Loan demand decreases and interest rates rise... Card loans 'stall'

[Asia Economy Reporter Yu Je-hoon] The long-term card loan (card loan) business, which has emerged as the main source of revenue for credit card companies, is declining. This is due to a sharp drop in loan demand following the government's Debt Service Ratio (DSR) regulations and the impact of interest rate hikes.

According to the Credit Finance Association on the 28th, the total card loan amount handled by seven domestic specialized credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) as of the end of October was 37.352 trillion KRW. This represents a decrease of about 21.5% (approximately 10.2 trillion KRW) compared to the end of the previous year (47.5981 trillion KRW).

The primary reason for the sharp decline in card loan amounts is attributed to the DSR regulations applied from this year. Since card loans are included in the borrower-level DSR, borrowers with existing loans have significantly reduced capacity to take out new card loans. Additionally, the DSR regulation for the secondary financial sector, including credit card companies, has been lowered to 50%.

The upward trend in card loan interest rates also appears to have had an impact. Despite the base interest rate hikes, the average card loan interest rates of specialized credit card companies showed a declining trend in the first half of this year: 13.66% in January, 13.54% in February, 13.26% in March, 12.98% in April, 12.97% in May, 12.92% in June, and 12.87% in July. This was because loan demand decreased from the beginning of the year, prompting each card company to lower loan interest rates through rate adjustments.

However, in the second half of the year, card loan interest rates reversed to an upward trend. The average card loan interest rate rebounded to 13.22% in August and rose to 13.92% as of the end of October, surpassing the level at the beginning of the year. A credit card company official stated, "Until the first half of the year, we were based on funds procured during last year's low-interest phase, but now, as refinancing rates soar, it has become difficult to maintain low interest rates."

According to the Bond Information Center of the Korea Financial Investment Association, as of the 18th, the 3-year bond yield for credit finance bonds rated AA+ (Shinhan, Samsung, KB Kookmin Card) was 5.823%, sharply rising by more than 3.4 percentage points compared to the beginning of the year (2.420%).

Industry insiders are concerned about profitability deterioration as the U.S. Federal Reserve's rate hike trend is likely to continue until the first half of next year. This is because, in addition to rising funding costs, the card loan business, a source of revenue, is also faltering. According to a report released by Korea Credit Rating in October, if the base interest rate rises by an additional 1 percentage point by the first quarter of next year, the increase in interest expenses for credit card companies is expected to be around 810 billion KRW. This amount approaches 29.7% of the average profit and loss of the card industry over the past three years. Consequently, the pre-tax profit of the card industry is estimated to decrease from 2.59 trillion KRW this year to 1.9 trillion KRW next year.