Rising Anxiety from Saemaeul Geumgo Boosts Corporate Bond Rates... Credit Card Companies 'On Edge'

Jeonyeonchae Interest Rate at 4.4%... Up 0.6%P in 3 Months
Rising Funding Costs... Delinquency Rate Also Increasing
Growing Concerns Over Credit Card Companies' Performance

Concerns originating from Saemaeul Geumgo are increasingly spreading to the card industry. Amid significant worries over the continued tightening stance of the U.S. Federal Reserve (Fed), Saemaeul Geumgo, which has sparked fears of a bank run (massive deposit withdrawals), is flooding the market with bond supply to secure liquidity, causing bond yields to rise and consequently increasing the funding costs for card companies.

According to the Korea Financial Investment Association on the 10th, the yield on credit specialized finance bonds (AA+, 3-year maturity), a major funding source for card companies, stood at 4.400% as of the 7th. It rose into the 4% range since May and reached the 4.4% level for the first time since early March. Compared to the annual low of 3.804% recorded on March 24, this marks an increase of nearly 60 basis points (bp; 1bp = 0.01%) in about three months.

Multiple factors are believed to have contributed to the rise in bond yields. First, concerns over U.S. interest rate hikes played a role. Despite the ongoing tightening stance, indicators showing that the U.S. labor market has not yet calmed have been released, leading to speculation that the Fed may raise rates again this month. The minutes of the Federal Open Market Committee (FOMC) meeting in June also included content suggesting further rate hikes within the year, strengthening expectations for rate increases.

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Additionally, Saemaeul Geumgo’s flooding of bond supply to secure liquidity amid bank run fears is also interpreted as having impacted the market. According to the Korea Financial Investment Association, mutual finance sectors including Saemaeul Geumgo net sold bonds worth 3.2143 trillion won just last week. During the two days of May 5-6, when bank run fears peaked, about 2.4837 trillion won worth of bonds were sold off. A bond market official explained, "Initially, Saemaeul Geumgo’s bond supply was supported, but as concerns grew, buying stopped," adding, "While U.S. tightening had the greatest impact, the selling pressure from Saemaeul Geumgo also negatively affected investor sentiment."

The rise in bond yields is a direct blow to card companies. Since they lack deposit-taking functions, they rely heavily on issuing credit specialized finance bonds for funding. When bond yields rise, funding costs increase accordingly. Due to last year’s bond market tightening, credit specialized finance bond yields rose to the 6% range, and card companies are still experiencing sluggish performance. The rise in delinquency rates amid the economic downturn is also a burden. As of the first quarter of this year, the delinquency rate (over 1 month overdue principal and interest) for seven full-service card companies including Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Hana, and Woori Card rose by 0.4 percentage points to 1.5% compared to the end of last year. The ratio of non-performing loans also increased by 0.3 percentage points to 1.1% during the same period. As delinquency rates rise, the amount of loan loss provisions to be set aside also grows. This is why there are concerns that card companies’ poor performance may continue.

A card company official said, "We are already tightening our belts focusing on cost management, so the renewed rise in funding costs is a significant burden," adding, "This year will truly be challenging."

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