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Ant financial ipo suspension

Clarity matters, especially during turbulent times. Almost buried in the main news this week is the world’s largest stock listing getting shut down right before its launch. Ant Group, the financial technology giant, was set to raise $34.5 billion in the Shanghai and Hong Kong stock exchange, which would have translated into a market valuation of $313 billion.

If the initial public offering (IPO) were to happen, Ant Group would have exceeded the size of JPMorgan Chase, Goldman Sachs, and Wells Fargo. But then this IPO veers off course.

Chinese authorities have cited “major issues” for halting the IPO, but major issues do not show up this late in the game. A record 19.05 trillion yuan ($2.85 trillion) worth of bids was received from retail investors for Ant’s shares on Shanghai’s Star Market, exceeding the supply of shares 870 times.

All these point to Jack Ma, the founder of Alibaba who personally controls 8.8% of Ant. He gave a talk last month in Shanghai criticizing regulators in China. “We shouldn’t use the way to manage a train station to regulate an airport,” Ma said. “We cannot regulate the future with yesterday’s means.”

Now we know who the real boss is.

Why You Need Clear Thinking Now

If you are like me, this is too much drama. There is too much information. What you and I want to know is really the future of finance. We want to know that the sort of fintech made by Ant will continue to gain traction.

If you work in the financial sector, you want to know if these innovations will still spread around the world. If you are retail investors, you want to know if the creditability of the Chinese stock market has been annihilated. Should you still diversify your pension plan with Chinese holdings or not?

In short, we have too many data points. We need clarity instead, to make decisions on things within our control.

How Future-ready Are Your Banks?

At the Center for Future Readiness at the IMD business school, we have been tracking companies’ readiness. In the financial sector, this is evaluated based on firms’ ability to leverage robo-advisory, artificial intelligence, mobile services, and blockchain. These are capabilities that CEOs have long recognized.

Here is what we have found. Those who ranked high in our study turned out to have followed a set of distinct logic. They acted less like a bank. They orchestrated ecosystems. They scaled fast.

Ranking Company Name
1 ANT GROUP
2 MASTERCARD
3 SQUARE, INC.
4 VISA INC.
5 PAYPAL HOLDINGS, INC.
6 JPMORGAN CHASE & CO.
7 PING AN INSURANCE (GROUP) CO. OF CHINA LTD
8 CREDIT SUISSE AG
9 BANK OF AMERICA CORPORATION
10 ALLIANZ SE
11 AMERICAN EXPRESS COMPANY
12 UBS AG
13 WELLS FARGO & COMPANY
14 AXA SA
15 HSBC HOLDINGS PLC
Rankings of leading financial services companies based on a “leap readiness index.” To arrive at these rankings, we relied on hard market data. This included 7 categories with 23 measurements.

Note that every financial institute—regardless of ranking—has its own digital strategy. But the top players scale digital innovation faster than others, and Ant does it to an extreme extent.

I remember visiting Ant’s headquarters in Hangzhou 18 months ago. Sitting down with a manager, I asked about staff growth. Despite the runaway growth in revenue, Ant was not on a hiring binge.

“You don’t need more people?” I asked.
“No. We automate everything once a new business stabilizes.”

“So where do those people go?” “They go to develop another new business,” the manager said.

A business is built by humans and then run by machines. Then the humans are redeployed to other ventures. It is the logical thing to do. However, only a few companies besides Ant could do it with such ferocity. You may ask, is Ant totally unique? Is this a new strategy unseen by the world?

Not really. If you were to look at Visa, Mastercard, PayPal, Square, or Ping An, they are all on the same trajectory. What that means is this: The kind of fintech revolution wrought by Ant will not stop. Ant or not, the inevitable remains the same.

Should I Invest in Ant When It’s Ready Again? There is no single authority responsible for regulating fintech products and services. The main regulatory bodies include the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), and the China Securities Regulatory Commission (CSRC). In other words, it is a diffused political system.

But since they can pause the world’s largest IPO, this also meant they share a similar viewpoint. They all want to send chills down Jack Ma’s back. His success is a story tied to the national narrative, both in substance and in form. Any deviation from it will have consequences. No one is too big to attack.

And so Ant is likely, and already is, regulated like any other banks. That means meeting the same capital requirement, auditing criteria, and compliance standard. It will be a challenge for a data-driven, AI-first enterprise like Ant. It will mean that, for the first time, software programmers at Ant need to still move fast but not break things.

Is it still a good investment opportunity? Well, depending on the revised price level. Here’s one way to look at it.

