Credit card IPO shows good side of Indian banks

India’s small club of richly valued financial institutions is about to get a new member. The credit card unit of State Bank of India, the country’s largest lender, is preparing for a likely $1.3 billion initial public offering. Amid the country’s raging financial fires SBI Cards and Payment Services shows what state-controlled companies can achieve when they are run more professionally.

Credit cards are taking off in India’s underbanked market. Just 4% of the population currently flashes the plastic. However, that’s changing quickly: the number of cards in issue grew at a 22% compound annual rate over the last four years as traditionally parsimonious Indians spend more and embrace digital payments. SBI Cards, the country’s second-largest operator with about 18% share of cards and spend, is in a prime position to take advantage.

In a country where state-owned financial institutions are almost synonymous with bad loans, SBI Cards bucks the trend. While its parent lender barely scrapes a 6% return on equity, SBI Cards delivered 36% in the six months to end September, just ahead of what global giant American Express earned for its shareholders last year. And it’s not one-off. Another subsidiary from the same owner, SBI Life Insurance, also stood out when it was spun off two years ago.

Good management has helped. Many of SBI Cards's senior executives are from GE Capital, even though the U.S. conglomerate sold out in 2017, offloading much of its stake to buyout firm Carlyle. As a separate subsidiary SBI Cards can hire more freely, pay more competitive salaries, and offer staff financial incentives, all in stark contrast to its government-controlled parent.

These advantages will help support a market value of just over $9 billion, or around 45 times its annualised earnings for the six months to the end of September. That will allow Carlyle to sell just over half its stake at a hefty profit.

India has no other listed credit card companies, but the multiple is in line with valuations of financial stocks like Bajaj Finance, which have benefited from a flight to safety despite a sharp consumer-led economic slowdown that could ultimately drive up bad retail debts. For now, State Bank of India’s offshoot is showing off the better side of Indian finance.