[Interest Rate Hike] Mixed Fortunes in Secondary Financial Sector... Insurance Companies Smile, Card Companies Cry

Insurance Companies and Asset Management Firms Breathe Easier
Card Companies Face Rising Funding Costs

[Asia Economy Reporter Ki Ha-young] As the Bank of Korea raises the base interest rate, the fortunes of secondary financial sectors such as insurance and credit cards are diverging. Insurance companies are finding relief in asset management, while credit card companies face increased cost burdens due to rising funding costs.

The Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points to 1.25% on the 14th. The rate, which had dropped to a record low of 0.5% due to the impact of COVID-19, has now returned to pre-pandemic levels.

Insurance companies welcome the rate hike as higher interest rates increase investment returns and positively affect the attraction of insurance subscribers. As interest rates rise, bond investment yields improve, making asset management more favorable. Additionally, the secondary interest margin on high-interest fixed contracts is expected to improve. Products with guaranteed interest rates of 5% or higher, sold until the early 2000s, may now see a reduced gap compared to the expected interest rates available at present.

Credit card companies are expected to face increased cost burdens due to the base rate hike. Unlike banks and insurance companies, credit card companies do not receive deposits or insurance premiums; instead, they raise funds for card loan businesses through corporate bond issuance. Therefore, as bond yields rise with the interest rate increase, credit card companies inevitably face higher funding costs.

The upward trend in funding costs for corporate bonds has already continued. According to the Korea Financial Investment Association’s Bond Information Center, as of the 13th, the average interest rate for 3-year corporate bonds with an AA+ credit rating was 2.496%. In January of last year, it was only 1.255%, about half the current level. Consequently, it is highly likely that credit card companies will raise interest rates on loan products such as long-term card loans (card loans) to offset increased funding costs.

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