SBI Cards and Payment Services continues to face pressure on earnings, even as asset quality shows signs of improvement. This has led Morgan Stanley to cut its price target and lower earnings estimates. In a post-results note, the brokerage reduced its price target on SBI Cards to Rs 665 from Rs 700, suggesting a 15% downside from current levels. It also maintained its Underweight rating. Morgan Stanley said adjusted profit missed expectations, mainly due to weaker pre-provision operating profit (PPOP).
Despite recent price corrections, SBI Cards is trading at 18x FY28 earnings and 2.9x price-to-book. Morgan Stanley believes these valuations remain high compared to peers, especially given slowing growth and weaker return metrics.
PPOP Weakness Leads to Earnings Cuts
Adjusted PAT for the quarter came in below both Morgan Stanley’s estimates and broader market expectations. PPOP was around 2% lower than forecasts, even after adjusting for one-time labour code-related costs. A Rs 70 crore provision write-back offered some support, but overall operating performance remained weak.
According to Morgan Stanley, the decline in PPOP is now clearly visible and is likely to lead to sharp earnings downgrades, especially for FY27 and FY28. The brokerage has cut its EPS estimates by 6% for FY27 and 5% for FY28, mainly due to lower revenue and PPOP assumptions.
Slower Growth and Lower Outlook
Receivables fell 4% quarter-on-quarter, and management did not provide near-term growth guidance. This marks a change from its earlier FY26 growth outlook of 10–12%. Morgan Stanley now expects receivables to grow 5% in FY26 and 10% in FY27. The brokerage cited slower revolver balances and cautious customer spending as key reasons.
Net interest margins (NIM) are also expected to come under pressure as the share of higher-yielding revolver balances declines. While management expects the cost of funds to remain stable, Morgan Stanley believes lower yields could hurt profitability.
Asset Quality Improves, but Concerns Remain
On a positive note, stressed asset formation and credit costs were better than expected. Stage 2 assets declined by 30 basis points quarter-on-quarter to 3.9%, while gross stage 3 assets stayed broadly stable at 2.86%. Management said credit costs could have been lower if provisions had been released, but it chose not to do so ahead of a planned ECL model update in the March quarter.
Despite these improvements, Morgan Stanley remains cautious. The brokerage believes that better asset quality alone is not enough to offset ongoing challenges from slower growth and margin pressure.
