Yeonjeonchae Interest Rates Soar Past 4%, Approaching 5%... Card Companies on 'Emergency' Alert

Decline in YEojeonchae Issuance, Surge in FRN and Long-term CP... "Survival is the Management Policy for the Second Half"

[Asia Economy Reporter Yu Je-hoon] Card company bond yields have surpassed 4% for the first time in about 10 years and are now eyeing the 5% range. Since card companies lack their own deposit functions and must rely on market-based funding, a deterioration in profitability is inevitable. Each card company appears to be setting "survival" as their management policy for the second half of the year and preparing accordingly.

According to the Bond Information Center of the Korea Financial Investment Association on the 2nd, as of the 31st of last month, the yield on 3-year AA+ rated credit finance bonds (Shinhan, KB Kookmin, Samsung Card) was recorded at 4.864%. This is an increase of 2.44 percentage points compared to the beginning of the year (2.768%), representing a yield level rarely seen in the 2010s.

Credit finance companies such as card companies, which lack their own deposit functions, have a market-based funding ratio exceeding 50%, of which about 60-70% depends on issuing credit finance bonds. The rise in funding costs inevitably leads to a deterioration in card companies' profitability, heightening tension across the industry.

The issuance volume of card company bonds is decreasing. According to NICE Credit Rating, from the beginning of this year until the 23rd of last month, the cumulative issuance of credit finance bonds by domestic card companies amounted to about 9.6 trillion KRW. This is approximately a 36% decrease compared to the previous year. This decline is due to the increase in issuance of Korea Electric Power Corporation bonds (AAA rating) amid a large-scale deficit situation in the first half of the year, which reduced demand for relatively inferior credit finance bonds along with rising market interest rates.

Although the demand for credit finance bonds has improved since the second half of the year, the likelihood of continued base rate hikes means funding difficulties are expected to persist. An industry insider stated, "Recently, even top-tier credit finance companies are feeling tight in securing funds."

In response, card companies are expanding the proportion of short-term bonds and issuing floating rate notes (FRN) and long-term commercial paper (CP). In fact, the cumulative FRN issuance from January to August was about 3.9 trillion KRW, more than ten times the 330 billion KRW issued in the same period last year, and long-term CP issuance increased by about 70% to 6.6 trillion KRW.

Regarding this, NICE Credit Rating commented, "Despite the unfavorable funding market environment, card companies are expected to manage liquidity risk stably in the future. However, if market interest rates surge sharply or the funding market is shocked again, they will utilize their held liquidity," adding, "This could lead to a decline in card companies' liquidity management capabilities."

The problem is that market conditions are worsening alongside the funding environment. Rate hikes are inevitable at least until the end of the year, and with the possibility of an economic recession emerging, consumer outlook is not bright. According to the Bank of Korea, the Consumer Confidence Index (CCSI) rose to 88.8 last month after four months but still remained below 100. The CCSI uses 100 as a baseline, with values above indicating optimism compared to the long-term average, and values below indicating pessimism.

A card company official said, "Until the first half of this year, performance was driven by funds raised during the previous low-interest-rate environment and increased credit sales following the lifting of COVID-19 social distancing measures, but the outlook for the second half is not easy," adding, "With rising funding costs and the possibility of an economic recession, the entire industry has set survival as the management policy for the second half."

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