Korean credit card companies have shifted to net bond redemption this year as market interest rates have surged.
According to financial industry sources on Monday, card issuers net redeemed 91.1 billion won in card bonds between January 1 and Monday. That contrasts with net issuance of 1.81 trillion won during the same period last year. It marks the first time card companies have net redeemed bonds during the period since 2019, when net redemptions reached 480 billion won.
Without deposit-taking functions, card companies raise funds by issuing bonds. This year, the war in Iran has pushed interest rates higher, increasing the burden of bond issuance. The yield on three-year 'AA+' card bonds stood at 4.133% as of Monday, up 0.764 percentage points from 3.369% at the end of last year. Compared to 2.755% a year earlier, the yield has jumped 1.378 percentage points.
Inflation concerns stemming from the Iran war have lifted treasury bond yields, pulling card bond yields higher as well. According to the Korea Financial Investment Association, the final quoted yield on three-year treasury bonds rose to 3.595% on Monday from 2.953% at the end of last year, a gain of 0.642 percentage points.
As the Iran situation has heightened credit risk, additional interest costs for card companies have also increased. The spread between three-year 'AA+' card bonds and treasury bonds stood at around 0.4 percentage points at the end of last year but widened to about 0.54 percentage points as of Monday. With the Bank of Korea (BOK) signaling a rate-hike stance, many observers expect market rates to remain elevated for some time.
"For three-year 'AA+' card bonds, a spread of around 0.35 percentage points over treasuries is considered neutral," a card company official said. "But the spread has now widened to 0.5 percentage points, which we see as a significant funding burden." Another official in the lending industry said, "There are also moves to utilize asset-backed securities (ABS), which carry a relatively lower interest burden."
Some observers attribute the card companies' shift to net bond redemption to a scaling back of their business. Financial authorities this year instructed card companies to keep household loan growth, including card loans, at around 1% to 1.5%. With limited room to extend loans, there is little reason to issue large volumes of bonds. "Factoring in risk management, card companies find it burdensome to expand lending," a financial industry official said. "The net redemption trend could continue for some time."
Capital finance companies are also reducing their funding volumes. Net bond issuance by capital firms totaled 1.2032 trillion won from the start of the year through Monday, down 30% from 1.7219 trillion won a year earlier. The yield on three-year capital bonds rated 'AA-' stood at 4.289% as of Monday, up 0.792 percentage points from the start of the year. "Higher funding costs will inevitably weigh on this year's earnings," a financial industry official said.
