HCS’s strong franchise in South Korea is underpinned by the dominance of HMC and Kia in the domestic car market. HCS’s loan growth in the near term is likely to be supported by an extension of a reduction in special consumption tax and the weaker Korea won, which makes HMC cars more price competitive against imported cars in the domestic market. However, Fitch expects HCS to face rising competition from banks and consumer financing companies, which could erode its share of financing for HMC and Kia vehicles and its underlying profitability in the medium term. HCS’s asset quality remains relatively stable in a low interest environment.
Fitch does not expect household debt leverage in Korea to escalate to a credit crunch in the near term, given Korea’s low unemployment rate of 3.6% in 2015, and accommodative fiscal and monetary policies. However, rising household leverage poses greater risk in the long term, particularly if interest rates rise at a rapid pace. HCS Affirm risky assets, such as personal loans, used-car financing and mortgages, which formed about 25% of its receivables at end, are likely to be more vulnerable in such a scenario.
HCS’s liquidity remains adequate despite its heavy reliance on wholesale funding. Modest growth and relatively stable receivable collection would curb the need for funding. HCS’s access to wholesale funding has been sustained by the linkage with HMC. HCS’s funding needs would be reduced in times of economic downturn as auto sales by HMC and Kia are likely to shrink. HCS’s senior unsecured debt rating is equalised with its Long-Term IDR, in line with Fitch’s criteria for rating senior unsecured bonds.
HCC’S IDRS HCC’s Long-Term IDR of ‘BBB’ is one notch below that of HMC, which reflects Fitch’s view that the credit card business is not a core operation of HMC and there is less synergy between HCC and HMC than in the case of HCS. Nonetheless, Fitch believes that HCC is a strategically important subsidiary and there is a high probability of support from HMC. HCC management’s linkage with HMC and Kia, majority ownership by HMC and its affiliates, and the use of a same brand name support this view. HCC’s Short-Term IDR of ‘F3′ reflects HCC’s high reliance on wholesale funding and as a result, potential liquidity risks, though this is mitigated by the assumption that there is a high probability of support from the parent, if needed.
HCC’s profitability will be strained by a regulatory cut in merchant fees in the near term. Fitch expects the merchant fee to remain low while interest rates remain low and the political climate favours merchants. HCC’s internal cost-saving measures (such as cutting marketing expenses and acquisition fees) may partly offset the negative impact of reduced merchant fees, but could shrink its market share, which has already been in gradual decline. HCC’s portfolio mix is geared towards risky assets, such as cash advances, card loans and revolving assets, which represented over a half of receivables at end-3Q15. HCC’s credit costs were higher than major credit card peers’ over the last three years.