Five Things The SBI Cards IPO Prospectus Tells Us About The Payments Industry

Did you know which cities contribute the highest increase in credit card customers?

Visa  and Mastercard credit cards are arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)
Visa and Mastercard credit cards are arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)

SBI Cards is set to become the first pure-play payments company to be listed on the Indian bourses. The company is looking to raise between Rs 8,000-9,000 crore at a valuation of Rs 53,000-Rs 60,000 crore in its initial public offer, BloombergQuint reported earlier this week citing a company official.

As per the draft red herring prospectus filed on Wednesday, SBI Cards reported a net profit of Rs 862.7 crore in financial year 2018-19 compared to Rs 601.1 crore in FY18 and Rs 372.8 crore in FY17. Its total revenue from operations stood at Rs 6,999 crore in FY19, Rs 5,187 crore in FY18 and Rs 3,346 crore in FY17.

In the first half of FY20, the company reported a net profit of Rs 725.8 crore and a revenue of Rs 4,677 crore.

SBI Cards, a subsidiary of State Bank of India, is India’s second largest cards company. It commands an 18 percent market share of outstanding cards and 17 percent of credit card spends, beaten only by HDFC Bank Ltd., the DRHP showed.

The DRHP provides deeper insights into the credit card business in India, which remains dominated by large bank and bank-led credit card players. A scrutiny of SBI Card’s earnings shows that interest income on credit card balances is the largest earner for the company versus the fee income it derives from issuing cards and processing card payments.

Local Banks Dominate

Data provided by SBI Cards in its prospectus shows that there are a total of 74 players offering credit cards in India. The market, however, is dominated by four players.

The top three private banks (HDFC Bank, Axis Bank Ltd. and ICICI Bank Ltd.), along with SBI Cards, which is registered as an non bank financial company, dominate the credit card business with approximately 72 percent market share by number of outstanding credit cards. The market share of these four firms in total credit card spends is also high at 66 percent.

Among these banks, HDFC Bank has remained the leader with SBI Cards second in the rankings.

Interest Income A Large Share Of Earnings

At least in the case of SBI Cards, a significant share of earnings come from interest on credit card receivables. In addition, the company earns non-interest income primarily comprised of fee-based income such as interchange fees, late fees, annual credit card membership fees and other such charges.

The company extends credit to the cardholders through ‘revolving’ credit card accounts. Using this facility, cardholders have the option to ‘revolve’ their balances or convert their balances into monthly installments and repay their obligations over a period of time at a fixed interest rate set forth in their cardholder agreements.

The interest the company earns on revolving credit card balances and monthly installment balances comprised 52.8 percent and 50.7 percent of the total revenue from operations in the six months ended Sept. 30, 2018 and 2019 respectively.

Non-interest income comprised 47.2 percent and 49.3 percent of the company’s revenue from operations in the six months ended Sept. 30, 2018 and 2019, respectively.

Growth Is Diversifying

Much of the growth in the credit card business for SBI Cards has historically been concentrated in India’s eight largest metropolitan areas.

For SBI, until the year-ended Mar. 31, 2017, the eight top metropolitan cities contributed 67 percent of new accounts. This has slowly changed, with less than half of the new accounts coming from these areas in the year-ended March 31, 2019.

Interestingly, it is not just tier-2 cities where most cards are being sold but even tier-3 and other areas, the DRHP shows.

Corporate Cards Are Big Business

Another takeaway from the SBI Cards experience is the lucrative business offered by corporate cards.

SBI’s credit card portfolio caters to both individual and corporate clients, and includes premium, travel and fuel, shopping, and corporate credit cards. While corporate credit cards may be relatively small in number they represent significant transaction volume.

Delinquencies Are Modest

In last few quarters, many lenders have increased the focus on the asset quality of their unsecured loan business, sparking some concern over defaults in the credit card portfolio. In the past, particularly in the aftermath of the global financial crisis, this portfolio proved to be volatile in terms of asset quality.

Since then, it is believe that credit bureaus and data analytics have made for a safer card portfolio.

Data included in SBI DRHP shows that at an industry level, delinquency rate for the credit card industry was a modest 1.5-1.8 percent as of March, 2019. Asset quality has been largely steady for the company, with gross bad loans remaining at close to 2 percent.