SBI Cards IPO: Information Analysis

In 1998, SBI Cards was started as a joint venture between SBI and GE Capital. Later in 2017, GE Capital exited by selling its stake to SBI and CA Rover Holdings. Promoted by SBI - the largest commercial bank in India by deposits, advances and number of branches - SBI Cards is a pure-play credit card issuer in India. It is the second-largest credit card issuer in India, having a market share of 18 per cent in terms of the number of outstanding credit cards issued as of FY19. It operates in a competitive market of 74 players, wherein four large players (HDFC Bank, Axis Bank, ICICI Bank and SBI Cards) together account for more than 72 per cent of the market as the per cent of outstanding cards. However, despite that, SBI Cards has been successfully gaining market share from 15 per cent in FY14 to 18 per cent in FY19 in terms of the number of cards outstanding. This growth can be attributed to its aggressive marketing strategy executed by 32,677 outsourced sales personnel as of Dec 31, 2019. This has also made it a leading player in open market customer acquisitions. SBI Cards is also the largest co-branded credit card issuer in India, with 21 co-brand partners, including reputed brands like IRCTC, Air India, Etihad Guest, Apollo Hospitals, BPCL and Yatra. Its co-branded partners accounted for 24.7 per cent of its total credit card spends during the nine months period ending December 31, 2019. Business Model Credit card companies primarily have two income sources: Interest income: This is the bread and butter business of a credit card company. Initially, a credit card company provides you with an interest-free, 50-day period during which, it allows you to fully exhaust your credit limit and spend freely. Later, when this period gets over and if you are unable to settle your bill or even minimum amount due, the company starts charging you a sky-high interest rate, which can go up to 48 per cent, depending on the credit profile. This is the primary reason behind the highly profitable credit card business. It accounted for 51 per cent of the company's total revenue for the nine-month period ending Dec'19. Non-interest or fee income: Whenever we make a transaction using a credit card, the bank charges certain fees from the merchant (usually two per cent of the transaction amount). Therefore, some merchants ask you to pay two per cent extra if you make a payment using the credit card. Technically known as interchange fees, the card issuer keeps 70 to 80 per cent of this two per cent charged. The bank also charges an annual fee for credit cards, which is more of an annuity income. Additionally, it charges late fees or various penalty charges, which further add to its income. SBI Cards' total non-interest income accounted for 49 per cent of its revenue for the nine-month period ending Dec'19. What will drive the business? Demographics: India is expected to have one of the lowest median ages of 28.4 years in 2020 as compared to other countries. A total of 90 per cent of the country's population is still below 60 years. A rising working-class population, higher per-capita income and a gradual shift towards formal economy may act as a key growth driver for the credit card industry. Low penetration: Credit card penetration in India is just three per cent, which is well b