89806 Access to Finance Forum Reports by CGAP and Its Partners No. 3, May 2012 Volume Growth and Valuation Contraction Global Microfinance Equity Valuation Survey 2012 Jasmina Glisovic, Henry González, Yasemin Saltuk, and Frederic Rozeira de Mariz E quity capital flows into microfinance have been increasing for many years, with both retail and institutional investors showing interest in this sector of financial services. Despite this growth, the vast majority of equity investments are still made in the form of private placements, as there are only three publicly traded microfinance institutions (Equity Bank in Kenya, Compartamos in Mexico, and SKS in India). The difficulty in accessing private data and the scarcity of publicly listed entities have limited the scope of the market research available to equity investors in microfinance institutions. To address this research gap, CGAP and J.P. Morgan joined efforts in 2009 to publish an annual Global Microfinance Equity Valuation Survey Report. This partnership benefits from the deep microfinance market knowledge of CGAP and the emerging markets equity research skills of J.P. Morgan. In the past two years, it has also benefited from the support and industry experience of the Council of Microfinance Equity Funds (CMEF). The aim of these yearly publications is to provide benchmarks for the valuation of microfinance equity, both private and publicly listed, to promote market transparency and identify industry trends. This year’s report is the fourth edition of this research partnership. Previous editions of the report are available on the J.P. Morgan and CGAP Web sites. © 2012 Consultative Group to Assist the Poor/The World Bank All rights reserved. Consultative Group to Assist the Poor 1818 H Street, N.W. Washington, DC 20433 USA Internet: www.cgap.org Email: cgap@worldbank.org Telephone: +1 202 473 9594 The authors of this paper are Jasmina Glisovic and Henry González (for CGAP) and Yasemin Saltuk and Frederic Rozeira de Mariz (for J.P. Morgan). Deborah Drake (Council of Microfinance Equity Funds— CMEF) provided invaluable guidance throughout the research. The authors also would like to acknowledge the contributions of Greg Chen and Mayada El-Zoghbi from CGAP, Danielle Donza from CMEF, Aditya Srinath, Head of Indonesia Research at J.P. Morgan, Mervin Naidoo, Head of South Africa Financials Research at J.P. Morgan, and Sunil Garg, Head of Equity Research for Asia- Pacific at J.P. Morgan. Senayit Mesfin, CGAP consultant, provided excellent research assistance. We thank the investors and MFIs who contributed to CGAP’s confidential equity valuation survey (see the appendix for the full list of contributing institutions). The authors remain responsible for the opinions expressed in this report and for any inaccuracies. This report is the result of a collaborative effort between CGAP and J.P. Morgan. J.P. Morgan analysts are solely responsible for the investment opinions and recommendations, if any, in this report. See page 17 for important disclosures. Introduction T oward the end of 2010, the asset quality of many microfinance institutions (MFIs) began to recover from a crisis of client over- indebtedness and unsustainable growth, particularly in India, Bosnia, and Nicaragua.1 During 2011 and into 2012, this recovery con- tinued to bring higher microfinance equity transaction volumes.2 Based on the responses gathered in this year’s survey, the private equity (PE) markets experienced an important increase in deal activity from the slower pace recorded in 2010. Large transactions in Latin America and the Caribbean (LAC) as well as strong flows from development finance institutions (DFIs) in India drove the increase in both the volume and the number of transactions. While asset quality improved and transaction volumes increased, equity valuations continued to decline in 2011 from their peak in 2010, reversing the multiple expansion that had taken place up until then. This is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny, which was most pronounced in a few countries making up a significant portion of our sample (and the market), such as India. In 2011, our comparables in the public market also declined with a drop in the average valuation of the Lower Income Finance Institutions (LIFIs) Index.3 We believe this reflects a wider trend where LIFI and microfinance valuations in the public and pri- vate markets are beginning to converge toward those of traditional fi- nancial institutions in emerging markets. Section 1 of this report examines the landscape of PE deals. It fol- lows the methodology of previous surveys and discusses valuation trends and new market developments (see Box 1 for more details on this methodology). This section also delves into deeper regional analy- sis and key country developments. We estimate that our sample covers 70–80 percent of the microfinance PE activity in 2011. Section 2 looks at the valuation trends in the public market for LIFIs in developing countries. This analysis includes banks that are not ex- clusively offering microfinance but are also offering consumer loans and other financial services. Since LIFIs serve similar markets to mi- crofinance, their valuation can be a useful comparable for MFIs. This report looks at the same 11 constituents of the LIFI Index that were reviewed in the 2011 edition. As evidenced by the percentage of loan portfolios where the loans are 30 days in ar- 1.  rears (known as portfolio-at-risk or PAR 30) for the average of 50 MFIs with signifi- cant foreign capital investments (as measured by Symbiotics SYM 50 index). For example, the average PAR 30 dropped from a high of 5.5% in early 2010 to its cur- 2.  rent level at 3.5%, as measured by Symbiotics SYM 50 index.  s measured by the Price/Book Value ratio in this report and the previous editions. 