by Yoo Jaehoon
Published 13 Apr.2022 11:10(KST)
[Asia Economy Reporter Yu Je-hoon] The card industry is struggling with signs of deteriorating profitability. The funding costs are soaring rapidly due to base rate hikes, and the core business of merchant card fee rates continues to be lowered, squeezing profitability. Recently, there are even forecasts that loan demand may decrease.
According to the Korea Financial Investment Association on the 13th, the issuance yield for 3-year maturity specialized credit finance bonds with an AA+ rating recorded 3.738% as of the previous day. Following the issuance yield entering the 3% range for the first time in about 8 years at the end of last month, it is rapidly approaching the 4% range. For AA- rated bonds, the yield is even closer to the 4% range at 3.967%.
Unlike commercial banks, card companies without deposit functions raise funds through bond issuance. Recently, they have been expanding their funding channels with long-term commercial paper (CP), but last year, the proportion of card bonds exceeded 70%, indicating a high dependency. The steep rise in card bond yields inevitably has a direct impact on the profitability of card companies.
Despite the economic downturn caused by COVID-19, card companies were able to post strong results largely due to the expansion of long-term card loans (card loans). Until last year, card companies raised funds at low issuance yields in the 1% range to meet related demand. However, since the beginning of this year, card loans have been included in the Debt Service Ratio (DSR) regulations, and with rising funding costs, this structure is now being shaken.
Card loan interest rates have so far remained stable, but this is widely interpreted as a result of card companies reflecting preferential rates to respond to declining demand. A financial sector official said, "With funding costs rising and the possibility of 2 to 3 base rate hikes this year, card loan interest rates will inevitably rise in the medium to long term."
The profitability of the core business, credit sales, is also on a downward path. The authorities and the card industry reduced the preferential fee rates for small and medium-sized card merchants to around 0.5-1.5% this year through a re-estimation of eligible card fee costs. The resulting fee reduction (470 billion KRW) inevitably leads to a decrease in card companies' net profits.
On top of this, there is a forecast that loan demand at credit card companies will also decline. According to the ‘Financial Institution Loan Behavior Survey’ released by the Bank of Korea yesterday, the loan demand index for credit card companies in the second quarter of this year was -6, the only negative figure among the surveyed sectors. This index ranges between 100 and -100; a positive (+) value means the number of institutions reporting easing (increase) exceeds those reporting tightening (decrease), while a negative (-) value means the opposite.
The Bank of Korea explained that this is the expected result of reduced household loan demand due to interest rate hikes and DSR regulations. A Bank of Korea official said, "For non-bank financial institutions, the decrease in household loan demand is expected to be offset by an increase in corporate loan demand. However, credit card companies mainly handle household loans rather than corporate loans, so loan demand is expected to decrease."
However, the card industry also offers an analysis that the sharp rise in interest rates could lead to short-term revenue increases for card companies. This is because, as market liquidity dries up due to rate hikes, consumers can bridge the gap between consumption and spending through credit cards and loans. A card industry official said, "Looking at past trends, when interest rates rise, card loans and similar products often increase in the short term."
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