SSL - Daily 25-03-19 PDF

SSL Daily Inst'l Equity Research | India
March 25, 2019
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SSL Banking De-mystified: Credit Cards - The Changing Playbook
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 Proprietary framework (SBI-CCQ) identifies critical variables to assess quality and
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Banking De-mystified
BFSI
Institutional Equity Research | India

Credit Cards - The Changing Playbook March 25, 2019
SSL “Banking De-mystified” is a series of

deep-dive publications that will detail our
Krishnan ASV
understanding of relatively significant elements
Analyst - BFSI
of the financial services industry. Through a
+91 22 4348 7184
comprehensive nuts-and-bolts analysis, we aim
krishnan.asv@sbicapsec.com
to address mini-themes such as emerging profit
pools, evolution of key balance sheet vectors
Deepak Shinde
and under-appreciated business segments. We
Associate - BFSI
initiate this series with a curtain raiser on the
+91 22 4227 3428
credit cards business across the Indian banking
deepak.shinde@sbicapsec.com
system.
Avinash Singh, CFA, FRM
Analyst - BFSI
+91 22 4348 7199
SBICAP Securities Ltd avinash.singh@sbicapsec.com
Marathon Futurex, A & B Wing,
12th Floor, N.M. Joshi Marg, Bhuvnesh Garg
Lower Parel, Mumbai -400013 Associate - BFSI
Ph: 91-22-4227 3300/01 +91 22 4348 7266
E-mail: sbicapresearch@sbicapsec.com bhuvnesh.garg@sbicapsec.com
SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com Please refer to our disclaimer given at the last page.
Banking De-mystified | Credit Cards - The Changing Playbook SBICAP Securities Ltd
Credit Cards - The Changing Playbook

 Banks closing in on a $4bn annual profit pool (10%
Did you know?
of sector profits) over the next decade
 Focus shifting from dominant fee-based model to  For large Indian banks,
hybrid model (healthy mix of interest income) the credit card business
segment delivers ROAs
 Proprietary framework (SBI-CCQ) identifies critical
in the range 4%-6% - at
variables to assess quality and profitability of cards
par or even better than
business across banks global banks such as
In this first edition of “Banking De-mystified”, we deep dive into Capital One, Citigroup
the credit card business. The number of consumers with access to and American Express
credit cards (>35mn) and the level of aggregate balances  The cost of acquisition
(>Rs850bn) is at an all-time high, reflecting renewed confidence of a new-to-bank (NTB)
in how banks are now approaching this segment. We estimate that customer is nearly twice
the credit cards business is likely to offer a $4bn profit pool over (Rs1,600-Rs2,000) that
the next decade. As the credit card business has matured, it is also
of an existing-to-bank
emerging as the highest ROA driver (ROAs of 4%-6%) for larger
(ETB) customer (Rs800-
banks with appropriate scale, primarily on the back of a more
Rs1,000). Acquisition
mature product cycle. The growing attractiveness of the segment
is reflecting in the entry of challenger banks and consequently, the costs (including joining
emergence of newer business models. We construct the SBI-CCQ, kits and vouchers)
a proprietary credit card framework to identify the quality of explain 20%-25% of the
credit card portfolios across banks. total opex in the credit
$4bn annual profit pool: Indian credit card players are looking at an card business
annual profit pool of $4bn (10% of banking sector profit) over the next  Banks appear to have
decade, driven by rising penetration (new customers), higher revolving covered <20% of the
balances and better mining (limits for existing customers).
available universe of
Massive under-penetrated profit center: While the credit card base prime and super-prime
has grown at a 18% CAGR during FY14-FY18, the current credit card base
customers with credit
is only 45mn - this compares to 210mn customers with a 700+ CIBIL
score (Super-Prime, Prime Plus and Prime), implying a 20% penetration
card offerings, implying
and massive headroom for growth while staying on the same risk curve. significant white spaces
Emergence of new business models: We see two diverse business
models at play in the credit card space: the primary business model is
centered on internal-to-bank customers (followed by larger banks) while a
secondary business model is emerging around new-to-bank customers
(followed by mid-sized banks). Large banks with a sizeable customer
franchise grow their credit card portfolio purely as a cross-sell offering to
their existing prime and prime-plus customers, resulting in lower
acquisition costs (Rs800-Rs1,000) and lower delinquencies and anchor
their revenue models around fee income. On the other hand, challenger
banks with a limited customer franchise are focused on credit cards as a
customer acquisition engine, thereby incurring higher acquisition costs
(~2x of internal customers) that demand revenue pools in addition to the
fee income component. Through two separate case studies on SBI Cards
and Amex India, we highlight the hybrid models that are currently in
vogue.
Upside levers to profitability: The credit cards business revolves
around two sources of income: NII (from revolving loans) and fee income.
Fee income is currently the largest driver of credit card revenues as
revolving rate/conversion into EMI loans remains low (driven by customer
profile). Going forward, with higher spends and increasing propensity to
convert to personal loans, we expect the contribution of interest income to
increase proportionally.
krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 2
Competitive intensity to remain benign: Although the credit card
segment is witnessing entry of challenger banks and new business
models, pricing continues to be rational. We believe that the competitive
intensity will continue to remain benign on the back of a) significant
headroom for growth; b) higher cross-sell to existing customers to raise
stickiness; c) rational pricing; and d) low default levels, significantly lower
than the delinquency levels of earlier cycle.
Asset quality - This time it is actually different: The profitability of
the credit card business has undergone a drastic change on the back of
target segment re-jigging, better gating criteria and rational pricing,
reflecting in low delinquencies that drive super-normal returns. However,
given the fact that credit card is an unsecured product and attracts 125%
risk weight, delinquencies may start inching up as the prime/prime plus
pool gets saturated - however, delinquencies are likely to be substantially
lower than historically-incurred losses (previous down cycle).
SBI-CCQ - a proprietary quotient: We construct an industry-first,
proprietary credit cards quotient (SBI-CCQ) to identify key variables that
influence the quality and profitability of credit cards portfolio across
banks.
Exhibit 1: SBI-CCQ - Proprietary framework to assess the quality of credit cards portfolio
Spends per
Spends Market Customer Income Loans o/s as
CY18 card/
share mix Mix % of spends
Industry avg
HDFCB 28.2% 100%
SBICARDS 16.6% 100%
RBL 2.5% 97%
AMEX 9.5% 303%
ICICI 11.1% 82% NA
AXIS 10.3% 85% NA
Blue: NII;
Blue: Internal; Blue: Loans as %
Legend Grey: Fee
Grey: External of annual spends
income
Source: RBI, Industry, Company, SSLe

