[Second Financial Sector Under Stress]③ Avoided PF... But Card Companies Face Tough Year

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Last year, credit card companies that experienced a 'top-heavy' trend are expected to face a challenging period again this year. Although they avoided the real estate project financing (PF) risks that swept through the financial sector, the proportion of non-performing loans classified as fixed or below has increased, and consumer spending is also expected to contract, leading to intensified survival competition, analysts say.

According to the Financial Supervisory Service's Financial Statistics Information System on the 26th, the balance of fixed and below non-performing loans of seven specialized credit card companies?Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana?was recorded at 1.3764 trillion KRW last year. This represents a 15.8% (187.5 billion KRW) increase compared to the previous year. Fixed and below non-performing loans refer to loans overdue by three months or more and are considered a measure of financial institutions' credit risk. The increase in credit card companies' fixed and below non-performing loans compared to the previous year is the first in four years since 2019.

Except for Samsung Card, which saw a decrease of 9.2 billion KRW compared to the previous year, all other credit card companies experienced an increase in fixed and below non-performing loans. Woori Card had the largest increase, rising 120.5% (65.3 billion KRW) year-on-year. This was followed by Lotte Card (41.3%, 60.6 billion KRW) and Hana Card (20.9%, 12.7 billion KRW). In terms of ratio, Lotte Card had the highest at 1.12%, up 0.18 percentage points from the previous year. Lotte Card also had the highest ratio of watch-listed and below non-performing loans, which refers to loans overdue by one month or more, at 6.1%. This is attributed to its significant exposure to real estate PF loans.

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Among major credit card companies, Lotte Card and Shinhan Card are identified as having ventured into real estate PF. At the end of last year, Lotte Card held the largest balance of short- and long-term loans and other loan receivables excluding household loans, amounting to 2.7861 trillion KRW. According to estimates by NICE Credit Rating, Lotte Card's real estate PF loan amount was 1.449 trillion KRW as of the first half of last year, more than five times that of Shinhan Card (290.1 billion KRW). However, it is assessed that there are no significant problems like those faced by capital or securities companies. NICE Credit Rating explained, "Considering the location of the projects, business stages, and repayment priority, Lotte Card's PF exposure risk is relatively favorable compared to large securities firms and AA-rated capital companies."

Although the risk from PF loans was avoided, it is too early to be complacent. First, delinquency rates mostly increased. Except for Samsung Card, which recorded a 0.95% delinquency rate, down 0.05 percentage points from the previous year, all others exceeded 1%. Woori Card had the highest delinquency rate at 1.65%, up 0.7 percentage points year-on-year. This was followed by KB Kookmin Card (1.34%), Hana Card (1.30%), and Shinhan Card (1.20%).

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Although the interest rate rise may somewhat ease this year, there are calls to continue focusing on managing credit quality, including delinquency rates. An executive from a credit card company said, "Since a 0.1 percentage point change in delinquency rate can affect hundreds of billions of won in performance, we have been putting all our efforts into managing delinquency rates from the end of last year to early this year, when funding costs surged." He added, "Since many credit card customers are multiple debtors, there is a strong atmosphere to continue various credit quality management efforts this year as well."

The burden of fees for simple payment services could also become an issue. If Apple Pay, which charges a fee of about 0.15% of the payment amount, expands, additional fee burdens will be inevitable. In this case, Samsung Pay, which has not demanded fees per transaction so far, might also start charging fees. With merchant fee rates already on a downward trend, any additional fee burden would make it difficult to avoid profitability deterioration.

Moreover, due to higher funding costs compared to previous years, interest expenses are expected to reach 1 trillion KRW this year alone. Although the interest rates on specialized credit finance bonds have stabilized compared to the end of last year, they remain at 3.8?3.9%, which is 1.4 percentage points higher than early 2022, increasing refinancing burdens. Hyunsoo Ha, a researcher at Korea Ratings, predicted, "As a result of aggressive asset growth during the COVID-19 period, the volume of refinancing has significantly increased compared to the past. Considering the difference between new issuance rates and maturing bond rates, the interest expense burden for credit card companies is expected to increase substantially over the next two to three years."

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