The Chinese regulators’ decision to require the delinking of Ant Group’s microlending business from its payment platform, Alipay, provides further evidence of the authorities’ focus on reducing risks to financial system and social stability posed by the online microlending (OM) sector, as well as their efforts to rectify anti-competitive behaviour in the third-party payment market, says Fitch Ratings.
We expect the heightened regulatory focus on risks posed by the OM sector, following its rapid expansion in recent years, to dampen its pace of growth. A more sustainable and less disruptive pace of growth should be positive for the sector’s long-term development and asset quality from a credit perspective.
Moreover, we still expect OM activity to expand at a pace faster than bank lending in the next few years, with demand being supported by continued economic growth and rising consumer spending. However, we believe recent actions by the authorities highlight the ongoing regulatory risk faced by companies in the sector in the near term.
We expect the delinking of Ant’s payment and microloan business to weaken its competitive advantage of cross-selling through its Alipay platform, allowing consumers more choice over their payment platforms or OM providers. This, coupled with the effects of other recent regulatory action, may moderate Ant’s revenue and profit growth in the near term.
Nonetheless, Ant has established its franchise and customer base in the OM sector, and has accumulated a large database to facilitate its underwriting system, powered by big data and artificial intelligence. We expect it will remain a key player in the sector and benefit from continued growth in OM volumes. Ant has also set up a consumer finance company, licensed by the China Banking and Insurance Regulatory Commission in September 2020, in which it has a 50% shareholding.
This allows it to offer small consumer loans nationwide, with leverage of up to 10 times, in contrast to the more restrictive small-scale consumer lending licences offered by regional governments.
Diminished growth prospects for Ant may create opportunities for other OM firms which can operate within the new regulatory standards. Regulators will, however, be alert to the potential for risks to appear elsewhere in the OM universe, particularly where such risks are related to retail clients and could raise social stability issues.
Increased regulatory risk may also lead OM companies to moderate their risk appetite, which could be positive for system stability. The regulatory environment will continue evolve rapidly, with regulatory oversight balancing the positive effects of financial innovation against the risk associated with growth in online consumer credit.
We expect the direct impact of developments affecting Ant on Alibaba Group’s (A+/Stable) cash generation to be limited. Ant is a 33%-owned associated company of Alibaba, but has never paid any dividends to its shareholders including Alibaba.
Alibaba’s credit profile remains underpinned by its leading market positions in China’s online shopping market and cloud computing services, its high free cash flow generation from its core commerce business, and a conservative capital structure with an ample net cash position.
