volume growth and valuation contraction: global microfinance equity valuation survey 2012

8/2/2019 Volume Growth and Valuation Contraction: Global Microfinance Equity Valuation Survey 2012

1/20

Ve Gwth nd Vtin Cntctin

Global Microfnance Equity Valuation Survey 2012

Jasmina Glisovic, Henry Gonzlez,Yasemin Saltuk, and Frederic Rozeira de Mariz

Access to Finance

ForumReports by CGAP and Its Partners

No. 3, My 2012


2/20

The authors o this paper are Jasmina Glisovic and Henry Gonzlez (or CGAP) and Yasemin Saltukand Frederic Rozeira de Mariz (or J.P. Morgan). Deborah Drake (Council o Micronance EquityFunds CMEF) provided invaluable guidance throughout the research. The authors also would liketo acknowledge the contributions o Greg Chen and Mayada El-Zoghbi rom CGAP, Danielle Donzarom CMEF, Aditya Srinath, Head o Indonesia Research at J.P. Morgan, Mervin Naidoo, Head oSouth Arica Financials Research at J.P. Morgan, and Sunil Garg, Head o Equity Research or Asia-Pacic at J.P. Morgan. Senayit Mesn, CGAP consultant, provided excellent research assistance.We thank the investors and MFIs who contributed to CGAPs condential equity valuation survey(see the appendix or the ull list o contributing institutions). The authors remain responsible forthe opinions expressed in this report and for any inaccuracies.

This report is the result o a collaborative eort between CGAP and J.P. Morgan. J.P. Morgan analystsare solely responsible or the investment opinions and recommendations, i any, in this report.

See page 17 or important disclosures.

2012 Consultative Group to Assist the Poor/The World Bank

All rights reserved.

Consultative Group to Assist the Poor1818 H Street, N.W.Washington, DC 20433 USA

Internet: www.cgap.orgEmail: [email protected]: +1 202 473 9594

Equity capital fows into micronance have been increasing or many years, with both retail

and institutional investors showing interest in this sector o nancial services. Despite

this growth, the vast majority o equity investments are still made in the orm o private

placements, as there are only three publicly traded micronance institutions (Equity Bank in

Kenya, Compartamos in Mexico, and SKS in India). The diculty in accessing private data

and the scarcity o publicly listed entities have limited the scope o the market research

available to equity investors in micronance institutions.

To address this research gap, CGAP and J.P. Morgan joined eorts in 2009 to publish

an annual Global Micronance Equity Valuation Survey Report. This partnership benets

rom the deep micronance market knowledge o CGAP and the emerging markets equity

research skills o J.P. Morgan. In the past two years, it has also beneted rom the support

and industry experience o the Council o Micronance Equity Funds (CMEF). The aim o

these yearly publications is to provide benchmarks or the valuation o micronance

equity, both private and publicly listed, to promote market transparency and identiy

industry trends.

This years report is the ourth edition o this research partnership. Previous editions o

the report are available on the J.P. Morgan and CGAP Web sites.


3/20


4/20

2

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 o 11 publicly traded LIFIs. We estimate that this sample o PE transac-

tions represents 7080 percent o the PE market. Combined with surveys rom

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 micronance to date.

Private transaction data set

This years data on PE transactions were collected and processed by CGAP in a

strictly condential survey conducted in the rst quarter o 2012. Twenty-nine

investors comprised o asset managers o micronance investment vehicles(MIVs) and DFIs provided data on their PE transactions or 2011 (or a list o

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 i they were executed at nominal value

where no valuation process could be assumed; were part o loans being con-

verted into equity; were part o a preagreed investment stage, the price o

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 inormation several

times in the database.

CGAP ollowed strict procedures to ensure ull condentiality o the datareported. These included condentiality agreements with all survey participants

and restricted access policies to the database. Only three CGAP sta and con-

sultants had access to the underlying data. CGAP was responsible or quality

control o the data and preliminary analysis. Only aggregated benchmarks were

shared with J.P. Morgans team, and the team did not have access to the under-

lying database.

Publicly traded LIFIs

LIFIs are publicly traded commercial institutions that provide nancial services

to customers who overlap signicantly with those o MFIsthe lower income

population in emerging markets. However, in many cases LIFIs do not necessar-

ily have an explicit social agenda, and their loan portolios tend to eature more

consumer loans than microenterprise loans. The companies selected as LIFIs

must meet the ollowing conditions: (1) oer nancial services; (2) serve the low-

income segment; and (3) be listed on an exchange, with daily liquidity o at least

US$0.1 million.

Box 1

methdgy nd sces


5/20

3

For this years report, we gathered data rom 29

investors who are asset managers o MIVs as

well as o bilateral and multilateral DFIs.4

This section examines the ollowing questions:

Whataretheglobalgrowthandvaluationtrends

or PE micronance transactions in 2011?

