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).

 

The ratings factor in the strong support SBI Cards receives from its majority shareholder, State Bank of India (SBI; ‘CRISIL AAA/CRISIL AA+[1]/FAAA[2]/Stable/CRISIL A1+’) on ongoing basis as well as in the event of distress. Ownership pattern and shared brand imply a strong moral obligation on SBI to continue supporting SBI Cards in meeting debt obligation 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 1.32 crore cards in circulation, and market share of 19.1% as on as on December 31, 2021. Profitability is above average, with calculated return on assets (ROA) of 4.7% in the first nine months of fiscal 2022 and 3.8% in fiscal 2021. However, because of the unsecured and high-risk business, the company remains susceptible to asset quality challenges.

 

In line with the measures announced by the Reserve Bank of India (RBI) for Covid-19, SBI Cards had given moratorium to its borrowers. Though collection declined during the initial months of the moratorium, it inched up subsequently. The second wave of the pandemic resulted in intermittent lockdowns and localised restrictions, impacting collections again. Although the impact has been moderate compared to the past fiscal, asset quality deteriorated with gross non-performing asset (GNPAs) increasing to 4.99% as on March 31, 2021, from 2.01% a year earlier. As the lockdowns eased from July 2021, GNPAs improved to 2.40% as on December 31, 2021. Nevertheless, change in the payment discipline of borrowers may affect delinquencies.

 

Under the schemes announced by the RBI, such as June 2019 Prudential Framework for Resolution of Stressed Assets, August 2020 Resolution Framework for COVID-19-related Stress and May 2021 resolution framework 2.0, SBI Cards had restructured around 2% of its portfolio as on December 31, 2021. Nevertheless, the ability of the company to manage collections and asset quality over the medium term will be a key monitorable. The impact of the third wave of the pandemic, in terms of its spread, intensity and duration, will be closely monitored.

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

[2] The rating pertains only to State Bank of Indore's (SBoI's) fixed deposit programme, rated by CRISIL Ratings, which has been transferred to SBI following the merger of SBoI with SBI

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SBI Cards. Further, the ratings factor in the 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

A credit card is integral to a bank’s product offerings. SBI Cards houses the credit card business of SBI, and hence, is strategically important to the parent. The company receives strong financial, managerial and branding support from SBI on an ongoing basis. It benefits from SBI’s strong customer franchisee, commanding a premium in the co-branded card segment. In the past, SBI has infused growth capital in SBI Cards. As on December 31, 2021, SBI (along with its subsidiaries) held 69.47% stake in the company and will continue to hold majority stake over the medium term. SBI deputes its senior management in SBI Cards, as well as 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 cards-in-force (CIF) has been faster than the industry in the recent past; therefore, the market share of the company by CIF had increased to 19.1% as on December 31, 2021, from 15.3% as on March 31, 2017. It had market share of 19.8% by spends in the nine months through December 2021. It is currently the second-largest credit card player by CIF and third-largest by spends. Gross card receivables stood at Rs 29,129 crore as on December 31, 2021, and 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, the market share of the company will improve over the medium term.

 

*Healthy profitability

ROA (calculated) averaged 4.6% over the past five fiscals supported by healthy net interest and strong fee income. ROA (calculated) rose to 4.7% in the first nine months of fiscal 2022 from 3.8% in fiscal 2021 (5.5% in fiscal 2020). Lower profitability in the past fiscal was largely on account of higher credit cost. Provisioning cost (calculated) increased to 10.3% in fiscal 2021 from 8.5% in fiscal 2020 because of stress on asset quality and stood at 8.4% in the first nine months of fiscal 2022. Nevertheless, impact of any further waves of the pandemic and the company’s 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 had improved to 2.40% as on December 31, 2021.

 

Around 2% of the loan book was under one-time restructuring as on December 31, 2021. 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: Superior

Asset-liability management (ALM) profile had cumulative positive mismatch in all the buckets of up to one year as on December 31, 2021, because of the short tenure of assets. The company has debt obligation of Rs 10,880 crore till March 2022, against expected asset collection of Rs 16,390 crore. Moreover, the company had unutilised bank lines of Rs 6,457 crore as on December 31, 2021. Its commercial paper borrowings are backed by unutilised bank lines. 

 

ESG Profile

CRISIL Ratings believes that SBI Cards’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile of financial institutions typically factors in governance as a key differentiator between them. 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, the lending decisions may have a bearing on environment and other sustainability related factors.

