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MOSL: SBI Cards and Payment Services (Buy)-Review of digital payment charges poses an overhang

SBI Cards and Payment Services: Review of digital payment charges poses an overhang; Assessing impact and risk mitigants; remain watchful of developments

(SBICARD IN, Mkt Cap USD11.5b, CMP INR922, TP INR1300, 41% Upside, Buy)

 

RBI proposed to issue a discussion paper in the next one month  () to cover aspects related to charges involved in various digital payment modes covering Credit Cards, Debit Cards, PPIs, UPIs, etc. This is with the intent to make digital transactions affordable to users and economically viable to providers. SBICARD has corrected ~9% over the past two days on fears of a reduction in MDR charges, which can adversely impact profitability. SBICARD’s spend-based fee constitutes 45-54% of total fees and corresponds to 18-23% of total revenue. As per our sensitivity analysis, we estimate 8-17% earnings impact in case MDR on Credit Cards is reduced by 10-20%. As the company mitigates this impact by effecting a reduction in payment processing charges, cost of reward points, and the interest free payment period to customers, the earnings hit could be shielded by 5-12%. This would limit the RoA/RoE damage to ~21-37bp/87-155bp. After a 9% decline in the stock price, it is now trading at 23x FY24E earnings, which appears attractive. Any reduction in MDR charges will be critical to earnings, keeping us watchful in the near term.

 Digital payments are witnessing strong growth; card spends grew 65% YoY during FY22 YTD

Digital payments have grown at 69% CAGR over the past three years, led by robust traction in UPI, while other payment instruments have reported strong growth. The mix of digital payments in the overall retail payments has thus increased, with UPI constituting 80% of digital payments (barring NEFT, RTGS, and IMPS). With an improvement in the economic environment and ongoing recovery after the COVID-19 outbreak, Credit Card spends have shown a strong 65% YoY growth during FY22 YTD (crossed the milestone of INR1t during Oct’21). However, the usage of cash has also increased, with currency in circulation being higher than pre-COVID levels. This, coupled with the fact that per capita digital payment transactions in India still stands the lowest, presents a huge growth opportunity for digital payment players.