High interest rates make bond issuance difficult... Credit card companies' earnings 'wobble'

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[Asia Economy Reporter Yu Je-hoon] The performance of specialized credit finance companies (such as card and capital companies) is faltering due to the base interest rate hike and the resulting tightening of the bond market. Industry analysts predict that credit finance companies, including card and capital firms, will not be able to avoid a deterioration in performance caused by increased funding costs for the time being.

According to the Bond Information Center of the Korea Financial Investment Association as of the 28th, the 3-year bond yield for AA+ rated specialized credit bonds (Shinhan, Samsung, KB Kookmin Card) was recorded at 5.888%. Although the rate has slightly decreased compared to a week ago when it exceeded 6%, it remains about 340 basis points (1bp=0.01%) higher than the beginning of the year (2.420%).

The upward trend in specialized credit bond yields is influenced by the Bank of Korea's base interest rate hikes and the bond market tightening that intensified following the 'Legoland incident.' In fact, from the beginning of this month until the 28th, the net issuance of other financial bonds in the domestic bond market was -3.2423 trillion KRW. This figure is more than four times higher compared to the same period last year (-840.2 billion KRW).

The major specialized credit companies are also showing declining performance. Shinhan Card, the leader in the card industry, recorded a net profit of 175 billion KRW in the third quarter, down 26.1% from the previous quarter. Samsung Card posted 140.5 billion KRW, down 9.4%, KB Kookmin Card 106.6 billion KRW, down 15.9%, Hana Card 46.8 billion KRW, down 26.8%, and Woori Card 44.8 billion KRW, down 6.3%.

A representative from a specialized credit company said, "While merchant fees and marketing costs are factors, the biggest pressure currently squeezing specialized credit companies is funding costs," adding, "If this were the early 2000s, we could respond by raising fees or (loan) interest rates, but with the legal maximum interest rate barrier in place, we have to endure the profitability deterioration caused by increased costs as is."

Recently, beyond the increase in funding costs, issuing bonds itself has become difficult. Hyundai Card conducted a demand forecast on the 25th for a 100 billion KRW scale specialized credit bond issuance, but the subscription volume reportedly remained at about 80 billion KRW. Considering Hyundai Card holds a relatively high credit rating (AA0), the pain for card and capital companies with lower ratings is expected to be even greater.

The performance deterioration is expected to continue for the time being. According to a stress test conducted by Korea Ratings, assuming an additional 1 percentage point base interest rate hike until the first quarter of next year, 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. Consequently, the card industry's pre-tax profit is estimated 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 about 36.6% of the capital industry's profit and loss over the past three years. Accordingly, pre-tax profits are 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 volumes due to decreased demand.

Moon Dong-kwon, Vice President of Shinhan Card's Management Planning Group, stated in a recent conference call, "Recently, funding costs across specialized credit companies have risen sharply, causing refinancing interest rates to increase rapidly," adding, "From next year, the average funding interest rate is expected to rise, leading to an increase in funding costs of about 300 to 350 billion KRW."

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