Managing Easypaisa could be a challenge for MCB

November 10, 2021 (MLN): MCB Bank is conducting due diligence and evaluating the feasibility and strategic synergies to acquire a 55% stake in Telenor Microfinance Bank, the operator of the country’s leading digital payments platform, Easypaisa.

MCB is one of the most profitable top-tier banks in Pakistan but lags peers in digital adoption. MCB’s expenditure on Information technology stands at 8% of core expenses vs 10%
for HBL, UBL and BAFL. This reflects in its app rating on Google Play a score of 2.4 vs over 4 for peers.

Thus, acquiring Easypaisa, a leading mobile money platform, would help plug this strategic gap and could be a strong addition to MCB’s portfolio. Despite this, there could be some negative impact on the MCB consolidated financials as Easypaisa is a loss-making entity.

A report by Intermarket Securities (IMS) said that Easypaisa is a heavy loss-making business and the competition is tough, this could decline MCB’s EPS by 14%.

For the unversed, Easypaisa, launched in 2009, is the pioneer of mobile money in Pakistan. Pakistan's mobile money industry is dominated by two major players, JazzCash (owned by Mobilink) and Easypaisa (owned by Telenor). As of December 2020, Easypaisa had 8 million active mobile wallets with an annual transaction value of Rs1.5trn. This translates to Easypaisa’s market share of around 22%, in terms of the transaction value.

As per the report, the key performance indicators of Easypaisa are growing strongly as it has seen strong user growth in recent years, with its monthly active user base reaching 8.1mn in 2020 compared with just 3.3mn in 2018, a CAGR of 58%. The transaction value has also grown to Rs1.5trn from Rs683bn in 2017 (CAGR: 30%). However, in terms of financial performance, the revenues of Easypaisa have come down by over 20% in 2020 and have remained flat in 2021 so far. This is mainly because of government regulations to waive inter-bank fees during Covid-19. That said, the revenue growth was not very impressive pre-Covid either, with a 4% and 1% dip in 2018 and 2019, respectively.

Speaking of consolidated performance, which includes Easypaisa and the microfinance business, the company’s bottom line has significantly deteriorated in the past few years with losses now touching Rs10bn in 2021 compared with a profit of Rs417mn in 2017. This is due to declining revenues, rising admin expenses and a surge in provisioning expenses. Higher provisions indicate that the microfinance business is creating a further drag on the already cash-burning digital payments business. The bank runs an NPL ratio of 17.2% and the provision coverage ratio is just 52%.

The competition for Easypaisa is high and pricing is under pressure as the government’s decision to remove digital banking fees during Covid-19, has resulted in take rates for Easypaisa coming under pressure. While the resumption in digital banking charges might improve the take rates slightly in the near term, the pressure would continue as various new fintech players are scheduled to commence operations in coming years, and some of them, like SadaPay, have aggressive pricing strategies which could hurt incumbents, the report highlighted.

This suggests that MCB can capitalize on Easypaisa’s strengths on various fronts including complementing its retail franchise. It could also give MCB’s shareholders exposure to the high-growth mobile money industry along with MCB’s current profitable and sustainable business. That said, a much product portfolio expansion under Easypaisa (eg. digital lending, insurance) is not expected as a result of this acquisition, the report underlined.

To explain how MCB’s consolidated ratios would look post-acquisition, the report highlighted that the high additional costs are likely to surpass additional fee income which itself likely to take a jump of 47% from the Easypaisa franchise. This will be more than offset by a sharp rise in admin expenses (+32%).

The cost to income ratio is likely to increase to 55% post-acquisition compared with 46% pre-acquisition. ROEs are expected to come off sharply. ROE in the initial years is likely to come off sharply due to losses from TMFB, restricting cash payout and demanding increased efforts on digital and IT infrastructure. According to the report’s estimates, ROEs will come off from 17.1% in CY22 to 14.6% post-acquisition (assuming a Rs8bn loss in CY22).

Furthermore, high cash burn by Easypaisa could slow MCB’s dividend payout. Easypaisa is likely to require significant cash burn and is unlikely to achieve breakeven in the medium term. This is in sharp contrast to MCB’s traditional highly profitable business model. Therefore, the dividend payout for MCB could be hurt, suggesting a 30% drop in annual dividends and a 3ppt fall in the dividend yield, the report mentioned.

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