Ant Financial CEO Eric Jing speaks during the Ant Financial event in Hong Kong, China November 1, 2016. REUTERS/Bobby Yip
HONG KONG (Reuters Breakingviews) – The Ant Group has vividly brought to life the cost of financial disruption. The Alibaba-backed company’s long-awaited initial public offering documents show its core consumer lending unit was hit by regulatory curbs in 2018, forcing it into a new, less risky, business model. The shift was profound, and Ant was fortunate to survive and thrive.
Tuesday’s trove of information offers a first look into Ant’s business, which Reuters says could be valued at over $200 billion. The company is best known for facilitating online payments but its lending business has become bigger in recent years: in the first half of 2020, the unit generated over $4 billion in sales, accounting for 40% of Ant’s top line. At the same time, the group’s overall profitability has been volatile. Operating profit margins have ricocheted from 20% in 2017 to 5% the following year, then back to 20% in 2019.
Ant offers scant explanation. It says gross margins in 2018 fell “due to an increase in the overall fee rate charged by financial institutions” without elaborating. Ant also states that it increased sales and marketing expenses. Elsewhere, the company says it reduced the use of asset-backed securities to support its credit business “in response to certain regulatory guidance”.
The reality was more grim. Regulators cracked down on China’s booming ABS market, through which online lenders could raise billions of dollars by repackaging consumer loans into securities and selling them. In 2017, Ant accounted for 60% of all issues, according to a Reuters report from January 2018. New rules around that time put traditional, bank-like, capital requirements on such loans.
Ant has since upended its business model. These days the company relies on roughly 100 partners including commercial banks and trust companies. As of June, 98% of Ant’s consumer credit balance of 1.7 trillion yuan ($246.86 billion) was underwritten by third parties or securitised. In exchange, Ant charges them technology service fees, a sort of loan origination commission. Those have been lucrative: the company’s operating profit margins in the first half of this year topped 34%. Ant’s vast user base, and enormous amount of data that can be used to assess credit risk, will have helped.
It’s a stark example of China’s fickle and unpredictable rules. Ant survived and even thrived one crackdown but it’s size and dominance only protects it to a point.
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