Jack Ma’s ant forced to take up arms from banks he dubbed “pawn shops”
Jack Ma’s Ant group has undermined, undermined and insulted China’s major state-owned banks for years. Regulators have now turned the tide 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 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 activities with regional lenders in favor of the big state-owned banks that Ma ridiculed as having a “pawnshop” mentality in a speech last October. The billionaire entrepreneur has largely disappeared public opinion 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 his IPO speech, 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 down 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 Rmb 2.2 billion ($ 340 billion) as of June 30.
About 90 percent 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 large customer base and national reach. .
The new rules state that joint loans made via the internet cannot be more than half of a bank’s total loan portfolio, and 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 Rmb20tn of Tier 1 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 municipal bank would no longer be able to extend 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 hurt Ant a lot, ”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.
Bank of Shizuishan in northwest China’s Ningxia region has granted Rmb 20 billion in loans through Alipay over about 18 months through October, according to state media.
A lender in Hangzhou said Alipay’s loans had been so good for business that the company entered into negotiations with Ant out of fear the group would walk away.
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 reduced their aggressive funding channel eventually used to fund the co-loan with the 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 require 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 he may have to hand over a lot more maintain its partnerships, even if that may not be enough.
“Even if Ant passes the data on, banks will struggle to create sophisticated risk management systems powered by AI algorithms that can match Ant’s,” said Linghao Bao of Trivium China, a research firm. . “Small banks won’t even know what to do with all this data. “
Take more credit risk
Chinese regulators were particularly troubled by the fact that Ant received commissions on the loans it made to users without having to assume the credit risk.
The new rules decree that online lenders will have to self-regulate.-finance 30 percent of each loan they do with the banks. It’s unclear what part of Ant’s lending business this will affect.
But a broad application of the rule would transform Ant from a light-asset tech company to a capital-intensive company more akin 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 light asset model 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 into a financial holding company will place 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 push 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