Card Companies Unable to Smile Despite Strong Q1 Performance... Concerns Over Excuse for Fee Reduction (Comprehensive)

Pent-up Consumption Revives
Delinquency Rates Drop
Double-Digit Net Profit Growth

Risk of Defaults Rises After September COVID-19 Support Ends
Strong Performance Raises Concerns Over Justification for Franchise Fee Cuts

[Asia Economy Reporter Ki Ha-young] Credit card companies recorded strong earnings in the first quarter of this year as their net income surged. This was due to increased card usage as suppressed consumption from COVID-19 revived, along with successful business diversification efforts such as installment financing and leasing. However, despite these strong results, credit card companies seem unable to celebrate fully. The upcoming reassessment of merchant fees this year could use these strong earnings as justification for fee reductions.

According to the industry on the 27th, Samsung Card, which announced its results that day, posted a net income of 138.4 billion KRW in the first quarter, a 23.4% increase compared to the same period last year. Other card companies that released their results earlier also recorded double-digit growth rates in net income. Shinhan Card’s net income for the same period was 168.1 billion KRW, up 32.8% year-on-year. KB Kookmin Card achieved 141.5 billion KRW, a sharp increase of 72.4%. Woori Card and Hana Card also posted net incomes of 72 billion KRW and 72.5 billion KRW, rising 41.2% and 139.4%, respectively.

The strong performance was mainly driven by increased card usage as consumption rebounded from the COVID-19 slump. Additionally, credit card companies’ efforts to diversify their businesses into installment financing and leasing showed positive results. Shinhan Card’s operating revenues from installment financing and leasing were 37.2 billion KRW and 75.5 billion KRW, respectively, increasing 5.7% and 21.3% compared to the same period last year. KB Kookmin Card’s operating revenues from installment financing and leasing also surged 63.5% to 39.4 billion KRW.

A significant reduction in loan loss provisions due to declining delinquency rates also contributed. Financial support measures such as loan maturity extensions and interest payment deferrals during COVID-19 lowered delinquency rates, reducing the need to set aside provisions for potential loan defaults. For example, Shinhan Card’s delinquency rate dropped from 1.35% in Q1 last year to 0.96% in Q1 this year, a decrease of 0.39 percentage points. During the same period, KB Kookmin Card’s rate fell by 0.38 percentage points to 0.86%, and Woori Card’s by 0.49 percentage points to 0.85%. Accordingly, Shinhan Card’s loan loss provisions in Q1 this year decreased by 36.9% year-on-year to 102.1 billion KRW.

Low Interest Rates and Cost Reduction Effects... Could Provide Grounds for Fee Cuts

Despite the strong performance, the credit card industry cannot be entirely pleased. Although there is currently no need to set aside provisions due to government COVID-19 support measures such as loan maturity extensions and interest payment deferrals, there is concern that defaults could surge all at once when these extensions end in September.

Moreover, with the upcoming reassessment of merchant fees this year, the strong earnings could ironically serve as justification for fee reductions, making the outlook complex. Fee rates are determined by reviewing eligible costs calculated based on cost analyses over the past three years, including funding costs, risk management costs, and marketing expenses. Credit card companies achieved strong results last year partly because marketing expenses decreased due to the low interest rate environment and reduced overseas travel caused by COVID-19. According to the Financial Supervisory Service, the net income of eight major credit card companies last year was 2.0264 trillion KRW, a 23.1% increase from 1.6463 trillion KRW the previous year. This trend continues this year, and such cost-saving factors could be used as grounds for fee reductions.

An industry insider said, "When the government’s extension measures end in September, large provisions may need to be set aside. It remains to be seen whether these strong earnings will continue." Another insider lamented, "Although the results look good due to the illusion caused by falling delinquency rates, merchant profits are at cost level. Using good performance elsewhere to argue for fee rate reductions is essentially the case."

This content was produced with the assistance of AI translation services.