By Harjeet Toor, Head – Credit Cards Business, RBL Bank
How are you seeing spends being affected because of COVID?
We rank among the top 4 issuers on an average retail spend per card metric at almost Rs. 11,000 per month per card. Most of our peers have a significant corporate card portfolio with spends that are around 20-30% of their total spends which are part of the published spend numbers by RBI. We have chosen to focus only on retail cards.
In the month of April, because of the lockdown, we saw this decline by almost 60%, in line with what you saw in the rest of industry. However, since May 4 when lockdown started easing in some areas of the country we have seen these spends increase by almost 35% in the past week. We expect another large spike in spends the moment there is more easing in the top 10-15 cities which unfortunately are part of the red zone today.
Now to give you a flavor of where our customers spend on our card. Almost 75% of our card spends are towards grocery, fuel, utilities, telecom, wallet loading, health/insurance, food etc. which are very steady and resilient spend categories. The share of spends on our cards in areas which could see a prolonged COVID impact like entertainment, travel etc. are a very low proportion of our spends at about 6%. This has been on account of the type of co-brands we have chosen to be part of.
So when life starts returning to normal and movement begins across the country, we expect two trends to play out, first – spends on day to day expenses to return to pre-COVID levels and secondly, we see a rise in spend categories like lifestyle, ecommerce, fuel, food delivery etc. because of pent-up demand and also accelerated conversion from cash to card. The spend categories which would recover with a lag, as described above, in any case are a low proportion of the spends (only 6%).
What is the profile of the Bank’s card customers?
70% of our customers are salaried. In the balance self-employed segment, we have very stringent card on-boarding parameters. In fact because of this the difference in delinquency levels between salaried and self-employed is only 30-40 basis points in our portfolio. 82% of the customers have another credit card at the time of our card issuance. 95% of these customers have cards issued by the top 4 players in the industry. This therefore means our carded segment is quite similar to these players. The balance 18% who don’t have a card are credit tested customers.
I would also like to highlight here that our focus in the Bajaj Finance cobrand customer selection has largely been on their top tier EMI customers who already have a credit card with someone else. Bureau data which is periodically tracked and published, shows that customers with multiple cards have loss rates that are 50% of those where there is only a single card.
In terms of the age profile, 68% of our customers have an age greater than 30 years as against 60% for the industry. Higher age groups typically denote matured borrowers having more stability both in terms of work experience, lifestyle and financial prudence. Therefore as expected, we have observed that delinquency levels also decrease with age in our portfolio.
How is the quality of the portfolio when compared to other card issuers?
I mentioned above, the steps we have taken in building a favorable client mix while building our business over the last several years. This has resulted in a portfolio where delinquency levels are significantly lower than the industry. We also track the bureau data of our portfolio delinquency measured at a (90+ dpd rate) vs the industry regularly and the results show that our 90+ dpd levels are around 27% lower than the industry.
You should remember that that the top 6 issuers (including us) account for 90% of the industry. Similarly, our early vintage delinquencies which we measure 6 months from sourcing for 30 dpd again is 28% lower than the industry. All our customer acceptance scorecards are designed to keep delinquency rates lower than industry and are tweaked regularly. This should help you get an understanding of the quality of our card portfolio. It is clearly better than the industry.
How do you see credit costs and profitability in the credit card business this year and next?
We have taken a very conservative view on credit costs and stress tested our portfolio severely for a COVID impact. Our estimate is that while our credit costs will increase, our profitability will be similar to FY20 levels and I will explain this in a little more detail We expect our total revenues for FY21 to be higher year on year, despite a marginal dip in overall spends per card. A credit card breaks even on costs in 15-18 months. We had a net addition of more than 10 lakh cards in FY20. In FY21, we expect our net additions to be significantly lower.
Typically, when new additions as a proportion of the existing base reduces, operating margins improve sharply. This is on account of much larger card base generating revenue for the full year. Further, average advances for the year are expected to grow around 10 to 15% (vs 100% previous year).
There is significantly low upfront acquisition costs. Our card growth is expected to be significantly lower than the million cards in the previous year. Majority of the costs are variable – costs related to spend promotion, rewards, service, technology etc. These automatically reduce during lockdown as well with spends and new acquisition.
As a result, our pre-provision operating income will actually be much higher in FY21 than last year. The increase in pre-provisioning operating profit will be able to absorb a significant part of the increase in credit costs we have estimated on account of COVID. As we had been saying over the last few quarters, the cards business was significantly increasing its profitability in FY20 with every passing quarter and therefore it has entered FY21 on a much higher Return On Assets (ROA) trajectory than what we saw in FY20 on the whole. However, we have chosen to be conservative with respect to provisions for credit costs on account of COVID as a result of which the profitability in FY21 will be similar to FY20.
I will also want to add one last comment. We have built this business over the last 6 years to be among the market leaders and we look at this as an important cornerstone of the Bank. We have made enormous investments as we built this business in portfolio analytics, risk, collections etc. in anticipation of credit challenges in the market in the business lifecycle. We remain confident of the long term opportunity in this segment and if we see that the external credit environment is stable, we have the ability to ramp up business quickly. We don’t expect demand to be a challenge at all.