3. A 1 Box 1 Methodology and sources The analysis in this paper is based on two original samples: (1) a private transac- tion data set that includes 68 transactions in 24 countries during 2011 and (2) a sample of 11 publicly traded LIFIs. We estimate that this sample of PE transac- tions represents 70–80 percent of the PE market. Combined with surveys from prior years, our sample now covers 302 transactions that occurred between January 2005 and December 2011, with an aggregate value close to US$1,057 million. We believe this is the most comprehensive data set on PE investments in microfinance to date. Private transaction data set This year’s data on PE transactions were collected and processed by CGAP in a strictly confidential survey conducted in the first quarter of 2012. Twenty-nine investors comprised of asset managers of microfinance investment vehicles (MIVs) and DFIs provided data on their PE transactions for 2011 (for a list of contributors see Appendix 1). During this survey cycle, covering January– December 2011, CGAP collected data on 84 individual transactions that amounted to US$382 million. However, only 68 transactions were included in our sample. Transactions were dropped if they were executed at nominal value where no valuation process could be assumed; were part of loans being con- verted into equity; were part of a preagreed investment stage, the price of which had been set during prior years; or were other deal types where valuation was not done during this cycle. Transactions that involved several parties that had done the valuation jointly are treated as one single transaction. This avoids a potential bias caused by including the same transaction information several times in the database. CGAP followed strict procedures to ensure full confidentiality of the data reported. These included confidentiality agreements with all survey participants and restricted access policies to the database. Only three CGAP staff and con- sultants had access to the underlying data. CGAP was responsible for quality control of the data and preliminary analysis. Only aggregated benchmarks were shared with J.P. Morgan’s team, and the team did not have access to the under- lying database. Publicly traded LIFIs LIFIs are publicly traded commercial institutions that provide financial services to customers who overlap significantly with those of MFIs—the lower income population in emerging markets. However, in many cases LIFIs do not necessar- ily have an explicit social agenda, and their loan portfolios tend to feature more consumer loans than microenterprise loans. The companies selected as LIFIs must meet the following conditions: (1) offer financial services; (2) serve the low- income segment; and (3) be listed on an exchange, with daily liquidity of at least US$0.1 million. 2 1 Pa r t Valuation of Private Equity Transactions F or this year’s report, we gathered data from 29 Table 1—Historical private equity transactions investors who are asset managers of MIVs as Transactions Transactions well as of bilateral and multilateral DFIs.4 Year (no.) (US$ mm) This section examines the following questions: 2005 28 106 • What are the global growth and valuation trends 2006 37 20 for PE microfinance transactions in 2011? 2007 37 60 • What trends in growth and valuation emerge at 2008 63 144 the regional or country levels? 2009 32 230 2010 37 205 2011 68 292 1.1. Overall Growth and Total 302 1057 Valuation Trends Source: CGAP Research, Global Microfinance Equity Survey 2012. This year’s survey of PE investments in microfi- nance included 84 transactions totaling US$382 PE activity resumed in India in 2011. However, million. For the analysis in this report, we selected a market participants remain sensitive to the prog- sample of 68 transactions totaling US$292 million ress of the Microfinance Institutions Bill cur- to include only direct investments into MFIs where rently under discussion. a valuation methodology was used as part of the in- 3. Lower valuations. In most regions, except East- vestment process (for more information, see Box 1). ern Europe and Central Asia (ECA), valuations Overall, the microfinance PE market experienced compressed year-over-year in 2011, which had a stronger deal flow in 2011, with almost twice the positive effect on the number and size of transac- number of transactions compared to 2010. In 2011, tions. there was also a 43 percent increase in capital from the previous year and the largest flow of capital re- Note that the number of respondents for this year’s ported to date. The key drivers that contributed to survey was higher (29 compared to 21 in 2010), the strong growth in the number of transactions and which also slightly impacted the reported volume investment amounts in 2011 were as follows: of capital flows. While transaction volumes rebounded in 2011, 1. Several large transactions. The increase in vol- the valuations for those transactions remained ume of flows was supported by several very large compressed. Valuations contracted in 2011, as mea- transactions where existing MFIs or networks sured by the forward book value multiple. This con- tapped new markets, mainly in LAC, as part of an traction began in 2010 after several years of steady international expansion strategy mostly to sus- rise. The forward book value multiple, the key tain growth. benchmark for equity valuation in the microfinance 2. Expectations of an improved regulatory envi- PE market,5 dropped to an average of 1.4x book ronment in India. Investors welcomed progress value from a high of 1.7x in 2009. This recent aver- toward a more stable regulatory framework, and age is at the same level as in 2008. Unless otherwise noted, all amounts are in U.S. dollars, and 4.   or more discussion on valuation methodologies, see 5. F comparisons are between 2011 and 2010. O’Donohoe et al. (2009). 