Breathing Room for Asset Expansion... Card Companies "Will Not Increase Loans Immediately"

From Next Month, Card Companies' Leverage Ratio Limit Expanded from 6x to 8x
Loan Increase Unlikely Immediately Due to COVID-19 Impact

[Asia Economy Reporter Ki Ha-young] Starting next month, the leverage limit for credit card companies, a long-standing issue, will be expanded. This provides some breathing room to pursue new business initiatives and expand loans amid declining fee income, their main source of revenue. However, it seems difficult to increase loan assets immediately. This is a preemptive response to concerns that the economic downturn caused by the COVID-19 pandemic could lead to a crisis in asset soundness.

According to the Financial Services Commission and financial authorities on the 25th, a revision to the Specialized Credit Finance Business Supervisory Regulations, which expands the leverage limit for credit card companies from the current 6 times to 8 times, has been approved. The regulation will take effect starting next month.

The leverage ratio refers to the ratio of total assets to the credit card company's own capital. It is a financial regulation that limits asset expansion through debt, restricting credit card companies from increasing loans or installment sales excessively relative to their capital due to intense competition. Under the current Specialized Credit Finance Business Act, credit card companies are subject to a leverage ratio regulation that prohibits total assets, including card loans and cash service supply amounts, from exceeding six times their capital. According to the Financial Supervisory Service, the leverage ratio of credit card companies in the first half of this year was 5.0 times, up 0.3 times compared to the same period last year.

The industry has continuously requested the authorities to expand the leverage limit. A lower leverage ratio narrows the scope of business operations. Including capital companies subject to the same Specialized Credit Finance Business Act, most financial companies have a leverage ratio limit of 10 times. Some credit card companies are approaching their leverage limits. According to NICE Credit Rating, as of the second quarter of this year, KB Kookmin Card had a leverage ratio of 5.8 times, Lotte Card 5.7 times, reaching near the limit. Shinhan Card and Hyundai Card were at 5.5 times, Woori Card 5.4 times, Hana Card 5.0 times, with six specialized credit card companies excluding Samsung Card exceeding 5 times.

Expected to be managed around 7%... Long-term boost for new business initiatives

Even with the easing of leverage regulations, credit card companies do not plan to immediately expand loans such as card loans and cash services or pursue new businesses. This is due to concerns over deteriorating asset soundness caused by COVID-19. Additionally, since financial authorities have decided to limit the leverage ratio to 7 times if more than 30% of net income in the past year was paid out as dividends, a rapid increase in the ratio is unlikely.

A representative from Card Company A said, "We have increased loans to self-employed and small business owners struggling due to COVID-19, so even if the leverage ratio rises, we will not immediately expand loans to increase profitability," adding, "Given the ongoing economic downturn caused by COVID-19, we expect to manage the leverage ratio at a maximum of 7%." A representative from Card Company B also said, "Although the leverage ratio has been eased, loans are still subject to similar regulations such as loan business ratio restrictions and ancillary business ratio restrictions," and added, "In particular, total household loan volume regulations continue, so a rapid expansion of loans is unlikely."

However, in the long term, credit card companies are expected to have more capacity to pursue new business initiatives as well as automobile installment financing, which they have entered for business diversification. A representative from Card Company C said, "Even if we do not immediately pursue new businesses or expand loans, we now have the capacity to invest in new business areas and asset expansion to discover new sources of revenue."