Is the Era of 5% Funding Rates Returning for Card Companies?... Defending Soundness Amid a Complex Crisis

High Reliance on Market-Based Funding Due to Lack of Deposit-Taking Function
Rising Funding Costs and Delinquency Rates Lead to Focus on Soundness Over Expansion

Due to the effects of the economic downturn and increases in the base interest rate, card companies are facing a rapid deterioration in their financing conditions. As the benchmark rate for card company bonds—namely, financial debenture rates—has risen to the 4.5% range, there are views in the market that their actual funding costs may enter the 5% range.

Because card companies do not have deposit-taking functions, they rely heavily on market-based financing measures such as bond issuances. Rising funding costs weaken both profitability and capital adequacy, making it more difficult to manage financial soundness. This, in turn, can negatively impact credit ratings and further worsen the conditions for issuing bonds. That is why card companies are prioritizing financial soundness over business expansion.

According to the credit finance industry on July 23, the seven major dedicated credit card companies—Samsung, Shinhan, Hyundai, KB Kookmin, Lotte, Woori, and Hana—view the recent rise in financial debenture rates not merely as an increase in costs, but as a signal of a complex crisis. Funding cost hikes, a slowdown in the profitability of their main business, and increasing delinquency rates are occurring simultaneously.

According to the Korea Financial Investment Association, the three-year AA+ financial debenture interest rate stood at 4.500% per annum as of July 20. After entering the 4.5% range on July 14 at 4.505% per annum, the highest level in 2 years and 8 months, it fell slightly but soon rose back to the 4.5% mark.

Depending on future monetary policy and market interest rate trends, there is a possibility that the actual funding costs for card companies will rise into the 5% range. The last time the three-year AA+ debenture rate was in the 5% range was on January 10, 2023, when it stood at 5.088% per annum.

While card companies had anticipated higher funding rates resulting from base rate hikes, they see the recent pace and magnitude of increases as steeper than expected. According to their analysis, continued upward pressure on prices and market rates, caused independently by rising exchange rates, higher oil prices, and geopolitical uncertainty, could result in elevated funding costs persisting for an extended period.

Improving profitability is also proving difficult. It is challenging to grow revenue from their core business of credit sales, due independently to the economic downturn and the prolonged reduction of preferred merchant commission rates, and because government management of total household loans makes it hard to aggressively expand card loan operations.

Key profitability metrics are worsening in reality. According to business reports from the seven dedicated card companies, the average return on assets (ROA) at the end of the first quarter this year was 1.14%, a drop of 0.22 percentage points from 1.36% a year ago.

The decline was particularly pronounced among large card companies. Samsung Card's ROA fell from 2.47% to 1.45%, a drop of 1.02 percentage points. Hyundai Card's ROA declined from 1.83% to 1.37%, and Shinhan Card's figure dropped from 1.27% to 0.86%.

Soundness indicators are also worsening. According to the Financial Supervisory Service's Financial Statistics Information System, the average actual delinquency rate of the seven dedicated card companies at the end of the first quarter this year stood at 1.72%, up by 0.10 percentage points from 1.62% at the end of the prior quarter. This actual delinquency rate, which includes receivables overdue by more than one month and delinquent refinancing loans, is one of the industry's key soundness indicators. Lower numbers indicate better financial health.

Card companies plan to focus on selective business centered on high-quality assets and risk management for the time being. An official at a major card company commented, "The rise in funding rates is substantial, and profitability indicators are in a situation of complex crisis where swift recovery is difficult," adding, "In the second half of the year, we plan to manage our portfolio centered on high-quality assets, strengthen risk management in advance, and improve capital efficiency to reinforce solid management."

Within the industry, maintaining asset soundness is now regarded as a greater priority than pushing for deregulation of card loans or launching new businesses. It is advised that card companies, in preparation for a potentially prolonged uptrend in funding costs, should focus on increasing provisions for bad debts, strengthening equity capital, and prioritizing the write-off and sale of non-performing loans (NPLs).

If financial soundness worsens, the conditions for issuing card bonds or commercial paper (CP) will deteriorate, which could lead to funding disruptions and possible liquidity crises. If increased funding costs further limit profits and the ability to set aside provisions, both soundness and funding conditions could concurrently deteriorate.

Professor Seo Ji-yong of the Business Administration Department at Sangmyung University stated, "With ROA declining and delinquency rates rising, it is wise for management strategies to focus on survival rather than growth at this point." He continued, "The top priorities should be to increase bad debt allowances and reserves proactively and conservatively, strengthen management of vulnerable borrowers, tighten screening criteria, and adjust portfolios to stabilize delinquency rates." He also remarked, "Expanding credit sales or launching new businesses should only be pursued gradually, once trends in delinquencies and losses have stabilized."

Professor Chae Sangmi of the Business Administration Department at Ewha Womans University advised, "It is necessary to institutionalize the write-off and sale procedures so delinquent assets can be dealt with in a timely manner, for example by utilizing NPL-specialized sales agencies or asset sale funds." She also emphasized, "Efforts to expand business scale through excessive zero-interest installment promotions or other low-profit marketing should be reduced in order to make the cost structure more efficient."

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