3 Table 2  P/E multiples have reversed since 2010, while P/BV multiples decreased Historical P/E Forward P/BV Year Average Median Average Median 2005 9.1 7.9 1.1 0.9 2006 8.5 7.3 1.0 0.9 2007 10.4 7.2 1.2 1.0 2008 10.3 8.1 1.4 1.1 2009 12.8 13.0 1.7 1.4 2010 20.1 23.4 1.6 1.4 2011* 11.4 11.3 1.4 1.2 *2011 calculations reflect data from 44 transactions where valuation information was provided for both Historical P/E and Forward P/BV. Source: CGAP Research, Global Microfinance Equity Survey 2012. The key drivers that contributed to the contrac- 1.2. Regional Growth and tion in valuation multiples in 2011 were continued Valuation Trends uncertainties about asset quality seen in some mar- kets since 2009 and the ongoing regulatory uncer- Share and growth of equity investments tainties in India (discussed later in the paper).6 In dollar terms, LAC accounts for more than half of the total amount of investments followed by Asia Type of Deals7 (notably India with over 92 percent of all invest- In terms of total volume of transactions, secondary ments in Asia), as shown in Figure 2. The highest issuances continued to dominate the PE space in growth in investments since 2009 was experienced microfinance following the 2010 trend, but at a by sub-Saharan Africa (SSA). Despite coming from slower pace. In 2011, the secondary markets repre- a low base in absolute terms, the volume of invest- sented 56 percent of total transaction volume in U.S. ments in SSA has more than tripled compared to dollar terms, a decrease from 69 percent in 2010, as 2009. Asia also had important growth, while LAC shown in Figure 1. LAC overwhelmingly captured has recovered from the drop in volume experienced the most volume of secondary issuance—perhaps in 2010, and continues to lead as the region with the due to its more mature nature. In addition, LAC largest share of capital flows. ECA lagged behind all continued its wave of acquisitions, and three of the other regions this year. these larger acquisition transactions in the second- Regarding median transaction size in 2011, LAC ary markets contributed over US$99 million (62 experienced an increase, SSA and Asia experienced percent of total amount transacted in LAC). As for a decrease, while ECA remained at the same level primary issuance, the volume of activity globally compared to 2010, as illustrated by Figure 3. grew more than 13 percent, with an important con- The following are some key trends in the most centration in India. active regions that impacted PE flows in 2011. LAC. The bulk of the investments channeled to 6. F or more information about MFI performance, see MixMarket (http://www.mixmarket.org/ ). LAC (70 percent of the total amount invested in the 7.  Primary issuance refers to the issuance of new shares to region) was represented by capital flows that came increase the MFI capital base; secondary issuance is the from established microfinance players growing into exchange (buy or sell) of existing shares of MFIs. new international markets as majority sharehold- ers. Within the region, Peru again had the most transactions and the largest size of investments. 4 FIGURE 1  Volume of transactions, by type of deals 180 75% 160 140 69% 56% 120 Millions 100 88% 68% 44% 80 88% 25% 31% Existing shares $ 60 32% New shares $ 40 20 12% 40% 60% 12% 0 2005 2006 2007 2008 2009 2010 2011 Source: CGAP Research, Global Microfinance Equity Survey 2012. FIGURE 2  Regional share of microfinance equity investments (volume US$) 350 300 250 Millions 200 LAC 150 ECA 100 Asia Africa 50 0 2005 2006 2007 2008 2009 2010 2011 Source: CGAP Research, Global Microfinance Equity Survey 2012. FIGURE 3  Median transaction size 2005–2011 (US$) 3,500 3,000 2,500 Africa Millions 2,000 Asia 1,500 ECA LAC 1,000 500 0 2005 2006 2007 2008 2009 2010 2011 Source: CGAP Research, Global Microfinance Equity Survey 2012. 5 Table 3  Key acquisitions in LAC in 2011 Month 2011 Target Acquirer Transaction Amount US$ mm June Financiera Crear Compartamos SAB de CV 63 (Peru) (Mexico) April Financiera Confianza (Peru) Fundación Microfinanzas BBVA 33 (Peru) (Spain) May Fondo Esperanza Fundación Microfinanzas BBVA 13 (Chile) (Spain) Source: MicroCapital Monitor. Table 4  Countries with more than 5 transactions in 2011 Total # Transaction Amount 4-yr average 2011 average Transactions (US$ mm) P/BV (fwd) P/BV (fwd) Peru 10 116.5 1.5 1.8 India 19 88.4 2.0 1.9 Mongolia 7 7.7 1.3 1.0 Source: CGAP Research, Global Microfinance Equity Survey 2012. Asia. Investments reported in Asia mainly in- However, greenfield transactions, usually valued cluded deals in India (92 percent of the total vol- nominally at book value, are excluded from the sur- ume in the region) with a few other transactions vey analysis so as not to skew the survey valuation in Pakistan, Indonesia, and Cambodia. Despite results downward. the microfinance crisis in the Indian state of Andhra Pradesh, India had 19 deals closed and Country-specific trends. India and Peru were once priced, amounting to over US$88 million com- again the leading markets accounting for around 70 pared to 10 deals that amounted to over US$45 percent of the total volume. Several large acquisi- million in 2010. The composition of investors in tions took place, making Peru the single country India included a mix of commercial banks, MIVs, with the largest volume transacted. India attracted and DFIs, but the most significant share in terms the second highest volume of all capital flows per of volume of transactions came from DFIs (74 country. Most of that capital was concentrated in a percent). few transactions funded by DFIs. Mongolia was the third country that attracted most deals; however, SSA. Public and private microfinance investors the total amount was significantly lower compared made more efforts to channel investments to SSA in to India and Peru. 2011, and they are expecting an increase in their SSA portfolio in 2012. However, there is still a high Valuations: Trends and breakdown by region concentration of capital flowing into a few African Overall, SSA and LAC each showed lower average countries.8 In addition, SSA continued to be an ac- valuations in 2011, Asia remained stable, while ECA tive region in the number of greenfield operations.9 showed a slight increase compared to 2010.  n 2011, flows were mostly to mature MFIs in Tanzania and Zambia. 8. I  Greenfield MFI is a new MFI built from scratch, without pre-existing structures, that uses a set of standard operating 9. A procedures disseminated by a central group. The central group—a holding company or international network—typically provides equity finance and technical assistance to the greenfield entity and holds a majority stake in its investees. 