Key Takeaways
- You may be overestimating SBI Cards' earnings durability after a 45% profit surge.
- Net interest margins slipped 20 basis points, signaling a near‑term earnings headwind.
- Operating expenses rose 23% YoY, largely driven by new labor‑code compliance costs.
- Motilal Oswal trimmed FY26/FY27 earnings forecasts by up to 6.5% and lowered the target price to INR 875.
- Neutral rating remains, but the bull case hinges on credit cost stabilization and a rebound in receivables.
You missed the fine print on SBI Cards' profit jump, and that could cost you.
SBI Cards' Profit Surge: The Numbers Behind the Headlines
For the quarter ending March 2026, SBI Cards reported a profit after tax (PAT) of INR 5.6 billion – a 45% jump year‑over‑year and a 25% rise quarter‑over‑quarter. The growth was largely driven by higher credit card spend and a modest improvement in asset quality. However, the headline number masks two critical dynamics: a contraction in net interest margin (NIM) and a sharp rise in operating expenses.
Margin Pressure: Why Net Interest Margins Are Contracting
The bank’s NIM fell 20 basis points to 11% in the latest quarter. The decline reflects that most of the benefit from cheaper funding has already been booked, while loan yields face a “mild near‑term downside bias.” In practice, this means that the spread between what SBI Cards earns on its credit‑card portfolio and what it pays for funds is narrowing, putting pressure on future profitability.
Lower margins are not unique to SBI Cards; the entire Indian credit‑card sector is grappling with a flattening yield curve and heightened competition for low‑cost funding. As margins compress, earnings become more sensitive to any uptick in credit costs or operational inefficiencies.
Operating Expense Spike: Labor Code Impact Explained
Operating expenses (OPEX) climbed 23% YoY and 5% QoQ, outpacing the peer group average by 3 percentage points. A significant portion of this increase – INR 120 million – stems from the recent amendment to India’s labor code, which raised statutory benefits for salaried employees. The new cost structure is likely to stay with the company, eroding earnings unless offset by revenue growth or cost‑optimization initiatives.
For investors, the OPEX trajectory is a red flag: if the company cannot improve its cost‑to‑income ratio, the net profit growth may stall even as credit‑card usage expands.
Sector Landscape: How Competitors Like HDFC and Axis Are Positioning
HDFC Bank’s credit‑card arm and Axis Bank have both reported steadier NIM trends, largely due to diversified loan books and stronger cross‑selling capabilities. HDFC, for instance, leverages its massive retail base to achieve economies of scale, keeping its cost of funds lower than SBI Cards. Axis has been aggressive in digitizing its credit‑card acquisition funnel, which helps contain acquisition costs.
The competitive pressure is intensifying as fintech players such as Paytm and Razorpay enter the credit‑card space with lower‑cost, app‑centric offerings. SBI Cards must therefore either innovate its product suite or improve its cost structure to stay ahead.
Historical Parallel: Past Credit Card Margin Squeezes
Looking back to FY2021‑22, SBI Cards experienced a similar margin compression after a rapid expansion phase. At that time, the company’s earnings per share (EPS) growth decelerated, and the stock price entered a flat‑line phase for over a year. The turnaround only materialized after the firm introduced a tiered rewards program and renegotiated its funding mix, which restored NIM to 11.5% by FY2023.
History suggests that margin recovery is possible, but it typically requires disciplined product innovation and a tighter control on funding costs.
Technical Metrics Decoded: RoA, RoE, and NIM
Return on Assets (RoA) measures how efficiently a company converts its assets into net income. Motilal Oswal projects SBI Cards to achieve a RoA of 3.85% by FY27, indicating modest asset efficiency relative to peers.
Return on Equity (RoE) reflects profitability on shareholders’ capital. An estimated RoE of 17.9% by FY27 places SBI Cards in the upper‑mid tier of Indian banks, but still below the 20%+ benchmark that many growth‑focused investors target.
Net Interest Margin (NIM) is the core profitability driver for any credit‑card issuer. The recent 20‑bp decline signals that any further yield erosion could push the NIM below 10.5%, which would materially affect earnings.
Investor Playbook: Bull vs. Bear Cases
Bull Case: If SBI Cards can stabilize its receivables, keep credit costs in check, and launch higher‑margin premium cards, earnings could rebound, pushing the RoE above 20% and justifying a multiple above 24x FY27E EPS. A successful cost‑containment program would also improve the cost‑to‑income ratio, supporting margin recovery.
Bear Case: Continued margin compression, rising OPEX from labor compliance, and a slowdown in credit‑card spend could depress profit growth. In this scenario, the target price of INR 875 would be hard to defend, and the stock could drift lower, especially if peers deliver stronger margin expansion.
Given the mixed signals, a Neutral rating with a revised target price of INR 875 appears prudent. Investors should monitor NIM trends, OPEX growth, and credit‑cost trajectories closely before adjusting exposure.