Ant Group, the fintech behemoth that looked set for the world’s largest IPO, is now facing a future of limited growth opportunities after China’s regulator came down hard on its once promising online lending business, and this has some analysts slashing their estimates on the company’s valuation.

The Hangzhou-based firm is at the beginning of what looks to be a lengthy overhaul of its businesses to comply with tightening financial regulations after its $35 billion initial public offering was abruptly halted late last year. Ant is being forced to become a financial holding company as part of a rectification plan supervised by several government agencies including the central bank, the People’s Bank of China, and the China Securities Regulatory Commission. Such holding companies are usually subject to much more stringent capital requirements and risk management controls.

The biggest impact appears to fall on Ant’s online credit and lending business, which is the company’s largest revenue source, accounting for 39.4% of the 72.5 billion yuan ($10.5 billion) it generated overall in the first half of last year. It once made lucrative technology service fees through a joint-lending model with banks, where the company charged its partners to use its software for analytics and risk management. Banks supplied 98% of the funding for some 1.7 trillion yuan in consumer loans facilitated mainly via Ant’s Huabei and Jiebei services, while Ant itself accounted for the remaining 2%.

China’s regulators are now turning that model on its head. Ant was summoned to another meeting with government agencies the same day it announced the formulation of its rectification plan.

Aside from new requirements stipulating that Ant hold more loans on its own balance sheet and curbs on its joint-lending program, regulators are also seeking to rein in the wide reach of the firm’s consumer lending products. According to a post on the PBOC’s website, authorities told Ant to break an “inappropriate link” between its microlending and payment services.

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This could mean directing less traffic from Ant’s Alipay e-wallet to those services, or it may stop using payment and shopping data harnessed from the 711 million Alipay monthly active users to tailor its marketing for such microloan products, says Oliver Rui, a professor of finance and accounting at the China Europe International Business School in Shanghai (CEIBS). The volume and scale of Ant’s online lending business would likely stagnate, or even shrink in the next one or two years amid the toughening rules that require the company to fund more loans itself, according to Zhu Ning, deputy dean at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University.

“The scale and the profit margins of the business will all be impacted,” Zhu says. “Ant was previously valued as a fast-growing internet company by multiplying its 2021 price-to-earnings ratio 50 to 60 times. A financial holding company normally just gets a multiple of five to six times.”

Zhu says it is entirely likely that Ant’s valuation could fall below the $150 billion level it reached during a 2018 private funding round. Brock Silvers, a Hong Kong-based chief investment officer at Kaiyuan Capital, says he also sees a valuation far below the $315 billion reached earlier, and he believes the company won’t revive its IPO plan any time soon.

“The earlier frenzy was the result of a high-growth, fintech proposition, and that model is now over,” Silvers says. “Many investors who would have participated in the earlier IPO may find themselves unexcited by what might look essentially like a China banking IPO.”

A company spokesperson declined to comment on Ant’s valuation or IPO plans. In the stock exchange filing disclosing the rectification plan, it said the Huabei and Jiebei services will be operated by its consumer finance company, which “will be operated in compliance with relevant laws and regulations.” The company also said via its official WeChat account that it “will spare no effort in implementing the rectification plan,” and “we will put our growth proactively within the national strategic context.”

CEIB’s Rui says there is at least one silver lining, though. Ant’s Alipay service won’t be impacted as much, because it is still in line with the government’s goal of inclusive financing and globalizing the Chinese currency. But he does see the revamp process dragging on because regulators may still want to demand more than what Ant is willing to do.

“The government’s wording is still harsh,” says Rui, referring to the PBOC website post. “Ant has shown its willingness but it may not necessarily be what the government wants. Authorities may want a more complete restructure.”

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