Your first quarter profits have declined and the NII has come under pressure, while profits have improved on a sequential basis. What explains this decline in profitability?
Profitability wise if we start from the gross income, on a year-on-year basis, it is a 12% increase in sequential terms as compared to the last quarter. We were holding ground despite being impacted by the second wave which did impact spends on the cards. Then again, the cost of funds continues to be a good story. We continue to record improvement in the cost of the funds. Operating costs, in as much as our sourcing during the quarter, is higher as compared to the first quarter in the last year. Operating costs have slightly elevated.
Overall if you look at earnings before credit cost, which is the core operating performance, we recorded improvement both quarter on quarter and year on year. Barring the elevated credit cost which again is a function of second wave impacting most part of the first quarter, credit costs are slightly elevated. But despite elevated credit cost, the PAT is at a very satisfactory level of Rs 305 crore which is 74% improvement sequentially, 23% year on year decrease, leaving a return on average assets of 4.5%. In the backdrop of a very aggressive second wave, when we look at the profitability and overall business metrics, we believe we delivered a fairly strong performance.
What has led to this delinquency?
I think we have to look at the problem in two parts. One is the known problem which RBRE restructured portfolio, another is whether on quarter-on-quarter basis we are adding to the stress. So RBRE is a known problem and that is the reason we have always been prudent in terms of provisioning, providing it almost like GNPA-level kind of provisioning for 30-day delinquencies and 80% provision coverage once they turn 90 plus; that means once they become NPA.
This we have seen and this is a stress portfolio. The second wave obviously impacted our ability in terms of resolving even a small percentage out of this portfolio. So whatever RBRE was outstanding as of March which have already become NPA as on March 31st, they have flown into this because we did make lot of changes to various filters. It was holding fort and its behaviour is uniform and is business as usual. It is not adding further to our stress.
Overall, provisioning wise we have always been conservative. We carried a management overlay of around Rs 258 crore. I think the way to look at it is despite being impacted by second wave, how much are we worse off as compared to previous quarter. Actually, in sequential terms we improved marginally. As I said earlier, despite elevated credit costs because of the robust earnings, we did make a decent return on averages.
How do you see Q2 moving?
One way to look at this RBRE portfolio is – in the earlier interactions also we made it very clear – that it will be a downward trajectory as the payments come and as some of it gets charged out, the portfolio will come down gradually over a period of time which is evident from a decrease in the RBRE composition by 2 percentage points. It came down from 8% as on March to 6% as on June 2021. So, if we maintain that downward trajectory as we resolve and as we seek more payments out of this portfolio along with it, the credit cost can also be expected to reasonably follow the same trajectory presuming that the external environment does not become adverse and our collection efficiency as on date is somewhere to be particularly in the month of July.
It is almost as good as the efficiency we have seen in April. Recovery will be taking some more time. So, in a couple of months’ time we expect the recovery efficiency to come back. I can only say the wave two has delayed our downward journey in terms of credit costs, but we are surely aiming for a reduction in the credit cost over a period of time.
Let us talk about customer behaviour. How has it been in terms of credit card spends and also especially spending between discretionary and non-discretionary items?
During the second wave, customer behaviour was no different from what we have seen first quarter of last year, particularly the way they tend to postpone the discretionary expenses while the non-discretionary will still be there. Then again, customers were effortlessly migrating to online channels for their spends. It again came back in the same very strong way. So, discretionary spends have come down as expected, while non-discretionary was holding well both in percentage terms it has improved and also in absolute terms it was more or less same as last quarter.
Particularly among the discretionary items there seems to be an aberration period; people actually were very comfortable in ordering for apparel online earlier, POS used to dominate that segment but we could see migration of the people and people being very comfortable ordering apparel even though it is slightly a discretionary item. Other discretionary items like consumer durables, travel, tourism, these continue to be impacted. In fact, on a quarter-on-quarter basis, we saw a dip of 55% in travel, particularly compared with the March quarter and discretionary spends with a slight deduction of around 21%.
We have also seen a behaviour where once things open up, discretionary spends do come back very strongly. In fact, last year we were the first ones to come back to pre-COVID levels in October itself whereas industry could catch up with the pre-COVID levels in November. Another way to look at is when we look at the overall spends, particularly the credit card spends during the first quarter, they are much better than what we have seen between April to September of last year. That means the impact is not that much like what we have felt during a complete lockdown last year. We are very confident because of the impending festive season and the vaccination drive that is on the way. We are hoping that there is no third wave. Things are looking better and spends will come back strongly in the coming days.
Looking at your return ratios I notice that return on assets is around 4.5%, but the return on equity is at 18.7%. What is the sustainable ROE and ROA for SBI Cards?
If you look at the contribution of interest income versus non-interest income, particularly during the first quarter of last year, interest income was more dominant because of the moratorium as there was no obligation to pay, which elevated the interest earnings. At the same time we were barred from charging any late payment fee, etc, so obviously we lost out on the non-interest income. But the first quarter of the current year obviously has improved slightly on a year-on-year basis which increases the interest earnings, but the non-interest income which is essentially by way of some late payment fee or the processing fee what we levy while giving various loans, etc, has come back strongly.
As I said, the retail spends came to hardly 9% as compared to previous quarter and they are much better than year-on-year first quarter of last year; almost grew by 63%. That means with the increased spends we also get interchange, you also get associated business development incentives given by the networks. So a steady state scenario. You can expect interest income to contribute 50% and the non-interest income to contribute 50% with a EDCC of almost a pre-tax basis.
So, it leaves a healthy 5-5.5% ROE. That was the reason why we were able to comeback very strongly from the previous quarter where the ROA was 2.5% and now it would come back to 4.5%. This is sustainable because consumer behaviour is also changing. We are also leveraging our learning as to how we engage with the customer, how we sustain the spends and what offerings we have to make. It is a continuous journey for us. We are confident the track record profitability can be sustained.
What growth and profits can one expect for the whole year and how do you expect the asset quality to shape up going forward?
Despite the short-term situation that is prevailing, given the low penetration in the credit card industry and favourable demographic trends that are there, we are reasonably confident about medium-term and long-term growth prospects of the industry; particularly given the incentives being given by the government and regulatory receipts in terms of promoting the digital payments. I think we are very optimistic about the prospects.
Even the disruption that is happening in the digital payment system, though it appears like this may be a potential competition for the credit card industry, we strongly believe that actually can provide and augment our new customer acquisition. We are very sanguine and very optimistic. Of course, there should not be any third wave, barring that we are very confident that we are on a sustainable profitable growth.