MBK Partners, the largest shareholder of Lotte Card, is promoting a public sale by distributing company presentations to potential acquirers of Lotte Card. Although Lotte Card’s net income has halved over the past two years, its expansion into credit sales, surpassing a 10% market share for the first time since its establishment in the first half of last year, is seen as a positive factor for the sale.
Given that the largest shareholder is a private equity fund, Lotte Card has a structural limitation where its funding expenses are higher than those of card companies affiliated with financial holding companies. This has led to analysis suggesting that synergies during a sale of the financial holding could increase net income.
According to the card industry on the 13th, Lotte Card's net income for last year was 137.2 billion won, a 62.7% decrease compared to the previous year (367.9 billion won). Even considering that profits increased after selling Rokamobility in 2023, it is still at half the level of 2022 (253.9 billion won).
In contrast, equity increased significantly from 29.154 trillion won in 2022 to 31.075 trillion won the following year and 35.262 trillion won last year. Total assets as of the end of last year stood at 24.9477 trillion won, marking an increase of more than 10 trillion won compared to shortly after MBK Partners acquired it in 2020.
As equity increased while net income declined, Lotte Card's return on equity (ROE) fell sharply to 2.03% last year from 14.28% the previous year, a drop of 12.25 percentage points. Return on assets (ROA) also decreased from 2.08% to 0.31% during the same period. ROE and ROA are profitability indicators that show how efficiently a company utilizes its capital to generate revenue. A low ROE or ROA indicates that the same operational efficiency has not yielded sufficient profits.
The decline in Lotte Card's net income is attributed to increased costs, including funding expenses. Last year, Lotte Card's interest expenses rose to 736.3 billion won from 589.5 billion won in the previous year, a 24.9% increase. During the same period, funding expenses also rose from 3.4% to 3.9%.
Moreover, the increase in allowance for bad debts due to defaults also contributed to rising expenses. Last year, Lotte Card set aside an additional 37.5 billion won for bad debt reserves due to defaulting on factoring receivables. As a result, Lotte Card's bad debt reserve balance for last year increased by 62.5 billion won from the previous year to 772 billion won. Factoring refers to borrowing funds using accounts receivable as collateral or obtaining financing by selling accounts receivable. Recently, due to the 'Homeplus incident,' Lotte Card also faced 79.3 billion won in non-performing loans.
However, Lotte Card's funding expenses have structural limitations. Typically, the funding costs of card companies affiliated with financial holding companies are cheaper than those of Lotte Card, which has a private equity fund as its largest shareholder. Consequently, there are forecasts that if Lotte Card is sold to a financial holding company, funding costs may decrease, leading to an increase in net income.
In particular, Lotte Card has maintained its position as the fifth largest in the card industry, surpassing a 10% credit sales market share for the first time in its history last year, up from 8.7% in 2020. Thanks to the popularity of the 'Roka' series launched in 2020, the number of members has also exceeded 9.52 million, indicating sustained growth.
The potential acquirers mentioned for Lotte Card are Woori Financial Group and Hana Financial Group. In the equity structure of Lotte Card, MBK Partners holds a 59.83% stake as the largest shareholder, while Woori Financial and Lotte Shopping each hold 20%. Since Woori Financial already holds part of the equity, there is an advantage in being able to acquire it with a smaller amount of capital. If Hana Financial acquires Lotte Card, its market share could jump to around 16%, making it similar to KB Kookmin Card, which is currently in fourth place.