Enormous Consumer lending market growth potential
China Consumer lending market size was amounted to over RMB13 tn in 2019, increased by 18.1% YoY, according to FinVolution. While the consumer lending balance in the US was amounted to over US$29 tn, increased by 6.2% YoY. The growth rate of consumer lending market in China is nearly three times as large as that in the US. The consumer lending penetration rate (consumer lending loan balance/ GDP) in China has increased for years. The penetration rate has increased from 5.4% to 13.3% from 2013 to 2019. Compared with the US consumer credit balance ($29 trillion) and penetration rate (20%), there is still much room for growth. Key players in the China online lending sector include Ant Group, WeBank (Tencent’s affiliates), JD Digits, and Lufax. Among all, Ant Group’s consumer lending loan balance is significantly larger (RMB2 tn) than that of other players (e.g. Webank loan balance was only RMB158.6 bn as of Dec 2019)
Chinese government tightening consumer lending market
According to the China Finance Forum in October 2020, the Chinese government is in favour of the consumer lending platform with big data analysis capability. Since the credit risks of Small and Medium businesses and consumers were difficult to be assessed, leading fintech lending platforms, e.g. Ant Financial can utilize big data and analytic tools do not only meet market demand but also significantly reduce default rate lending rate. As such, the interest of the privately-owned consumer lending industry itself perfectly aligns with government long term policy.
In China, lots of licenced micro-lending companies are providing consumer loans. Regarding maximum lending rate for micro-lending company, China’s Supreme court in July ruled that the lending rate should be capped at 4x of the Loan Prime Rate (LPR) or an annual rate of 15.4% (July 2020 one-year loan prime rate was 3.85%) to ensure healthy economic growth. Ant Group addressed that the lending rate of most borrowers is similar to the level of interest rate required by China’s supreme court.
Right before the Ant Group IPO, China government just promulgated new regulations for micro-lending companies. The new rules are a more stringent requirement for micro-lending companies regarding their leverage level. Regarding regulation on financial leverage, the China Banking and Insurance Regulatory Commission (CBIRC) stated that the funded ratio of micro-lending company in each lending must be no less than 30%. Moreover, the Asset-Backed Securities (ABS) of assets of a micro-lending company must be taken into the calculation of leverage ratio, which must be equal to or less than 5x of its net asset size.
Regarding regulation of the maximum lending amount, CBIRC also stated that the maximum amount of each consumer loan should not exceed RMB300,000 or one-third of the borrowers’ average 3 years’ annual income, whichever lower will be applied. Small business loan size should not exceed RMB1 mn. The latest rules would significantly limit the growth of the consumer lending market in China, as many consumer borrowers do not have proper proof of income. And the official definition of “income” remains uncertain.
What are the negative impacts of the new regulations?
Firstly, the Chinese government would lower the consumer lending rate further to tackle the economic downtrend due to the pandemic of COVID-19, thus negatively impact the profitability of the consumer finance business of Ant Group.
Secondly. According to IPO prospectus, Ant Group has RMB2.1 tn Credit Tech loan balance as of Jun 2020 (including both RMB1.7 bn consumer loan and RMB0.4 bn SMB loan). Since China government just announced stricter regulations on the leverage level of micro-lending business, we estimate that Ant Group would require RMB700 bn (US$90 bn) to comply with the latest regulation. Since Ant Group has raised around US$40 bn in the latest IPO, Ant would have to further raise capital to fulfil the remaining US$50 bn. Separately, the Ant group has successfully secured a Consumer Financial Company license in Sep 2020 and such a new license would resolve its consumer lending business funding requirement.