Whattrendsingrowthandvaluationemergeat

the regional or country levels?

1.1. ove Gwth ndVtin Tends

This years survey o PE investments in micro-

nance included 84 transactions totaling US$382

million. For the analysis in this report, we selected a

sample o 68 transactions totaling US$292 million

to include only direct investments into MFIs where

a valuation methodology was used as part o the in-

vestment process (or more inormation, see Box 1).

Overall, the micronance PE market experienced

stronger deal ow in 2011, with almost twice the

number o transactions compared to 2010. In 2011,

there was also a 43 percent increase in capital rom

the previous year and the largest ow o capital re-

ported to date. The key drivers that contributed to

the strong growth in the number o transactions and

investment amounts in 2011 were as ollows:

1. Several large transactions. The increase in vol-

ume o ows was supported by several very large

transactions where existing MFIs or networks

tapped new markets, mainly in LAC, as part o an

international expansion strategy mostly to sus-

tain growth.

2. Expectations o an improved regulatory envi-

ronment in India. Investors welcomed progress

toward a more stable regulatory ramework, and

PE activity resumed in India in 2011. However,

market participants remain sensitive to the prog-

ress o the Micronance Institutions Bill cur-

rently under discussion.

3. Lower valuations. In most regions, except East-

ern Europe and Central Asia (ECA), valuationscompressed year-over-year in 2011, which had a

positive eect on the number and size o transac-

tions.

Note that the number o respondents or this years

survey was higher (29 compared to 21 in 2010),

which also slightly impacted the reported volume

o capital ows.

While transaction volumes rebounded in 2011,

the valuations or those transactions remained

compressed. Valuations contracted in 2011, as mea-

sured by the orward book value multiple. This con-traction began in 2010 ater several years o steady

rise. The orward book value multiple, the key

benchmark or equity valuation in the micronance

PE market,5 dropped to an average o 1.4x book

value rom a high o 1.7x in 2009. This recent aver-

age is at the same level as in 2008.

Vtin Pivte Eqity Tnsctins

P a r t

5. For more discussion on valuation methodologies, see

ODonohoe et al. (2009).

4. Unless otherwise noted, all amounts are in U.S. dollars, and

comparisons are between 2011 and 2010.

1TaBlE 1Histic pivte eqity tnsctins

Transactions TransactionsYear (no.) (US$ mm)

2005 28 106

2006 37 20

2007 37 60

2008 63 144

2009 32 230

2010 37 205

2011 68 292

Total 302 1057

Source: CGAP Research, Global Micronance Equity Survey 2012.


6/20

4

6. For more inormation about MFI perormance, see

MixMarket (http://www.mixmarket.org/ ).

7. Primary issuance reers to the issuance o new shares to

increase the MFI capital base; secondary issuance is the

exchange (buy or sell) o existing shares o MFIs.

The key drivers that contributed to the contrac-

tion in valuation multiples in 2011 were continued

uncertainties about asset quality seen in some mar-

kets since 2009 and the ongoing regulatory uncer-

tainties in India (discussed later in the paper).6

Type of Deals7

In terms o total volume o transactions, secondary

issuances continued to dominate the PE space in

micronance ollowing the 2010 trend, but at a

slower pace. In 2011, the secondary markets repre-

sented 56 percent o total transaction volume in U.S.

dollar terms, a decrease rom 69 percent in 2010, asshown in Figure 1. LAC overwhelmingly captured

the most volume o secondary issuanceperhaps

due to its more mature nature. In addition, LAC

continued its wave o acquisitions, and three o

these larger acquisition transactions in the second-

ary markets contributed over US$99 million (62

percent o total amount transacted in LAC). As or

primary issuance, the volume o activity globally

grew more than 13 percent, with an important con-

centration in India.

1.2. regin Gwth ndVtin Tends

Share and growth of equity investments

In dollar terms, LAC accounts or more than hal o

the total amount o investments ollowed by Asia

(notably India with over 92 percent o all invest-

ments in Asia), as shown in Figure 2. The highest

growth in investments since 2009 was experienced

by sub-Saharan Arica (SSA). Despite coming rom

a low base in absolute terms, the volume o invest-

ments in SSA has more than tripled compared to

2009. Asia also had important growth, while LAChas recovered rom the drop in volume experienced

in 2010, and continues to lead as the region with the

largest share o capital ows. ECA lagged behind all

the other regions this year.

Regarding median transaction size in 2011, LAC

experienced an increase, SSA and Asia experienced

a decrease, while ECA remained at the same level

compared to 2010, as illustrated by Figure 3.

The ollowing are some key trends in the most

active regions that impacted PE ows in 2011.

