Brokerage firm Nuvama has upgraded the rating of India's second-largest card issuer SBI Cards from 'REDUCE' to 'BUY' based on improving credit cost outlook. Analysts have raised the target price of SBI Cards from Rs 620 to Rs 850. The change is based on a 30x price-to-earnings ratio for FY26E, up from 24x previously. The decision comes after the company showed signs of improvement despite weak earnings and rising credit costs in the last two years.

Signs of improvement in credit cost, likely to decline from Q4FY25E

Credit costs, which have been a constant drag on SBI Cards' earnings, rose to a high of 9% in Q2FY25 from 5.6% in Q3FY23. However, analysts expect credit costs to stabilise in Q3FY25E and are likely to decline from Q4FY25E.

Analysts believe credit costs will improve due to a reduction in the number of weak customers and improved risk assessment measures adopted by the company. Credit costs are expected to decline by 25–30 basis points (bps) in Q4FY25E and by 90–100 bps from Q4 levels by FY26E.

While other companies are facing a rise in credit card defaults, SBI Cards' proactive measures and earlier onset of the weak credit cycle are likely to improve its credit costs going forward.

Regulatory impact is already included in the fees, benefit will be received from possible reduction in interest rates

SBI Cards' revenue was negatively impacted by regulatory changes implemented by RBI's Master Direction in October 2022. This included a ban on over-limit fees, which led to an estimated Rs 4 billion loss in FY25E. In addition, rent payments from credit cards have also declined, with fees declining to single digits year-on-year in H1FY25 from double digits in mid-Q3FY24.

Despite these regulatory challenges, their full impact has already been adjusted in FY25 earnings, leaving SBI Cards poised for improvement. Analysts believe SBI Cards could further benefit from a potential rate cut by the RBI in the coming quarters, as its liabilities have a short tenure.

SBI Cards' earnings likely to improve

SBI Cards has adopted a strong strategy to handle credit cost challenges and regulatory impacts. Due to this, the company is set to perform better in FY26. Efforts to manage non-performing loans (NPLs) and reduce the number of weak customers are considered to be the main reasons for its improvement. Investors are optimistic about SBI Cards' growth due to its improving position and favorable market environment.