[Opinion] The Need for Diversification of Card Companies' Funding Structures

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

The funding structure of domestic card companies still relies heavily on the issuance of card bonds. As of the second quarter of this year, the net issuance volume of card bonds by eight specialized card companies was 1.2 trillion KRW, and the average issuance ratio of card bonds in the total funding amount of card companies was 76.2%. This represents a 2.7 percentage point increase compared to the same period last year. In particular, large card companies tend to have a higher dependence on card bonds compared to small and medium-sized card companies. Recently, with ESG (Environmental, Social, and Governance) management emerging as a key issue, the issuance volume of ESG bonds by card companies in the first half of this year increased by about 35% compared to the same period last year. However, due to the continued low-interest-rate environment, the funding behavior of card companies preferring card bond issuance has not changed significantly.

However, recently, the Governor of the Bank of Korea hinted at the possibility of an interest rate hike within the year, leading to a continued rise in market interest rates. The 3-year government bond yield recently reached the highest level of the year in the high 1.4% range, and the long-term 10-year government bond yield surpassed 2%, the highest level since November 2018.

As a result, there is a possibility that the funding costs for card companies, which raise funds through market-based deposits, will increase in the second half of the year. The rise in issuance interest rates on card bonds could negatively affect the liquidity securing of card companies. Additionally, the implementation of the maximum interest rate reduction (from 24% to 20%) has intensified the contraction of operating margins, creating a negative situation for the profitability of card companies.

Moreover, if the Debt Service Ratio (DSR) regulation on total debt principal and interest repayment per borrower is expanded to card company members, the borrower's ability to secure card payment funds will deteriorate, increasing the likelihood of card loan defaults. If the increase in non-performing loans leads to a downgrade in the credit ratings of card companies, their funding costs could rise further, which is a serious concern. Ultimately, a rapid change in funding conditions is expected, and since this change could negatively impact the financial performance of card companies, a change in the funding structure of card companies is urgently needed.

Card companies rely entirely on market-based deposits to fund credit sales, card loans, and installment financing, making their funding structure vulnerable to financial market changes compared to banks that have deposit functions. However, card companies can reduce funding costs through asset-backed securities (ABS) issued by securitizing card receivables. This is because credit enhancement allows them to issue securities with high credit ratings. Given that the issuance interest rates of ABS are relatively lower than those of card bonds and commercial paper, the issuance ratio of ABS should be actively increased.

According to recent academic research results published by the author, it was confirmed that the higher the proportion of funding using securitized assets such as ABS, the higher the return on assets (ROA) and equity ratio of card companies. Conversely, it was also confirmed that the higher the proportion of short-term borrowings, the more the profitability and capital adequacy of card companies tend to deteriorate.

In conclusion, in preparation for base rate hikes, maximum interest rate reductions, and strengthened borrower-specific DSR regulations, a change in the funding structure focused on card bonds is urgently needed. In particular, for card companies, it seems desirable to further increase the issuance ratio of ABS, which has relatively low issuance interest rates, and to secure funds mainly through long-term bonds as much as possible.

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

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