High Interest Rates and Bond Market Tightening... Signs of Slowing Earnings for Yeojeonsa

by Yoo Jaehoon

Published 27 Oct.2022 09:42(KST)

Card-Capital Industry 3Q Net Profit Shows Clear Decline Compared to Previous Quarter

[Asia Economy Reporter Yu Je-hoon] Due to high interest rates and the resulting increase in funding costs, the earnings of credit-specialized financial companies such as card companies and capital companies have consecutively slowed down. The industry views that, with additional base rate hikes expected by the end of the year and the bond market's tightening still ongoing, a 'difficult period' is inevitable for the time being.

According to the financial sector on the 27th, Shinhan Card, the leader in the card industry, recorded a net profit of 175 billion KRW in the third quarter. This is a 26.1% decrease compared to the previous quarter. Thanks to the first half's performance, the cumulative net profit for the third quarter increased by about 9% to 587.7 billion KRW, showing resilience, but signs of slowdown were clear. Other card companies that have announced their results so far showed similar situations. Samsung Card posted 140.5 billion KRW, down 9.4% from the previous quarter; KB Kookmin Card recorded 106.6 billion KRW, down 15.9%; Hana Card fell 26.8% to 46.8 billion KRW; and Woori Card decreased 6.3% to 44.8 billion KRW.

Although card companies expanded the scale of credit sales, the primary reasons for the signs of earnings slowdown include one-time factors such as the full impact of merchant fee reductions and increased marketing expenses related to summer vacations and overseas travel. However, the biggest cause is attributed to the rise in funding costs following the Bank of Korea's base rate hikes.

According to the Korea Financial Investment Association, the 3-year AA+ (Shinhan, Samsung, KB Kookmin) credit finance bond rate surged to 6.082% on the 21st and is currently hovering around 5.8% to 5.9%. This is about 350 basis points (1bp=0.01%) higher than the beginning of the year (2.420%). A mid-sized card company official said, "There are one-time factors such as merchant fees and marketing costs, but the biggest immediate problem is funding costs," adding, "Since there is no deposit function, the rise in funding costs inevitably affects profitability."

The performance of capital companies was similar. Looking at the results disclosed so far by holding company-affiliated capital firms, KB Capital posted a net profit of 54.7 billion KRW, down 14.5% from the previous quarter; Shinhan Capital recorded 78.8 billion KRW, down 17.1%; and Woori Financial Capital remained at 46 billion KRW, down 45%. Only Hana Capital showed a strong performance with a 24.9% increase, recording a net profit of 253 billion KRW.

Capital companies are also taking a significant hit from the rise in funding rates. Being relatively disadvantaged compared to government bonds and bank bonds, they are among the hardest hit by the recent bond market tightening. For example, a holding company-affiliated capital firm issued floating-rate bonds last week at a rate about 50 basis points (1bp=0.01%) higher than the average market rate.

For the time being, the rise in funding costs for credit-specialized financial companies and the resulting deterioration in profitability appear unavoidable. Moon Dong-kwon, Vice President of Shinhan Card's Management Planning Group, said in a recent conference call, "Recently, funding costs across credit-specialized financial companies have risen sharply, and the interest rates that need to be refinanced have also surged," adding, "From next year, the average funding cost is expected to increase, which will lead to an increase in funding costs of about 300 to 350 billion KRW."

A credit-specialized financial industry official said, "Due to the recent bond market tightening, refinancing issuance itself is becoming difficult," adding, "Although the government is operating a 50 trillion KRW bond market stabilization fund and corporate bond/commercial paper (CP) purchase programs, a significant portion is concentrated on high-credit corporate bonds rated AAA to A, so it is necessary to expand these programs to include card and capital bonds as well."

[Image source=Yonhap News]