Jack Ma, Show Them How to Run a $280 Billion Bank

(Bloomberg Opinion) -- How bad is the damage from China’s plan for Ant Group Co. to become more like a bank? Before regulators put the brakes on the planned initial public offering, Jack Ma’s fintech platform was weighing in at 4.4 times its book value, versus two times at traditional global banks. In other words, Ant could be worth less than half what it was two weeks ago. At the latest pre-IPO round, the company was priced at $280 billion. Now, its value could be just $140 billion, some analysts say.

Actually, no. Banks — contrary to what some would have you believe — can be quite lucrative. Even within the conventional banking space, there’s plenty of variation. Winners emerge. China Merchants Bank Co., with a vibrant retail franchise, and Bank of Ningbo Co., which has a successful regional small business loan operation, both boast a handsome 15% return on equity.

Things start looking even better when tech is used to drive economies of scale. Take WeBank Co., whose largest shareholder is Tencent Holdings Ltd., with a 30% stake. China’s first and largest digital bank, it reported a 28% return on equity last year, up from around 9% in 2016. Compare that to the 11% to 12% (and declining) for the big lenders. 

None of that is lost on Ma, founder of Alibaba Group Holding Ltd. and Ant. The financial outfit has a similar 30% ownership in MyBank, and describes the licensed digital lender as one of its largest customers and “most important partner,” serving more than 12 million small and medium business clients in 2019. Net interest margins are close to 4%; those at large, traditional banks are around half that. 

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The strong user traffic seen by Ant’s AliPay and Tencent’s WeChat can significantly bring down customer acquisition costs. WeBank’s effective retail clients grew 68% to 200 million last year compared to 2018, the fifth-largest customer base in China.  The bank has 900,000 small and medium companies as clients.

This gives the digital bank a lot of operating leverage. In just three years, WeBank’s cost-to-income ratio fell to 35% from 54%. Cost per account is only 3.60 yuan (55 cents), versus 20 yuan at big traditional banks, data provided by CLSA Ltd. show. Last year, with revenue at only 74 yuan per head, WeBank was servicing the lower tiers of Chinese society, a business segment regular banks didn’t tap because of higher operating costs. 

At a 16% return on equity, Ant’s MyBank isn’t quite as lucrative, but chances are it will expand. The company had until recently been relying on a loan-facilitation matchmaking model for its consumer lending business. Given the recent actions by China’s regulators, that operation plan is on its way out.

In the speech last month that ultimately led regulators to halt Ant’s $35 billion IPO, Ma said that China’s financial system works like a pawnshop: Banks won’t lend without collateral or guarantees. Ma wants the lending industry to evolve into one based on effective credit systems. Using real-time payments data and its own risk management tools, MyBank can quickly decide whether to make small loans.

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Running a bigger, successful MyBank would prove Ma’s point. One clear path of expansion would be consumer loans, leveraging the co-lending model with traditional banks. That’s a strategy that seems to be working for WeBank. 

There’s a business case for financial innovation, even if Beijing is squirming. Regulators are rightly fixated on stability and cutting risk. Anxiety about a futuristic, gargantuan digital finance platform like Ant is understandable. But it ignores the reality of where the industry is headed. There must be other ways of dealing with their discomfort with Ant’s many products and businesses, and of disentangling various segments.

When it comes to banks, taking a page from big tech’s books seems worth a shot. WeBank raked in 4 billion yuan last year. China’s traditional lenders could use the money. The large banks forfeited 1.25 trillion yuan in profits between January and October to support the real economy during the coronavirus crisis. 

In theory, regulators would like to protect consumer interests. Skepticism of the evolving financial world is understandable, given the challenge of imposing rules on high-yielding wealth management investment and insurance products over the last couple of years. However, consumers also need credit. 

For years, Beijing has had to force banks to lend to small and medium enterprises. They wouldn’t be reluctant if there was profit in it. WeBank has shown state planners that lenders can serve the broader economy more effectively.

So, take your pick: Banks that make money or, well, those that don’t. Tamping down the profitable ones seems like a bad idea. After all, operating leverage is the kind we all want, especially China’s banking and insurance regulator.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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