2.47% and the net NPA ratio at 0.83% end December 2019. The capital adequacy ratio was healthy at 19.2% (minimum requirement 15%), of which Tier I capital was 15.4% (minimum requirement 10%).
The Offer and the Objects
The initial public offer (IPO) is to collect around Rs 10289.5 crore by issuing 13.719 crore shares at the lower band of Rs 750 per share (face value Rs 10 per share) and Rs 10354.8 crore by issuing 13.715 crore shares at the upper band of Rs 755 per share. The issue consists of a fresh issue of equity shares (0.662 – 0.667 crore shares) aggregating up to Rs 500 crore and offer for sale of equity shares 13.053 crore equity shares aggregating up to Rs 9789.5-9854.8 crore.
The offer for sale comprises an offer aggregating 3.729 crore shares by promoters and 9.323 crore share by other selling shareholders. The issue is to be made through the book-building process and will open on 02 March 2020 and will close for QIB bidders on 04 March 2020 and for all other bidders on 05 March 2020.
The net proceeds of the Fresh Issue are proposed to be utilized for augmenting capital base to meet future capital requirements. The Net Proceeds of the Fresh Issue are proposed to be deployed in the FY2020. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India.
The offer comprises of employee reservation portion of up to 1,864,669 Equity Shares and SBI Shareholders Reservation Portion up to 13,052,680 Equity Shares. A discount of Rs 75 per equity share is being offered to eligible employees bidding in the employee reservation portion.
Strengths
The total credit card spends of the company grew at a 54.2% CAGR as compared to a 35.6% CAGR for the overall credit card industry and the number of credit cards outstanding grew at a 34.5% CAGR compared to a 25.6% CAGR for the overall credit card industry during March 2017 to March 2019. With the strong growth in last three years ahead of fast growing credit card market, the company has accelerated its market share from 15% to 18%.
Second largest credit card issuer at 9.83 million credit cards base with track record of growth and profitability with a deep expertise in India's credit card market with more than 20 years' operating history and significant operating efficiencies helping to diversify regional or geographical risks.
The company is the largest co-brand credit card issuer in India and has partnerships with several major players in the travel, fuel, fashion, healthcare and mobility industries, including Air India, Apollo Hospitals, BPCL, Etihad Guest, Fbb, IRCTC, OLA Money and Yatra, among others.
The credit cards carry the SBI Card brand, which is a highly trusted and recognizable brand in India. The partnership with SBI provides access to SBI's extensive network of 21,961 branches across India, enabling to market credit cards to SBI's vast customer base of 445.5 million customers end December 2019. The company has significantly increased the proportion of new accounts sourced from SBI's existing customer base from 35.2% of all new accounts in FY2017 to 45.5% in FY2018 and 55.2% in FY2019.
The company has a scalable, modern and sophisticated technology infrastructure capable of servicing the entire credit card life cycle and handling a much higher number of accounts and transaction volumes than they currently handle, providing the operating leverage to support the expansion of cardholder base.
Indian credit card market presents significant growth potential due to its favorable demographic changes and relatively low credit card penetration rate, rising affluence, increasing shift to card and digital payments, e-commerce boom etc. Despite these favorable demographic changes, India's credit card markets still remains largely underpenetrated at 2.2% as compared to 320% in the United States, 42% in China and 73% in Brazil, and credit cards spends as a percentage of GDP stood at 3.0% as compared to 17.0% in the United States, 25.0% in Hong Kong and 12.0% in Brazil.
Risks
Substantial benefits are derived from existing relationship with promoter SBI and a loss or reduction in the level of support from promoter could adversely affect the company.
The credit card portfolio is unsupported by any collateral, while 98.6% of credit card portfolio was unsecured end December 2019.
The credit cards business is facing increasingly competitive environment due to changes in technology, product delivery systems and regulation, as well as the emergence of new or significantly larger credit card issuers or payment solutions providers, all of which may affect cardholders' expectations and demands.
The risk of fraudulent activity associated with merchants, cardholders and other third parties handling cardholder information may affect the company.
Regulators and legislative bodies in a number of countries are seeking to reduce credit card interchange fees through legislation, competition-related regulatory proceedings, central bank regulation or litigation. The RBI has already implemented regulations limiting interchange fees payable on debit card transactions, and similar regulations could be extended to credit card transactions in the future. Credit card interchange fees are one of the largest components of total revenue of the company comprising 22.5% of total revenues in FY2019.
