* Fast-growing money market funds compete with deposits
* Higher rates may force banks to offer more yield to
* Move could reduce net interest margins
By Lianting Tu
SINGAPORE, March 19 (IFR) - Yuebao, a fund management
platform under Chinese e-commerce group Alibaba, is hurting the
bottom line of the country's banks as they scramble to offer
competing products, analysts said.
Yuebao has become an attractive alternative to banks because
it offers around 6% in annualized return. In contrast, banks'
demand deposits offer a paltry 0.36%. As a result, Yuebao has
attracted around Rmb500bn (US$81bn) from over 81 million users
since its creation just nine month ago.
"It is a replacement for demand deposits from many
investors' perspective," said Qing Liao, a bank analyst at
Standard & Poors in Beijing. Yuebao manages users' cash balance
on Alipay, a Paypal-like third-party payment system offered by
Unlike banks, Yuebao passes on to customers most of the
yield it earns while investing the money collected from clients
into bank term deposits and the interbank market. Over 90% of
Yuebao funds are invested in so-called negotiable term deposits,
meaning the money returns to the financial system, but in higher
yielding products than straight deposits, according to a
research report from Shenyin Wanguo Securities dated March 5.
When liquidity was tight during the Lunar New Year and
interbank loans were paying high yields, Yuebao was offering
annualized returns of 6.74%. Those yields have since dropped to
5.56% as of March 19 but are still considerably higher than bank
As depositors move into Yuebao funds, banks may be forced to
offer more higher yielding money market products, increasing the
cost of liquidity in the financial system.
The move is especially worrying as other internet companies
move into financial services as well.
In January, another Chinese tech firm Tencent, which has a
huge user base on its QQ and Wechat platforms, also rolled out
its money market fund called Licaitong. By February 25 the fund
had already accumulated assets in excess of Rmb50bn.
Faced with intense competition from Yuebao for retail
deposits, banks in China have taken measures to defend
themselves. They have established test branches for their own
money market products and they have also set daily limits for
depositors to transfer funds to Yuebao.
In the past few months, a group of banks - including Ping An
Bank, Communications Bank of China, Industrial and Commercial
Bank of China, Bank of China, China Minsheng Banking Corp - have
also rolled out their own money market products, according to
the Shenyin Wanguo research. More banks are expected to follow
Banks are in a better position to sell their own money
market products given their huge deposit base.
By end-2013, there were Rmb104.4trn deposited within Chinese
financial institutions, of which individual demand deposits
accounted for 17% while corporate demand deposits stood around
14%. The rest sits in term deposit accounts.
Based on these numbers, if 20% of the individual deposits
went to money market funds, it would represent Rmb3.55trn and
Rmb2.92trn for corporates.
While the amounts are daunting and should be an incentive
for banks to invest further in their money market business,
because of the high yield benchmark being set by Yuebao,
increasing the percentage of deposits held in money market
instruments will significantly push up the cost of funding for
" have to be careful enough not to hurt their own
profits," an onshore credit analyst warned. "It is basically
replacing one kind of bank liability with another [costlier
one]," said Liao.
Sensitivity analyses show that if 20% of banks' deposits
shift to negotiable term deposits, the average cost of banks'
liabilities will go up to 3.48% from 2.5%, a 40% increase. The
cost will shoot to 4.37% if the ratio goes to 80%, according to
the research from Shenyin Wanguo Securities.
Such a large spike in the cost of funding is likely to eat
into banks' net interest margins. Liao, from S&P, said that an
aggressive estimate suggests that the net interest margin of
Chinese banks could be reduced by 0.06% to 0.07% in 2014. The
net interest margins of Chinese banks stand around 2.5%-3%,
according to him.
As the cost of liquidity rises, banks may try to increase
the yields they get on loans, something that could expose them
to additional risk, analysts said.
"In order to preserve their profitability, banks may end up
lending to riskier borrowers at higher yields, which may lead to
higher credit risk facing the banks," said Jonathan Cornish,
head of bank ratings, from Fitch.
Counterintuitively, bigger banks are likely take a harder
hit in profitability because they do not have the expertise to
lend to small and medium enterprises to get higher yields.
On the flip side, the net interest margin of smaller
players, such as China Minsheng Banking Corp and Industrial
Bank, may even increase as they are able to pass the higher
costs on to the borrowers, most of which are smaller companies,
the onshore bond analyst noted.
While analysts agree that Yuebao could add fuel to risky
lending in China, it could also play a key role in developing
Chinese money market funds.
"Average investors in China are getting familiar with money
market funds thanks to the publicity that Yuebao has drawn,"
said Liao of S&P.
Total assets managed by China's money market funds are still
quite small, accounting for less than 2% of bank deposits, or
less than Rmb2trn, Liao said.
The explosive growth seen by Yuebao and Licaitong may
provide a yardstick of how quickly the market could develop.
If history is any guidance, the US money market fund
industry grew from one fund set up in 1971 to over US$3.5trn in
assets by 2008. One factor that prompted such growth was the
wide interest rate discrepancy between regulated deposit rates
and market rates, the Shenyin Wanguo research noted.
(Reporting By Lianting Tu; editing by Christopher Langner and