Fitch Ratings has upgraded South Korea-based Hyundai Card Co., Ltd.'s (HCC) Long-Term Issuer Default Rating (IDR) to 'BBB+', from 'BBB', and Short-Term IDR to 'F2', from 'F3'.

The Outlook on the Long-Term IDR is Stable. The agency has also upgraded the Shareholder Support Rating (SSR) to 'bbb+', from 'bbb'.

The rating action follows the upgrade of parent Hyundai Motor Company's (HMC) Long-Term IDR to 'A-', from 'BBB+' (see 'Fitch Upgrades Hyundai Motor and Kia to 'A-'; Outlook Stable', published on 16 February 2024).

Key Rating Drivers

Parent's Stronger Ability to Support: HCC's ratings are driven by our belief that it would receive extraordinary support from HMC, if needed. The upgrades reflect the parent's stronger ability to provide support, as the automaker's credit profile has significantly improved on enhanced brand recognition and stronger market position in key markets. The Stable Outlook on the Long-Term IDR mirrors that on the parent.

Strong Synergies with Parent: The SSR continues to be underpinned by HCC's strong synergies with HMC and Kia Corporation (A-/Stable), two automakers in Hyundai Motor Group. HCC finances about half of the total credit-card purchases of autos sold by the two automakers in the domestic market. It also collaborates with the automakers for business opportunities, such as in-car payments.

The two automakers and Hyundai Commercial Inc. (BBB+/Stable), the group's financial affiliate, collectively owned 78% of HCC's common equity at end-2023, which allows the group to maintain control over HCC's management.

Significant Non-Captive Transactions: The SSR is one notch lower than the parent's Long-Term IDR, reflecting our view that the parent's propensity to support HCC would be lower than that for key subsidiaries in the auto-centric group. The majority of HCC's credit-card transactions are derived from non-captive merchants, while captive auto purchase transactions complement its business profile.

Contingent Liquidity Needs: The Short-Term IDR reflects our belief that HCC may be of lower priority in receiving shareholder support than HMC's core subsidiaries, such as Hyundai Capital Services, Inc. (A-/Stable) whose operation is mainly captive auto financing. This assessment also takes into consideration the potential requirements from HCC's large commitments provided to credit-card holders as well as HMC's other major financial subsidiaries, which have large aggregate business scales relative to HMC and could have simultaneous significant contingent liquidity needs.

Performance Risks Mitigated: HCC's pre-tax income/average assets increased modestly to 1.6% in 9M23, from 1.4% in 2022, with revenue growth from larger credit-card transaction volumes and higher asset yields exceeding the increase in funding costs. Its tighter credit limit management and sustained focus on good-quality borrowers over the past few years have allowed HCC to contain the credit costs. A likely monetary easing in Korea in 2024 would support HCC's profitability, but any significant near-term improvement is unlikely, given the higher cost of funding secured over the past two years.

Improved Funding Conditions: Funding conditions in Korea's debt market have eased moderately in recent months after domestic interest rates peaked in 4Q23. A reversal of monetary policy could help the credit-card operator maintain a steady funding profile. Its access to funding also benefits from debt investors' confidence in HCC, stemming from its close linkages with HMC.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

HCC's ratings are sensitive to Fitch's assessment of HMC's ability and propensity to provide extraordinary support to the financial subsidiary. Negative action on HMC's Long-Term IDR would indicate a weakening shareholder credit profile, and prompt a similar rating action on HCC's SSR and Long-Term IDR.

HCC's ratings could also be downgraded if the group's stake in the credit-card operator, held by HMC and its affiliates, declines to below 50% and the influence of a third-party minority shareholder significantly increases, or if HCC's operational linkages to the group weaken materially.

A significant deterioration in HCC's financial profile, potentially resulting from a severe asset-quality stress or prolonged liquidity crunch in Korea's credit-card industry, could also negatively affect the rating, especially if it puts an excessive burden on HMC's financial profile or renders the subsidiary less important to the parent's business strategy.

The Short-Term IDR would be downgraded if the Long-Term IDR is downgraded.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive action on HMC's Long-Term IDR would prompt a similar action on HCC's SSR and Long-Term IDR.

The Short-Term IDR could be upgraded to 'F1' if the Long-Term IDR was upgraded to 'A' or above, or if Fitch assesses that required contingent support will be less material relative to the group's financial resources.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings on HCC are driven by institutional support from HMC. A change in Fitch's assessment of HMC's ratings would automatically result in a change in HCC's ratings.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores

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