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 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