Why are the enterprises flocking to banking license?
If we take a look at the market values of the banks that go public, we may find that most of them are fluctuating around the net assets, which means we can buy these banks’ shares at the same or even lower price of the sponsors. So why do the private enterprises bother to run a bank by themselves? We think there are four reasons:
Firstly, the current average return on equity of banks in China exceeds 16%, which was even higher a few years ago when the economy hadn’t declined yet. Thus, it is very profitable to operate a bank in China. Although China’s economy has kept booming for the past ten years, it is still rare to find a listed company whose average return on equity goes over 15%. That is to say, from the perspective of long-term business, one will profit a lot from holding a bank despite the unattractive valuation.
Next, minority shareholding does not help with the enterprise strategy. Except for China Minsheng Bank, listed banks in China are mostly state-owned, so the enterprises that make investments can never get involved in the operation of the banks as merely financial investors, not to mention a deep integration between their business and financial resources to promote their unique superior resources and abilities. Meanwhile, there are many restrictions on private enterprises’ purchase of the majority shareholding of non-listed banks in China.
And thirdly, banking is a highly-leveraged business that the quality of assets is the crux, which is almost impossible for the outside investors to learn about. This may also account for the private enterprises’ inaction towards listed banks of low valuation.
Lastly, it is necessary for some enterprises especially Internet tycoons to enter banking business for their expansion. I believe that they will strive for all the other financial licenses helpful to their development as long as policies permit. As we can see that Alibaba is buying the majority shareholding of the fund companies that cooperate with Yuebao.
Banking has a particularly important position in China, because the direct financing market in China has not fully developed and most enterprises have to receive financing from banks instead of going public or issuing bonds. Banking occupied over 90% of the financing a few years ago, and still keeps over 50% directly and 70% indirectly now.
Will there be impacts like Yuebao?
Will Internet companies’ banks bring about impacts to banking business like Yuebao? I don’t think it will happen.
On the one side, licenses and regulations prevent the possibility. The goal of private banks has already been set up at the beginning – a supplement conducive to the previous financial system instead of a replacement. For example, CBRC (China Banking Regulatory Commission) clearly demands that the pilot banks insist on a market position of serving small and micro business and communities, and should provide efficient and differentiated financial services for the real economy.
On the other side, I think that even the Internet companies get full-service licenses, they will not cast big impact upon traditional banking industry in the short term. It is due to an obvious lack of ability to run banking for private enterprises. Banks have to face two kinds of customers: capital providers (the public who deposit money in the banks) and enterprises or individuals who ask for loans from banks. Internet companies are mostly consumer-oriented, so I believe they will do well in the service of individual customers, but may lack experience of serving enterprise customers, especially in the field of risk assessment and pricing.
Alibaba’s bank may come out first
What will the pilot banks do? According to Yang Jiacai from CBRC, Tencent’s bank will set an upper limit for loans and a lower limit for deposit, while Alibaba’s bank will set an upper limit for deposit. This means, Tencent’s capital mainly comes from relatively rich people or enterprises, and Alibaba will have a pleasant cooperation with small enterprises. I think Alibaba’s positioning is closely related to its advantages. For example, its financial product Yuebao has accumulated 81 million users since born 9 months ago, which are all potential deposit customers of the bank. Besides, Alibaba’s small business loan also brings about much experience of dealing with small business. But when you look at Tencent, there are no advantages other than the binding of WeChat and its users’ bank cards thanks to WeChat Hongbao. Judging from the current situation, I believe Alibaba’s bank will come out earlier than Tencent’s.
Original Author: Zhou Zhanhong (WeChat Account: Ability Circle)