The Lower the Hopes for Rate Cuts, the Greater the Worries for Card Companies: "Overseas Bond Issuance Must Increase"

Concerns Grow Over Specialized Credit Finance Bond Yields Entrenching Above 3%
Bank of Korea Unlikely to Cut Rates Soon
Diversification of Funding Sources Urgent Amid Prolonged 'Lean Period'?ABS and ESG Bonds in Focus
Card Companies Must Accelerate Funding Diversification, Following Hyundai Card's 'Kimchi Bond' Example

With the Bank of Korea signaling that a benchmark interest rate cut will be difficult for the time being, credit card companies are expected to maintain a conservative management approach focused on cost control. This is because the bond yields of specialized credit finance companies (which serve as the main funding channel for card issuers) are expected to remain above 3% for the foreseeable future. Experts advise that card companies should diversify their funding sources, such as by issuing overseas asset-backed securities (ABS) or ESG (Environmental, Social, and Governance) green bonds, to reduce their reliance on specialized credit finance bonds.

According to the financial sector and the Korea Financial Investment Association on January 20, the average market rate for three-year specialized credit finance bonds (credit rating AA+) stood at 3.440% as of January 16, up 33.7 basis points (1bp = 0.01 percentage point) compared to the same period last year. The yield on these bonds soared to the mid-5% range during the Legoland default crisis at the end of the third quarter of 2022, before stabilizing to the high-2% range by the end of the third quarter last year. However, since the end of last year, rates have risen again to the low-3% range, and recently climbed to the mid-3% range following hawkish (tightening) remarks from the Bank of Korea. Earlier, on January 15, the Bank of Korea indicated its intention to maintain a tightening stance by removing the phrase "keeping the possibility of a rate cut open" from the minutes of its monetary policy meeting.

Card Companies Without Deposit Functions Face Profitability 'Vicious Cycle' Amid Rising Rates

The credit card industry believes that, given unstable real estate prices and the high exchange rate (weaker won), the monetary authorities are unlikely to lower interest rates in the near term. There is particular concern that the yield on specialized credit finance bonds could become entrenched in the mid-3% range or even return to the 4% range.

Unlike banks, which can raise funds through deposits, card companies lack deposit functions and therefore secure most of their funding by issuing specialized credit finance bonds. With these funds, they pay merchants first and later collect payments from consumers to repay bond interest. As a result, when funding costs rise, profitability deteriorates and overall business activities tend to contract, creating a vicious cycle.

On top of this, card companies are struggling to secure new growth drivers, having fallen behind banks and fintech (finance + technology) firms in future-oriented businesses such as stablecoins. An industry insider commented, "With funding costs rising and few sources of revenue, there is no alternative but to pursue austerity management." Some also point out that the regulatory environment is worsening for card companies, as seen last year when card loans were included in the total debt service ratio (DSR) regulations, further tightening oversight by financial authorities.

"Diversifying Funding Sources Through ABS and Overseas Bonds Is Essential"

Experts note that, since it will be difficult to reverse the trend of lower merchant commission rates or loosen household lending regulations, card companies must diversify their funding sources on their own. They should reduce their reliance on specialized credit finance bonds by issuing ABS or ESG green bonds, and focus on developing innovative products to discover new business opportunities and increase credit sales.

The industry is already moving quickly. Just the previous day, Hyundai Card issued a "Kimchi bond" (a foreign currency-denominated bond issued in Korea) worth 20 million dollars (approximately 29.4 billion won), reflecting the growing number of specialized credit finance companies tapping overseas bond markets.

Suh Jiyong, Professor of Business Administration at Sangmyung University and President of the Korea Credit Card Academic Society, stated, "When the exchange rate surges, issuing bonds overseas and converting the proceeds into won increases demand for the won, which can help lower the exchange rate (strengthen the won). Therefore, authorities are more likely to take a favorable view of overseas bond issuance, rather than restricting it due to exchange rate risk as they have in the past." Professor Suh added, "Card companies should take advantage of these macroeconomic conditions to actively secure funding sources beyond specialized credit finance bonds."