Tencent, Alibaba Stray From Roots With Bank Licenses

Alibaba, Tencent get banking licenses

The Internet world is buzzing today with word that Alibaba and Tencent (HKEx: 700), China’s 2 dominant Internet firms, are among the first group of 10 companies to receive banking licenses as Beijing opens the sector to private competition. From a macro-economic perspective, the move is certainly a welcome one for China and should provide some much-needed competition for the nation’s stodgy state-run lenders that now control the sector.

But from an individual company perspective, I really can’t see how traditional banking fits into either Tencent’s or Alibaba’s core Internet business, and worry a bit that this new initiative could ultimately distract these companies from their main focuses. I do expect that Tencent may ultimately follow its recent strategy of spinning off businesses and move its bank into a separate company, which looks like the right move. Alibaba would be well advised to do the same, though founder Jack Ma has shown a tendency for wanting to keep all his companies under one roof.

Talk of opening China’s banking sector to private investment has been circulating for much of the last year, though without any major developments. It finally took a major step forward with the banking regulator’s new announcement of the list of the first 10 companies that will receive licenses to set up privately funded banks. The list actually consists of 5 pairs of partners, each of which will get one license. (English article; Chinese article)

Tencent is pairing with Baiyeyuan Investment Co, also based in its hometown of Shenzhen; while Alibaba is teaming up with auto parts maker Wanxiang, also located in its hometown of Hangzhou. China’s other major Internet company, Baidu (Nasdaq: BIDU), said it applied for but didn’t receive a license in the first round, though I expect it will probably get approved in a later round this year. The other noteworthy license recipient on the list is a partnership between Shanghai-based Juneyao and Fosun groups, 2 of China’s largest and most entrepreneurial private conglomerates.

I do expect the licensees will probably be limited to their own geographic areas initially, meaning the Fosun-Juneyao group would have a clear advantage due to its location in Shanghai. Tencent’s bank will also benefit from its base in the boomtown of Shenzhen, while Alibaba will be at a slight disadvantage due to its location in the smaller Hangzhou. But that said, I do think there’s plenty of room for growth for all of these new banks, which will be much better than the big state-run lenders at providing financing for smaller, more entrepreneurial borrowers.

I have little doubt that the Alibaba, Tencent and Fosun-Juneyao banks will succeed, as all 3 pairings have plenty of funds and strong experience working with the small, entrepreneurial companies that so desperately need financing in China. But from the longer term perspective, I really do think that all of these partnerships need to think about where these banks fit into their business in the big picture.

As I’ve said above, I expect Tencent to spin off its bank into a separate company that will be allowed to develop by itself with some support from its larger parent. That would follow Tencent’s broader approach, which often sees it take strategic but minority stakes in partner companies and then let those partners develop independently. Alibaba founder Jack Ma could be less likely to take that approach, as he likes to stay actively involved in all of his company’s initiatives. That worked relatively well when the company was small and Internet-focused, but will grow increasingly difficult as Alibaba’s assets become much wider and more diversified.

Bottom line: New banks being set up by Alibaba and Tencent will do well by focusing on private, entrepreneurial borrowers, and should be spun off into separate, independent units.

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