Baidu's Move Into Fintech Arouses Caution -- WSJ

Baidu Inc. is among China's tech giants looking to get a leg up in the competitive financial-services market. Credit-rating companies aren't so sure it's a good idea.

Fitch recently placed Baidu on negative watch, citing "significantly higher" business risks as it moves into making unsecured consumer loans and selling uninsured investments known as wealth-management products, which Fitch said are "part of the shadow banking system in China."

Moody's decided last month to place Baidu's bond ratings on review for a downgrade, citing concerns over the firm's short history in the financial-services business.

Baidu's financial services, which also include its mobile payment platform, now account for about 12% of its assets, or 25 billion yuan ($3.7 billion) -- representing rapid growth for a firm that formed its financial-services group only about a year ago. That has significantly changed Baidu's credit profile, said Moody's vice president and senior credit officer Lina Choi.

"The execution risk is high," Ms. Choi said of wealth-management products, which are targeted at consumers looking to earn more than they could in bank deposits or bonds. "If these investments do not yield expected returns or generate losses for retail investors, that may result in reputation risks to Baidu."

A Baidu spokeswoman declined to comment on the actions by Moody's and Fitch. On Baidu's most recent earnings conference call, however, then-Chief Financial Officer Jennifer Li said the firm's financial services were "progressing very well."

The credit-rating firms' reports haven't troubled Baidu's share price, which is up about 8% this year on Nasdaq through Wednesday. Analysts said the bigger issue, reflected in its stock performance, is slowing growth, particularly in its core search business.

"Investors have been concerned about Baidu's slowing growth rate compared with the other internet giants in China," said Marie Sun, an analyst at Morningstar.

Along with Baidu, Chinese tech giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. also are moving into the attractive and risky fintech space as they all look to move beyond their core businesses. The fintech products they offer include short-term consumer loans and wealth-management products.

Fitch said Baidu's credit risk is higher than that of Alibaba and Tencent because it doesn't have the financial might of those two rivals, which are more profitable and have stronger cash-generation abilities. Alibaba shares are up 56% this year through Wednesday on the New York Stock Exchange, and Tencent shares in Hong Kong have risen 44% through Thursday.

Oftentimes, wealth-management products are bundles of corporate loans, trusts and other investment vehicles -- making it difficult for investors to understand what they are getting. The products have attracted increasing regulatory oversight from China's central bank.

Tencent recently joined with China Rapid Finance, a consumer-lending marketplace, to offer more investment products. Tencent also runs a distribution channel that lends users sums ranging from 500 to 300,000 yuan (roughly $75 to $44,000) through its online banking affiliate, with interest rates ranging from 7.3% to 18.25%. The average loan size distributed is around 8,200 yuan ($1,200).

Alibaba Group's financial affiliate, Ant Financial, offers lines of credit and consumer loans with lending limits of 50,000 yuan a month. The company says more than 100 million users have taken out loans, with interest rates ranging from 2.5% to 8.8%.

"There's a good appetite for personal loans and one that hasn't fully been met," said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based tech consultancy. "The online lending platforms allow loan products to extend to a much greater percentage of the population."

Last year, about 160 million Chinese went online to take out loans worth 1.2 trillion yuan ($177 billion). Analytics firm iResearch expects China's lending to grow at an annual rate of 50% for the next three years.

One reason China's internet giants have waded into the fintech business is the vast amount of data they collect, and which they can use to assess creditworthiness in nontraditional ways, such as by analyzing a person's search history or online video-watching patterns.

Baidu's finance group has focused particularly on the education-loan market, where it says it has a market share of roughly 75%. Typical borrowers are 20- to 35-year-olds who are attending a trade school or signed up for language or IT programs.

A Baidu financial-services group executive said the company now has partnerships with more than 2,500 educational institutions in China and provides, at peak times, 3,000 loans each day to students.

When Truman Chu needed a loan to help pay for his M.B.A. degree at Tsinghua University, the 33-year-old didn't turn to traditional banks but instead went to China's internet search giant.

Mr. Chu applied for a loan from Baidu two years ago, after hearing about its lending program in association with Tsinghua's School of Economics and Management. He filled out an application on his smartphone while walking through campus. Fifteen minutes later, he received confirmation for a loan for 118,000 yuan ($17,370), which covered tuition for his first year of business school.

"It was so convenient, unlike commercial banks where you have to go to a designated bank and line up and apply for it," said Mr. Chu, who is repaying his loan in three years at an annual interest rate of nearly 6%.

Most of Baidu's education loans are for less than 30,000 yuan (roughly $4,400), though a small number of elite graduate loans can range higher. The Baidu executive says the company aims to serve one million students a year.

Baidu said it offers sales incentives to some of the schools it works with and wires money directly to the institution when the loan is approved.

Baidu's consumer interest rates range from 10.8% to 18%, with 70% of its consumer loans falling between 13% and 15%. For elite education loans, such as M.B.A. programs, Baidu's interest rates are lower to stay competitive with state-run bank rates. The average loan amount made by Baidu is 15,000 yuan ($2,200), with many borrowers getting more than one loan.

In the U.S., average graduate or professional federal loans charge interest rates between 5% and 6%; private loan rates vary from 9% to 12%.

Baidu says its loans are an option for students who can't get traditional bank loans. Mr. Natkin notes that there is a risk the borrowers don't fully understand the debt they are taking on.

"We've seen a number of loan products that have been problematic," Mr. Natkin, the Beijing consultant, said, referring to unscrupulous peer-to-peer online lending practices. Still, industry executives see the huge potential of China's online lending marketplace.

"The Chinese market is unique in that it's still relatively new in terms of offering unsecured credit to consumers," says Douglas Merrill, founder and chief executive of Zest Finance, an online lender that has worked with Baidu on underwriting technology. "There's a massive opportunity to create a whole new credit ecosystem."

--Lilian Lin contributed to this article.

Write to Alyssa Abkowitz at alyssa.abkowitz@wsj.com

(END) Dow Jones Newswires

June 16, 2017 02:47 ET (06:47 GMT)