6 Table 5  Historical valuation breakdown, by region Average Forward P/BV # of Deals 2005 2006 2007 2008 2009 2010 2011 2011 SSA 0.6 0.8 1.5 1.5 1.0 1.1 0.8 5 Asia 1.3 1.7 1.5 1.5 1.9 1.8 1.8 19 ECA 1.1 1.1 1.0 1.6 2.1 0.9 1.1 10 LAC 1.2 0.8 1.0 1.2 1.2 1.5 1.4 10 Source: CGAP Research, Global Microfinance Equity Survey 2012. The microfinance industry in India continued FIGURE 4  India median and average forward to be impacted by the crisis that erupted in the P/BV state of Andhra Pradesh in October 2010. As illus- 2.5 trated in Figure 4, the average and median multi- 2.1 Average 2.0 Forward P/BV 1.9 ple of price-to-book value dropped in 2011, though 2 2.1 by a smaller degree than between the years 2009 1.5 1.7 Median and 2010. Note that several of the MFIs that at- Forward P/BV 1.6 tracted capital in 2011 had distressed portfolios, 1 especially in Andhra Pradesh, and this likely re- duced valuations. 0.5 0 2009 2010 2011 Source: CGAP Research, Global Microfinance Equity Survey 2012. 7 2 Pa r t Valuation of Publicly Listed Companies: LIFIs L IFIs provide financial services (consumer, mi- The individual weightings of each stock depend on croenterprise loans, payments, savings, and in- the market capitalization of the companies. That surance) to lower-income segments of the said, the weight of some stocks was reduced in the population, but they do not necessarily have a stat- index to reflect the percentage of the operations of ed social mission. As they operate largely in the the company that correspond to lower income fi- same market as MFIs, they offer interesting compa- nance. For example, the weight of Bank Rakyat is rables for MFI valuations. only 50 percent of what its actual market cap would Based on these criteria, 11 listed LIFIs that have correspond to in the index, as roughly 50 percent of a broad microfinance focus were identified. The the bank’s operations and revenues correspond to purpose of this section is to answer the following lower income finance. key questions: Indonesian stocks constitute the highest weight ~56 percent, while stocks listed in Kenya and India • What is the current composition of the LIFI In- comprise 4 percent and 1 percent of the basket, re- dex? spectively. The resulting weights show that Indo- • What is the performance of the LIFI Index in nesia combines one of the most mature markets for absolute and relative terms? public equity in microfinance (Bank Rakyat was • Do LIFIs continue to outperform traditional founded in 1895) with an especially well-developed banks? stock market (unlike Bangladesh, for example). The breakdown of countries in the LIFI Index (i.e., on public markets) is different from the break- Composition of the LIFI Index down on the PE market described in the first sec- tion of this report. The countries attracting mean- The LIFI Index is a market cap-weighted index of ingful interest from PE players in microfinance— 11 companies, encompassing various geographies such as India or Peru—are not represented with the and business models. The index includes banks that same weight in the LIFI Index. India—a major mar- are not exclusively offering working capital loans to ket for PE until recently—represents only 1 percent microentrepreneurs, broadening the scope to in- of the index (via SKS,the only listed LIFI in India). clude consumer loans and other financial services. The weight of SKS reached a peak of 10 percent of It includes the same 11 constituent list of LIFIs as the index in September 2010, but its market capital- discussed in last year’s report. ization, and hence weight in the index, fell signifi- cantly due to the Andhra Pradesh crisis in October Basket Methodology and Composition 2010. Companies selected as LIFIs must meet the follow- Figures 5 and 6 show the current breakdown of ing conditions: the LIFI Index, by stock and by country. 1. Offer financial services Table 6 includes the main country of operations of those LIFIs as well as their focus. The last column 2. Serve the lower-income segment of the population indicates the current weight of each institution in 3. Be listed on an exchange, with daily liquidity of the index. at least US$0.1 million10 10. Stock liquidity ensures that the price reported by data provid- ers, such as Bloomberg, is not distorted by temporary imbal- ances between supply and demand of shares. 8 FIGURE 5  Stock breakdown of the LIFI Index FIGURE 6  Country breakdown of the LIFI Index IPF 2% Tabungan Findep 1% India 1% 2% Other 4% SKS 1% Kenya Equity 4% 4% First Cash 5% Mexico 11% Comparc 8% Rakyat 38% Capitec 12% Indonesia South Africa 56% 24% Danamon 12% African Bk 16% Source: J.P. Morgan, as of April 24, 2012. Source: J.P. Morgan, as of April 24, 2012.11 Table 6  Institutions in the LIFI Index Company Country Focus Bank Rakyat Indonesia Government-owned bank (57%) focusing on rural microlending (>4,400 outlets across Indonesia). Micro- and payroll loans represent ~50% of the loan book, but a higher stake in revenues. Bank Danamon Indonesia Consumer mass market lending, with more than 1,000 outlets. Self-employed entrepreneurs are ~20% of loans, while segment of 2- and 4-wheelers represents ~40% of total loans. Bank Tabungan Indonesia Mostly focused on pensioners, while ~20% of loans go to Pensiunan microborrowers. SKS India Largest MFI in India, with loan growth of ~15x before the crisis. Andhra Pradesh represents ~30% of total loans of SKS. African Bank South Africa Individual consumer lending. African Bank owns a furniture retailer (~25% of group’s revenues). Capitec South Africa Individual consumer lending. Capitec offers a full suite of transactional banking services. Equity Bank Kenya Microlender offering credit, savings, and fund transfer services in Kenya, southern Sudan, and Uganda. The bank accounts for roughly half of Kenyan bank accounts. Compartamos Mexico/Peru Microloans to entrepreneurs in Mexico, Peru, and a greenfield operation in Guatemala; group lending methodology (more than 80% of total loans). Financiera Independencia Mexico Microloans to individual consumers (~80% of total) and group lending to entrepreneurs (~20% of total loans). First Cash Financial Mexico/USA Pawn store, with half of revenues coming from interest income and half coming from inventory sales. IPF Eastern Europe/Mexico Consumer lending present in six countries, originated through independent workforce. Source: J.P. Morgan. 