"Next Year's Card Industry: Increased Funding Costs Are a Given... The Key Is Managing Multiple Debtors"

Next Year’s Credit Card Company Interest Expenses to Increase by 1 Trillion Won Compared to This Year 'Constant'
Focus on Asset Soundness Leading Indicators... "Managing Multiple Debtor Risks Is Key"

[Asia Economy Reporter Yu Je-hoon] Amid forecasts of deteriorating performance in the domestic card industry next year due to rising funding costs, an analysis suggests that the key point determining each card company's performance will be maintaining asset soundness, including managing multiple debtors.

According to the financial sector on the 2nd, Korea Ratings recently published a report titled "Interest Cost Increase is a Constant, Asset Soundness Management is a Variable," stating, "A decline in overall industry profitability due to increased interest costs is inevitable, but the aspect of asset soundness is different," adding, "Whether latent risks materialize or remain latent depends on how each card company establishes and implements risk management measures."

According to the report, the deterioration of card companies' performance due to rising funding costs next year is a "constant." Since card companies without their own deposit functions rely on bond issuance for 60-70% of their funding, the more funding costs increase, the more their performance inevitably worsens.

Korea Ratings estimated that card companies' interest expenses at the end of this year will increase by about 36% compared to the previous year, reaching 2.6 trillion won, and next year's interest expenses will increase by about 38% compared to this year, exceeding 3.6 trillion won. Korea Ratings noted, "If we simply assume that next year's operating revenue will be similar to this year, the increase in interest expenses alone could reduce operating profit to levels near 2019."

While performance deterioration is inevitable, asset soundness is identified as a "variable." Currently, the ratio of non-performing loans (overdue more than 3 months) stands at about 0.75% of total credit, indicating a stable atmosphere. However, the problem lies in the delinquency transition rate (normal → 2 months overdue), a "leading indicator," which has surged sharply since the second quarter. Considering that non-performing loans sharply increased around 2017 during the 2016-2018 interest rate hike period, there is a high possibility that such a pattern will recur.

Korea Ratings pointed out, "The non-performing loan ratio is strongly retrospective, but the delinquency transition rate, which can be considered a leading indicator, has been rapidly rising since the second quarter of this year, mainly in card loan assets," adding, "During the 2016-2018 interest rate hike period, the delinquency transition rate of card loan assets rose with a lag after market interest rates increased, and in this current interest rate hike period, the delinquency transition rate is also rising with a lag following the market interest rate increase."

Therefore, the biggest challenge for card companies to maintain asset soundness next year is expected to be managing multiple debtors who hold debts with multiple financial institutions. The proportion of card loan balances held by multiple debtors with two or more debts is 79.7% for short-term card loans (cash services) and 87.7% for long-term card loans (card loans). Among multiple debtors, those with three or more debts have an average delinquency rate over five years (2017-2022) of 2.5% (card loans) to 2.9% (cash services), significantly higher than the overall average of 2.4%, and account for 70% of total delinquent amounts, raising concerns about deterioration.

Korea Ratings stated, "Card companies with a high proportion of loans to borrowers with five or more debts may face a significantly increased impact of asset soundness deterioration on performance in the future and should strengthen risk management," adding, "Also, companies with a high proportion of multiple debtors in sectors such as savings banks and capital companies, where delinquency rates are rapidly rising, need to monitor the soundness trends of major borrowers in those sectors alongside risk management."

[Image source=Yonhap News]