BANKING: Baidu in Bank JV, Tencent WeBank Looks for Cash

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Bottom line: Baidu’s new joint venture bank with Citic could help it catch up to stumbling private banks backed by Tencent and Alibaba, which are struggling due to restrictions on their operations by Beijing.

WeBank seeks new funding

Two headlines are highlighting the opportunities and challenges that private banking is presenting for China’s Internet giants. The larger of the news items has online search leader Baidu (Nasdaq: BIDU) forming a joint venture with traditional banking giant Citic Bank (HKEx: 998), as it plays catch-up with Internet rivals Tencent (HKEx: 700) and Alibaba (NYSE: BABA). The second headline involves Tencent’s recently formed WeBank online bank, which is reportedly looking to raise $1 billion nearly a year after its official launch.

China’s Internet companies have rushed into financial services over the last 2 years, as Beijing tries to breathe new life into a stodgy sector previously dominated by big state-run firms. Both Tencent and Alibaba have been at the forefront of the movement, with each getting licenses to open private banks earlier this year under a new pilot scheme. But the transition has been filled with obstacles, partly due to lack of regulation but also because of resistance from the traditional banks.

Baidu’s new move is aimed at overcoming that resistance, since its choice of a major partner like Citic Bank should help to remove many of the obstacles that Alibaba and Tencent have faced in their own private bank initiatives. Word of this new tie-up first appeared earlier this week, and now Baidu has officially confirmed its agreement to form a joint venture bank with Citic, one of China’s leading financial conglomerates.

Citic said the new bank, Baixin Bank Co, will have a relatively modest registered capital of 2 billion yuan ($300 million), and that it will be the new lender’s controlling shareholder. (English article; Chinese article) The final shareholding structure is still under discussion, and the new bank must also still get regulatory approval, meaning its launch is probably still at least a year away.

Partners for the Long Haul

Baidu’s chief Robin Li is being quoted in Chinese media insisting that the tie-up is not a “flash wedding”, pointing out that Baidu and Citic Bank already have existing relationships. (Chinese article) This new partnership does look relatively solid, and could be more potent than the efforts by Alibaba and Tencent. That’s because it should allow Baidu to set up a real bank without all the restrictions that its 2 Internet rivals are facing.

Those restrictions include a prohibition on accepting bank deposits, which appears to be a major factor behind Tencent WeBank’s new fund-raising campaign. According to the headlines, WeBank is in the market to raise $1 billion, mostly from  private equity investors. (English article) There’s no additional detail, except to say that WeBank will meet with potential investors over the next 2 months.

Tencent is part of a group that was the first to receive a private banking license at the start of this year under Beijing’s pilot program to open up the sector. But licenses under that program have come with severe restrictions, forbidding new banks from many standard operating procedures such as accepting deposits and operating real-world branches. Those restrictions have severely hampered the banks’ ability to do business, and were a likely factor behind the sudden departure of WeBank’s chief in September just 9 months after the bank’s launch. (previous post)

The $1 billion in new funds will help WeBank in the short-term, as it needs the money to finance its lending in the absence of traditional bank deposits. But Beijing will eventually need to lift many of its restrictions on these new private banks if it really wants them to become serious competitors. In the meantime, that reality could work to Baidu’s advantage, since it won’t face any of those restrictions in its Citic Bank partnership.

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