Ant Faces Dent in Profitability With New Consumer Finance Unit

(Bloomberg) -- Ant Group Co.’s most lucrative business of consumer lending is likely to become less profitable as the financial juggernaut emerges from a six-month regulatory crackdown aimed at curbing its influence.

While the writing has been on the wall for months, the approval of its consumer finance unit on Thursday with a capital base of 8 billion yuan ($1.3 billion) limits Ant’s ability to lend on its own and in partnership with banks. At the same time, the firm might not need to raise more capital, because loans funded entirely by banks but distributed on Ant’s Alipay platform won’t contribute to the unit’s balance sheet.

The approval marks an important step in Ant’s overhaul as it transitions to become a financial holding company that will be regulated more like a bank. Getting the nod to continue with its consumer lending business allows the fintech giant to chart a way forward after regulators torpedoed its record listing last year.

“There are ambiguities but the importance is this is a step ahead,” said Shujin Chen, a Hong Kong-based analyst at Jefferies. The move will curb Ant’s ability to lend, but it’s yet to be seen whether regulators will allow it to continue to distribute loans for other institutions for a fee, she said.

Chongqing Ant Consumer Finance Co. will be allowed to lend to individuals, issue bonds and borrow from domestic financial institutions, according to a notice from the China Banking and Insurance Regulatory Commission on Thursday.

Ant, China’s largest provider of online consumer loans, will need to transfer its lending operations and outstanding loans to the unit. It will provide 4 billion yuan of capital, giving it a 50% stake.

Two Brands

Ant plans to retain its two most important brands for online lending -- Huabei and Jiebei -- though only for loans underpinned by capital from the consumer finance firm or co-funded by banks, according to a person familiar with the matter. Loans solely provided by banks but distributed via Ant’s platform can’t use the brand names, the person added.

The unit will need to provide 30% of funding for all co-loans, based on rules released earlier this year. At 10 time leverage of its registered capital, that means its total amount of joint loans will be capped at 266 billion yuan.

The banking regulator said that Ant will need to comply with laws by fully disclosing borrowers, loan terms, annual interest rates and overdue loans.

Ant will work with the other shareholders “to serve the needs of consumers, and to continue enhancing the quality of financial services and risk management capabilities,” a company spokesperson said in a text message.

China Huarong Asset Management Co. is also among the shareholders, with a 4.99% holding. Other investors include Nanyang Commercial Bank Ltd., China TransInfo Technology Corp. and Contemporary Amperex Technology Co.

Separately, the People’s Bank of China-backed Financial News reported that the consumer finance unit will take over qualified businesses from two small-loan companies of Ant Group, which will be closed within a year after the new unit starts operation.

Before the crackdown, Ant had a thriving business doling out small unsecured loans via the Huabei and Jiebei brands. Overall, its CreditTech business was its single biggest revenue maker, contributing 39% of the total in the first six months of last year.

Ant issued about 1.7 trillion yuan in micro consumer loans to 500 million people as of last June.

Fintech platforms have since faced criticism for not having enough safeguards and for lending to low-income and young people. In February, the banking regulator imposed restrictions on banks and financial institutions working with online microlenders, capping the amount of joint lending they can do with the platforms.

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