Despite Stable Bond Market... Credit Card Companies Tighten Their Belts

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[Asia Economy Reporter Minwoo Lee] The interest rates on credit specialized financial bonds, a major funding source for card companies, have stabilized by dropping into the 4% range for the first time in a while. Nevertheless, with high delinquency amounts and unfavorable business conditions, these companies are tightening their belts, prioritizing soundness management as their top task this year.

According to the Korea Financial Investment Association on the 17th, as of the 13th, the interest rate on credit specialized financial bonds (AA+, 3-year maturity) stood at 4.780%. It has already fallen by more than 0.75 percentage points this year alone. The last time the bond rate dropped to the 4.7% range was about four months ago, in early September last year. Compared to the peak of 6.088% recorded on November 7 last year, it has fallen to about four-fifths of that level, indicating that market interest rates are stabilizing.

Despite this, card companies are emphasizing the crisis situation and have begun risk management. This is because the business outlook for this year is still expected to be challenging. According to the Financial Supervisory Service, the amount overdue by more than one month for eight major card companies including Shinhan, KB Kookmin, Samsung, Hyundai, Lotte, Hana, Woori, and BC Card was 1.4076 trillion KRW as of the third quarter last year. This represents an increase of nearly 11% compared to the end of the previous year. The delinquency amount exceeding 1.4 trillion KRW is the first time since the end of March 2020, when the economy rapidly contracted due to COVID-19. Considering the continued rise in the base interest rate until the end of last year and the spread of recession fears, it is highly likely that the delinquency amount increased in the fourth quarter as well.

Not only automobile installment financing, which was considered a future growth area, but also existing major revenue sources such as card loans have stagnated due to high interest rates. According to the Korea Federation of Credit Finance Companies, as of the end of the third quarter last year, the average interest rate on short-term card loans such as cash advances reached the legal maximum rate of about 20%. Coupled with the continuous reduction in merchant commission rates, the difficult environment is expected to persist.

Accordingly, card companies are reducing some members' credit limits and cutting back on benefits such as interest-free installments to reduce default risks. Major card companies including Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, and Woori Card reviewed individual members' usage limits at the end of last year and notified some members of limit reductions. Some even saw their card limits drop from 30 million KRW to 2 million KRW.

Moon Dong-kwon, President of Shinhan Card, is presiding over the '2023 First Half Business Strategy Meeting' held on the 13th at KINTEX in Goyang-si, Gyeonggi-do. (Photo by Shinhan Card)

Leaders of major card companies have also judged the current situation as a crisis from the beginning of the year, emphasizing soundness management and solid business operations. Moon Dong-kwon, CEO of Shinhan Card, the industry leader, defined this year as a complex crisis environment at the first half business strategy meeting held on the 13th at KINTEX in Goyang. He said, "Only the determination to survive by adapting and to disappear by complacency will be a powerful driving force to overcome the complex crisis of uncertain environment, competition, and customs," and urged, "Let us prioritize protecting and growing customer value and make a new leap forward through differentiated competitiveness and continuous change." On the same day, Lee Chang-kwon, CEO of KB Kookmin Card, held a first half management strategy meeting and emphasized, "Since this is a foreseeable risk, rather than passively or defensively avoiding risk, let us overcome the crisis through thorough response."

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