Regulatory changes limiting the interest rates charged (unregulated currently) to cardholders could adversely affect business.
Consumer confidence, unemployment and overall economic growth rates are among the main factors that often impact consumer spending behavior and demand for credit. Poor economic conditions reduce the usage of credit cards and the average purchase amount of transactions on credit cards, both of which reduce interest and fee incomes, while increasing delinquencies, charge-offs and provisions for credit losses and decreasing recoveries. The Indian economy's growth momentum moderated significantly in FY2018 and FY2019 as compared to previous years, while the RBI currently forecasts India's real GDP growth to be 5% for FY2020. A prolonged period of slow economic growth or a significant deterioration in economic conditions would likely affect the business.
There are four direct tax proceedings pertaining to income tax involving the company, with aggregate amount involved is Rs 352.85 crore. The proceedings relate to transfer pricing adjustment for specified domestic transactions, expenditure incurred which are deferred for accounting purposes, advertisement expenses, license fees and data service management charges paid/payable for FY2008, FY2012 and FY2016.
Increasing regulatory focus on personal information protection could impact business and exposes to increased liability.
Valuation
The total income increased from Rs 3471.04 crore in FY2017 to Rs 7286.84 crore in FY2019 at a CAGR of 44.9%. The net profit increased from Rs 372.86 crore in FY2017 to Rs 862.72 crore in FY2019 at a CAGR of 52.1%. ROE has been robust at 28.4% and ROA at 4.8% in FY2019.
The annualized EPS on post-issue equity works out to Rs 16.5 for 9MFY2020. At the price band of Rs 750 to Rs 755, P/E works out 45.5 to 45.8 times for 9MFY2020.
Post-issue, the book value (BV) works out to Rs 55.9 at the issue price of Rs 755. P/BV works out to 13.5 times. Post issue adjusted BV (net of net NPAs) works out to Rs 53.8 per share and P/Adj BV works out to 14.0 times.
The company is the first pure play credit card company to list on exchanges and currently there is no comparable peer company listed on the exchanges in India. As the credit card industry has grown at a fast pace in the recent past and has good growth potential ahead, the company will enjoy high scarcity premium on the bourses till other credit card players list.
The company has strong potential to maintain healthy growth trajectory and improve market share along with delivering higher returns provided it is able to maintain its asset quality in the face of sluggish economy and slowing consumption growth.
SBI Cards and Payment Services : Issue highlights
For Fresh Issue Offer size (in no of shares ) | |
- On lower price band | 66,66,667 |
- On upper price band | 66,22,517 |
Offer size (in Rs crore ) | 500 |
For Offer for Sale Offer size (in Rs crore) | |
- On lower price band | 9789.51 |
- On upper price band | 9854.77 |
Offer size (in no shares) | 13,05,26,798 |
Price band (Rs)* | 750-755 |
Minimum Bid Lot (in no. of shares ) | 19 |
Post issue capital (Rs crore) | |
- On lower price band | 939.00 |
- On upper price band | 938.96 |
Post-issue promoter & Group shareholding (%) | 69.5 |
Issue open date | 02-03-2020 |
Issue close date | 05-03-2020 |
Listing | BSE,NSE |
Rating | 58/100 |
SBI Cards and Payment Services: Financials
