Ant Group - is a non-bank a bank ?

Much commented in the run-up, the prospective IPO of China-based Ant Group was planned for early November '20, and marketed as the largest ever in the world

With a $37bn offering and a theoretical valuation of more than $300 billion, Ant Group,  33% owned by Alibaba ,  was the focus of attention of every fund manager around the world, and every Chinese private investor 

Rightly so…with 1 billion million users of its mobile payment services in China, Ant’s payment transactions of $17.6 trillion are equivalent to Visa ($11.3 trillion) and MasterCard ($6.3 trillion)  combined

Starting out with Alipay, Alibaba's online and mobile payment platform which runs half of all Chinese digital payments transactiions, Ant expanded in money market funds and credit, quickly becoming dominant in both segments, and went on with a platform distributing third-party funds and insurance

Anything digital...and everything financial is

Next to the focus on the firm’s huge size, the location of the new listing – in Hong Kong and in Shenzhen – was also much commented, especially in the American financial media, muttering disappointment about New York being given the cold shoulder with just an inkling of worse to come in a power shift away from the homestead of global finance

There is indeed reason for concern, as the more thoughtful investment bankers on Wall Street have known for a while, but the numbers generated by a vast – and still under-developed – Chinese financial market has not been the only, and not even the main, reason to clobber their minds

Fascinated by Ant Group, these professionals recognized the immense virtues of digital integration, embracing every financial transaction

From payments (in store and on platform) to financial services (money markets, insurance, loans, portfolio investment), Ant is operating on a different level, and accumulating on the way a prized data hoard on every consumer' choice and profiling the credit-worthiness of every business in a mirror image of retail turnover

 

Winter is coming

In a still image of late October ’20, this is how all the players stood

It is said that the IPO was oversubscribed, although the word downplays the tidal wave of interest which resulted in 870 demands for every share brought to market – $2.8 trillion of orders just from retail investors in mainland China

Along with Chinese financiers, a group of foreign investors, bringing strategic credibility and excluding funds associated with competitor Tencent , had been invited to participate in the June ’18 funding round which raised $14 billion in total, valuing the company at $150 billion at the time

These investors, the sovereign-wealth funds of Singapore and Malaysia, the Canada Pension Plan Investment Board and private-equity firms Silver Lake, Warburg Pincus, Carlyle Group CG and General Atlantic, mutual-fund managers T. Rowe Price Group , BlackRock and Fidelity Investments, were all expecting to double the value of their investment of 30 months ago…a windfall estimated at $8 billion

Investment bankers Goldman Sachs , JP Morgan and Morgan Stanley  were said to expect a fee of $400 million, though one cannot be sure if such a large amount was justified

And Mr Ma, the founder of Alibaba, may have felt legitimate pride at what promised to be an earth-shattering global success

Except for the fact that none of this was to come true…

 

A hard landing

Brutal and most unusual, the notification by the Shanghai stock exchange that the IPO had to be canceled as “Ant might no longer meet the requirements for listing”, occurred just a few days before launch – and Ant followed suit by withdrawing its IPO from Hong Kong exchange as well

Undoubtedly, by intervening at the very last minute, the heavy-handed approach of the regulators has put a dent in China’s effort to gain recognition as a world-class financial center

If China’s authorities were willing to bear the reputational costs to a financial and monetary strategy which has been years in the making, and which remains of paramount importance, the planned IPO must have been recognized as a landslide sweeping all before it

Ferreting out the underlying motives in the debacle may be an impossibility because of so many overlapping factors – some of which fairly subjective, related to the personality of Mr Ma himself, some reflecting China’s authoritarian government and some – probably more fundamental – credit risks of Ant’s business model

One might argue that the motives fed upon one another, building up pressure until the dam burst at the eleventh hour…and there should be a grain of truth to this ‘dynamic’ explanation

 

Five minutes to twelve

Early on, commentators made much of power struggles going on behind the scenes

Mr. Ma had indeed been outspoken about the urgent reform of the state-owned Chinese banks to be delivered, not unreasonably from his point of view, by Ant’s technological expertise

Even if the today much quoted presentation by Mr. Ma at an Oct. 24 financial Bund Summit in Shanghai, attended by top regulators, politicians and bankers, appears, with the benefit of hindsight, provocative, the sharp words were hitting home

The criticism of regulatory focus on risks alone “overlooking development” and the portrayal of big Chinese banks’ “pawnshop mentality” ring true, as they might in fact of any over-extended institution the world over

Not coincidently, risk management based on Ant’s expert data analysis and the Group’s large loan portfolio to small and medium businesses are two of the key drivers propelling the firm’s growth expectations

Mr. Ma was doing his job of sorts, as ambassador (and Group owner…)

Less welcome, and more questionable, was his assertion that “there is no systemic risk in China’s financial system” and that “Chinese finance has no system”, which might be true but is definitely a contradiction in terms since the lack of 'system' is definitely a systemic risk..., even though Mr. Ma elaborated 'the risks are the lack of systems'

The comment, probably meant to shock the monetary authorities, was very much out of the purview of Mr. Ma’s private firm, and for no clear purpose

These words may have been taken out of context (we would not know), but the implication of Chinese finance having ‘no system’ could undeniably be understood to highlight that Ant Group stood ready to deliver such a system – and in fact was well on the way

While the firm had made every effort to distance its business model from finance and banking activities, changing its name from Ant Financial Services to Ant Group, and insisting on coverage by Technology (not Finance) analysts, Mr. Ma's speech was bringing home how central his firm had become to  market volatility, to credit allocation and to financial data analysis, for businesses and for consumers

Mr. Ma's insight, which we will discuss in "A Risk too far", confronts the banking system, globally, and not only in China, with the prescient conjecture that their business model is on a fast track to commoditization...

...but not just yet...