Jack Ma’s Ant group has undermined, undermined, and insulted China’s major state-owned banks for years. Regulators have now turned the tables on the fintech group after forcing the company to withdraw its record $ 37 billion public offering in November.
Beijing is targeting the symbiotic relationship that transformed China’s financial system by matching loans from small regional banks with 500 million borrowers through the Ant’s Alipay app, the country’s largest payments platform.
Under new rules that will be enforced from next January, Ant will have to limit its business with regional lenders in favor of large state-owned banks, Ma, ridiculed as having a “pawnshop” mentality in a speech last October. The billionaire entrepreneur has largely disappeared from the public perspective since making the comments in a dispute that highlighted growing tensions between the state and the private sector in China as President Xi Jinping tightens his grip on the economy.
The decision to cut Ant’s wings came after the size and scale of the company loan transaction, which was revealed in its IPO, caught regulators off guard, according to several people familiar with the situation.
“Regulators were surprised that Ant had a larger market capitalization than China’s largest state-owned banks,” said a Chinese banker who advises the government on financial policy issues. “When the IPO was priced, they looked at it and said, ‘What, this thing is bigger than JPMorgan?’”
Rules designed to slow Ant
Ant was responsible for arranging about a tenth of China’s consumer loans last year through two products: Huabei, which is similar to a credit card; and Jiebei, which offers small unsecured loans through Alipay. Ant’s total outstanding loans reached 2.2 billion rmb ($ 340 billion) as of June 30.
About 90% of the loans were underwritten by a network of 100 partner banks, many of which were smaller regional lenders who offered competitive rates in return for access to Ant’s vast customer base and national reach.
The new rules state that joint loans made via the internet cannot represent more than half of a bank’s total loan portfolio and that lending through a single fintech platform cannot exceed 25% of the first tier capital or base of a bank.
This will inevitably lead Ant to work more closely with the country’s biggest banks to expand its lending business, as China’s top 10 banks hold 64% of the country’s total of rmb 20 billion in senior capital, according to Bernstein.
“Since every player, especially the smaller ones, can do less, Ant needs to do more with the big banks with big balance sheets,” said Kevin Kwek, analyst at Bernstein. “This will weaken Ant’s negotiating position with them.”
Bernstein lowered his estimate of Ant’s value from $ 310 billion at the putative IPO price to $ 230 billion and said it could go down further. “The model is not completely broken, but the growth will be reduced a bit,” Kwek said.
The rules also introduced regional restrictions, so that a Beijing city bank would no longer be able to provide Alipay loans to consumers in Shanghai.
“Ant has more than 100 financial partners, but China only has about 20 national banks. . . the new rules on interregional lending will do great harm to Ant, ”said Xiaoxi Zhang, financial analyst at Gavekal Dragonomics, a research firm.
Bank of Tianjin, for example, increased its consumer loan portfolio by nearly 800% in 2018 after signing deals with Ant and other fintech platforms.
The Bank of Shizuishan in northwest China’s Ningxia region granted RMB 20 billion in loans through Alipay over about 18 months through October, state media reported.
A lender in Hangzhou said Alipay’s loans had been so good for business that the company had backed out of negotiations with Ant for fear the group would pull out.
To help fund their lending frenzy, analysts said, regional banks had offered attractive rates for deposit products on platforms such as Alipay. On January 15, regulators banned banks from offering deposit accounts on third-party online platforms.
“This essentially cut off their aggressive funding channel that was eventually used to fund the co-loan with fintech platforms,” said Jacky Zuo, analyst at China Renaissance, an investment bank. “The tendency is for small banks to withdraw from this type of cooperation.”
Data sharing and risk management
The rules will force banks to perform credit scans on potential borrowers themselves, rather than relying on Ant.
But most banks have mainly dealt with mortgages and business loans, situations in which borrowers have collateral, said Chen Long, a Beijing-based partner at Plenum, a consultancy firm.
“Banks don’t have the expertise, they don’t have the data” to assess consumer credit risk, he added. “Banks will have to find another way to get around this regulation.”
Ant shares some borrower data with lenders, but it may take a lot more maintain its partnerships, although this may not be enough.
“Even if Ant passes the data on, banks will struggle to create sophisticated risk management systems powered by artificial intelligence algorithms that can match Ant’s,” said Linghao Bao of Trivium China, a company of research. “Small banks won’t even know what to do with all this data.”
Take more credit risk
Chinese regulators were particularly concerned that Ant was charging fees on loans it made to users without having to take credit risk.
New rules outline online lenders will have to fend for themselves-fund 30 percent of each loan they do with the banks. It’s unclear what part of Ant’s lending activity this will affect.
But extensive application of the rule would transform Ant from a low-asset tech company to a large-cap company closer to a bank. Bernstein noted that a shift to on-balance sheet loans would actually improve Ant’s profitability, as the company would earn the interest income, but also reduce its return on capital.
“Not being a model in light of assets will mean investors will punish the stock via lower multiples,” he said.
Even though Ant has reached a restructuring agreement with Chinese regulators, the reorganization of its activity as a financial holding company will bring it directly under the control of the central bank.
In January, the People’s Bank of China also took the unusual step of releasing draft rules that would allow it to lobby for the dissolution of payments companies like Ant on antitrust grounds.
Ant declined to comment.
Additional reporting by Nian Liu, Sun Yu and Tom Mitchell