[Base Rate 3%] Non-bank Corporate Bond Yields Hover Above 6%... Card and Capital Companies Face 'Cloudy' Outlook

Funding Difficulties for Card and Capital Companies... Performance Deterioration Inevitable

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] As the era of a 3% base interest rate reopens, the interest rates on specialized credit finance bonds (specialized bonds) are also eyeing the 6% mark. It is evaluated that the deterioration of earnings for specialized credit finance companies such as card and capital companies, which rely on bond issuance for funding, is inevitable.

According to the financial sector on the 13th, the interest rate on a 3-year AA+ rated specialized bond was recorded at 5.728% as of the 11th. This is an increase of 330 basis points (1bp=0.01%) compared to the beginning of the year (2.420%). Although it slightly fell to 5.511% on the 12th, the upward trend is likely to continue as Lee Chang-yong, Governor of the Bank of Korea, mentioned a final year-end interest rate level of up to 3.5%.

This sharp rise in interest rates is quite unfavorable for specialized credit finance companies such as card and capital firms. Since they do not have their own deposit functions, they rely on bond issuance for about 70% of their funding. Moreover, recently, a large amount of Korea Electric Power Corporation bonds (KEPCO bonds, AAA rated) have flooded the market, and with interest rates surpassing the 5% level, demand for specialized bonds is further squeezed.

As funding conditions tighten, specialized credit finance companies are diversifying their funding sources. For example, card companies have recently diversified their funding by issuing long-term commercial paper (CP) and asset-backed securities (ABS), and are also expanding floating rate notes (FRN) whose interest rates vary with market rates. According to Korea Credit Rating, the proportion of FRNs among card bonds issued this year surged from 24% in the first quarter to 46% in the second quarter.

The industry expects that earnings deterioration in the specialized credit finance sector is inevitable as further interest rate hikes are anticipated for the time being. Korea Ratings conducted a stress test assuming an additional 1 percentage point increase in the base interest rate by the first quarter of next year, and the increase in interest expenses next year is expected to be around 810 billion KRW. This approaches 29.7% of the card industry's average profit and loss over the past three years. Accordingly, the pre-tax profit of the card industry is expected to decrease from 2.59 trillion KRW this year to 1.9 trillion KRW next year.

Capital companies are also predicted to see interest expenses rise from 230 billion KRW this year to 1.55 trillion KRW next year. This accounts for 36.6% of the capital industry's profit and loss over the past three years. The pre-tax profit is also expected to decline from 4 trillion KRW this year to 2.68 trillion KRW next year. In particular, small and medium-sized companies with lower credit ratings are expected to reduce bond issuance volume due to decreased demand.

A representative of a specialized credit finance company said, "Interest rates in the 6% range were only seen before the 2010s, but now there is a regulation called the legal maximum interest rate (20%), making it more difficult to respond. Even now, it is difficult to bear funding costs, and if interest rates rise further, we may have to reduce credit sales by cutting back on marketing."

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