Next Year Interest Expenses Increase by 1 Trillion Won... Card Companies Busy with Countermeasures

Diversifying Funding Routes and Reducing Demand through Demarketing

[Asia Economy Reporter Yu Je-hoon] A red light has been turned on for the performance outlook of domestic credit card companies next year. This comes as an analysis suggests that interest expenses from funding next year could reach about 3.6 trillion won, which is 1 trillion won more than this year's (estimated) amount, due to the impact of base rate hikes and bond market tightening.

According to the financial sector on the 11th, as of the 9th, the interest rate on 3-year AA+ rated credit finance bonds was 5.759%. Although this is a level adjusted down from the annual high point above 6%, it is still more than 300 basis points (1bp=0.01%) higher than the beginning of the year (2.420%).

Card companies, which do not have their own deposit functions, raise funds for their business through credit finance bonds, commercial paper (CP), asset-backed securities (ABS), etc. Among these, the proportion of credit finance bonds reaches 60-70%. The more interest expenses increase, the more profitability is inevitably adversely affected.

In particular, the card industry has expanded assets through aggressive funding during past low-interest periods, but as the interest rate hike phase begins in earnest, both refinancing rates and scale are becoming burdens. Recently, the interest rate gap between newly issued bonds and maturing bonds of each card company has widened to about 4 percentage points, and the amount maturing next year that must be refinanced accounts for about 37% of total borrowings (97 trillion won as of October).

Korea Ratings recently estimated in a report that card companies' interest expenses at the end of this year will increase by about 36% from the previous year to 2.6 trillion won, and next year's interest expenses will increase by about 38% from this year to more than 3.6 trillion won. Korea Ratings pointed out, "If we simply assume that next year's operating revenue will be similar to this year, the increase in interest expenses alone could reduce operating profit to near the 2019 level."

Card companies facing a tough period are actively preparing countermeasures. In addition to existing bond issuance, long-term CP, ABS, and fund borrowings are increasing. Shinhan Card, the industry leader, recently borrowed 400 billion won from Shinhan Bank, which is in the same group, and Lotte Card also issued ABS worth 300 million dollars based on credit card sales receivables.

Demarketing (marketing to reduce customer demand) is also part of the response. Despite the year-end when consumption is concentrated, each card company is reducing interest-free installment benefits applied to merchants and cutting various events and benefits. As a result, customer demand is being reduced. A card company official said, "Refinancing rates are so high that securing margins is difficult," adding, "Demarketing is also appearing in the auto loan market, where card companies once competitively entered, with new marketing significantly decreasing."

[Image source=Yonhap News]

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