Corporate Bond Yields Reach 5% Range... Credit Card Companies 'Stagger'

Highest Level in About 12 Years... "Possibility of Profitability Deterioration"

[Asia Economy Reporter Yu Je-hoon] As the interest rate on credit specialized financial bonds surpasses the 5% mark for the first time in about 12 years, the backbone of the card industry is bending. While funding costs are soaring, loan demand is plummeting, raising concerns about long-term profitability deterioration.

According to the Bond Information Center of the Korea Financial Investment Association on the 21st, the interest rate on 3-year AA+ rated credit specialized bonds (Shinhan, Samsung, KB Kookmin Card) recorded 5.060% as of the previous day. This is a 229 basis point (1bp=0.01%) increase compared to the beginning of the year (2.768%), marking the highest level in about 12 years since 2010.

Card companies, which do not have their own deposit functions, rely on issuing credit specialized bonds for about 70% of their funding. With a capped upper limit on interest rates that can be raised, the increase in credit specialized bond rates inevitably leads to a deterioration in card companies' profitability. A financial sector official noted, "In the early 2000s, credit specialized bond rates were around 6%, but there was relatively more freedom as there was no cap on loan interest rates."

The biggest cause of the rise in credit specialized bond rates is the increase in the base interest rate. The Bank of Korea's base rate, which was 1.25% at the beginning of this year, rose by 125 basis points to 2.50% last month. Due to global inflation, the U.S. has also announced plans to raise rates until next year, so the base rate increase is expected to continue for the time being.

As the funding environment deteriorates with soaring credit specialized bond rates, credit specialized finance companies are turning their attention to corporate commercial paper (CP) and floating rate notes (FRN) instead of credit specialized bonds. Financial authorities are also requiring credit specialized finance companies to diversify their funding channels to manage liquidity. In fact, as of the first quarter, the issuance amount of CP and electronic short-term bonds maturing within one year by seven specialized card companies increased by 62% year-on-year to 38 trillion won.

However, although the proportion has decreased, since about 60% of funding still depends on credit specialized bonds, it is expected that interest rate hikes on loan products such as long-term card loans (card loans) will be inevitable. In fact, the card loan interest rates, which had been 'going against the trend,' are also poised to rise. According to the Korea Federation of Credit Finance, the average card loan interest rate of seven domestic specialized card companies as of the end of last month was 13.22%, up 0.35 percentage points from the previous month. The average card loan interest rates this year have steadily declined as follows: ▲January 13.66% ▲February 13.54% ▲March 13.26% ▲April 12.98% ▲May 12.97% ▲June 12.92% ▲July 12.87%.

The industry believes that there is a limit to raising card loan interest rates, so profitability is likely to deteriorate somewhat. A card industry official said, "As bonds issued at the beginning of the year mature, card loan interest rates will ultimately have to rise to some extent, but the increase will be limited due to maximum interest rate regulations and shrinking loan demand," adding, "In the end, it is highly likely to have a slight impact on net income."

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