If investors in Ant Group were hoping China’s biggest fintech would rapidly bounce back from the last-minute suspension of its $37bn listing last week, Beijing was quick to disappoint them.

In comments that capped off a disastrous week for Ant and Jack Ma, the group’s controlling shareholder and China’s richest man, the banking regulator suggested it would begin treating fintechs more like banks — a move that could drastically slash their valuations and attractiveness to investors.

“In accordance with fintech’s financial nature, we will bring all financial activities under a unified scope of supervision,” Liu Fushou, chief legal counsel at the China Banking and Insurance Regulatory Commission, said on Friday.

Ant Group had been set to begin trading last week when Beijing on Monday abruptly announced new draft regulations for fintechs and a day later suspended the listing.

The prospect of being forced to navigate a regulatory shake-up before it can even contemplate returning to the market is a shock for a group that was poised to hold the world’s largest initial public offering with a valuation of $316bn.

Ant’s payments platform Alipay is ubiquitous in Chinese commerce. Its fast-growing CreditTech consumer lending business, which serves as a high-tech matchmaker between borrowers and banks, had become a crucial driver of sales and the source of its rich market valuation. 

The new draft rules for online micro-lending state that internet platforms will have to provide 30 per cent of the funding of “joint loans” — a term the regulators have yet to fully define — that are offered through their platforms.

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Ant currently funds only 2 per cent of its total Rmb1.7tn in consumer loans itself with most of the remainder coming from its partner banks. Ant disclosed in its listing documents that revenues from the CreditTech unit accounted for almost 40 per cent of its total sales.

Ant extracts an estimated fee of 2.5 per cent from its partner banks for each loan it arranges and takes on none of the risk. But the new regulations could force Ant to move substantially more of those loans on to its own books.

Iris Tan, senior equity analyst at Morningstar, said in her “base-case” scenario of light-touch regulation, Ant might be able to limit loans on its balance sheet to 5 per cent of the total. That would still lower its return on invested capital and could bring Ant’s valuation down by 10 to 15 per cent, she said.

Ms Tan’s estimate assumes that regulators would require Ant to source 30 per cent of loans itself but allow it to avoid holding most of them on its balance sheet, possibly by securitising the loans and selling them on to other parties, among other measures.

But “based on a regulatory trend of treating fintech players more like banks”, Ant could be forced to hold 20 per cent of the loans on its books in a worst-case scenario, she added, potentially cutting its valuation by 45 to 50 per cent.

Another analyst at a Chinese investment bank said regulators were unlikely to be lenient on Ant, especially when deciding new capital requirements for fintechs.

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“[Ant will] have to be under the same regulatory framework as other banks, and I think the valuation will dive to comparatively lower levels,” the analyst said. He estimated Ant’s price-to-earnings ratio could more than halve into the 20s or 10s.

Ant previously had a trailing price-to-earnings ratio — a measure of valuation — of 48 times based on its IPO valuation, meaning it was priced at the higher end of the range of its China tech peers.

“The opposite might happen now,” said Kevin Kwek, senior analyst at Bernstein. Private banks have a price-to-earnings ratio of 12-14 times, although Mr Kwek added Ant’s valuation would be unlikely to fall that low.

Under the new measures, Ant also faces a tortuous regulatory path back to any listing. It will have to apply for a cross-provincial licence to provide online microloans from the CBIRC. It is not yet clear whether the online lending regulations will include a grace period, or whether Ant will have to halt some of its activities once the law is enacted.

But first Ant will need to wait for the online lending regulations to be passed into law before it can even apply for a cross-provincial licence. Another recent set of regulations on financial holding companies that also affected the company took a year to proceed from draft to implementation. 

Wang Dan, analyst at Hang Seng Bank China, said Ant could still try to convince regulators it was only an intermediary and not a bank. “If Ant only provides big data and customer information, and the banks pay service fees and provide loans . . . then this rule has little effect on them,” she said.

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But even if regulators accepted this argument, that might not stop banks from insisting the fintech take on more risk by helping to fund more joint loans in the future.

“Once this regulation comes out, banks may be more inclined to issue joint loans in the future to let online platforms share their risk,” Ms Wang said.

Additional reporting by Nian Liu in Beijing

Via Financial Times