Credit Cards business in India – a snapshot

A near-$4bn annual profit pool

Indian credit card players are looking at an annual profit pool of $4bn
(~10% of banking sector profit) over the next decade, driven by rising
penetration (new customers), higher revolving balances and better mining
(limits for existing customers).
Over the next decade, the domestic credit card sector offers an annual profit pool
of $4bn (10% of banking sector profit), primarily driven by rising penetration (new
customers) as the product segment remains highly underpenetrated. To put this in
context, TransUnion CIBIL estimates that only 25% of the adult population in India
is currently credit-active.
India currently has just 45.2mn credit cards outstanding compared to 931mn debit
cards. CIBIL database indicates ~210mn customers having score of 700+
(prime/prime plus customers). Changing consumer behaviour/preference toward
consumption/personal loans suggest that penetration could increase at a faster Credit cards volumes and
clip. We expect volumes to continue to grow at ~15% CAGR during FY18-FY28 spends/card are expected
(compared to 18% CAGR during FY14-FY18). to grow at ~15% and ~7%
CAGR over FY18-FY28e
Increasing consumer spends are likely to translate into revolving/EMI loans that driven by low penetration
generate superior NII (interest rates in the range of 42% for revolving loans and and increasing share of
wallet
20-22% for EMI loans). We assume net profit of SBI Cards (~Rs1k/card adjusted
for accelerated provisioning in FY18) as the base case with annual inflation rate of
4%. Our base case assumes inflation-linked increase in credit card spends and
similar conversion ratio into revolving/EMI loans indicating further upside potential.
The revolve rates (conversion of spends into EMI loans) in India are lower than
global comparables as most customers are currently in prime / prime-plus
category. As banks penetrate into customer categories beyond prime, the superior
NIIs (from higher share of revolving loans) are likely to compensate
disproportionately for the elevated credit costs.
Exhibit 2: Market-sizing the opportunity canvas
FY14 FY18 FY28e
No of cards (mn) 19.2 37.5 151.6

Loans o/s (Rs bn) 301 777 7,709
Spends (Rs bn) 1,557 4,626 33,518
Per card statistics FY14 FY18 FY28e
Spends (monthly) 6,763 10,285 18,419
Spends 81,157 123,418 221,023
Loan o/s 15,667 20,724 50,835
NII 2,193 3,109 8,642

Fee income 2,629 4,425 7,924
Interchange fee 1,461 2,222 3,978
Other fees 1,169 2,203 3,945
Net Profit 605 960 1,853

