EFFECTIVE Jan 1 this year, credit cardholders are charged an annual service tax of RM50 per principal card and RM25 per supplementary card. The service tax is imposed on any new credit card issued from Jan 1, 2010. For existing cards, the service tax will be charged on the anniversary of card issuance.

There are diverging views from analysts and bankers on the impact of the new service tax. Some expect the growth of card usage to slow down as cardholders cancel some of their cards. Others think that although the number of cards will shrink, the growth of credit card spending will not be affected.

Our view is that the service tax will reduce the number of cards in circulation and will have a slight negative impact on the growth of credit card receivables.

Most banks allow cardholders to use their reward points to offset the annual service tax. Some banks even absorb the service tax if the utilisation of the card hit a certain level within a specified period of time.

But we think this will not stop the slide in the card base as cardholders cancel cards that they do not use actively as they do not have enough reward points to offset the service tax or meet the utilisation needed to qualify for selected banks' absorption of the service tax.

In this report, we look at the growth of the credit card business in January this year after imposition of the service tax. We qualify that it is too early to deduce the full impact of the new tax as some cardholders will be only be cancelling their cards when the renewal time approaches.

Despite the imposition of the service tax, growth in credit card receivables unexpectedly accelerated to 7.2% year-on-year (y-o-y) in January 2010 from the 5.8% y-o-y pace in November to December 2009. We attribute this to the positive impact of the improved economic climate, which offset the drag from the new service tax.

The trend in credit card loans, to a large extent, mirrored economic growth but with a three to four-month lag.

While the one-month numbers may not be reflective of the full impact of the service tax as some existing cardholders will cancel their cards only when the time for renewal draws closer, the improved momentum in January 2010 imbues us with confidence that it will not have a significant negative impact for the full year.

Furthermore credit card receivables made up only 3.4% of the industry's loan base in January.

Despite the improved growth in credit card receivables in January, we still see downside risks in the momentum given the 13%-45% y-o-y contraction in credit card loan approvals between April 2009 and January 2010.

We still see downside risks for the momentum of credit card loans despite the improvement in January. This is partly premised on the 13%-45% y-o-y pullback in credit limits approved for new credit cards in April 2009-January 2010.

Credit card loan approvals even slumped 44.8% y-o-y in January, partly due to the slower growth of 10.9% y-o-y for credit card loans disbursed in January versus 20%-35% y-o-y in June-December 2009. In absolute terms, January's loan approval totalling RM1.08 billion was also the lowest since February 2006. The faster expansion of credit card loans in January despite the contraction in approvals was mainly due to the higher utilisation of existing credit limits.

However, the continuous drop in credit card approvals will cap the growth of credit card receivables in the longer term.

As expected, the cards in circulation shrank as cardholders cancelled some of their cards to avoid paying the service tax. Cards in circulation dropped from 11.1 million in November to 10.8 million in December and 10.4 million in January.

Principal cards fell 6.1% from 9.8 million in November to 9.2 million in January while supplementary cards dropped 7.7% from 1.3 million to 1.2 million.

Due to the imposition of service tax, cardholders are cancelling some cards and concentrating their usage on a limited number of cards.

This makes it harder for banks to expand their card base unless they can get new cardholders by offering transfers of credit card balances held with other banks.

To lure them, banks need to offer better packages including freebies, higher credit balance or better reward points. This suggests more intense competition in the industry and higher cost of acquiring new cardholders.

A seasonal spike in card usage
Credit card utilisation jumped in December-January due to increased spending before and during Christmas and Chinese New Year.

Amounts charged to credit cards shot up to between RM5.6 billion and RM6 billion in December and January compared to RM5.1 billion in November and an average of RM4.9 billion in January-November last year.

The number of transactions also rose to 24 million and 26 million in December last year and January 2010 versus an average of 22.7 million in the preceding 11 months.

The seasonality factor also pushed up the utilisation of credit cards (total purchases over the credit limit) to 72%-75% in December and January from an average of 66% in the first 11 months of 2009. We expect credit card purchases to subside to the RM5 billion level after the festive period.

Benign delinquencies
Despite last year's weak economic climate, the asset quality of credit card receivables remained intact. Loans not serviced for more than three months (which technically should have been classified as NPLs) accounted for only 2% of the total credit card receivables in December and January, slightly lower than the year-ago level of 2.1%.

Credit card loans in arrears for less than three months comprised about 7% of total credit card loans in December 2009 and January 2010, down from 7.9% in December 2008.

We believe that the annual service tax of RM25-RM50 is too small to have an impact on the asset quality of credit card receivables.

On a positive note, the improved operating environment amidst the economic recovery should cap the delinquency rates at the end-2009 levels of 2% for more than three months and 7% for less than three months.