11. Others include the operations of International Personal Finance (IPF), present in six countries in Eastern Europe and Mexico. The category also includes the revenues derived from the U.S. operations of First Cash Financial (approximately half of the total for First Cash). 9 LIFI Index generally outperforms, July 2011). South African banks did well in 2011 on resilient earnings and stable revenue delivery. Indo- but not in the first months of 2012 nesian banks remained immune to Europe-related The LIFI Index has outperformed significantly the stress in 2011 and received positive impetus from MSCI World Financials Index and the MSCI EM the central bank moving to an easing bias in the Banks Index since its inception and over different fourth quarter of 2011, and a sovereign upgrade to time periods. In Figure 7, the performance of the investment grade. LIFI Index is compared to global financial institu- The top three underperformers were SKS (In- tions (as measured by the MSCI World Financials dia, -69 percent), Findep (Mexico, -51 percent), and Index) and emerging markets banks (as measured Compartamos (Mexico, -33 percent). The microfi- by the MSCI EM Banks Index). nance crisis in India continued, with significant The annualized return of the LIFI Index was write-offs in banks’ portfolios, despite new deci- +26 percent since its inception in November 2003, sions taken by the Reserve Bank of India (RBI) to while the annualized MSCI World Financials In- help the sector following the Andhra Pradesh crisis dex and the MSCI EM Banks Index during the of October 2010. In Mexico, the focus over the past same period were -3 percent and +13 percent, re- few months has been on increasing competition in spectively. the sector, increasing loan delinquencies (still at a As in previous editions of this report, LIFIs have relatively low level, however), and general elections generally outperformed both emerging markets (due July 2012). and developed markets banks over different time periods. Table 7 summarizes the compound annual LIFIs show a high correlation with EM Banks growth rate (CAGR) of the three indices over four The correlation of the LIFI Index to the MSCI EM distinct time periods: since its inception (Novem- Banks Index returns has been 66 percent on aver- ber 2003), since the precrisis peak (November age since November 2003. Figures 9 and 10 show 2007), since the Lehman failure (September 2008), the correlation of the LIFI Index to the MSCI EM and since the Andhra Pradesh crisis (October 2010). Banks Index. The correlation between the two indi- In those four time periods, the LIFI Index mostly ces decreased meaningfully in the second half of outperformed the other two indices. 2011 to reach a low of 41 percent and is now back to Table 8 shows the annual performance of the average levels of 89 percent. This was mostly due to indices considered (LIFI, MSCI World Finan- the LIFI Index being relatively resilient to global cials, and MSCI EM Banks) since January 2004. turmoil (U.S. rating downgrade and European sov- LIFIs outperformed World Financials and EM ereign crisis) in August and September 2011. banks for six of the nine years since 2004, all but 2005 and 2007. Figure 8 shows the performance of each of the Current Valuation of the LIFI Index 11 individual stocks comprising the LIFI Index since the last edition of this report (July 2011). The Table 9 shows the current valuation of the constitu- chart shows that the performance of stocks has ents of the index and of the index itself. We also been unequal and mostly driven by country spe- compare these to global financial companies.12 cific factors. The LIFI Index currently trades at 13.5x 2011A The top three outperformers since 1 July 2011 earnings and 2.7x 2012E book value.13 This repre- were Capitec (South Africa, +42 percent), Dana- mon (Indonesia, +19 percent), and Tabungan (In- For the historical valuation of the LIFI Index, please see the 12.  donesia, +13 percent). South African and Indone- previous editions of this report. sian stock markets were up, outperforming global 2012E stands for “expected” at the end of 2012 and is used for 13.  future expectations of earnings or book value. By contrast, markets, at +6 percent and +6 percent versus +2 2011A corresponds to actual data, as financial information for percent for the S&P500 (all performance since 1 2011 is already known. 10 Index outperformed has other FIGURE 7  LIFI Table 7  Annualized performance of indices over four banks indices since inception (November 2003) time periods (%) 1000 LIFI Index MSCI World MSCI 800 MSCI Global Fin LIFI Index Financials EM Banks MSCI EM Banks 600 Since launch 26 –3 13 (November 2003) 400 Since precrisis peak 6 –14 –4 200 (November 2007) 0 Nov Nov Nov Nov Nov Nov Nov Nov Nov Since Lehman 20 –6 7 2003 2004 2005 2006 2007 2008 2009 2010 2011 (September 2008) Since AP crisis –4 –2 –9 Source: J.P. Morgan, Bloomberg, as of April 24, 2012. The index is set (October 2010) with a value of 100 in November 2003. Source: J.P. Morgan, Bloomberg prices as of April 24, 2012. Table 8  Annualized performance of indices for each year (%) 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD LIFI Index 108 10 53 14 –42 93 46 –13 13 MSCI World Financials 15 9 21 –11 –56 28 2 –21 11 MSCI EM Banks 39 32 32 23 –53 83 17 –24 10 Source: J.P. Morgan, Bloomberg, prices as of April 24, 2012. We highlight the top performing index for each year. * year-to-date (YTD) performance. FIGURE 8  Performance of the underlying stocks in the LIFI Index Since July 2011 (the last edition of this report) 180 160 140 ABL SJ Equity CPI SJ Equity 120 COMPARC* Equity FINDEP* Equity 100 BBRI IJ Equity BDMN IJ Equity 80 BTPN IJ Equity 60 IPF LN Equity FCFS US Equity 40 SKSM IN Equity EQBNK KN Equity 20 0 Jun 2011 Oct 2011 Feb 2012 Source: J.P. Morgan, Bloomberg data since July 1, 2011, as of April 24, 2012. ABL: African Bank; CPI: Capitec; COMPARC*: Compartamos; FINDEP*: Financiera Independencia; BBRI IJ: Bank Rakyat Indonesia; BDMN IJ: Danamon; BTPN IJ: Tabungan; IPF: International Personal Finance; FCFS: First Cash Financial; SKSM IN: SKS; EQBNK KN: Equity Bank. 11 Index vs. MSCI EM Banks: FIGURE 9  LIFI returns of the LIFI Index vs. FIGURE 