Profit Pool (Rs bn) 36 281
Source: RBI, Industry, SSLe

Massive under-penetrated profit centre

While the credit card base has grown at a 18% CAGR during FY14-FY18,
the current credit card base (unique) is only 45mn - this compares to
210mn customers with a 700+ CIBIL score (Prime and Prime Plus),
implying a mere 20% penetration (without accounting for multiple cards)
and massive headroom for growth as penetration rises further.
The credit cards industry has been on an up-cycle with high growth and declining
delinquencies (compared to the previous cycle). Card spends and loans have
grown at a CAGR of 30%/23% during FY12-FY18, while the number of credit cards
has grown at a CAGR of 13% during the same period.
Exhibit 3: Credit card volumes and spends have Exhibit 4: Credit card loans have picked up
shown strong growth during FY13-FY18 meaningfully over the past 4 years
45.0 1,000 32.0
32.5 750 24.0

(Rs bn)
(%)
20.0
(%)
500 16.0
7.5
250 8.0
(5.0)
FY13 FY14 FY15 FY16 FY17 FY18 0 0.0
FY13 FY14 FY15 FY16 FY17 FY18
# Credit Cards (% YoY) Credit Card spends (% YoY)
Credit Cards loans o/s % YoY (RHS)
Source: RBI, SSL
Penetration still very low - significant headroom for growth: While credit
card loans have grown at a staggering pace over the past four years, the
segment’s exposure as % of overall banking credit is still below 1%. Credit card
spends as % of GDP is at ~3% (for FY18) and number of credit cards per person is
~0.02x indicating significant room for growth. The current card base is 45mn - this
compares to 210mn customers with a 700+ CIBIL score (Prime and Prime Plus),
implying a 20% penetration and massive headroom for growth.
Exhibit 5: Credit card loans as % of banking Exhibit 6: India well-behind on cards per capita
credit and GDP is below 1%
1.00 8.0
0.75
6.0
(%)
0.50
(x)
4.0
0.25
2.0
0.00
FY13 FY14 FY15 FY16 FY17 FY18
0.0
As % of Banking Credit As % of GDP South US Brazil UK India
Korea
Source: Industry, SSL

Currently, metros contribute to bulk of the credit cards industry (>95% market
share in terms of no of credit cards). This reflects in the fact that >10% of savings
account holders have a credit card in metros - this compares to an abysmal
penetration in other geographical clusters.
Exhibit 8: Metros have the highest number of credit

Exhibit 7: Metros account for 95% of credit cards cards per saving account (albeit low at ~10%)
100 14.0
95 10.0
(%)
6.0
(%)
90
2.0
85
(2.0)
FY15
FY16
FY17
FY18
80
Dec-14
Dec-15
Dec-16
Dec-17
Jun-15
Jun-16
Jun-17
Jun-18
RURAL SEMI-URBAN
URBAN METROPOLITAN
Source: RBI, SSL
Exhibit 9: Major 5 players - ~75% volume market Exhibit 10: Major 5 players - ~70% market share
share in spends
100% 100%
75% 75%
50% 50%
25% 25%
0% 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18
HDFCB SBICARDS ICICI AXIS RBL Others HDFCB SBICARDS ICICI AXIS RBL Others
Source: RBI, SSL
Cross-sell as first port of call for larger banks: Given the low levels of credit
card penetration across customer and geographic segments, our discussion with
bankers suggests that larger banks are clearly focused on sweating their existing
customer franchise (savings deposit holders). Our analysis suggests that at an
industry level, <10% of savings deposit customers have a credit card - even
among the larger banks, HDFC Bank is an outlier with >40% of its SA customers
having a credit card account.

Exhibit 11: Cross-sell canvas (Credit card/debit cards)
48
36
24
(%)
12
0
HDFCB AXIS YES KOTAK ICICI Industry SBI
CARDS
Source: RBI, SSL

Note: SBI customer base is used as proxy for SBI Cards
Exhibit 12: Only ~25% of new credit cards issued are new-to-credit (NTC) customers
Source: TransUnion CIBIL, SSL
Exhibit 13: >95% of Axis Bank’s new card Exhibit 14: RBL has been steadily increasing its
issuances are to the existing deposit customers pace of new card issuances
100.0 2.0
0.32 0.34 0.17 0.31 0.48 0.18 0.20 0.21 0.26 0.29
97.5 1.5
(mn)
(%)
95.0 1.0
92.5 0.5
96.0 97.0 97.0 97.0 96.0 0.6 0.8 1.0 1.2 1.4
90.0 0.0
Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19
% Sourcing from Internal customers - Axis Bank # Credit cards o/s - RBL Bank
Source: Company, SSL
Denotes new cards issued during the quarter

