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Analysis: South Korean card firms suffer

By JONG-HEON LEE, UPI Business Correspondent

SEOUL, March 18 (UPI) -- Just a year ago, credit card companies were considered the most favored employers among South Korea's young job seekers.

Basking in booming plastic card use spurred by a government-led drive to boost domestic consumption, the country's major credit card firms enjoyed strong earnings growth in 2000 and 2001.

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In the first quarter of last year, the companies posted record earnings, and staff got hefty special bonuses.

As a result of their aggressive sales campaigns, South Korean adults carry more than four credit cards each, encouraged by tax benefits for using plastic aimed at reviving domestic spending and ensuring transparent tax collection.

But the card companies' heyday ended last year and they plunged into the red, after the government toughened industry rules and forced the companies to boost loan loss provisions in the face of rapidly rising household debt.

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That debt has surged to 75 percent of gross domestic product.

South Korea's nine main credit card companies saw combined net profit in 2002 plunge 87.5 percent from a year earlier to about $248 million.

Their bad loans quadrupled to about $400 million, the Financial Supervisory Service said Tuesday, despite massive write-offs. The bad loan ratio rose from 1.3 percent in 2001 to 4.0 percent last year, it said.

Goldman Sachs, a major shareholder of South Korea's largest lender -- Kookmin Bank, which owns Kookmin Credit Card -- warned the card firms' problem could trigger a serious liquidity squeeze in the financial markets.

The financial watchdog said troubles facing credit card firms were attributed to higher delinquency rates and stricter rules imposed by the government, forcing companies to raise bad loan reserves and reduce new cash loans.

Many analysts also blame local card issuers for their reckless expansion, which resulted in the credit card bubble and soaring marketing costs to cope with intense competition.

In an alarming sign, 60 percent of the delinquent borrowers were "excessive borrowers" whose total debts to banks or card firms exceeded 250 percent of annual income. In January, one out of 10 card holders failed to pay their credit card debts on time, according to the FSS.

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Analysts have said that the bursting of the credit bubble would lead to mass personal bankruptcies.

Credit card delinquency also brings woe for local card issuers and banks, since tougher regulations have forced them to make greater provisions against souring loans. Ratings agency Moody's Investors Service described the rise in credit card losses as the biggest challenge facing South Korean banks.

Investor fears deepened as cash-strapped investment trusts were finding it difficult to offload large holdings of bonds issued by credit card companies after a $1.2 billion accounting restatement at SK Group, the country's fourth-largest conglomerate, which sparked massive bond sell-offs and fund redemptions.

Faced with growing concerns over credit card companies' debt rollover problems, the government unveiled measures on Monday to improve profitability in the credit card industry, highlighted by an easing of regulations.

Under the bailout package, card issuers will be allowed to raise interest rates on cash advance services, despite growing criticism for shifting the burden from lenders to consumers.

Regulators will extend the maximum maturity date of the loans provided to delinquent credit-card users from the current one to three years to five years.

And they'll delay by a year the introduction of a rule banning card companies from making cash advances and card loans totaling over 50 percent of their total card usage, a measure aimed at preventing a bubble of credit card debt from developing.

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The government would also encourage the Korea Asset Management Corp. to boost efforts to sell card companies' bad loans.

As part of their efforts to receive such government assistance, the country's eight credit card companies said on Tuesday they would raise about $1.9 billion via rights offerings and bond issues.

In a joint statement, the card firms also pledged to make every effort to reduce operating costs, including shortening the grace period for repaying credit-card debts and minimizing discounts or long-term loans at zero interest.

Through the efforts, the credit card firms would have no short-term liquidity problems, the statement said.

But some say the government's bailout plan just shifts the card firms' burden to consumers, instead of aiming for a fundamental resolution.

"The liquidity problem was caused by card firms' own business failures," said Kang Ki-pil, a 38-year-old office worker. "I cannot understand why the government moved to rescue the card firms at the expense of their customers without taking appropriate punitive actions against them," he said.

"The government's bailout plan can reduce delinquency rates of card companies in the second half of this year, but it lacks substantial measures to settle fundamental problems, such as their debt issue," said Sung Byung-soo, an analyst at Kyobo Securities.

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"The card firms can hardly improve profitability until next year because they remain vulnerable to an economic downturn," said Lee Jun-jae, an analyst at Meritz Securities.

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