Alibaba and Tencent affiliates Ant Financial and WeChat Pay will soon be the two biggest banks in China – a development that should serve as a wake-up call for investors betting on a resurgence in traditional financial institutions in the developed world.
This is according to Xavier Hovasse, co-manager of the Carmignac Portfolio Emerging Patrimoine fund, which invests in emerging market equities and bonds.
The Chinese H-shares market looks relatively cheap at the moment, but Hovasse said this is because it is dominated by banks which will find it difficult to deliver a return on equity above the cost of capital in the coming years.
Performance of index over 5yrs
Source: FE Analytics
While banks in the developed world are struggling to make a decent return due to low interest rates, Hovasse (pictured) said the main threat to incumbents in China is the pace of disruption.
“While fintech was seen as a threat a few years ago, the threat is now actually materialising and China is where the disruption of banks has been the most advanced,” he explained.
“Very soon, the two largest banks in China are going to be Tencent and Alibaba.
“Alibaba is going to do the IPO of its financials business [Ant Financial] this year. The whispered number for the valuation is around $180bn, so it will be one of the most expensive financials in the world.”
As of April last year, Ant Financial subsidiary Alipay had 550 million active monthly users while Tencent’s WeChat Pay had 800 million – and both have already begun their international expansion.
Performance of stocks over 5yrs
Source: Google Finance
Hovasse said the reason these companies have been able to grow so quickly is because of the speed in uptake of mobile payments in China, which has made cash virtually redundant.
For example, the People’s Bank of China had to force certain shops to accept cash again after they had begun refusing it as payment, while many homeless people have started using mobile phones with a QR code to ask for donations as so few people carry money.
“The banks are losing a lot,” Hovasse continued. “And these guys, Ant Financial and Tencent, are already providing credit to merchants and consumers, they are broking insurance online. They are disrupting the banks.”
His co-manager on the fund, Joseph Mouawad, said that this trend is not just confined to China, but is gathering momentum across all emerging markets.
The pace of disruption can be attributed to the lack of a well-penetrated banking system – for example, while most people in the West have a credit card, they are difficult to obtain in countries such as China. Mouawad said this makes it easier for disruption to take place, and as a result, new technology has “leapfrogged” the older business models.
Hovasse said the best example of this is in Kenya.
“The poorer the country, the easier it is to disrupt the banks,” he added. “In Kenya, a lot of people don’t have anything, they don’t have a car, they don’t have a house, but they have a phone. And one of the companies that we own is Safaricom which has a mobile payments service.
“People don’t have bank accounts, but they transfer money and they buy everything from the internet.”
It is a similar story in Latin America, with Mercadolibre, which started off as an e-commerce company, and its online payment arm MercadoPago.
Fintech has not disrupted banks in the developed world to the same extent, which aside from a more developed banking system, can also be attributed to the adaption of credit and debit cards for contactless payments. However, Hovasse believes it is just a matter of time before they suffer the same fate as their emerging market counterparts.
“The classic reflex is ‘let’s look at what’s going to happen in the US because they are ahead and everybody else will follow suit’,” he said.
“Things have changed, and now the country that is ahead is China. E-commerce as a percentage of retail sales is much higher in China – it is 15 per cent in the US and 22 per cent in China.
“The credit guru of China is Alibaba. They know everything about everybody because everybody’s buying and selling on Alibaba, so Ant Financial can issue loans with a better understanding of the risk than the traditional methods.
“So, if you want to know what’s going to happen, have a look at China. And in China, the e-commerce companies are completely disrupting the banks.”
Data from FE Analytics shows Carmignac Portfolio Emerging Patrimoine has made 34.36 per cent since Hovasse joined in February 2015, compared with gains of 41.7 per cent from its benchmark, split 50/50 between the MSCI Emerging Markets and JP Morgan GBI-EM Global Diversified Composite indices, and 24.26 per cent from its IA Mixed Investment 20-60% Shares sector. However, it has underperformed both measures since launch in April 2011.
Performance of fund vs sector and benchmark under manager
Source: FE Analytics
The €468.7m fund has ongoing charges of 1.15 per cent.