Experimenting with emerging business models

Banks are currently straddling two diverse business models to run their
credit card businesses: the primary business model is centred on internal-
to-bank (ETB) customers (followed by larger banks) whereas a secondary
model is emerging around new-to-bank (NTB) customers (followed by
mid-sized banks). Large banks with a sizeable customer franchise grow
their credit card portfolio purely as a cross-sell offering to their existing
prime and prime-plus customers, resulting in lower acquisition costs
(Rs800-Rs1,000) and lower delinquencies and anchor their revenue
models around fee income. On the other hand, banks with a limited
customer franchise drive credit cards as a customer acquisition engine,
thereby incurring higher acquisition costs (2x of internal customers) that
demand revenue pools in addition to the fee income component.
The number of consumers with access to credit cards (>35mn) and the level of
aggregate balances (>Rs850bn) is at an all-time high, reflecting renewed
confidence in how banks are now approaching this segment. As the credit card
business has matured, it is also emerging as the highest ROA driver (ROAs of 4%-
6%) for larger banks with scale, largely on the back of a more mature product
cycle. However, the growing attractiveness of the segment is reflecting in the entry
of challengers and consequently, the emergence of newer business models.
Exhibit 15: New business models emerging - different strokes for different folks
Parameter Primary business model Secondary business model

Customer segment Super-Prime; Prime-Plus; Prime Prime-Minus
Bureau score >750 650-750
Customer profile Internal-to-bank (ETB) customers New-to-bank (NTB) customers
Unit acquisition cost Rs800-Rs1,000 Rs1,500-Rs2,000
Revolving rate Low High
Revenue model Fee income Interest income + Fee income
Interest income contribution Negligible Significant
Delinquency Matured steady-state Still evolving
Break-even <12m ~24m
Programs Balance transfers Offers to induce high-ticket spends
So, what are the variables that really move the needle?
Exhibit 16: Credit cards - the key control variables

Control variable Description
Number of cards Size of the customer base and penetration of existing customer franchise
Predominantly includes the acquisition costs, A&P expenses (largest

Expenses component around reward points), collection & recovery costs and fixed
costs (employee, admin etc.)
Spends drive the interchange fee and higher spends can translate into
Spends
revolving loans
Denotes conversion of card spends into interest-bearing loans - key

Revolving rate
variable for driving the interest income
Denotes conversion of card spends into relatively lower interest-bearing

Merchant EMI conversion rates
personal loans
Delinquencies Higher delinquencies/default on loans will suppress the overall profitability

Having identified the key control variables, we plot the key players in the credit
cards business across some of these variables in Exhibit 17.
Exhibit 17: Credit cards - the competitive canvas
40
Loans o/s as % of annual spends
RBL
30
HDFCB
20 AXIS
SBI Cards
ICICI
10 Amex India
IndusInd
0
0 9 18 27 36
Spends market share (%)
Source: RBI, Industry, SSL

Note: x-axis denotes the spend market share; y-axis denotes the revolving rate; the size of the
bubble denotes the mix of credit cards within the overall loan book (100% for Amex India)
Having identified the key control variables, we demonstrate the economics of the
credit card segment by presenting a generic revenue model that applies to credit
cards businesses.
Exhibit 18: Credit cards - the revenue model
Annexure-I carries an illustration of a classic 4-party model comprising of

merchants, acquiring banks, issuing banks and switches. Exhibit 19 below outlines
how the transaction fee is broken down between the various parties. For details on
the transaction fee pool, please refer to Annexure-I.

Exhibit 19: Credit card transaction fee - the standard 4-party ecosystem
model
Having understood the revenue model, we now assess the key costs that a bank
incurs on its credit card business.
Exhibit 20: Credit cards - the cost structure
We categorize the costs under two broad categories: fixed costs and variable costs.
While the fixed costs are largely overheads, variable costs include acquisition costs
(this would include advertising expenses), sales and promotion costs as well as
provision towards reward points.

Exhibit 21: Credit cards - the reward points economics

Card Type Reward points earned
Entry-level cards (Silver, Gold) 1 reward point per Rs. 100-150 spent
Premium (Signature, Platinum cards) 2 reward points per Rs. 100-150 spent
Co-branded cards (fuel, air miles etc.) Up to 5 reward points per Rs. 100-150 spent
1-2 reward points on domestic/international

Corporate cards
spending
Our discussion with senior card executives suggests that issuers re-invest a portion
of their interchange fees into reward points in order to encourage a customer to
spend more, which is one of the control variables that we identified in Exhibit 16.
Exhibit 22: Credit cards - the reward points canvas
40
HDFCB
Spends market share (%)
30
20 SBICARDS
ICICIAMEX INDIA
AXIS
10
IIB
0
0.00 0.20 0.40 0.60 0.80
Provisioning as % of annual card spends (%)
Source: RBI, Companies, SSL

Note: x-axis denotes the provisioning for reward points as proportion of spends; y-axis
denotes the spend market share
Exhibit 23: Credit cards - redemption

0.80
Redemption as % of prev year
0.60 AMEX INDIA
ICICI
spends
0.40 SBICARDS
IIB
0.20 AXIS HDFCB
0.00
0.00 0.20 0.40 0.60 0.80
Provisioning as % of annual spends
Source: RBI, Companies, SSL

x-axis denotes the provisioning for reward points as proportion of spends; y-axis denotes the
spend market share
Our analysis of the redemption trends suggest a mature customer franchise across
most banks - we conclude this on the back of the fact that the provisioning run
rate closely hugs the redemption run rate trend line.

