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Pakistan

Pakistan banks: Covid-19 could drive a shift to digital payments

  • BAFL is our top technology play in Pakistan as it aggressively invests in its mobile banking platform Alfa

  • We think a lack of awareness about digital payment channels has been a reason for Pakistan’s high cash utilisation level

  • But now Covid-19 could trigger a long-lasting shift in consumer behaviour towards digital payment

Pakistan banks: Covid-19 could drive a shift to digital payments
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Tellimer Research
8 April 2020
Published byTellimer Research

Pakistan is heavily cash-based. We think a lack of awareness about digital payment channels is a key factor for the economy’s high cash utilisation level, in addition to a large undocumented economy and banking transaction taxes on non-filers.

Figure 1: Currency in circulation/M2 ratio 


 
Source: Tellimer Research, Central Bank data 

Covid-19 could provide a lasting push to digital payments. We believe the following developments could trigger a long-lasting shift in consumer behaviour away from cash and allow for a sharp growth in digital payments: (1) recently, the State Bank of Pakistan waived digital banking transaction fees to facilitate cashless and branchless transactions; (2) funds from the government’s relief package for low-income workers are likely to be disbursed through mobile wallets like Easypaisa, JazzCash; (3) fear of transmission through the use of physical banknotes is also encouraging individuals and businesses to seek out alternative methods of payment. 

BAFL is our top technology play in Pakistan. Bank Alfalah has a strong focus on technology and is continuously improving and aggressively promoting its new mobile application, Alfa. Its valuation multiples are also attractive with 2020f PE at 4.4x and PB at 0.7x compared to past 5-years' average of 7.4x and 1.0x, respectively. The bank's 2020f ROE is expected to be 16.5%. Among larger-cap names, we think HBL is the most tech-savvy; both its Konnect (digital wallet for the unbanked) and HBL Mobile (for existing banking customers) products have been witnessing strong growth. UBL has also recently improved its mobile banking application, but we think it has lost the first mover advantage it held in branchless banking through its Omni platform.

BAFL and HBL have been making more substantial technology investments compared to peers. Most of our covered banks have ramped up their IT expenditures in 2019. BAFL’s IT expenses grew by 23% in 2019; its IT expenses to total assets ratio was 27bps and IT expenses were 9.6% of total costs. For HBL the same metrics were 38%, 24bps and 8.1%, respectively. The relatively lower IT/total expenses ratio for HBL is due to abnormally high operating costs (New York branch and business transformation project). For the sector, we estimate IT expenses growth was 25% yoy in 2019, and that these costs were equivalent to 20bps of total assets and 8.9% of total costs. MEBL appears to be playing catch-up in this context; its IT expenditure is growing rapidly (38% yoy), but from a low base – its IT costs are just 15bps of assets and 6.0% of total costs.

Figure 2: IT expenses/total assets ratio

Source: Company accounts, Tellimer Research

Figure 3: IT expenses/total operating expenses

 
Source: Company accounts, Tellimer Research

The bulk of IT expenses are software-related. Among our covered banks, c50% of IT expenses comprise software-related activities (software maintenance and amortisation), while c30% are hardware-related and 20% are network charges. We believe banks with higher focus on software-related activities would be more likely to deliver product innovation and an enhanced consumer experience. Within our coverage, BAFL has the highest software expenses (60% of total IT expenses).

Figure 4: IT expenses breakdown – 2019

Source: Company accounts, Tellimer Research

Branch expansion is more measured than five years ago, with scope for a further slowdown. Banks grew their branch networks by an average of 4% in 2019; this is roughly half the 2014 growth rate. Slower growth prospects may be one factor, but we think technology adoption is also a contributor. MEBL has expanded its branch network the most (15% yoy growth in 2019), but we think this is because of its unique proposition of Islamic banking, which still has a significant untapped potential in rural areas. For conventional banks, we think branch networks could ultimately start to shrink (as we have seen in Nigeria and Malaysia) as alternative channels (mainly mobile phones) become more popular. Note that active mobile wallet accounts grew by 2.2mn in H1 19, compared to just a 0.8mn addition in the number of bank accounts.

Figure 5: Branch Expansion - yoy

Source: Company accounts, Tellimer Research

Table 1: Pakistan banks valuation summary
 
Mkt Cap (US$ mn)RatingETR2020 PE2020 PB2020 ROE
2020 DY 

ABL PA 

560

Buy

57%

5.7

0.78

14.3%

11.0%

BAFL PA 

392

Buy

68%

4.4

0.69

16.5%

11.5%

HBL PA 

927

Buy

85%

5.2

0.67

13.7%

6.6%

MCB PA 

1,031

Buy

79%

5.9

1.04

18.1%

11.0%

MEBL PA 

491

Buy

100%

4.4

1.26

31.9%

9.4%

UBL PA 

770

Buy

100%

4.5

0.65

15.0%

11.4%

Median

 

 

82%

4.9

0.73

15.8%

11.0%

Source: Bloomberg, IMS, Tellimer Research