The Case of the Wandering Won: South Korea Credit Card Accounting Lapse

by Brian Riley 0

This is not the first time for a crisis in the South Korean credit card industry but it is a whopper, as regulators and card companies struggle to box their numbers, Business Korea reports today.

  • There is confusion over (Korean) domestic credit card companies’ net profits in the first half of the year as the financial watchdog has provided an estimate that is widely different from that of the card companies themselves.
  • The eight credit card companies said their net profit in the first half plunged 31.9 percent compared to the same period a year earlier, while the Financial Supervisory Service (FSS) said the figure surged 50.9 percent.

According to another source, domestic Korea news agency Yonhap News, all top issuers are affected.

  • The combined net profit of eight card issuers, including Shinhan Card Co., Samsung Card Co. and KB Kookmin Card Co., came to 810.1 billion won (US$718 million) in the January-June period, up 50.9 percent from a year earlier, according to the Financial Supervisory Service (FSS).

There are a lot of Wons involved.  Imagine going into your boss’ office to discuss a variance of more than USD 1Billion? That’s not on my bucket list.

  • The FSS announced on September 13 that the combined net profit of the eight credit card companies amounted to 810.1 billion won (US$721.69 million) in the first half, showing a whopping 50.9 percent growth from 537 billion won (US$478.4 million) during the same period a year ago.
  • However, the credit card companies said their combined net profit in the first half totaled 966.9 billion won (US$861.38 million), down 31.9 percent from 1.42 trillion won (US$1.26 billion) a year earlier.

Much has to do with accounting magic.

  • This is due to a different accounting standard applied to calculate results. The credit card companies calculated the results based on the international accounting standard IFRS 9, which is used by all financial firms, including banks, while the FSS did a calculation based on the internal standard, which is used to manage and supervise financial companies.
  • The FSS and the credit card companies announced conflicting business results because they interpreted the allowance for bad debts differently. The FSS has been calculating the credit card companies’ business showings according to specialized credit finance industry supervision regulations that require an additional 30 percent of allowance for bad debts on more than one credit card loans from June last year. As the new regulations were applied for the first time in the first half of last year, the net profit of credit card companies showed a sharp decline at that time. However, the figure rebounded in the first half of this year and credit card companies needed less allowance for bad debts.

Accounting rules are the underbelly of credit cards.  They control pricing,  revenue, and loss recognition; accruals often help smooth things out but they don’t cure all sins.

My colleague who runs consulting at Mercator, Ted Iacobuzzio, worked with me at a significant Korean issuer attempting to rebound from Korean Card Crisis II during 2008.  Ted has his own stories but we both can remember the Korean regulatory authorities were active in propping up credit cards to move the country away from a cash economy.  We were at a Mastercard company named TowerGroup at the time.

Now, here in the US expect to see excitement in 2019 as the US adopts loan loss recognition standards under CECL: Current Expected Credit Loss.  We covered the concept recently in this Mercator Viewpoint. Please let us know if you want a deeper dive.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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