[Viewpoint]Credit Card Companies' Leverage Ratio Is Too Low

This year again, the key management focus for credit card companies is business diversification. The main business area for credit card companies to focus on is the expansion of automobile installment financing. As a source of revenue for credit card companies this year, automobile financing has already established itself as a major business sector last year. According to financial statistics from the Financial Supervisory Service, the cumulative revenue from installment financing by credit card companies reached 190 billion KRW as of the third quarter last year, a 12.4% increase compared to the same period the previous year. In particular, some credit card companies operating automobile platforms saw their revenue in this sector increase by as much as 65% year-on-year. Due to the decline in merchant fee income and stricter regulations on card loans, credit card companies have been eager to discover new business opportunities, making automobile installment financing the core of their business diversification.

Credit card companies handling automobile installment financing are putting their lives on the line to secure members and enhance their platforms. Especially, some credit card companies are focusing on expanding used car installment financing by opening specialized branches for used car installment financing. This is because the number of automobile ownership transfers has recently become about twice the number of new car registrations due to the active used car market. Ultimately, this is a strategic move by credit card companies to prepare for the increased financial demand for automobile installment purchases resulting from the rise in used car transactions. The used car installment financing market is still dominated by top-tier capital companies. However, this year, credit card companies’ challenge in the used car installment financing sector is expected to be stronger than before.

However, there is a limiting factor in the expansion of automobile financing by credit card companies, which is the leverage ratio regulation. The leverage ratio regulation is a financial regulation that restricts asset expansion through debt, referring to the ratio of total assets to equity capital. The current Specialized Credit Finance Business Act (hereinafter referred to as the SCFB Act) limits the leverage ratio of credit card companies to 6 times. Considering that the leverage ratio limit for capital companies subject to the SCFB Act is 10 times, the 6 times leverage ratio for credit card companies is a differentiating factor in asset management. Recently, the average leverage ratio of the seven major credit card companies reached 5.1 times, nearly hitting the 6 times limit. Although assets from new data industries such as mid-interest loans and MyData are excluded from the leverage ratio calculation, automobile installment financing is included. Therefore, the expansion of installment financing assets by credit card companies competing with capital companies is inevitably restricted.

Despite repeated demands from credit card companies to increase the leverage ratio, the financial authorities’ response has been lukewarm. In a situation where the business areas of financial companies subject to the SCFB Act have become ambiguous, it is somewhat contrary to financial trends that only credit card companies are discriminated against in terms of leverage ratio. Moreover, the leverage ratio applied to credit card companies is lower compared to the capital adequacy indicator, the equity capital ratio. The equity capital ratio is the percentage of equity capital to total assets, with a regulatory ratio of 8% for credit card companies. When the leverage ratio, which is the inverse of the equity capital ratio, is converted to the equity capital ratio, it becomes 12.5 times, which is more than twice the current leverage ratio of 6 times.

The financial authorities’ stance to be cautious about credit card companies’ loan expansion is understandable. However, the author recently published academic research results indicating that domestic credit card companies’ loan loss provisions are set excessively high in anticipation of future risks, and that the profit contribution of loan receivables through leverage is low due to excessive risk management costs. In other words, since the risk management costs for maintaining credit card companies’ soundness have exceeded a sufficient level, the current leverage ratio regulation of 6 times needs to be reconsidered.

In conclusion, capital expansion is necessary for credit card companies to diversify their business into automobile financing. Some credit card companies are considering issuing perpetual bonds to increase the required capital for automobile financing expansion. Perpetual bonds have more than twice the funding cost compared to card bonds. Given that credit card companies lack deposit functions, increased capital costs make it difficult to secure profit margins. On the contrary, if they enter businesses with high risk premiums to compensate for high funding costs, there is a concern about deterioration in soundness. Furthermore, increased capital costs may negatively affect the launch of loan products that meet the mid-interest loan requirements, which the financial authorities are focusing on, due to reduced interest margins. It is high time for the financial authorities to urgently reconsider raising the leverage ratio for credit card companies.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]