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

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The profitability of three main native bank card companies will face difficult months of decline, strained by softening economic growth resulting in decrease transaction volumes, as dampening client sentiment exhibits no indicators of fast restoration, in response to a Fitch-affiliated analyst. The three are KB Kookmin, Shinhan and Woori.

Additional fueling the pessimism are political uncertainties within the aftermath of President Yoon Suk Yeol’s botched martial legislation imposition and the following impeachment proceedings, which can have delayed fiscal measures to spice up retail spending, Karen Wu, affiliate director at CreditSights, a Fitch Options firm, stated in a latest interview with The Korea Occasions.

Nevertheless, a slower-than-expected financial easing by the Financial institution of Korea (BOK) may help restrict the speedy decline in funding prices. This can be a uncommon upside to the cardboard companies uncovered to greater monetary soundness deterioration issues in comparison with industrial lenders that deal with robust-credit, high-income debtors, she stated.

Karen Wu, affiliate director at CreditSights / Courtesy of CreditSights

“The cardboard companies are anticipated to come across a number of challenges this 12 months,” Wu stated, including subdued client sentiment can weaken transaction quantity development.

An financial slowdown results in elevated credit score prices, principally attributable to greater default dangers from shoppers and companies present process monetary stress at the next charge. This general bleak macro atmosphere is compounded additional by Korea-specific uncertainties, the director stated. “The potential for fewer charge cuts by the BOK to guard the nation’s foreign money towards the U.S. greenback might decelerate the decline in funding prices for card companies.”

Chief among the many challenges is, she added, the implications of softening financial development, tied carefully to the working efficiency of the cardboard companies this 12 months. “Nonetheless, the cardboard companies are well-capitalized, and liquidity has not been a priority up to now, as Korea’s home monetary markets have remained steady.”

Diversification

The monetary teams’ efforts to diversify their noninterest earnings portfolios and the ensuing strengthening of the enterprise technique of the cardboard associates, in her view, is a optimistic improvement.

“We expect the Korean monetary teams have been excellent at diversification and have a variety of nonbank firms with their teams — insurance coverage, playing cards, leasing, safety homes and belief establishments,” she stated.

The teams have persistently sought to develop their nonbank companies, and the cardboard firms are vital contributors to the income of their monetary teams.

“We anticipate that they are going to proceed to obtain sturdy assist from their father or mother firms. From an funding perspective, now we have market carry out suggestions on the three card firms we cowl,“ Wu stated.

Delinquencies

Within the fourth quarter of 2024, there was an noticed enhance in delinquency ratios, she famous. “Purchasers of bank card firms are typically extra weak to financial downturns in comparison with these of banks. We anticipate that bank card firms will proceed to expertise strain on asset high quality this 12 months. Increased delinquencies will result in elevated credit score prices, which might weaken the profitability of bank card firms.”

In line with monetary market information, the proportion of delinquencies of card mortgage debtors who didn’t repay for over a month is on the rise.

Knowledge from card associates of KB Kookmin, Shinhan, Hana and Woori teams confirmed their mortgage delinquency charge averaged 1.53 % on the finish of final 12 months.

Hana Card had the very best charge of 1.87 %, adopted by Shinhan (1.51 %), Woori (1.44 %) and KB Kookmin (1.31 %).

The figures will not be a pink flag but since they continue to be under 2 %. Nevertheless, they’ve been rising for 3 consecutive years, up from a median of 0.8 % on the finish of 2021.

Card loans cost excessive rates of interest, however borrowing necessities will not be as stringent.

For this reason mid-to-low credit score debtors beforehand declined by industrial lenders flip to bank cards for emergency money wants.

In line with the Korea Credit score Finance Affiliation, the stability of card loans within the nation surpassed 42 trillion ($28 billion) as of December final 12 months, up from 40 trillion gained in Could 2024.

The quantity of revolving loans, taken to repay earlier card loans, additionally surged. The overall stability of revolving loans exceeded 1.6 trillion gained as of the tip of final 12 months.