SBI Card, India’s second-largest credit card issuer, faces significant headwinds as profitability declines and competition intensifies. During the quarter ended September 2024, the company recorded a 32.9 per cent decline in net profit to ₹404.42 crore compared to ₹602.98 crore in the same period last year.

Finance costs jumped 30% year-on-year to ₹788 crore, attributable to the increase in receivables, while loan depreciations increased sharply.

Despite a 3% reduction in operating expenses, SBI Card’s margin was squeezed by rising credit costs and regulatory changes that limited its ability to take risks.

Jignesh Shial, director of research and head of BFSI at InCred Capital, says these factors, along with the inability to attract premium co-branded partnerships, have put SBI Card at a competitive disadvantage.

Rising financial costs and asset quality concerns weigh on financial results

SBI Cards profitability is affected from several angles.

Its financial costs soared to ₹788 crore due to rising receivables, a trend exacerbated by tightening market conditions and rising interest rates. Credit costs also increased, with impairment losses and bad debts rising 63% to ₹1,212 crore.

Shial notes that as a pure credit card issuer, SBI Card does not have diversified revenue streams that could alleviate such financial pressures.

This leaves it exposed to increasing credit impairments in a competitive lending environment.

HSBC analysts noted that low issuance of new cards and low share of earning assets contributed to the slowdown.

They added that in the absence of clear indications of a recovery in asset quality, predicting an earnings rebound remains difficult.

Erosion of market share signals competitive weakness

SBI Card’s share in the Indian credit card market has declined. Its share of active cards fell from 19.2% to 18.5%, while its share of spending declined from 18% to 15.7% over the past year.

According to Shial, regulatory changes implemented by the Reserve Bank of India (RBI) in November 2023 increased the risk weight on unsecured loans, thereby reducing the Tier 1 capital of the SBI Card by around 450 points. base at 16.3% in September 2024.

This decline in capital adequacy limited the company’s risk-taking ability, reducing its appeal to high-value customers and contributing to a significant loss of market share, particularly in the corporate spending segments. and online.

Nomura analysts also flagged FY25 as a potential “washout year” for SBI Card, with operational weaknesses leading to card additions at multi-quarter lows.

They predict that this trend will have a negative impact on spending and loan growth.

Low ticket sizes and focus on retail limit profitability

Another challenge for SBI Card lies in its customer profile and average transaction size, which leans towards low-cost retail transactions.

Shial says SBI Card’s focus on tier 2 and 3 cities, where small transactions are common, reduces its revenue from interest on revolving credit and EMI transactions.

(Source: Abhishek Kothari of CNBC-TV18)

“Smaller ticket sizes generally generate less interest income because customers in these segments have less credit, which impacts overall profitability,” adds Shial.

Difficulties in attracting premium brands diminish competitive advantage

SBI Card’s mass market strategy has limited its appeal to premium brands seeking urban and affluent customers for co-branded partnerships.

Currently, only about 31% of SBI Card’s new supplies come from Tier 1 cities, where wealthier customers are more concentrated.

This is forcing premium brands to seek co-branded partnerships with other credit card issuers that cater more directly to high-income urban segments.

Competitors like HDFC Bank and ICICI Bank have taken advantage of this gap by partnering with luxury brands, which builds customer loyalty and attracts higher-value spending.

Shial suggests that SBI Card’s inability to enter into such partnerships limits its ability to compete effectively in the high-spend credit card market.

“Co-branded cards are particularly effective in driving new customer acquisition and retaining high-spending customers. SBI Card’s limited co-branded offerings make it more difficult to capture high-net-worth customers looking for premium experiences,” he says.

Impact of Changing Consumer Preferences on SBI Card’s Business Model

Consumer behavior is changing, with more small transactions moving to UPI payments and more expensive items increasingly being charged by credit card.

For SBI Card, this trend has resulted in a decline in its turnover rate from around 30% to 23%, thereby reducing the company’s main source of revenue: interest from carried balances.

Shial notes that SBI Card’s revenue model, which relies heavily on interest income from revolvers, is under strain as fewer customers now carry balances.

Outlook: Can SBI Card regain its position in the market?

SBI Card faces a tough road to regain profitability and market share.

Shial believes that SBI Card’s proprietary credit card business model is becoming less attractive as market dynamics change.

“The company needs to focus more on premium co-branded partnerships and higher value-added customer segments to remain competitive,” he advises.

Moreover, stricter capital requirements, stagnant profit margins and rising credit costs are all obstacles that SBI Card must overcome to regain its position in the market.

Without strategic changes, the company’s premium valuation and growth prospects could come under continued pressure.