Interest Rate 'Soars' Loan 'Slows'... Credit Card Companies Forecast Risky Path in Second Half

Card Che 3-Year Interest Rate at 4% Range for the First Time in 10 Years

[Asia Economy Reporter Yu Je-hoon] Due to the impact of the base interest rate hike, the interest rates on card bonds have surpassed the 4% level for the first time in over a decade, signaling a challenging road ahead for the card industry’s performance in the second half of the year. Recently, long-term card loans (card loans), which have emerged as a major source of revenue, have also weakened due to regulatory measures by authorities and the rise of internet-only banks.

According to the Bond Information Center of the Korea Financial Investment Association on the 13th, as of the 10th, the 3-year interest rate on AA+ rated specialized credit finance bonds (Shinhan, Samsung, KB Kookmin Card) was recorded at 4.005%. This represents an increase of 1.585 percentage points compared to the beginning of the year (2.420%). The card bond interest rate surpassing the 4% mark is the first time since April 2012, about 10 years ago.

In response to this rise in funding costs, card companies have recently been expanding their funding sources through commercial paper (CP), asset-backed securities (ABS), and foreign currency bonds. However, since 60-70% of their funding still relies on specialized credit finance bonds, this increase in interest rates inevitably has a direct impact on the profitability of card companies. In particular, the industry anticipates that the rise in interest expense ratios will accelerate from now on, as maturing bonds are refinanced or leveraged at higher interest rates.

According to a recent simulation by Korea Ratings, assuming the year-end new issuance rate for card bonds (AA+ to AA-, 3-year) is 4.2% and the average new issuance rate for the 2nd to 4th quarters of this year is 3.8%, the interest expense ratio for card companies this year is estimated to rise sharply to 2.30% from 1.90% in the first quarter. The resulting annual increase in interest expenses is expected to be about 300 billion KRW, which corresponds to 8.8% of the card industry’s operating profit last year.

To make matters worse, card loans, which have so far helped defend card companies’ profitability, are also slowing down. In the first quarter, card loans by major card companies amounted to about 11.6 trillion KRW, down approximately 15% compared to the same period last year. This is attributed to the Financial Supervisory Service’s Debt Service Ratio (DSR) regulations and the active expansion of loans to middle- and low-credit borrowers by internet-only banks.

A card industry official said, "Since the impact of rising bond interest rates due to interest rate hikes may become more pronounced from the second half of the year, card companies are diversifying their funding portfolios through CP, ABS, and other instruments." He added, "Especially in the second half, non-performing loans that were hidden due to COVID-19 financial support may surface, making it a significant risk alongside the interest rate hikes."

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