Concerns for Rising Default Rate Pull Down LG Card by 11%

LG Card’s shares dropped sharply by about 12% on October 9.

The start of the day’s trading saw LG Card hit its lowest level by dropping more than 5%, and continued to drop about 12% or so. As of 1:48p.m., it plunged by 11.64% to KRW 33,400, down by KRW 4,000 from the previous day.

Market experts cited that a decline of over 10% for LG Card is too much even though concerns over the rise in default rates makes the overall outlook for credit card companies bleak.

Dongwon Securities head researcher Chul-ho Lee said, “Selling orders for LG Card originate mainly from G Securities. As far as I know, this is because of the stop-loss order, which calls for automatic selling in case losses of more than 20% of the buying price are incurred.

While default rates on credit cards have risen from April 2002 to June 2002, the Financial Supervisory Service also projected that September’s default rates would rise as well. These bearish indications prompt institutional investors holding a significant volume of credit card stocks to sell aggressively right now.

The latest development in the continuous downtrend in the stock price of credit cards can be attributed to the increase in default rates and the possible worsening of quarterly results. Lee also explained, “In the long term we can only expect prices to recover when default rates stop climbing.”

LG Card’s BPS (book value per share) earnings are pegged at KRW 27,000, but can reach up to KRW 34,000 considering the KRW 560 billion additional infusion as of end of June 2002. The fundamentals of credit companies is expected to improve in 2003 when the increase in default rates becomes more controllable. Starting June 2002, companies have strengthened their risk management by reserving 100% of their appropriations on bonds overdue for more than six months.