 

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

 

SBI Cards’ key ESG highlights:

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

 

• Waste management units and rainwater harvesting systems are being actively set up across the Bank’s various branches, offices and other establishments. Further, various digital initiatives have been taken to reduce paper consumption.

 

• Women comprised 28% of the total employees and 31% of senior management as on December 31, 2021. One member out of 9 board members is a woman.

 

• The company has 56% of the board members are independent directors, with split in chairman and executive position, investor grievance redressal mechanism and disclosures are extensive.

 

There is growing importance of ESG among investors and lenders. SBI Cards’ commitment to ESG will play a key role in enhancing stakeholder confidence, given 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 1.32 crore CIF and market share of 19.1% as on December 31, 2021. Total spends in fiscal 2021 were Rs 122,416 crore, and receivables stood at Rs 25,114 crore as on March 31, 2021. In the first nine months of the fiscal 2022, spends were Rs 132,218 crore. As on December 31, 2021, receivables stood at Rs 29,129 crore. Networth rose to Rs 7,396 crore as on December 31, 2021, from Rs 6,302 crore as on March 31, 2021.

 

Net profit was Rs 1,035 crore on total income (net of finance cost) of Rs 7,525 crore during the first nine months of fiscal 2022, against net profit of Rs 809 crore on total income (net of finance cost) of Rs 6,446 crore in the corresponding period of the previous fiscal. ROA (calculated) stood at 4.7%, compared with 4.1% earlier.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE018E08060	Lower Tier II Bonds	25-Feb-16	9.65%	25-Apr-22	100	Complex	CRISIL AAA/Stable
INE018E08078	Lower Tier II Bonds	17-Oct-16	8.10%	17-Oct-23	200	Complex	CRISIL AAA/Stable
INE018E08086	Lower Tier II Bonds	17-Jul-17	8.30%	17-May-23	500	Complex	CRISIL AAA/Stable
INE018E08144	Lower Tier II Bonds	29-Jan-19	9.55%	29-Jan-29	250	Complex	CRISIL AAA/Stable
INE018E08169	Lower Tier II Bonds	12-Jun-19	8.99%	12-Jun-29	100	Complex	CRISIL AAA/Stable
INE018E08136	Non-convertible debentures	18-Dec-18	9.15%	17-Jun-22	450	Simple	CRISIL AAA/Stable
INE018E08151	Non-convertible debentures	13-May-19	8.55%	12-Aug-22	175	Simple	CRISIL AAA/Stable
INE018E08177	Non-convertible debentures	14-Nov-19	7.60%	14-Feb-23	410	Simple	CRISIL AAA/Stable
INE018E08185	Non-convertible debentures	16-Dec-19	7.50%	9-Mar-23	300	Simple	CRISIL AAA/Stable
INE018E08193	Non-convertible debentures	26-Feb-20	7.50%	25-Feb-25	300	Simple	CRISIL AAA/Stable
INE018E08201	Non-convertible debentures	29-Jun-20	6.85%	29-Jun-23	400	Simple	CRISIL AAA/Stable
INE018E08219	Non-convertible debentures	17-Aug-20	5.75%	17-Nov-23	500	Simple	CRISIL AAA/Stable
INE018E08227	Non-convertible debentures	22-Dec-20	6.00%	22-Dec-25	450	Simple	CRISIL AAA/Stable
INE018E08235	Non-convertible debentures	23-Feb-21	5.90%	23-Feb-24	550	Simple	CRISIL AAA/Stable
INE018E08243	Non-convertible debentures	10-May-21	5.70%	10-May-24	455	Simple	CRISIL AAA/Stable
INE018E08250	Non-convertible debentures	14-Jun-21	5.55%	14-Jun-24	500	Simple	CRISIL AAA/Stable
INE018E08268	Non-convertible debentures	17-Aug-21	5.70%	16-Aug-24	500	Simple	CRISIL AAA/Stable
INE018E08276	Non-convertible debentures	15-Nov-21	5.75%	14-Nov-24	500	Simple	CRISIL AAA/Stable
INE018E08284	Non-convertible debentures	24-Dec-21	5.82%	24-Dec-24	650	Simple	CRISIL AAA/Stable
NA	Lower Tier II Bonds*	NA	NA	NA	450.2	Simple	CRISIL AAA/Stable
NA	Non-convertible debentures*	NA	NA	NA	2,850	Simple	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7 to 365 Days	20,000	Simple	CRISIL A1+
NA	Cash credit & working capital demand loan	NA	NA	NA	19,990	NA	CRISIL AAA/Stable
NA	Bank guarantee	NA	NA	NA	10	NA	CRISIL A1+

*Yet to be issued