China banks strike back against threat from Internet finance

Sun Feb 23, 2014 4:05pm EST
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By Gabriel Wildau

SHANGHAI (Reuters) - China's brick-and-mortar banks are launching a counter-attack against the assault on their business from Alibaba and other Internet heavyweights, in a bid to staunch the outflow of bank deposits into high-yielding online investment products.

In less than eight months, Alibaba Group Holding Ltd's IPO-ALIB.N money market fund, Yu'e Bao, has attracted 400 billion yuan ($66.0 billion) in assets under management, more than the customer deposits held by the five smallest listed Chinese banks.

Similar online products from Baidu Inc (BIDU.O: Quote) and Tencent Holdings Ltd (0700.HK: Quote) also contributed to a fall of one trillion yuan in traditional bank deposits in January.

"Yu'e Bao and similar products are posing a very strong competitive challenge to banks," said Zennon Kapron, head of Kapronasia, a finance and technology consultancy based in Hong Kong. "Although the amount of money that (online products) have attracted is still small as a portion of banks' overall deposit base, it's very significant in terms of the speed at which they've grown."

Now traditional lenders, initially caught flat-footed, are striking back.

Industrial and Commercial Bank of China (1398.HK: Quote)(601398.SS: Quote), Bank of China (3988.HK: Quote)(601988.SS: Quote), Bank of Communications (3328.HK: Quote)(601328.SS: Quote) and Ping An Bank (000001.SZ: Quote) have all launched new products in recent weeks that match the attractive features of Yu'e Bao.

Banks are also lobbying regulators to introduce curbs on the growth of on-line funds offered by non-banks.

Ultimately, however, competition for deposits will drive up banks' funding costs and crimp profit margins this year.   Continued...

An employee walks past a logo of Alibaba Group at its headquarters on the outskirts of Hangzhou, Zhejiang province, in this May 17, 2010 file photo. REUTERS/Stringer