How Ant fell into fintech’s middle-income trap
09/02/2023 02:37
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Robyn Mak
HONG KONG, Feb 9 (Reuters Breakingviews) - It’s been
almost ten years since the company now known as Ant tipped
China’s clunky financial system on its head. The pivotal moment
was the launch of Yu'e Bao, a service that lets online shoppers
shift their payment balances into a money-market fund for a
return far higher than what they’d get from a bank. Within three
years, Yu'e Bao was the biggest money market fund in the world.
Disruption had arrived with a bang.
Sometime in the ensuing decade, though, Ant lost its mojo.
Having lured global investors from General Atlantic to Carlyle
CG.O , and introduced hundreds of millions of Chinese consumers
to online investing, the privately-held financial affiliate of
e-commerce empire Alibaba 9988.HK BABA.N fell foul of
regulators. Now the company has been cut down to size. Founder
Jack Ma, once China’s most globally visible tech mogul, last
month gave up majority control.
Like most of China’s large technology firms, Ant doesn’t
quite match anything that exists in the West. It started by
handling payments for Alibaba, making it something akin to
Paypal PYPL.O . But as it expanded into consumer and business
credit, wealth management and insurance, Ant has taken on
features of U.S. firms like Charles Schwab SCHW.N or Morgan
Stanley MS.N , as well as the Chinese state-owned banks whose
neglect of consumers spawned its early success.
As excitement mounted, so did Ant’s valuation – it hit $300
billion in 2020, based on where it priced its planned initial
public offering – bigger than Industrial and Commercial Bank of
China 601398.SS , the world’s largest lender by assets. But
unlike ICBC and its peers, Ant neither took deposits, nor piled
risky loans onto its balance sheet. Nearly all of the short-term
credit offered on Alipay, the consumer-facing app that boasts
over 700 million domestic users, was securitised or underwritten
by third-party banks and partners.
Free from the red tape that binds regular banks, the loans
facilitated by Ant ballooned. By the end of June 2020, it had
processed a whopping 2.1 trillion yuan ($310 billion) worth of
consumer and business loans. That's more than the non-mortgage
personal loans at ICBC or Bank of China 601988.SS . And Ant
paved a trail that others, like Lufax LU.N and LexinFintech
LX.O , happily trod in its wake. Digital offerings accounted
for half of overall consumer loans in China, Fitch Ratings
calculated in 2021.
If there’s one thing that makes regulators nervous – for
good reason – it’s rapid growth in new areas of finance that
they don’t directly oversee. That’s why Ant’s growth, and Ma's
ties with Beijing, inevitably started to show strain. That
showed through when regulators yanked Ant’s initial public
offering in November 2020. The resulting revamp is only now
coming to an end, and Ma has all but faded from view. Based on
listing rules in Shanghai and Hong Kong, Ant will have to wait
at least one year after a change of control before reviving its
offering.
For its users, the new Ant isn’t much different. The
domestic-payments business is mostly unchanged while it is
growing overseas. For investors, it’s a far cry from where it
started, and where the company looked like it might be going.
Ant is set to become a licensed financial holding company,
putting it under the close watch of China's main banking
regulator.
But in other businesses, Ant’s march has slowed. Assets
under management at Yu'e Bao have fallen, due to new
restrictions. Huabei, a revolving line of credit for shoppers,
and short-term consumer loans unit Jiebei have been folded into
a 50%-owned consumer finance company subject to capital
requirements and other rules. From now on, the latter must fund
30% of the loans it makes with partners, and those banks can’t
originate more than half of their total loans through online
companies.
To put that into perspective, the 18.5 billion yuan of
registered capital at Ant's consumer finance unit currently
implies it can extend roughly 500 billion yuan of credit with
its partner banks, after taking into account leverage ratios and
the different capital constraints. That's less than a quarter of
Ant's loan balance back in 2020.
All this is glum news for investors, but probably good for
China’s adolescent financial system. Small banks had gorged at
Ant’s loan trough. Bank of Shizuishan, a municipal operation in
the Ningxia Hui Autonomous Region, said nearly two-thirds of its
credit outstanding in 2019 was consumer lending made via Ant.
Nor was it clear how Ant was using its troves of customer data
to facilitate its business.
Even in its less racy new form, however, Ant is on solid
footing. Beijing wants Chinese consumers to consume, so is
likely to indulge controlled growth of consumer credit. Less
than 30% of adults in China owned a credit card in 2019,
according to Fitch. Analysts at Bernstein reckon Ant's loan
growth rate can hit roughly 15% a year for the next three years,
which would make it roughly the same size as China Minsheng
Bank’s 600016.SS personal lending business.
Still, that’s disappointing for investors who once hoped the
company would become a $300 billion giant. And Ant still has to
contend with economic turbulence. Rival Lufax reported a 67%
year-on-year drop in earnings in the three months to September,
and analysts expect them to fall another 15% this year. If Ant
mirrors those declines, its earnings could shrink to roughly $5
billion in 2023.
Put that on a multiple of 11 times forecast 2023 earnings –
between where mid-sized Chinese banks and technology hotshots
trade – and Ant today is worth perhaps just over $55 billion,
although that could rise if other businesses keep growing. Seen
another way, Ma’s creation, at its peak, would have been as
valuable as U.S. mega-lender Bank of America BAC.N ; now it’s
probably one-fifth the size. Bigger than its six-legged namesake
perhaps, but barely knee-high to its global peers.
Follow @mak_robyn on Twitter
CONTEXT NEWS
Chinese financial technology company Ant Group on Jan. 7
said founder Jack Ma will give up majority control of the
company as part of a broader "corporate governance
optimisation".
Ma held more than 50% of voting rights in Ant through his
investment vehicle, Hangzhou Yunbo. Under the latest
restructuring, his voting share will fall to 6.2%.
Ant is nearing the completion of a two-year restructuring,
with Chinese authorities set to fine the company more than $1
billion, Reuters reported in November.
(Editing by John Foley and Thomas Shum)
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