SBI Cards and Payment Services continues to face earnings pressure despite improving asset quality trends, prompting Morgan Stanley to cut its price target and lower earnings estimates. In a post-results note, Morgan Stanley reduced its price target on SBI Cards to Rs 665 from Rs 700, implying a 15% downside from current levels, while maintaining an Underweight rating. The brokerage said adjusted profit missed expectations, driven primarily by weaker pre-provision operating profit (PPOP).
Even after recent corrections, SBI Cards trades at 18x FY28 earnings and 2.9x price-to-book, which Morgan Stanley views as expensive relative to peers, especially given deteriorating growth and return metrics.
PPOP Weakness Drives Estimate Cuts
Adjusted PAT for the quarter fell short of both Morgan Stanley’s estimates and Street expectations, with PPOP coming in around 2% below forecasts, even after adjusting for one-time labour code-related costs. While a Rs 70 crore provision write-back provided some relief, underlying operating momentum remained soft.
Morgan Stanley said the weakness in PPOP is now clearly emerging and is likely to result in deep consensus earnings cuts, particularly for FY27-FY28. The brokerage has cut its own EPS estimates by 6% for FY27 and 5% for FY28, driven largely by lower revenue and PPOP assumptions.
Slower Growth, Lower Guidance
Receivables declined 4% quarter-on-quarter, and management refrained from providing near-term growth guidance, a shift from its earlier outlook of 10-12% growth for FY26. Morgan Stanley now forecasts 5% receivables growth for FY26 and 10% for FY27, citing moderation in revolver balances and cautious customer spending.
Net interest margin (NIM) is expected to face downward pressure as the share of higher-yielding revolver balances declines. While management expects cost of funds to remain stable, the brokerage believes yield compression could weigh on profitability.
Asset Quality Improves, But Not Enough
On the positive side, stressed asset formation and credit costs came in below expectations. Stage 2 assets fell 30 basis points QoQ to 3.9%, while gross stage 3 assets remained broadly stable at 2.86%. Management indicated that credit costs could have been lower had it released provisions, but chose not to do so ahead of an expected ECL model refresh in the March quarter.
Despite these improvements, Morgan Stanley remains cautious, noting that better asset quality alone is unlikely to offset structural pressures from slower growth and margin compression.
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