Credit card companies sell 82 percent more of their delinquent loans in Q1

[Courtesy of Lotte Card]

South Korean credit card companies saw their overdue bond sales surge by 82 percent in the first quarter from a year ago as they preemptively monetized the delinquent loans amid the worsening business environment.

According to data obtained by People Power Party Lawmaker Yoon Chang-hyun from the Financial Supervisory Service on Sunday, the combined profit from the sale of overdue bonds at seven local credit card companies stood at 194.5 billion won ($148.5 million) in the January-March period, up 82.3 percent from 106.7 billion won in the same period a year ago.

Lotte Card Co. sold 64.4 billion won in overdue loans in the first quarter, the largest among the seven companies, followed by Woori Card Co. (58.4 billion won) and Shinhan Card Co. (45.2 billion won).

The sale of overdue bonds was relatively small at companies under the umbrella of major conglomerates, such as Samsung Card Co. (2.7 billion won) and Hyundai Card Co. (3.6 billion won).

When card users fail to repay their debts, the companies treat those debts as loans receivable and write them on their books as losses, or more exactly as “allowances for credit loss.”

The loans receivable, however, are not loans that have defaulted with zero value.

Companies can choose to sell those loans to lenders or to institutions that buy non-performing loans (NPLs), including the Korea Asset Management Corp., or they can recover their money owed through collection agencies.

The increase in the sales of such loans receivable in the first quarter implies that credit card companies chose immediate cash instead of potential long-term profits.

The move comes as the companies struggle financially.

[Photo by Yonhap]

“Due to the worsened financing environment, positive performance on the books has been much more significant for us to survive,” said one industry insider.

The overall business environment is less likely to improve in the near future, insiders noted, with stagnant growth in card loans, the main revenue source for the companies, continuing into the second quarter.

The combined new card loans at the seven card companies reached 3.63 trillion won as of the end of April, down 15.1 percent from a year ago, according to data published by the Credit Finance Association.

The decline comes partly due to the card companies having reduced their costs, but it is also attributed to the fall in the number of potential borrowers eligible for loans due to regulations on individuals‘ debt service ratio, industry insiders noted.

The companies may also see an increase in their operating costs following the introduction of paid services for using the mobile payment system Samsung Pay.

According to industry sources, Samsung Electronics Co. notified about 10 card companies in May that the automatic extension of Samsung Pay contracts would end.

The industry believes that Samsung Pay is likely to charge card companies a fee now since Apple Pay’s launch in Korea in March.

Some say that credit card companies need to find a completely new revenue model and criticize them for their complacency in the past on their traditional business of lending, which has made them vulnerable to changes in the external environment.

“Card companies will have to switch their business model to be data-driven, from the traditional way of covering losses from credit sales with loans,” said Representative Yoon of the ruling party.