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SBI Cards and Payment Services
A fast-growing, higher ROE business
CM RATING58/100
SBI Cards and Payment Services is the second-largest credit card issuer in India with a 18.1% market share of the Indian credit card market in terms of the number of credit cards outstanding end November 2019 and 17.9% market share in total credit card spends in the eight months ended November 2019. The company offers an extensive credit card portfolio to individual cardholders and corporate clients, which includes lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate cards covering all major cardholder segments in terms of income profiles and lifestyles.

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 band66,66,667
- On upper price band66,22,517
Offer size (in Rs crore )500
For Offer for Sale Offer size (in Rs crore)
- On lower price band9789.51
- On upper price band9854.77
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 band939.00
- On upper price band938.96
Post-issue promoter & Group shareholding (%)69.5
Issue open date02-03-2020
Issue close date05-03-2020
ListingBSE,NSE
Rating 58/100

 SBI Cards and Payment Services: Financials

201703 (12)201803 (12)201903 (12)201812 (9)201912 (9)
Income from operations3346.205186.986999.115083.926843.06
Other Income124.84183.22287.72194.75397.10
Total Income3471.045370.197286.845278.687240.16
Interest Expenses528.43711.511017.21742.57966.37
Other expenses1834.222914.793709.182734.483479.02
Gross profit1108.391743.902560.441801.632794.77
Depreciation4.7924.4981.1058.1174.04
Profit before tax and Provisions 1103.591719.402479.341743.532720.73
Provisions and write off 531.97800.061147.74796.021102.06
Profit before tax 571.62919.341331.60947.511618.67
Provision for tax 198.76318.20468.88333.00457.47
PAT372.86601.14862.72614.521161.21
EPS*(Rs)4.06.49.28.716.5
* 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 965813227165991598522299
To be realized after twelve months from reporting date 6471343192818842477
Total gross loans and advances 1030514570185261786924776
Less: Impairment loss allowance -322-524-618-629-843
Total net loans and advances 998314046179091724023933
Credit cards
Total cards outstanding (millions)4.576.268.277.5310.03
Premium cards (%)15.70%15.50%14.80%15.36%13.68%
Average total cards outstanding (millions)4.095.417.266.899.15
Net card additions (millions)0.951.692.011.271.76
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)77.0071.0080.0079.2378.95
Market share of total cards outstanding (%)15.30%16.70%17.60%17.00%18.10%
Accounts
Total accounts in forece (millions)3.95.627.616.889.32
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)1.242.532.841.882.56
Credit card spends and transactions
Total card spends (Rs crore)43436764901032657519598486
Market share of total card spends (%)13.20%16.70%17.10%17.00%17.90%
Average card spends per cards outstanding (Rs)106083141289142142145477143482
Total number of card transactions (millions)147.39210.46278.1203.55285.28
Average ticket size (Rs)29473634371336943452
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 tax372.86601.14862.72614.521161.21
Average total assets9285.1213225.4917962.8217392.3523116.55
Average shareholders' equity1310.391936.703038.912958.994238.03
ROAA4.00%4.50%4.80%4.70%6.70%
ROAE28.50%31.00%28.40%27.70%36.50%
Proportion of new accounts sourced by geographic category (million)
Top-eight metropolitan areas0.831.371.220.81.07
Tier II metropolitan areas0.230.470.50.330.46
Tier III metropolitan areas0.130.340.390.260.36
Others 0.050.350.730.50.67
Total 1.242.532.841.882.56
Proportion of new accounts acquired by customer acquisition channels
Open market channel (retail partnerships) distribution / co-brand 0.791.371.260.791.32
Retail 0.440.70.420.270.42
Co-brand 0.350.670.840.520.9
Bank distribution channel (SBI) 0.441.151.571.081.23
Corporate distribution channel 0.010.010.010.010.01
Total 1.242.532.841.882.56
Asset Quality
Gross NPAs240.90412.50452.95465.12611.70
Addition/ Reduction 21.57-55.07-103.10253.63379.76
Impairments/Write off -12.63-163.03-282.51-228.73-262.42
New cases addition 50.06389.69426.0527.7241.42
Gross NPA Ratio2.34%2.83%2.44%2.60%2.47%
Net NPAs77.332134.76151.82152.18202.13
Net NPAs Ratio0.76%0.94%0.83%0.87%0.83%
Stage Wise Loan Portfolio
Stage 1 & Stage 21006414157180731740424164
Stage 3241412453465612
Total Advances1030514570185261786924776
Provisions
Stage 1 & Stage 2159247316316433
Stage 3164278301313410
Total Provisions322524618629843
Provision Rate
Stage 1 & Stage 21.58%1.74%1.75%1.81%1.79%
Stage 367.90%67.33%66.48%67.28%66.96%
Overall Rate3.13%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
Collections658695
Customer Service12091077
Marketing78112
Operations448473
Risk Management306448
Sales574602
Others428476
Total37013883
Source: SBI Cards and Payment Services IPO Prospectus

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