10  Daily 12M correlation is currently 89% MSCI EM Banks Index returns: Average correlation of 66% 100% 15% 80% LIFI daily return (%) 10% 60% 5% 40% 0% 20% –5% 0% –10% –20% Nov Nov Nov Nov –15% 2004 2006 2008 2010 –20% –10% 0% 10% 20% MSCI EM Banks Daily Return (%) Source: J.P. Morgan, Bloomberg prices through Apriil 24, 2012. Source: J.P. Morgan, Bloomberg prices through April 24, 2012. Sample since November 2003. Table 9  Valuation summary: Comparing the LIFI index with traditional banks EPS ROE Country of Mkt. Cap ADTV Local growth (%) P/E P/BV (%) Company Ticker Listing (US$ mm) (US$ mm) Price 2011–12E 11A 12E 12E African Bank ABL SJ S. Africa 3,965 18.8 3,845.00 25 12.9x 2.1x 21 Capitec CPI SJ S. Africa 2,852 4.2 22,400.00 44 30.3x 4.7x 26 Equity Bank EQBNK KN Kenya 905 0.7 20.25 14 7.4x 2.1x 35 Bank Rakyat BBRI IJ Indonesia 18,526 23.4 6,900.00 17 12.7x 2.8x 29 Danamon BDMN IJ Indonesia 6,572 4.5 6,300.00 10 16.9x 2.1x 15 Tabungan BTPN IJ Indonesia 2,272 0.2 3,575.00 25 15.6x 2.8x 26 SKS SKSM IN India 147 3.0 106.80 -86 (1.0)x 0.8x NA Compartamos COMPARTO MM Mexico 1,924 7.2 15.68 8 12.4x 2.9x 32 Fin. Independencia FINDEP* Mexico 272 0.1 5.00 59 17.2x 1.3x 16 First Cash Financial FCFS US USA / Mexico 1,153 13.1 39.13 20 17.4x 3.1x 22 IPF IPF LN UK 1,017 0.9 245.00 -12 8.2x 1.7x 19 LIFI Index 17 13.5x 2.7x 27 Market Cap. Weighted Averages for Banks Covered by J.P. Morgan 2011–12E 12E 12E 12E Middle East/Africa 15 11.0x 1.8x 17 Developed Asia Pacific 5 11.2x 1.5x 14 Emerging Asia Pacific 15 7.9x 1.6x 21 Emerging Europe 23 9.4x 1.1x 17 LAC 12 10.9x 1.8x 19 Source: J.P. Morgan, Bloomberg estimates, prices as of April 24, 2012. ADTV = average daily trading volume for the past three months; EPS = earnings per share; ROE = return on equity. Notes for the LIFI Index: We used Bloomberg consensus estimates (EPS GAAP, and ROE) for the individual stocks composing the LIFI Index. LIFI is a market capitaliza- tion-weighted index. Notes for Global Emerging Markets Banks: We show market capitalization-weighted averages of banks covered by J.P. Morgan analysts, representing a sample of 109 banks across global markets. 12 sents higher earnings and book multiples than tra- Interestingly, the main difference from last year ditional global banks. We focus more on the book is that the expected ROE of institutions included value multiples, as earnings of traditional banks in the LIFI Index is relatively stable around 27 have been under pressure, therefore inflating earn- percent, but book value valuations contracted ings multiples. In fact, global banks, as measured by from 4.2x in last year’s edition to 2.7x using most an average of 109 banks covered by J.P. Morgan ana- recent data. lysts, trade at average multiples of 10.1x 2012E earn- We think this correction in average multiples ings and 1.6x 2012E book value. is mostly due to the pressure on the individual The LIFI Index currently trades at 2.7x 2012E stock valuations of Bank Rakyat (38 percent of book value, for an average expected return on eq- the LIFI Index) and Compartamos (8 percent of uity (ROE) in 2012 of 27 percent. As Figure 11 shows, the index). In the case of Bank Rakyat, the P/BV this suggests that the valuation of the index is close multiple contracted from 4.7x actual book in last to fair value (i.e., close to the trend line) in 2012. In year’s edition of this report to 3.6x actual book. 2010 and 2011, the LIFI Index was above the trend For Compartamos, the multiple decreased from line, suggesting a slight overvaluation. This indi- 6.6x to 3.4x actual book. Other stocks’ multiples cates that current valuations are in line with the were also down, although not as much as the two broader emerging market banks universe reflected banks mentioned. in the regression. Table 10  Matrix of equivalence for global banks Figure 11  LIFIs are below the regression line; i.e., LIFIs are undervalued Theoretical ROE (%) Corresponding P/BV Regression of ROE and price-to-book multiples for 0 0.4x 109 banks across global markets 5 0.6x 6 10 0.9x 15 1.3x 5 Forward Price-to-Book Multiple 2011 20 1.8x 4 25 2.7x 30 3.9x 2010 2012 3 Source: J.P. Morgan estimates, using the relation between ROE and price-to- book multiples. The correlation reaches 68%. Note: According to this matrix, a bank with a ROE of 20% would trade 2 2009 at a fair multiple of 2.0x book. 1 0 0% 5% 10% 15% 20% 25% 30% 35% ROE (Average 2012–13E) Source: J.P. Morgan estimates, Bloomberg. Prices as of April 24, 2012. Price-to-book multiples use the current price divided by 2012-end estimated book value per share. The axis for ROE uses the average of ROE for those institutions for 2012e and 2013e. 13 Conclusion Overall, the microfinance PE market experienced stronger activity in 2011, picking up from 2010, with an increase in the volume of transac- tions. However, some lingering effects of the crisis remain, and 2011 saw the continued compression of valuation multiples for MFIs and LIFIs from the highs in 2009. We believe there is a wider convergence trend between the valuation of emerging market banks and microfi- nance providers, be it specialized MFIs or LIFIs. For 2012, we do not expect microfinance equity valuations to de- couple significantly from the valuation of emerging market banks. We expect valuations to be stable in most markets, with the exception of SSA and certain countries of LAC, which could see some increase in valuations. 14 References De Mariz, Frederic, Xavier Reille, Daniel Rozas. 2011. “Discovering Limits: Global Microfinance Valuation Survey 2011.” Washington, D.C.: J.P. Morgan and CGAP, July. Reille, Xavier, Christoph Kneiding, Daniel Rozas, Nick O’Donohoe, and Frederic Rozeira de Mariz. 2010. “All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010.” Occasional Paper 16. Washington, D.C.: CGAP and J.P. Morgan, March. O’Donohoe, Nicholas P., Frederic Rozeira de Mariz, Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding. 2009. “Microfinance: Shedding Light on Microfinance Equity Valuation Past and Present.” Occasional Paper 14. Washington, D.C.: CGAP and J.P. Morgan, February.   