Ant has made a $3.5 billion profit in six months. Let us assume it stops growing for the next six. It will still end the year with $7 billion. Compare that with a truly mature tech company like Netflix, whose P/E ratio is around 80. Ant would still have an estimated valuation of $560 billion.

But maybe you want to use a Chinese firm as a benchmark. Let’s take Tencent, another Chinese technology giant with a fast-growing payments business. It is trading at about 40x earnings. Applying the same multiple to Ant, that would imply a $280 billion valuation. Again, it’s assuming no profit growth in the second half of the year. Such a scenario is virtually impossible. Ant’s profit for the first half exceeded the full-year total for 2019.

A $280 billion valuation is still huge. Obviously, all eyes will still be watching the IPO of the decade, delayed.

Howard Yu is the LEGO professor of management and innovation at Switzerland's IMD and is director of the advanced management program (AMP). His book Leap: How to Thrive in a World Where Everything Can Be Copied was published by PublicAffairs in 2018.
Jialu Shan is a Research Fellow at The Global Center for Digital Business Transformation–An IMD and Cisco Initiative.

Why are Bank stocks undervalued

By JAY WEI
Updated Aug 7, 2020
Bank stocks are notorious for trading at prices below book value per share, even when a bank's revenue and earnings are on the rise. As banks grow larger and expand into nontraditional financial activities, especially trading, their risk profiles become multidimensional and more difficult to construct, increasing business and investment uncertainties.

This is presumably the main reason why bank stocks tend to be conservatively valued by investors who must be concerned about a bank's hidden risk exposures. Trading for their own accounts as dealers in various financial derivatives markets exposes banks to potentially large-scale losses, something investors have decided to take into full consideration when valuing bank stocks.

Book Value per Share
Book value per share is a good measure to value bank stocks. The price-to-book (P/B) ratio is applied with a bank's stock price compared to equity book value per share, meaning that the ratio looks at a company's market cap in comparison to its book value.

The alternative of comparing a stock's price to earnings, or price-to-earnings (P/E) ratio, may produce unreliable valuation results, as bank earnings can easily swing back and forth in large variations from one quarter to the next due to unpredictable, complex banking operations.

Using book value per share, the valuation is referenced to equity that has less ongoing volatility than quarterly earnings in terms of percentage changes because equity has a much larger base, providing a more stable valuation measurement.

Banks With Discount P/B Ratio
The P/B ratio can be above or below one, depending on whether a stock is trading at a price more than or less than equity book value per share. An above-one P/B ratio means the stock is being valued at a premium in the market to equity book value, whereas a below-one P/B ratio means the stock is being valued at a discount to equity book value. For instance, Capital One Financial (COF) and Citigroup (C) had P/B ratios of 0.92 and 0.91,

Many banks rely on trading operations to boost core financial performance, with their annual dealer trading account profits all in the billions. However, trading activities present inherent risk exposures and could quickly turn to the downside.

Wells Fargo & Co. (WFC) in 2018 saw its stock trading at a premium due to its equity book value per share, with a P/B ratio of 1.42 in Q3 2018.3 One reason for this was that Wells Fargo was relatively less focused on trading activities than its peers, potentially reducing its risk exposures.

Valuation Risks
While trading mostly derivatives can generate some of the biggest profits for banks, it also exposes them to potentially catastrophic risks. A bank's investments in trading account assets can reach hundreds of billions of dollars, taking a large chunk out of its total assets.

For the fiscal quarter ending Sept. 30, 2018, Bank of America (BAC) saw its equity trading revenue up 2.5% to $1 billion, while its fixed-income trading fell by 5% to $2.06 billion over the same period.4 Moreover, trading investments are only part of a bank's total risk exposures when banks can leverage their derivatives trading to almost unimaginable amounts and keep them off the balance sheets.

For example, at the end of 2017, Bank of America had total derivatives risk exposure of more than $30 trillion, and Citigroup had more than $47 trillion.5 These stratospheric numbers in potential trading losses dwarf their total market caps at the time of $282 billion and $173 billion for the two banks, respectively.67

Faced with such a magnitude of risk uncertainty, investors are best served to discount any earnings coming out of a bank's derivatives trading. Despite being partly responsible for the extent of the 2008 market crash, banking regulation has been minimized over the past few years, leading banks to take on increasing risks, expand their trading books, and leverage their derivatives positions.

The Bottom Line
Banks and other financial companies may have attractive price-to-book ratios, putting them on the radar for some value investors. However, upon closer inspection, one should pay attention to the enormous amount of derivatives exposure that these banks carry. Of course, many of these derivatives positions offset each other, but a careful analysis should be undertaken nonetheless