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Bank stocks defy market rally; Ant debacle has wide regulatory implications

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Ant analysis

China’s decision to suspend Ant Financial’s record-setting IPO “shows that [Ant’s] attempts to dodge and weave may be futile when Ant itself has grown to be such an important player in China’s financial system: It has the equivalent of $321 billion in credit balances outstanding to consumers and small businesses, for example,” the Wall Street Journal reports.

“Ant has portrayed itself as a technology company, rather than a financial institution, partly to avoid the scrutiny of regulators. The company has in recent years switched from being primarily a direct provider of financial services to being an online platform for these services—precisely because being an online lender had become a hazardous business from a regulatory-risk perspective.”

“While Ant was gearing up to launch its IPO, regulators had begun taking aim at the company’s fast-growing microloan business, which provides short-term credit to hundreds of millions of individuals and scores of small businesses,” the Journal said in a separate article. “When Ant partners with banks to make loans, the lenders provide the funding and bear the risk of defaults, while Ant collects fees for facilitating the transactions.”

But back in September, “China’s banking regulator released draft regulations that will likely force Ant to come up with $30 for every $100 in consumer and business loans it originates in conjunction with banks. That would require the company to use significantly more capital to support its lending unit.”

“The tussle with Ant is also a high-profile example of the wider global debate over regulation in digital banking,” the Financial Times comments. “The question regulators must wrestle with is — what is a bank? Is it a company that takes deposits or is it one that just lends and processes payments?”

“This is a live debate in the U.S., where the Office of the Comptroller of the Currency has proposed a fintech charter which would, in essence, give fintechs one set of national regulations while excluding them from the most burdensome ones linked to deposit-taking. Another issue is whether the charter would enable large technology groups to enter the financial system by the back door. To avoid a failure of regulation or rules fragmenting further requires a federal approach and lawmaking by Congress.”

“The saga shows both how capitalist China has become and how Communist it remains,” the FT adds. “The latest episode has shown how even a billionaire businessman as influential as Jack Ma, the founder of Alibaba and Ant’s biggest shareholder, remains subject to the dictates of the Chinese Communist party.”

“Standing back from the immediate fray, it is worth considering what Ant’s meteoric rise tells us about how businesses flourish in the digital age and how they are still constrained by the markets in which they operate.”

Wall Street Journal

Bucking the uptrend

Bank stocks dropped sharply on Wednesday, “a sharp departure from the broader market as investors bet that another round of stimulus relief will be hard to come by. The KBW Nasdaq Bank Index finished 5% lower” while the broader S&P 500 rose 2.2%. “Shares of regional banks, some of the most dependent on a strong economy, were down the most on Wednesday. Some of the big U.S. banks with large Main Street lending arms were also down,” although by smaller percentages.

“Investors are wagering that the results of Tuesday’s election, and a potential prolonged period of vote counting, will delay and possibly curb the size of a potential stimulus bill that would aid the economic rebound. Bank executives have said that without more federal support, the recovery is likely to stall.”

“The state of the U.S. election as it stands now is good for the market broadly, but bad for banks and financial companies,” the Journal says in a separate analysis. “The reality might not be quite so stark once all is tallied up.”

“This simplistic view glosses over a lot of things that could, in the slightly longer term, favor banks, whose stocks remain some of the most beat-up in the market. For one, lower rates do favor certain parts of the business, notably mortgage lending, which for some banks is a good-sized fee generator. Buoyant mortgage lending also has the indirect effect of providing a bit of stimulus to borrowers who can use refinancing, or even move, to help bolster their household budgets.”

“And while fiscal stimulus has almost certainly eased the pressure on banks’ consumer loans in particular, it hasn’t been a totally unalloyed good, either. The flood of deposits onto banks’ balance sheets has created challenges for banks short of lending opportunities, leading to balance sheets heavy with cash and low-yielding securities and putting pressure on net interest margins for now. Keep in mind too that banks have also already contemplated life without further stimulus, building up loan-loss allowances based on models of an economy without another round of fiscal support.”

Quotable

Bankers would like to know sooner than later the status of a lot of the rules and regulations … whether they need to adjust their budgets and their staffing, and business models and business strategies based on the outcomes of the election.” — Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, about how uncertainty over the election results affects banks.

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