15 Appendix: Survey Participants We would like to thank the following survey participants for contributing valu- able data for the 2012 Global Microfinance Equity Valuation Report. Data pub- lished in this report is only at the aggregate level. Aavishkaar Goodwell India Microfinance Development Company ACCION Advans SA SICAR BlueOrchard Investments CAF Development Bank of Latin America Caspian Advisors Private Limited Compartamos SAB de CV Creation Investments Capital Management, LLC Developing World Markets (DWM) Développement International Desjardins (DID) Elevar Equity, LLC European Bank for Reconstruction and Development (EBRD) FINCA FMO, Netherlands Development Finance Company Fundación Microfinanzas BBVA Incofin Investment Management MicroCred MicroVentures Investment SICAR MicroVest Capital Management, LLC Norwegian Investment Fund for Developing Countries (Norfund) Norwegian Microfinance Initiative AS (NMI) Omidyar-Tufts Microfinance Fund OXUS Group PROPARCO Prospero Microfinanzas GP responsAbility Social Investments AG Solidarité Internationale pour le Développement et l’Investissement (SIDI) Triodos Triple Jump B.V 16 Important Disclosures J.P. Morgan (“JPM”) is the global brand name for J.P. Morgan Securities LLC persons regarded as professional investors (or equivalent) in their home jurisdic- (“JPMS”) and its affiliates worldwide. This research is written by Social Finance tion. Australia: This material is issued and distributed by JPMSAL in Australia to Research and is not the product of J.P. Morgan’s research departments. “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients”. The recipient of this material must not distribute it to any third party or MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley outside Australia without the prior written consent of JPMSAL. For the purposes of Capital International Inc. (MSCI). Without prior written permission of MSCI, this this paragraph the terms “wholesale client” and “retail client” have the meanings information and any other MSCI intellectual property may not be reproduced, redis- given to them in section 761G of the Corporations Act 2001. Germany: This material seminated or used to create any financial products, including any indices. This infor- is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and mation is provided on an ‘as is’ basis. The user assumes the entire risk of any use J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bunde- made of this information. MSCI, its affiliates and any third party involved in, or re- sanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclo- lated to, computing or compiling the information hereby expressly disclaim all war- sure as of the previous month end satisfies the requirements under Paragraph 16.5(a) ranties of originality, accuracy, completeness, merchantability or fitness for a par- of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the ticular purpose with respect to any of this information. Without limiting any of the Securities and Futures Commission. (For research published within the first ten foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, days of the month, the disclosure may be based on the month end data from two or related to, computing or compiling the information have any liability for any dam- months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/ ages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes market maker for derivative warrants, callable bull bear contracts and stock options are services marks of MSCI and its affiliates. listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may oc- Legal Entities Disclosures cur due to a change in the price of the shares in the case of share trading, and that a U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase loss may occur due to the exchange rate in the case of foreign share trading. In the Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a bro- Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member kerage fee and consumption tax (shouhizei) calculated by multiplying the executed of the London Stock Exchange and is authorized and regulated by the Financial Ser- price by the commission rate which was individually agreed between JPMorgan vices Authority. Registered in England & Wales No. 2711006. Registered Office 125 Securities Japan Co., Ltd., and the customer in advance. Financial Instruments London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) member of the Johannesburg Securities Exchange and is regulated by the FSB. No. 82 Participating Association / Japan Securities Dealers Association, The Finan- Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is cial Futures Association of Japan, Type II Financial Instruments Firms Association regulated by the Hong Kong Monetary Authority and the Securities and Futures and Japan Securities Investment Advisers Association. Korea: This report may have Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul been edited or contributed to from time to time by affiliates of J.P. Morgan Securities Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Mor- (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a gan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by holding in any of the securities discussed in this report; for securities where the ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Li- holding is 1% or greater, the specific holding is disclosed in the Important Disclo- cence No: 238066) is a Market Participant with the ASX and regulated by ASIC. sures section above. India: For private circulation only, not for sale. Pakistan: For Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock private circulation only, not for sale. New Zealand: This material is issued and dis- Exchange (company-type) and regulated by the Taiwan Securities and Futures Bu- tributed by JPMSAL in New Zealand only to persons whose principal business is the reau. India: J.P. Morgan India Private Limited, having its registered office at J.P. investment of money or who, in the course of and for the purposes of their business, Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a mem- habitually invest money. JPMSAL does not issue or distribute this material to mem- ber of the National Stock Exchange of India Limited (SEBI Registration Number - bers of “the public” as