High-Interest Bonds Soar... Both Card Companies and Customers on Alert

Approaching 5% Again Since Early Year... Emergency in Funding for Female Warriors
Cash Service and Revolving Interest Rates Already at 17% Expected to Rise Further
"Need to Resolve Funding-Related Regulations"

As domestic and international tightening policies intensify, the bond market has frozen, and the interest rates on specialized credit finance bonds have risen close to 5%. With the lifting of restrictions on bank bond issuance, card companies and capital companies are facing an emergency in fundraising. The worries of loan customers of credit finance companies are also expected to deepen. Since there is a time lag for bond issuance interest rates to be reflected in loan interest rates, cash service and revolving (partial amount carry-over agreement) interest rates, which have already reached the 17% range, are expected to approach the legal maximum interest rate even more.

According to the Korea Financial Investment Association on the 23rd, the interest rate on specialized credit finance bonds (AA+, 3-year maturity) recorded 4.814% as of the 20th. Compared to 4.681% on the 12th, it rose by more than 0.13 percentage points in just over a week. The interest rate on specialized credit finance bonds, which had fallen to the high 3% range at the beginning of the year, is now again approaching 5%. Specialized credit finance bonds are a major fundraising tool for credit finance companies such as card companies and capital companies, which do not have deposit functions.

This is interpreted as an effect of the freezing of domestic and international bond markets, such as the 10-year U.S. Treasury bond yield surpassing 5% for the first time in 16 years since July 2007. As expectations grow that domestic and international tightening policies will continue, the upward trend in interest rates is expected to persist for the time being.

The financial authorities' lifting of restrictions on bank bond issuance has added fuel to the fire. As demand concentrates on relatively attractive bank bonds, specialized credit finance bonds are being neglected, and credit finance companies are feared to be caught in a vicious cycle where they have no choice but to raise issuance interest rates reluctantly. At the end of last year, interest rates also rose sharply, and the bond market froze due to incidents such as the Legoland case, with bank bonds playing the role of a financial black hole. As the situation became urgent, card companies even issued ultra-short-term bonds with maturities of less than one year. Last month, the issuance amount of bonds with maturities under one year by card companies was about 750 billion won, an increase of more than 50% compared to the previous month. Typically, credit finance companies raise funds with maturities under one year through commercial paper (CP).

As funding costs inevitably rise, the outlook for credit finance companies' performance this year is also clouded. According to the Financial Supervisory Service, the net profit of eight domestic full-service card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Hana, Woori, BC Card) in the first half of this year was 1.4168 trillion won, down about 13% compared to the same period last year. Although credit and check card usage increased by 8% during the same period, the burden of funding costs offset this. As the funding situation has not improved, there are forecasts that performance will be even worse by the end of the year.

Loan customers of card companies are also distressed. This is because the already soaring loan interest rates are expected to rise further. According to the Credit Finance Association, the average interest rate on short-term card loans (cash services) of eight full-service card companies at the end of last month was 17.51%, up 0.05 percentage points from the previous month. Hana Card, KB Kookmin Card, and Lotte Card have already surpassed an average cash service interest rate of 18%. The average revolving interest rate also rose by 0.18 percentage points to 16.37% compared to the previous month. Considering that it takes about three months for bond issuance interest rates to be reflected in loan interest rates, card company loan interest rates are expected to rise for the time being.

If loan interest rates rise, delinquency rates may also increase accordingly. As of the first half of this year, the delinquency rate of card companies was 1.58%, up 0.38 percentage points from the end of last year. The delinquency rate on card loans reached 3.67%. A credit finance industry official said, "The situation continues with no good news," adding, "Relieving asset-backed securities (ABS) regulations or allowing new foreign currency bond issuance will be necessary to ease the situation."

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