UPI Growth And Data Risks Will Erode Credit Returns

Key Takeaways

• Rapid growth of digital payments and fintech competitors threatens the long-term relevance and profitability of traditional credit card offerings.
  
• Rising regulatory, compliance, and credit risks are likely to constrain margins and increase earnings volatility amid shifting market dynamics.
  
• Expansion into digital payments, improved risk management, product diversification, tiered market penetration, and supportive regulations are strengthening growth prospects and profitability for SBI Cards.

Catalysts

A non-banking financial company, provides credit cards to individual and corporate customers in India.

• The ongoing rapid adoption of UPI and other mobile-based payment systems in India may steadily erode the relevance of credit cards for everyday transactions, structurally capping long-term revenue growth as consumer preferences continue to shift away from traditional card products.
  
• Heightened regulatory and consumer scrutiny on data privacy and cybersecurity is poised to drive up compliance costs and expose SBI Cards to greater reputational risk, putting persistent downward pressure on net margins as digital transactions and data vulnerabilities increase in scale and frequency.
  
• Increasing penetration of alternative lending channels and digital-first fintechs is expected to intensify competition and pricing pressures, diminishing SBI Cards' market share and fee income over time, with negative implications for both revenue growth and return on equity.
  
• Customer concentration in the urban salaried segment leaves SBI Cards exposed to the risk of economic downturns or job losses within this group, raising the likelihood of higher credit losses and greater volatility in earnings, especially given recent trends of increasing credit costs and stagnating ROEs.
  
• Deteriorating asset quality, particularly as the company targets riskier semi-urban or new-to-credit markets and faces higher leverage among its legacy customer base, is likely to push up provisions and write-offs, further eroding net margins and constraining overall profitability for the foreseeable future.

SBI Cards and Payment Services Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SBI Cards and Payment Services compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SBI Cards and Payment Services's revenue will grow by 29.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 18.3% today to 17.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹38.6 billion (and earnings per share of ₹40.63) by about September 2028, up from ₹18.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.4x on those 2028 earnings, down from 43.3x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 28.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.56%, as per the Simply Wall St company report.

SBI Cards and Payment Services Future Earnings Per Share Growth

Risks

• Rapid growth in India's digital payments and the integration of credit cards with UPI and mobile platforms are expanding the addressable market for SBI Cards, which could drive sustained growth in transaction volumes and bolster long-term revenue.
  
• The company is investing in advanced data analytics, stricter underwriting, and portfolio management tools, which have resulted in improving delinquency trends, lower gross write-offs, and a stabilizing credit quality profile, supporting stronger net margins and more resilient earnings.
  
• Increasing focus on premium, co-branded, and wellness-focused credit card products, along with high-profile partnerships (like Tata Digital and Apollo HealthCo), is diversifying revenue streams and enhancing spend-per-card, supporting profitability and revenue growth.
  
• Strategic expansion into Tier 2 and Tier 3 cities to capture rising affluence and digital adoption, along with leveraging SBI's wide depositor network, provides a scalable customer acquisition pathway, which could contribute to steady increases in card issuance and stable long-term growth in earnings.
  
• Continuous regulatory and government support for financial inclusion and the formalization of the economy is likely to add millions of new potential users to the banking and credit system, thereby providing SBI Cards with a larger customer base and opportunities to improve revenue and profitability over the long term.

Valuation

• The assumed bearish price target for SBI Cards and Payment Services is ₹675.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SBI Cards and Payment Services's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1025.0, and the most bearish reporting a price target of just ₹675.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹221.9 billion, earnings will come to ₹38.6 billion, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 16.6%.
• Given the current share price of ₹854.4, the bearish analyst price target of ₹675.0 is 26.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.