Alibaba's (BABA) Ant Financial Stops High Interest Loans

Alibaba Group Holding Limited’s (NYSE:BABA) financial arm Ant Financial has imposed a ban on consumer loans with annual interest rates above 24% from its Alipay platform, with China tightening regulations related to the Internet lending industry.

We observe that Alibaba stock has gained 114.2% year to date, substantially outperforming the 65% rally of the industry it belongs to.

China’s government is trying to cut down problems associated with online loans such as abusive collection methods, default risks and diversion of loan funds to real estate market.

Ant Financial’s move comes on the heels of People’s Bank of China and China Banking regulatory commission’s decision to impose stricter regulations on Internet micro loans that have been proliferating over the past year taking advantage of weak regulations. The government has asked provincial authorities to suspend issuance of new licenses for online consumer loan companies and stop the non-compliant ones.

What’s Behind the Move

Ant Financial said in a statement,” Our inspections discovered that products recommended by a few merchants on Lifestyle have problems such as interest rates that exceed the legal limit and inappropriate collection methods.”

So basically, the move appears to be part of Ant Financial’s efforts to impose better monitoring and remove inferior loan offerings from its platform. It has asked all to perform self-checks by Nov 30.

Alibaba Group Holding Limited Revenue (TTM)

Notably, China’s Supreme People’s Court ruled in 2015 that collection of loans with annual interest rate up to 24% would be enforced by the courts. Interest rates of up to 36% are legally allowed but collection would not be enforced by courts. Lenders have to find their own collection methods in case of default.

That being said, the move underscores a conservative approach on Ant Financials’ part to preserve its ongoing partnerships under a situation where it is still not clear how regulators will act.

We believe that increased government regulations will affect Alibaba and Ant Financial backed Chinese online lender, Qudian. This U.S. listed company offers small cash and merchandise credit products to college students and young workers.

Zacks Rank and Stocks to Consider

Alibaba shares currently carry a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Activision Blizzard (NASDAQ:ATVI) , Applied Materials (NASDAQ:AMAT) and Twitter (NYSE:TWTR) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings per share growth rate for Activision, Applied Materials and Twitter is projected to be 13.8%, 13.3% and 21.5%, respectively.

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