determined in accordance with section 3 of the Securities Act INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Lim- 1978. The recipient of this material must not distribute it to any third party or outside ited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated New Zealand without the prior written consent of JPMSAL. Canada: The informa- by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thai- tion contained herein is not, and under no circumstances is to be construed as, a land) Limited is a member of the Stock Exchange of Thailand and is regulated by the prospectus, an advertisement, a public offering, an offer to sell securities described Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT herein, or solicitation of an offer to buy securities described herein, in Canada or any J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and province or territory thereof. Any offer or sale of the securities described herein in is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Canada will be made only under an exemption from the requirements to file a pro- Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities spectus with the relevant Canadian securities regulators and only by a dealer prop- and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the erly registered under applicable securities laws or, alternatively, pursuant to an ex- Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: emption from the dealer registration requirement in the relevant province or J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of territory of Canada in which such offer or sale is made. The information contained the Mexican Stock Exchange and authorized to act as a broker dealer by the Na- herein is under no circumstances to be construed as investment advice in any prov- tional Banking and Securities Exchange Commission. Singapore: This material is ince or territory of Canada and is not tailored to the needs of the recipient. To the issued and distributed in Singapore by J.P. Morgan Securities Singapore Private extent that the information contained herein references securities of an issuer incor- Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a porated, formed or created under the laws of Canada or a province or territory of member of the Singapore Exchange Securities Trading Limited and is regulated by Canada, any trades in such securities must be conducted through a dealer registered the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., in Canada. No securities commission or similar regulatory authority in Canada has Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: reviewed or in any way passed judgment upon these materials, the information con- This material is issued and distributed in Malaysia by JPMorgan Securities (Malay- tained herein or the merits of the securities described herein, and any representa- sia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Ber- tion to the contrary is an offence. Dubai: This report has been issued to persons re- had and a holder of Capital Markets Services License issued by the Securities Com- garded as professional clients as defined under the DFSA rules. mission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Com- General: Additional information is available upon request. Information has been mission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affili- Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out deal- ates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness ing as an agent, arranging, advising and custody, with respect to securities business or accuracy except with respect to any disclosures relative to JPMS and/or its affili- under licence number 35-07079 and its registered address is at 8th Floor, Al Faisali- ates and the analyst’s involvement with the issuer that is the subject of the research. yah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. All pricing is as of the close of market for the securities discussed, unless otherwise Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Finan- stated. Opinions and estimates constitute our judgment as of the date of this mate- cial Services Authority (DFSA) and its registered address is Dubai International Fi- rial and are subject to change without notice. Past performance is not indicative of nancial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. future results. This material is not intended as an offer or solicitation for the pur- chase or sale of any financial instrument. The opinions and recommendations herein Country and Region Specific Disclosures do not take into account individual client circumstances, objectives, or needs and are U.K. and European Economic Area (EEA): Unless specified to the contrary, issued not intended as recommendations of particular securities, financial instruments or and approved for distribution in the U.K. and the EEA by JPMSL. Investment re- strategies to particular clients. The recipient of this report must make its own inde- search issued by JPMSL has been prepared in accordance with JPMSL’s policies for pendent decisions regarding any securities or financial instruments mentioned managing conflicts of interest arising as a result of publication and distribution of herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and investment research. Many European regulators require a firm to establish, imple- accepts responsibility for its contents. Periodic updates may be provided on compa- ment and maintain such a policy. This report has been issued in the U.K. only to nies/industries based on company specific developments or announcements, mar- persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services ket conditions or any other publicly available information. Clients should contact and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in referred to as “relevant persons”). This document must not be acted on or relied on their home jurisdiction unless governing law permits otherwise. by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged “Other Disclosures” last revised April 18, 2012. in only with relevant persons. In other EEA countries, the report has been issued to Copyright 2012 JPMorgan Chase & Co. and CGAP.