201703 (12) | 201803 (12) | 201903 (12) | 201812 (9) | 201912 (9) | |
Income from operations | 3346.20 | 5186.98 | 6999.11 | 5083.92 | 6843.06 |
Other Income | 124.84 | 183.22 | 287.72 | 194.75 | 397.10 |
Total Income | 3471.04 | 5370.19 | 7286.84 | 5278.68 | 7240.16 |
Interest Expenses | 528.43 | 711.51 | 1017.21 | 742.57 | 966.37 |
Other expenses | 1834.22 | 2914.79 | 3709.18 | 2734.48 | 3479.02 |
Gross profit | 1108.39 | 1743.90 | 2560.44 | 1801.63 | 2794.77 |
Depreciation | 4.79 | 24.49 | 81.10 | 58.11 | 74.04 |
Profit before tax and Provisions | 1103.59 | 1719.40 | 2479.34 | 1743.53 | 2720.73 |
Provisions and write off | 531.97 | 800.06 | 1147.74 | 796.02 | 1102.06 |
Profit before tax | 571.62 | 919.34 | 1331.60 | 947.51 | 1618.67 |
Provision for tax | 198.76 | 318.20 | 468.88 | 333.00 | 457.47 |
PAT | 372.86 | 601.14 | 862.72 | 614.52 | 1161.21 |
EPS*(Rs) | 4.0 | 6.4 | 9.2 | 8.7 | 16.5 |
* Annualised on post issue equity of Rs 939.0 crore, figures in Rs crore, Source: SBI Cards and Payment Services IPO Prospectus |
SBI Cards and Payment Services: Performance
201703 (12) | 201803 (12) | 201903 (12) | 201812 (9) | 201912 (9) | ||||||
Loans and advances to customers (Rs crore) | ||||||||||
To be realized within twelve months from reporting date | 9658 | 13227 | 16599 | 15985 | 22299 | |||||
To be realized after twelve months from reporting date | 647 | 1343 | 1928 | 1884 | 2477 | |||||
Total gross loans and advances | 10305 | 14570 | 18526 | 17869 | 24776 | |||||
Less: Impairment loss allowance | -322 | -524 | -618 | -629 | -843 | |||||
Total net loans and advances | 9983 | 14046 | 17909 | 17240 | 23933 | |||||
Credit cards | ||||||||||
Total cards outstanding (millions) | 4.57 | 6.26 | 8.27 | 7.53 | 10.03 | |||||
Premium cards (%) | 15.70% | 15.50% | 14.80% | 15.36% | 13.68% | |||||
Average total cards outstanding (millions) | 4.09 | 5.41 | 7.26 | 6.89 | 9.15 | |||||
Net card additions (millions) | 0.95 | 1.69 | 2.01 | 1.27 | 1.76 | |||||
Total Cards outstanding from open market channels (%) | 66.70% | 62.20% | 59.40% | 57.90% | 59.30% | |||||
Total cards outstanding from bank (SBI) distribution channel (%) | 33.30% | 37.80% | 40.60% | 42.10% | 40.70% | |||||
Average credit limit (Rs thousands) | 77.00 | 71.00 | 80.00 | 79.23 | 78.95 | |||||
Market share of total cards outstanding (%) | 15.30% | 16.70% | 17.60% | 17.00% | 18.10% | |||||
Accounts | ||||||||||
Total accounts in forece (millions) | 3.9 | 5.62 | 7.61 | 6.88 | 9.32 | |||||
Total new-to-credit accounts (%) | 17.50% | 21.60% | 24.50% | 28.80% | 16.20% | |||||
Salaried cardholders (%) | 90.40% | 89.00% | 86.70% | 87.60% | 85.40% | |||||
Self-employed cardholders (%) | 9.60% | 11.00% | 13.30% | 12.40% | 14.60% | |||||
30-day active accounts (%) | 54.10% | 57.00% | 55.90% | 56.40% | 55.10% | |||||
90-day active accounts (%) | 69.00% | 69.50% | 67.80% | 69.80% | 68.60% | |||||
Total new accounts (millions) | 1.24 | 2.53 | 2.84 | 1.88 | 2.56 | |||||
Credit card spends and transactions | ||||||||||
Total card spends (Rs crore) | 43436 | 76490 | 103265 | 75195 | 98486 | |||||
Market share of total card spends (%) | 13.20% | 16.70% | 17.10% | 17.00% | 17.90% | |||||
Average card spends per cards outstanding (Rs) | 106083 | 141289 | 142142 | 145477 | 143482 | |||||
Total number of card transactions (millions) | 147.39 | 210.46 | 278.1 | 203.55 | 285.28 | |||||
Average ticket size (Rs) | 2947 | 3634 | 3713 | 3694 | 3452 | |||||
