INTERVIEW Credit card firms feared to suffer asset quality decline amid growing delinquencies: Fitch Solutions-affiliated analyst

gettyimagesbank

The profitability of three leading local credit card firms will face challenging months of decline, strained by softening economic growth leading to lower transaction volumes, as dampening consumer sentiment shows no signs of immediate recovery, according to a Fitch Solutions-affiliated analyst. The three are KB Kookmin, Shinhan and Woori.

Further fueling the pessimism are political uncertainties in the aftermath of President Yoon Suk Yeol’s botched martial law imposition and the ensuing impeachment proceedings, which may have delayed fiscal measures to boost retail spending, Karen Wu, associate director at CreditSights, a Fitch Solutions company, said in a recent interview with The Korea Times.

However, a slower-than-expected monetary easing by the Bank of Korea (BOK) can help limit the rapid decline in funding costs. This is a rare upside to the card firms exposed to higher financial soundness deterioration concerns compared to commercial lenders that handle robust-credit, high-income borrowers, she said.

Karen Wu, associate director at CreditSights / Courtesy of CreditSights

“The card firms are expected to encounter several challenges this year,” Wu said, adding subdued consumer sentiment can weaken transaction volume growth.

An economic slowdown leads to increased credit costs, mostly due to higher default risks from consumers and businesses undergoing financial stress at a higher rate. This overall bleak macro environment is compounded further by Korea-specific uncertainties, the director said. “The possibility of fewer rate cuts by the BOK to protect the country’s currency against the U.S. dollar could slow down the decline in funding costs for card firms.”

Chief among the challenges is, she added, the implications of softening economic growth, tied closely to the operating performance of the card firms this year. “Nonetheless, the card firms are well-capitalized, and liquidity has not been a concern so far, as Korea's domestic financial markets have remained stable.”

Diversification

The financial groups’ efforts to diversify their noninterest income portfolios and the resulting strengthening of the business strategy of the card affiliates, in her view, is a positive development.

“We think the Korean financial groups have been very good at diversification and have a wide range of nonbank companies with their groups — insurance, cards, leasing, security houses and trust institutions,” she said.

The groups have consistently sought to expand their nonbank businesses, and the card companies are significant contributors to the profits of their financial groups.

“We anticipate that they will continue to receive strong support from their parent companies. From an investment perspective, we have market perform recommendations on the three card companies we cover," Wu said.

Delinquencies

In the fourth quarter of 2024, there was an observed increase in delinquency ratios, she noted. “Clients of credit card companies tend to be more vulnerable to economic downturns compared to those of banks. We anticipate that credit card companies will continue to experience pressure on asset quality this year. Higher delinquencies will lead to increased credit costs, which could weaken the profitability of credit card companies.”

According to financial market data, the proportion of delinquencies of card loan borrowers who failed to repay for over a month is on the rise.

Data from card affiliates of KB Kookmin, Shinhan, Hana and Woori groups showed their loan delinquency rate averaged 1.53 percent at the end of last year.

Hana Card had the highest rate of 1.87 percent, followed by Shinhan (1.51 percent), Woori (1.44 percent) and KB Kookmin (1.31 percent).

The figures are not a red flag yet since they remain below 2 percent. However, they have been increasing for three consecutive years, up from an average of 0.8 percent at the end of 2021.

Card loans charge high interest rates, but borrowing requirements are not as stringent.

This is why mid-to-low credit borrowers previously declined by commercial lenders turn to credit cards for emergency cash needs.

According to the Korea Credit Finance Association, the balance of card loans in the country surpassed 42 trillion ($28 billion) as of December last year, up from 40 trillion won in May 2024.

The volume of revolving loans, taken to repay previous card loans, also surged. The total balance of revolving loans exceeded 1.6 trillion won as of the end of last year.