HONG KONG, Feb 9 (Reuters Breakingviews) – It has been almost a decade since the company now known as Ant turned China’s clumsy financial system on its head. The pivotal moment was the launch of Yu’e Bao, a service that allows online shoppers to move their payment balances to a money market fund for a return far higher than what they would get from a bank. Within three years, Yu’e Bao was the largest money market fund in the world. The disruption had come with a bang.
Sometime in the following decade, Ant lost his mojo. After luring global investors from General Atlantic to Carlyle ( CG.O ), and introducing hundreds of millions of Chinese consumers to online investing, the privately held financial tie-up with e-commerce empire Alibaba ( 9988.HK ) fell foul of regulators. Now the company has been cut down. Founder Jack Ma, once China’s most globally visible tech mogul, last month gave up majority control.
Like most of China’s big tech firms, Ant doesn’t match anything found in the West. It started by handling payments for Alibaba, making it something similar to Paypal ( PYPL.O ). But as it expanded into consumer and business credit, wealth management and insurance, Ant has taken on functions from U.S. firms such as Charles Schwab ( SCHW.N ) or Morgan Stanley ( MS.N ), as well as the Chinese state-owned banks whose neglect of consumers created its early success.
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As tensions mounted, so did Ant’s valuation — it hit $300 billion in 2020, based on where it priced its planned IPO — bigger than Industrial and Commercial Bank of China ( 601398.SS ), the world’s biggest lender by assets. But unlike ICBC and its peers, Ant neither took deposits nor piled risky loans on its balance sheet. Almost all of the short-term credit offered on Alipay, the consumer-facing app that boasts over 700 million domestic users, was securitized or guaranteed by third-party banks and partners.
Free from the bureaucracy that binds ordinary banks, the loans were arranged by Ant balloon. By the end of June 2020, it had processed a whopping 2.1 trillion yuan ($310 billion) in consumer and corporate loans. There are more than personal loans without a mortgage at ICBC or Bank of China (601988.SS). And Ant blazed a trail that others, such as Lufax (LU.N) and LexinFintech (LX.O), happily trod in their wake. Digital offers accounted for half of total consumer loans in China, Fitch Ratings calculated in 2021.
If there’s one thing that makes regulators nervous—with good reason—it’s rapid growth in new areas of finance that they don’t directly oversee. That is why Ant’s rise, and Ma’s ties with Beijing, inevitably began to be strained. That became apparent when regulators pulled Ant’s IPO in November 2020. The resulting renewal is only now coming to an end, and Ma has all but disappeared from view. Based on listing rules in Shanghai and Hong Kong, Ant must wait at least one year after a change of control before reviving the offering.
For users, the new Ant is not much different. The domestic payments business is largely unchanged while it is growing abroad. For investors, it’s a long way from where it started, and where the company looked like it could go. Ant is to become a licensed financial holding company, putting it under close watch by 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 loan 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 finance 30% of the loans it makes with partners, and these banks cannot make more than half of their total loans through online companies.
To put that in perspective, the 18.5 billion yuan of registered capital at Ant’s consumer finance unit currently means it can extend about 500 billion yuan in credit with its partner banks, after taking into account leverage ratios and the various capital constraints. That is less than a quarter of Ant’s loan balance back in 2020.
All of this is grim news for investors, but probably good for China’s youth financial system. Small banks had swallowed Ant’s loan trough. Bank of Shizuishan, a municipal enterprise in the Ningxia Hui Autonomous Region, said nearly two-thirds of outstanding credit in 2019 was consumer loans made through Ant. It was also unclear how Ant used its troves of customer data to facilitate its business.
Even in his less furious new form, however, Ant is on solid footing. Beijing wants Chinese consumers to consume, so it is likely to indulge in controlled growth of consumer credit. Less than 30% of adults in China owned a credit card in 2019, according to Fitch. Analysts at Bernstein expect Ant’s lending growth could reach about 15% a year for the next three years, which would make it about the size of China Minsheng Bank’s ( 600016.SS ) personal lending business.
Still, it’s disappointing for investors who once hoped the company would become a $300 billion behemoth. And Ant still has to struggle with economic turbulence. Rival Lufax reported a 67% drop in year-on-year earnings in the three months to September, and analysts expect them to fall a further 15% this year. If Ant mirrors those declines, revenue could shrink to roughly $5 billion in 2023.
Put that at a multiple of 11 times expected 2023 earnings — between where mid-sized Chinese banks and tech hotshots trade — and Ant today is worth perhaps just over $55 billion, though that could rise if other businesses continue to grow. Put 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 is probably a fifth of the size. Bigger than its six-legged namesake perhaps, but barely knee-high for its global peers.
Chinese financial technology company Ant Group said on Jan. 7 that founder Jack Ma will give up majority control of the company as part of a broader “optimization of corporate governance.”
Ma held more than 50% of the voting rights in Ant through his investment company, Hangzhou Yunbo. Under the latest restructuring, his share of the vote will fall to 6.2%.
Ant is nearing 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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Robyn Mak
Thomson Reuters
Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She has a master’s degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and graduated magna cum laude from New York University.