Online card spends as a proportion of total card spends (%) | 34.50% | 34.20% | 40.10% | 40.80% | 39.10% | |||||
Yield and Margins | ||||||||||
Yield (%) | 21.30% | 22.20% | 21.60% | 21.60% | 21.50% | |||||
Average cost of funds (%) | 7.40% | 7.20% | 8.10% | 8.10% | 8.00% | |||||
Net interest margin (%) | 15.30% | 16.50% | 15.50% | 15.50% | 15.60% | |||||
Return on equity and assets | ||||||||||
Net profit after tax | 372.86 | 601.14 | 862.72 | 614.52 | 1161.21 | |||||
Average total assets | 9285.12 | 13225.49 | 17962.82 | 17392.35 | 23116.55 | |||||
Average shareholders' equity | 1310.39 | 1936.70 | 3038.91 | 2958.99 | 4238.03 | |||||
ROAA | 4.00% | 4.50% | 4.80% | 4.70% | 6.70% | |||||
ROAE | 28.50% | 31.00% | 28.40% | 27.70% | 36.50% | |||||
Proportion of new accounts sourced by geographic category (million) | ||||||||||
Top-eight metropolitan areas | 0.83 | 1.37 | 1.22 | 0.8 | 1.07 | |||||
Tier II metropolitan areas | 0.23 | 0.47 | 0.5 | 0.33 | 0.46 | |||||
Tier III metropolitan areas | 0.13 | 0.34 | 0.39 | 0.26 | 0.36 | |||||
Others | 0.05 | 0.35 | 0.73 | 0.5 | 0.67 | |||||
Total | 1.24 | 2.53 | 2.84 | 1.88 | 2.56 | |||||
Proportion of new accounts acquired by customer acquisition channels | ||||||||||
Open market channel (retail partnerships) distribution / co-brand | 0.79 | 1.37 | 1.26 | 0.79 | 1.32 | |||||
Retail | 0.44 | 0.7 | 0.42 | 0.27 | 0.42 | |||||
Co-brand | 0.35 | 0.67 | 0.84 | 0.52 | 0.9 | |||||
Bank distribution channel (SBI) | 0.44 | 1.15 | 1.57 | 1.08 | 1.23 | |||||
Corporate distribution channel | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||
Total | 1.24 | 2.53 | 2.84 | 1.88 | 2.56 | |||||
Asset Quality | ||||||||||
Gross NPAs | 240.90 | 412.50 | 452.95 | 465.12 | 611.70 | |||||
Addition/ Reduction | 21.57 | -55.07 | -103.10 | 253.63 | 379.76 | |||||
Impairments/Write off | -12.63 | -163.03 | -282.51 | -228.73 | -262.42 | |||||
New cases addition | 50.06 | 389.69 | 426.05 | 27.72 | 41.42 | |||||
Gross NPA Ratio | 2.34% | 2.83% | 2.44% | 2.60% | 2.47% | |||||
Net NPAs | 77.332 | 134.76 | 151.82 | 152.18 | 202.13 | |||||
Net NPAs Ratio | 0.76% | 0.94% | 0.83% | 0.87% | 0.83% | |||||
Stage Wise Loan Portfolio | ||||||||||
Stage 1 & Stage 2 | 10064 | 14157 | 18073 | 17404 | 24164 | |||||
Stage 3 | 241 | 412 | 453 | 465 | 612 | |||||
Total Advances | 10305 | 14570 | 18526 | 17869 | 24776 | |||||
Provisions | ||||||||||
Stage 1 & Stage 2 | 159 | 247 | 316 | 316 | 433 | |||||
Stage 3 | 164 | 278 | 301 | 313 | 410 | |||||
Total Provisions | 322 | 524 | 618 | 629 | 843 | |||||
Provision Rate | ||||||||||
Stage 1 & Stage 2 | 1.58% | 1.74% | 1.75% | 1.81% | 1.79% | |||||
Stage 3 | 67.90% | 67.33% | 66.48% | 67.28% | 66.96% | |||||
Overall Rate | 3.13% | 3.60% | 3.33% | 3.52% | 3.40% | |||||
Capital Adequacy | ||||||||||
CRAR – Tier I Capital | 11.28% | 12.41% | 14.74% | 15.34% | 15.42% | |||||
CRAR – Tier II Capital | 4.41% | 5.87% | 5.26% | 4.08% | 3.76% | |||||
Total CRAR | 15.69% | 18.28% | 20.00% | 19.42% | 19.18% | |||||
Distribution of employees (excluding outsourced workforce) by key functions | ||||||||||
Collections | 658 | 695 | ||||||||
Customer Service | 1209 | 1077 | ||||||||
Marketing | 78 | 112 | ||||||||
Operations | 448 | 473 | ||||||||
Risk Management | 306 | 448 | ||||||||
Sales | 574 | 602 | ||||||||
Others | 428 | 476 | ||||||||
Total | 3701 | 3883 | ||||||||
Source: SBI Cards and Payment Services IPO Prospectus |