As mentioned in Exhibit 21, banks segment their customer base and offer different
loyalty programs across their customer franchise. For instance, for “silver-card”
customers, banks offer one reward point for every Rs100 worth of spend by the
customer. Each reward point is usually equivalent to 20p-50p (the price that the
bank would pay a third party to assume the reward point liability). Banks provide
customers with a reward catalogue comprising of products sold by a third party,
which co-participates in the customer loyalty programme.

The ‘co-branded card’ economics

Co-branded cards have been in vogue in India since the mid-1990s. A recent PwC
study of popular co-branded cards in India indicates travel as the most prolific use
case followed by fuel, e- tail and retail shopping.
Exhibit 24: Co-branded card - the value proposition for stakeholders
• Access to focused customer base

• Increased average spends per
ISSUERS card
• Improved customer stickiness
• Contribution to topline and

bottomline with shared revenues
PARTNERS • Better brand visibility
• Enhances customer loyalty
Co-branded cards are typically characterized by high customer stickiness (benefits

and rewards are vendor-specific), higher spends, better activation (low dormancy)
and lower acquisition costs (much more targeted).
Exhibit 25: Co-branded credit cards - snapshot of major revenues and cost
line items
• Joining fees
Shared revenues • Annual fees
Borne by issuer • Discount / voucher expenses

only • Reward redemption
Shared costs • Marketing expenses
Our discussion with practitioners suggests that new partnership models are
emerging in the co-branded space as issuers look for better targeting of customers
and smarter acquisition.
Although co-branding has conventionally been popular in the credit cards business,
banks are now beginning to extend co-branded tie-ups to debit cards and prepaid
cards.

Indicative Case Study 1 - SBI Cards
Exhibit 26: SBI Cards has consistently generated ~4% RoA since FY14
(% of average assets) FY13 FY14 FY15 FY16 FY17 FY18

Interes t i ncome 17.2 20.8 19.7 19.5 18.9 19.8
Interes t expens e 6.0 7.4 6.8 6.1 5.6 5.4
Net Interes t i ncome 11.2 13.5 12.9 13.4 13.3 14.4
Other i ncome 13.11 16.15 14.97 15.73 17.05 19.75
Tota l Income 24.3 29.6 27.9 29.2 30.4 34.2
Tota l Opera ti ng expens es 16.9 18.1 18.7 19.2 20.3 24.4
PPoP 7.4 11.5 9.2 10.0 10.1 9.7
Provi s i ons 3.5 4.4 4.2 3.8 3.7 4.0
PBT 3.9 7.1 4.9 6.2 6.4 5.7
Provi s i on for Ta x 1.3 2.3 1.6 2.2 2.2 1.5
RoA 2.6 4.8 3.3 4.0 4.2 4.2
Per Card (Rs.)

Spends (Monthl y) 3,970 5,061 5,896 7,166 8,925 11,856
Loa ns o/s 13,056 15,773 18,463 20,569 22,576 23,261
Net Profi t 378 720 603 838 953 1,021
Loa ns o/s a s % of a nnua l s pends 27.4 26.0 26.1 23.9 21.1 16.3

Note: FY18 numbers adjusted for accelerated provisioning for NPAs; Tax Rate adjusted to
33% for FY13, FY14 and FY15
Indicative Case Study 2 - American Express India

Exhibit 27: Fee income as the dominant source of income
(% of average assets) FY13 FY14 FY15 FY16 FY17 FY18

Interes t i ncome 3.8 3.6 4.1 4.8 5.1 5.2
Interes t expens e 5.0 4.3 3.8 3.5 2.0 1.8
Net Interes t i ncome (1.2) (0.7) 0.3 1.3 3.0 3.4
Other i ncome 24.3 22.5 20.3 20.0 20.1 17.9
Tota l Income 23.0 21.8 20.7 21.4 23.2 21.3
Tota l Opera ti ng expens es 24.4 22.0 21.4 19.6 19.7 17.7
PPoP (1.3) (0.2) (0.7) 1.7 3.5 3.6
Provi s i ons 2.4 1.8 1.3 2.3 2.5 2.4
PBT (3.8) (2.1) (2.0) (0.6) 0.9 1.2
Provi s i on for Ta x (0.7) 1.1 0.0 (0.0) - -
RoA (3.1) (3.1) (2.0) (0.6) 0.9 1.2
Per Card (Rs.)

