Becoming a bank would shrink but not squash Ant

[HONG KONG] Becoming a bank will shrink Ant. Regulators are set to treat Jack Ma's financial group more like a regular Chinese lender. Though it has enough capital to support its existing online credit business, growth prospects will dim and its US$300 billion-plus valuation will shrivel.

Ant's payments, wealth management and lending businesses have thrived largely outside China's regulated banking system.

Now the authorities are stepping up pressure for it to create a holding company, monitored by the central bank, Reuters reported on Dec 30, citing people familiar with the matter. Discussions as to which parts of Ant will go into the new entity are ongoing. But recently unveiled rules on financial holding companies and draft micro-lending curbs hint at what's to come.

One proposal requires online companies to fund 30 per cent of consumer loans offered jointly with financial partners.

That will impact Ant's fast-growing credit unit, its largest business by revenue. As at June, the company processed 1.7 trillion yuan (S$348.74 billion) worth of consumer loans, of which 98 per cent were underwritten by other financial institutions or securitised. The new rules would require Ant's lending business to have capital of roughly 87 billion yuan, assuming almost one third of loans are held on its balance sheet, and any external funding for those are capped at five times its equity.

That looks manageable for Ant, which had net assets of 215 billion yuan as at June. Even in the unlikely scenario that the entire 2.1 trillion yuan of consumer and small-business credit ends up on its own balance sheet, Ant could manage. Assuming a 100 per cent risk weighting for its loans, the company's capital ratio would be 10 per cent, not that far from the 14 per cent Tier 1 ratio at ICBC , China's biggest bank.

The biggest hit will be to Ant's growth prospects.

Enthusiasm for the company's now-suspended initial public offering rested on it selling more loans and insurance products while transferring the financial risk to others. Changing that model would suggest more modest growth, and a valuation more in line with a traditional bank.

ICBC and Chinese peers roughly trade at book value, Refinitiv data shows. On that multiple, the digital challenger would be worth just US$33 billion.

Mr Ma and Ant executives may find ways to minimise the impact of the rules, perhaps by focusing on distributing investment products. But while regulations won't squash Ant, they will certainly shrink it.

China's Ant Group is considering plans to move some of its businesses, including digital payments, online lending, wealth management and insurance, into a financial holding company, Reuters reported on Dec 30, citing people familiar with the matter.

The People's Bank of China said in a statement to Reuters that Ant is drafting a plan to set up a financial holding firm, and that the company should ensure that all its financial operations are placed under regulatory supervision.

REUTERS