Korea's central bank lowered the benchmark seven-day repurchase rate by 25bps to 4.00% on 7 November 2008. This followed two consecutive cuts of 75bps and 25bps, both in October 2008. The cuts are expected to reduce the funding costs of Korean credit card companies in the short-term, thus easing the immediate pressure on lenders to raise charges on credit cards.
For Fitch-rated Korean credit card ABS transactions, the average 61-90 days past due delinquency ratios, a useful indicator of future defaults, have been stable for the past year at 0.2-0.3%. However, it is unlikely that the interest rate cuts can prevent a deterioration of asset performance in the medium-term. Fitch revised its rating Outlook on the Korean sovereign to Negative from Stable on 10 November 2008, and highlighted that the economy is experiencing a sharp slowdown and bank asset quality is deteriorating. With rising unemployment considered likely, card holders may find it harder to service their debts, particularly those utilising the cash advances and revolving products. This may be exacerbated by the actual and future increases in the funding cost of credit card companies, notwithstanding the recent rate cuts, which is expected to be transferred to credit card holders in the medium-term. Thus, although an increase in delinquencies is anticipated, the agency does not expect to see delinquency rates increase to the peaks of 2003, as more prudent underwriting policies have been adopted by the Korean credit card companies since then.
During the credit card crisis, the average delinquency ratio (excluding restructured loans) of credit card companies reached 14.06% as at end-2003, according to data from the Financial Supervisory Service. This was more than five times the 2.6% recorded at the end of 2001. The credit card market has stabilized substantially since 2004 because credit card companies have adopted tighter underwriting policies, improved risk management systems, risk-based pricing and stronger asset quality control. This stability has been evidenced by a significant improvement in the delinquency ratio and a turnaround in the profit generation of most credit card companies since Q304.
Fitch believes that its ratings on Korean credit card ABS transactions will be able to withstand the more challenging economic environment. The agency's rating approach applies simultaneous stresses to increase charge-offs, reduce the monthly payment rate and decrease expected yield. Credit enhancement, in the form of subordination, ranges from 20% to 25% for 'AAA' tranches and continues to remain appropriate. Therefore, the agency believes that although the credit card delinquency rates will rise in the medium-term, Korean credit card ABS transactions will continue to perform within expectations.