Spends (Monthl y) 20,722 24,526 28,508 31,228 35,932 35,139
Loa ns o/s 27,086 32,584 32,112 35,675 35,428 43,050
Net Profi t (1,170) (1,426) (1,055) (321) 532 742
Loa ns o/s a s % of a nnua l s pends 10.9 11.1 9.4 9.5 8.2 10.2

So, what does this mean for credit card unit economics? Our analysis suggests the
following unit economics for these diverse portfolios:
Exhibit 28: American Express India offers a sharp non-linearity compared to SBI Cards
UNIT ECONOMICS (Rs) Amex India SBI Cards
Per Card FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18
Spends (Monthl y) 20,722 24,526 28,508 31,228 35,932 35,139 3,970 5,061 5,896 7,166 8,925 11,856
Loa ns o/s 27,086 32,584 32,112 35,675 35,428 43,050 13,056 15,773 18,463 20,569 22,576 23,261
Interes t i ncome 1,403 1,618 2,014 2,434 2,712 3,068 2,507 3,154 3,598 4,073 4,317 4,758
Interes t expens e 1,858 1,935 1,845 1,764 1,094 1,062 876 1,117 1,239 1,270 1,274 1,295
Net Interest income (455) (317) 169 670 1,618 2,006 1,631 2,037 2,359 2,803 3,043 3,462
Other i ncome 8,985 10,033 9,934 10,083 10,752 10,450 1,909 2,444 2,733 3,281 3,896 4,745
Tota l i ncome 8,529 9,716 10,103 10,753 12,370 12,456 3,540 4,481 5,092 6,084 6,940 8,207
Operating expense 9,026 9,806 10,456 9,887 10,521 10,350 2,468 2,744 3,417 4,001 4,630 5,869
Empl oyee expens es 1,740 1,931 1,859 1,585 1,315 1,220 188 201 207 234 247 258
Adverti s i ng & Promoti on 2,260 2,696 3,755 3,923 5,303 5,122 477 629 982 1,142 1,628 2,602
Others 5,027 5,179 4,842 4,379 3,903 4,008 1,803 1,914 2,229 2,625 2,755 3,010
Net Profit (1,170) (1,426) (1,055) (321) 532 742 378 720 603 838 953 1,021
Loa ns o/s a s % of a nnua l s pen 10.9 11.1 9.4 9.5 8.2 10.2 27.4 26.0 26.1 23.9 21.1 16.3

Revolve rates to augment profitability

Fee income is currently the major driver of credit card revenues as
revolving rate/conversion into EMI loans remains low (driven by
customer profile). Improving revolving rate (% customers or % amount
that remains unpaid on the due date) would increase the interest income
contribution (interest rates of ~14%-42% pa) to revenue mix and
profitability. Going forward, with higher spends per card (~16% CAGR
during FY13-FY18) and increasing propensity to convert spends into
personal loans, we expect the contribution of interest income to increase
proportionally.
Credit card spends (without rollover) generate only fee income for the issuing
banks through interchange fee. However, in order to generate interest income and
boost profitability these spends need to translate into revolving/EMI loans (interest
rates range from 14% to 42% p.a.).
Credit card portfolio’s loan book, at any point of time, comprises of five major
categories:
 Unbilled card spends (0-30 days due)
 Billed card spends (30-50 days due)
 Revolving loans (>50 days due)
• Complete amount due
• Amount above minimum amount paid
 EMI/personal loans
 Cash withdrawals from credit cards (30% p.a. interest from day 0)
Revolving loans, EMI loans and cash withdrawals are the high interest-generating
sources of income.
Exhibit 29: Credit card loan book
Unbilled and billed card spends before due date (0-50 days) are under interest-
free credit period and hence do not generate any interest income.
For instance, a customer spends Rs100 during a month. Banks derive no interest
income if the customer pays the bill amount on/before the due date (Case A).
Suppose the customer makes partial payment of Rs50 by due date (Case B). The
remaining amount (Rs50) gets rolled over to next month (Revolving rate of 50%)
which generates interest income (~ 40-42% p.a.). Issuing banks typically offer
EMI loans product on card spends during the month or at the time of purchase of
large ticket spends (electronics, etc.) which carry relatively lower interest cost
(~14-22% p.a.) (Case C).

