On April 15, Citibank (Citi) announced that it will sell its Indian retail banking business. This is part of the American bank’s plan to exit retail banking operations in several Asia-Pacific countries like China, Australia, South Korea, Indonesia, including India, among others. Jane Fraser, the bank’s CEO said that Citi couldn’t scale quickly enough to compete against domestic rivals.

After Citi’s departure from India was announced, a stock which after trading at a three-month low, closed the day higher by 7% was State Bank of India’s (SBI) payments services and credit cards subsidiary SBI Cards and Payment Services (SBI Cards).

The street expects the credit card issuer to be one of the prime contenders to take over Citi’s credit card business. But is Citi’s Indian credit card business worth it? What does it offer, and will SBI Cards be the only horse in the race or will HDFC Bank also compete for Citi’s customer base? 

We looked for some of these answers.

Credit cards the main play

Citi is primarily a credit card loan provider. This is evident in its primary market of the US where credit card loans form 53% of its retail banking portfolio of $172 billion (Rs 13 lakh crore) as of March 2021. This is because of high credit card penetration, which stands at 320% of GDP per capita in the US. On the other hand, India’s credit card penetration is 4% of GDP per capita. This is the same theme in other Asia Pacific (APAC) and Latin America (LATAM) countries.

Citi’s retail banking business will be divided and sold in a piecemeal fashion. This comprises - credit cards, wealth management, mortgages, and deposit accounts. Since Citi’s main business lies in retail credit cards, this will be the most prized possession on offer for Indian banks. 

Collectively, Citi’s Indian assets are worth $4.1 billion (Rs 30,700 crore) or 1.5% of its global assets. The Indian credit card portfolio is worth 51% of its total Indian assets at $2.1 billion (Rs 15,700 crore). 

Citi leads transaction volume, trails in market share

One in every four outstanding credit cards in India is issued by HDFC Bank, the market leader. SBI Cards trails the private bank with a 19% market share followed by ICICI Bank (17%), and Axis Bank (11.4%). Analysts expect SBI Cards and these banks to be the front runners in the bid for Citi’s credit card assets.

As of February 2021, Citi had 26.5 lakh outstanding credit cards, 4.3% of all credit cards issued. These credit cards rack up Rs 3,077 crore in monthly transactions, 5% of total monthly credit card transactions.

What bidders will be eyeing is Citi’s high-volume credit card transactions. Lenders want customers who make recurring transactions with the same credit card. Every outstanding Citi credit card accounted for four transactions - higher than any other credit card issuer. The leading domestic bank - HDFC Bank’s credit card generated three transactions, and the leading foreign bank - HSBC’s credit card generated 2 transactions per card.

Credit card companies prefer higher spenders as it increases their loan book. Foreign banks usually attract higher spenders than domestic banks. In 2012, every Citi credit card customer spent Rs 7,300 per month on average. HDFC Bank and SBI Cards credit card customers spent between Rs 3,500-4,000 in 2012. By 2021, Citi’s monthly expenditure per credit card rose by 59%. SBI Cards’ monthly expenditure per card rose by 168% between 2012-2021, the most by any credit card issuer. HDFC Bank and Citi’s credit card monthly expenditure is 30% higher than SBI Cards. But the pure-play credit card issuer is looking to increase the monthly credit card spend.

SBI Cards rapid scale-up

HDFC Bank has a higher market share in the credit card sector, but SBI Cards is the frontrunner. This is because SBI Cards’ number of credit cards issued has grown more than the private bank in the previous decade.

In 2012, the credit card market was dominated by HDFC Bank (40% market share). The next biggest credit card issuers were ICICI Bank (20% market share) and Citi (17% market share). SBI Cards was trailing in the credit card market (11% market share) despite dominating the debit card market (33% market share).

SBI has put its weight fully behind SBI Cards. This has allowed SBI Cards’ outstanding credit cards to grow at a compounded annual growth rate (CAGR) of 20.5% between 2012-2021 to 1.1 crore credit cards. During the same period, HDFC Bank’s and Citi’s outstanding credit cards grew at a 12% and 1.5% CAGR to 1.5 crore and 26 lakh credit cards respectively.

This rapid growth allowed it to close the market share gap compared to HDFC Bank. Other private banks that recorded a higher CAGR growth in the period were - Kotak Mahindra Bank (33%) and Axis Bank (28%). However, the growth was on a lower base of 1.8 lakh and 7.3 lakh credit cards in 2012 (SBI Cards’ 2012 base was 22 lakh credit cards). 

If SBI Cards takes over Citi’s credit cards business, the former’s market share will increase to 22.4%.

HDFC Bank hamstrung, SBI in pole position

In December 2020, the Reserve Bank of India (RBI) restricted HDFC Bank from sourcing new credit card customers. This was due to several outages in the bank’s internet banking, mobile banking, and payment gateway services between 2018-2020. This will prevent HDFC Bank from issuing additional credit cards and puts the private bank out of the running to bid for Citi’s credit card portfolio. The central bank did not provide a timeline for the lifting of the restriction. The latest incident of an outage occurred as recently as March 30.

The effect of the restriction was felt in the bank’s card loan book growth in Q4FY21. Analysts suggest that this lack of clarity on the RBI ban could further dampen the bank’s credit card business in FY22.

SBI Cards, on the other hand, is growing its customer base. In a recent interview, Rama Mohan Rao, the CEO of SBI Cards said, “there is plenty of runway [for growth] left.” This growth is on the back of a positive end to FY21. In Q3FY21, SBI Cards retail credit card spend (82% of total credit card spend) recovered to pre-Covid levels. 

In FY20, 50% of new accounts were sourced from SBI customers, up from 35% in FY17, and is expected to be higher in FY21. Rao said that SBI Cards will tap into the SBI customer base and increase penetration in tier-2 cities and beyond in FY22. This points to long-awaited growth for SBI Cards’ business.

Since listing on the eve of India’s Covid-19 crisis last year, SBI Cards’ stock is up 41% while the Nifty 50 is up by 68% and SBI by 78%. SBI Cards debuted at a discount of 10%, for investors who are holding on since the IPO, the gains stand at 27%. But positive signs for the only pure-play credit card company are there and Citi’s exit will only add to it.

Citi’s credit card business will leave a respectful market share (4.3%) up for grabs. This includes high spending and high volume customers that SBI Cards does not already have. SBI Cards already has the potential 45 crore customer base of SBI to source customers. Its outstanding credit cards have grown at a 20.5% CAGR between 2012-2021, and retail deposits are up 18% since the start of the year. 

With these factors in place, SBI Cards may finally have its moment in the sun. Investors holding the stock should have reasons to perk up.