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Korean credit card receivables have featured low delinquencies, low defaults, and high principal payments over the last few years, including during the financial crisis in 2007, according to a new report by Moody's Investors Service.
Nevertheless, the country also faces challenges that may lead to performance deterioration, the rating agency added.
To facilitate investors' understanding of one of the fastest growing credit card markets in Asia, Moody's also provides some information on the UK credit card market, the largest and most mature market in Europe.
"Korea is one of the few countries to have experienced an early recovery from the global financial crisis. The unemployment rate has hovered at around 3% to 5%, with no major deterioration for a number of years," said Marie Lam, co-author of the report.
As credit card performance is sensitive to the macroeconomic environment — particularly to a rising unemployment rate — the more favourable economic environment in Korea has helped keep card performance stable.
"In addition, the high principal payments requirement on Korean credit cards help the card companies identify a problem cardholder much earlier than cards for which a holder needs only to make a minimum monthly payment. This allows the card companies to jump-start their delinquency management," said Lam.
"Nevertheless, the Korean credit card market has a number of challenges of its own. That each Korean cardholder holds about four credit cards, and that the credit limit for each card is about two to three times the average monthly salary, mean that cardholders can spend a lot more than they can afford. Under stress, they may end up maxing out all of their cards," added Jerome Cheng, co-author of the report.
Moreover, Korean households are already highly leveraged — the majority of their debt is variable rate, and more than 40% of their mortgage loans require bullet payments. Refinancing in a high interest rate environment would stress their debt payment ability.
"Interest rates rising, debt rising faster than cardholder income, or the economic recovery stalling will pressure highly leveraged consumers," adds Cheng.
Given the significant improvement in risk management following the 2003 credit card crisis, deterioration would not be as bad as it was then, when the annualized default ratio in some securitized transactions rose as high as 60%, the Moody’s report added.