Exhibit 30: Credit cards revolving rate illustration
Industry spends (on per cards basis) has witnessed a healthy traction (16% CAGR
during FY13-FY18). Increasing spends, along with increasing propensity to convert
spends into personal loans, is likely to improve interest contribution to the mix.
Exhibit 31: Monthly spends/card have grown at a CAGR of ~17-25% for leading industry players
FY13 FY14 FY15 FY16 FY17 FY18 CAGR FY13-FY18
HDFC Bank 4,912 6,519 8,664 9,363 10,265 11,475 18.5%
SBI Cards 3,970 5,061 5,896 7,166 8,925 11,856 24.5%
ICICI Bank 4,090 4,742 5,521 6,341 7,631 9,284 17.8%
Axis Bank 4,275 5,933 7,262 7,330 8,313 9,432 17.1%
RBL Bank NA 1,255 3,639 7,652 11,394 10,691 NA
Industry 5,577 6,701 7,955 8,903 10,158 11,452 15.5%

Source: RBI, SSL

Credit Card Quotient (SBI-CCQ)

The credit card market in India is extremely concentrated with >70% of
volumes and >75% of spends residing with the top five players. In this
section, based on publicly available disclosures, we construct an industry-
first, proprietary cards quotient (SBI-CCQ). As industry-wide disclosure
standards improve, we expect SBI-CCQ to evolve into a more robust
framework that allows investors and analysts to compare and contrast the
quality and profitability of the cards business across multiple players.
As highlighted in the earlier sections, “card spends” and “revolve rates” are the
two biggest revenue drivers in the credit cards business. Based on these critical
control variables, we construct an industry-first, proprietary credit card quotient,
SBI-CCQ - our framework combines key control variables such as target customer
mix, income mix, spend market share and revolve rate.
 Spends market share: Assessing the scale that helps drive superior ROAs
and position in the credit card market (presence of bargaining power)
 Spends/card vs industry average: Assessing the per card spends of a bank
vs peers
 Customer mix: Assessing the customer profile (internal/external). Higher
proportion of internal customers indicate bank is mining its internal customers
that leads to lower acquisition costs
 Income mix: Assessing the major revenue stream. Higher contribution of fee
income indicates higher proportion of prime/prime plus customers that
typically has lower revolving rates.
 Loans o/s as % of annual spends: As there are no disclosures on revolve
rates by banks, we take loans outstanding as a % of annual spends as a proxy
for the revolving rate. A high revolve rate indicates conversion of spends into
high-yielding revolving/EMI loans and high interest income
Exhibit 32: SBI-CCQ - Proprietary framework to assess the quality of credit cards portfolio
Spends per
Spends Market Customer Income Loans o/s as
CY18 card/
share mix Mix % of spends
Industry avg
HDFCB 28.2% 100%
SBICARDS 16.6% 100%
RBL 2.5% 97%
AMEX 9.5% 303%
ICICI 11.1% 82% NA
AXIS 10.3% 85% NA
Blue: NII;
Blue: Internal; Blue: Loans as %
Legend Grey: Fee
Grey: External of annual spends
income
Following are our key observations from the SBI-CCQ framework:
 SBI Cards, a subsidiary of SBI, boasts of a healthy revolve rate, driving a

significant interest income contribution. The customer mix is skewed towards
external customers, indicating low penetration within SBI’s customer base and
huge headroom for growth at relatively low acquisition costs. As seen earlier,
SBI Cards has been consistently generating ~4% ROA over the past few years.
 Axis Bank and ICICI Bank operate on a primary business model of mining their
internal customer base and consequently have lower revolve rates. A relatively
low cross-sell ratio leaves significant elbowroom for increasing the cards base
with low acquisition costs.
 RBL Bank, given its liability franchise, is following a secondary business model
of acquiring external customers. RBL has one of the best revolve rates in the
industry, leading to higher contribution of interest income, thus offsetting high
customer acquisition costs and driving higher profitability.
 Given the lack of a deposit franchise, the credit card business of American
Express is characterized by a low revolve rate, sub-optimal contribution of
interest income and elevated acquisition costs (including reward programs and
vouchers) and consequently lower profitability ratios (Exhibit 27).
 HDFC bank, the market leader with ~28% market share in card spends, has
one of the highest cross-sell ratios (Exhibit 11) within the banking industry.
Revolve rates remain healthy, although there is room for further improvement.
As industry-wide disclosure standards improve, we expect SBI-CCQ to evolve into

a more robust framework that allows investors and analysts to compare and
contrast the quality and profitability of the cards business across multiple players.
Given the growing significance of the credit cards business segment, we believe
that further disclosures around revolve rates, fee income contribution, breakdown
of key costs and delinquencies would help in better assessing segment profitability
across the banking system.

