As the Bank of Korea has effectively ended rate cuts, yields on asset-backed securities issued by specialized credit finance companies (credit finance bonds), a funding tool for card issuers, are rising. The increased interest burden for card companies is feeding through to higher lending rates on products such as card loans.
According to the Korea Financial Investment Association on the 22nd, as of the 20th, the yield on AA+ three-year credit finance bonds was 3.538%, up 0.201 percentage point from Jan. 2 (3.337%) at the start of the year. Credit finance bond yields stayed in the 2.7–3.1% range from January to October last year but began to rise in November, surging to around 3.5%.
Card issuers, which lack a deposits function, raise funds by issuing credit finance bonds. The rise in credit finance bond yields is seen as stemming from the Bank of Korea's signaling of a rate hike. On the 15th, the Bank of Korea kept the base rate unchanged and removed the phrase "possibility of a rate cut" from its decision statement. The market interpreted this as the Bank of Korea ending rate cuts and reverting to a tightening stance. Expectations of base rate increases are pushing up market rates.
When card companies issue credit finance bonds at higher rates, interest expenses increase, so they must recoup costs by raising the lending rate or reducing card benefits. The card industry expects credit finance bond yields to rise further from here. In 2023, when the base rate was raised to 3.5%, credit finance bond yields rose from the low 4% range in June of the same year to 4.9% in November. During the debt default incident at Legoland in September 2022, they spiked to the mid-5% range.
Card loan rates, considered the representative loans for low- and middle-income borrowers, are already on a steep climb. As of the end of December last year, the average card loan rate at eight standalone card issuers was 15.27–18% per year, with the lower bound up 1.19 percentage points and the upper bound up 2.55 percentage points from the end of December 2024 (14.08–15.45%). Over the same period, card loan funding costs rose from 3.14–3.39% to 3.42–3.68%. Card loan funding costs were under 3% in July last year but have been above 3% since November.
If card companies' profitability deteriorates, it could lead not only to lending rate hikes but also to reduced benefits such as interest-free installments and cash back. Card issuers have been holding out by expanding lending and cutting expenses amid continued reductions in card fee rates. The eight standalone card companies discontinued issuance of 525 card products last year alone, including 421 credit cards and 104 debit cards.