Annexure I: The classic 4-party ecosystem model

The standard 4-party model comprises of issuing banks (customer interface),
acquiring banks (merchant interface), merchants and switches. Merchants obtain
card processing services from Acquiring Banks, which route transactions via
Switches to Issuing Banks, which debit customer accounts. Acquiring Banks
represent the merchant leg of the transaction whereas Issuing Banks represent the
customer leg of the transaction.
Exhibit 33: The standard 4-party model
Source: RBI, SSL
Switches are typically ecosystem nodes such as Visa, MasterCard and RuPay.
While a single bank could play the role of an acquirer as well as an issuer, these
are often separately-housed verticals within the bank.
Exhibit 34: Step 1 - how does it all begin?
Source: RBI, SSL
We start with a basic example to demonstrate how the credit card fee pool is
shared among the various stakeholders. Let’s assume a customer uses a Visa
Regalia credit card issued by HDFC Bank to purchase goods worth Rs10k from an
online retailer. The customer’s perspective is straightforward: the customer pays
Rs10k.
The merchant, on the other hand, has a contract with the acquiring bank (let’s
assume that is Bank P), which entails a transaction fee of 2% of the value of the
transaction - this is called the merchant discount rate (MDR). So, for the Rs10k
transaction, Bank P will charge an MDR fee of Rs200, which implies that the
merchant will actually receive a net amount of Rs9,800. The MDR fee of Rs200 is
what the merchant pays to the entire “credit card industry” (MDR pool), which
then needs to be further distributed among the various stakeholders.

Exhibit 35: Step 2 - The Merchant Perspective (Merchant Discount Rate)
The next step is to understand how this MDR pool gets distributed among various
stakeholders. The lion’s share of this pie accrues to the issuing bank in the form of
“interchange fees”, which in a simple exercise could be modeled at 1.6% - so, the
issuing bank (HDFC Bank) is entitled to an interchange fee of Rs160 out of the
Rs200 MDR pool.
Exhibit 36: Step 3 - The Issuer Perspective (Interchange Fees)
The remaining Rs40 is allocated between the switch (in this case, Visa) and the
acquiring bank (Bank P). Typically, the switch charges 0.15% as “assessment fee”,
which works out to Rs15.

Exhibit 37: Step 4 - The Final Cut

SSL Daily
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SSL Daily Inst'l Equity Research | India

March 25, 2019

Domestic Closing Points (%)Change

aiding in retaining healthy growth (To view more link)

Market Breadth Advances Declines Unchanged

Last Last (%)

US Bond Yield 2 (0.01) (0.51)

Last Last (%)

SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com

Trader’s Desk–Bulk Deals

Source: NSE & BSE

SBICAP Securities Ltd

Institutional Equity Research | India

SSL “Banking De-mystified” is a series of

Credit Cards - The Changing Playbook

HDFCB 28.2% 100%

SBICARDS 16.6% 100%

RBL 2.5% 97%

AMEX 9.5% 303%

ICICI 11.1% 82% NA

AXIS 10.3% 85% NA

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 3

Credit Cards business in India – a snapshot

Source: RBI, Industry, Company, SSLe

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 4

A near-$4bn annual profit pool

Exhibit 2: Market-sizing the opportunity canvas

FY14 FY18 FY28e

No of cards (mn) 19.2 37.5 151.6

Spends (Rs bn) 1,557 4,626 33,518

Per card statistics FY14 FY18 FY28e

Spends (monthly) 6,763 10,285 18,419

Spends 81,157 123,418 221,023

Loan o/s 15,667 20,724 50,835

NII 2,193 3,109 8,642

Interchange fee 1,461 2,222 3,978

Other fees 1,169 2,203 3,945

Net Profit 605 960 1,853

Source: RBI, Industry, SSLe

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 5

Massive under-penetrated profit centre

45.0 1,000 32.0

32.5 750 24.0

Source: RBI, SSL

Source: Industry, SSL

Exhibit 8: Metros have the highest number of credit

Source: RBI, SSL

Source: RBI, SSL

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 7

Source: RBI, SSL

Source: TransUnion CIBIL, SSL

Source: Company, SSL

Denotes new cards issued during the quarter

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 8

Experimenting with emerging business models

Parameter Primary business model Secondary business model

Exhibit 16: Credit cards - the key control variables

Predominantly includes the acquisition costs, A&P expenses (largest

Denotes conversion of card spends into interest-bearing loans - key

Denotes conversion of card spends into relatively lower interest-bearing

Delinquencies Higher delinquencies/default on loans will suppress the overall profitability

Source: Industry, SSL

krishnan.asv@sbicapsec.com | deepak.shinde@sbicapsec.com March 25, 2019 | 9