LAC. The bulk o the investments channeled toLAC (70 percent o the total amount invested in the

region) was represented by capital ows that came

rom established micronance players growing into

new international markets as majority sharehold-

ers. Within the region, Peru again had the most

transactions and the largest size o investments.

TaBlE 2 P/E tipes hve evesed since 2010, whie P/BV tipes decesed

Historical P/E Forward P/BVYear 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 refect data rom 44 transactions where valuation inormation was provided or both Historical P/E and Forward P/BV.



7/20

5

FIGurE 1 Ve tnsctins, by type des

FIGurE 2 regin she icfnnce eqity investents (ve uS$)

FIGurE 3 medin tnsctin size 20052011 (uS$)




88%

75%

69%

56%

25% 31%

44%

88%

12%

68%

32%

40%12% 60%

0

20

40

60

80

100

120140

160

180

2005

Millions

2006 2007 2008 2009 2010 2011

Existing shares $

New shares $

350

300

250

200

150

100

50

0

Millions

2005 2006 2007 2008 2009 2010 2011

LAC

ECA

Asia

Africa

Africa

Asia

ECA

LAC

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Millio

ns

2005 2006 2007 2008 2009 2010 2011


8/20

6

TaBlE 3 Key cqisitins in laC in 2011

Month 2011 Target Acquirer Transaction Amount US$ mm

June Financiera Crear Compartamos SAB de CV 63(Peru) (Mexico)

April Financiera Conanza (Peru) Fundacin Micronanzas BBVA 33(Peru) (Spain)

May Fondo Esperanza Fundacin Micronanzas BBVA 13(Chile) (Spain)

Source: MicroCapital Monitor.

Asia. Investments reported in Asia mainly in-

cluded deals in India (92 percent o the total vol-

ume in the region) with a ew other transactions

in Pakistan, Indonesia, and Cambodia. Despite

the micronance crisis in the Indian state o

Andhra Pradesh, India had 19 deals closed and

priced, amounting to over US$88 million com-

pared to 10 deals that amounted to over US$45million in 2010. The composition o investors in

India included a mix o commercial banks, MIVs,

and DFIs, but the most signicant share in terms

o volume o transactions came rom DFIs (74

percent).

SSA. Public and private micronance investors

made more eorts to channel investments to SSA in

2011, and they are expecting an increase in their

SSA portolio in 2012. However, there is still a high

concentration o capital owing into a ew Arican

countries.8 In addition, SSA continued to be an ac-tive region in the number o greeneld operations.9

However, greeneld transactions, usually valued

nominally at book value, are excluded rom the sur-

vey analysis so as not to skew the survey valuation

results downward.

Country-specic trends. India and Peru were once

again the leading markets accounting or around 70

percent o the total volume. Several large acquisi-tions took place, making Peru the single country

with the largest volume transacted. India attracted

the second highest volume o all capital ows per

country. Most o that capital was concentrated in a

ew transactions unded by DFIs. Mongolia was the

third country that attracted most deals; however,

the total amount was signicantly lower compared

to India and Peru.

Valuations: Trends and breakdown by region

Overall, SSA and LAC each showed lower average

valuations in 2011, Asia remained stable, while ECAshowed a slight increase compared to 2010.

TaBlE 4 Cnties with e thn 5 tnsctins in 2011

Total # Transaction Amount 4-yr average 2011 averageTransactions (US$ mm) P/BV (fwd) P/BV (fwd)

Peru 10 116.5 1.5 1.8

India 19 88.4 2.0 1.9Mongolia 7 7.7 1.3 1.0


8. In 2011, ows were mostly to mature MFIs in Tanzania and Zambia.

9. A Greeneld MFI is a new MFI built rom scratch, without pre-existing structures, that uses a set o standard operating

procedures disseminated by a central group. The central groupa holding company or international networktypically

provides equity nance and technical assistance to the greeneld entity and holds a majority stake in its investees.


9/20

7

TaBlE 5 Histic vtin bekdwn, by egin

Average Forward P/BV # of Deals2005 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


The micronance industry in India continued

to be impacted by the crisis that erupted in the

state o Andhra Pradesh in October 2010. As illus-

trated in Figure 4, the average and median multi-

ple o price-to-book value dropped in 2011, though

by a smaller degree than between the years 2009

and 2010. Note that several o the MFIs that at-

tracted capital in 2011 had distressed portolios,

especially in Andhra Pradesh, and this likely re-

duced valuations.

FIGurE 4 Indi edin nd vege wd

P/BV


2.5

2

1.5

1

0.5

0

2.0

1.7

1.9

1.6

2.1

2.1

2009 2010 2011

MedianForward P/BV

AverageForward P/BV


10/20

8

LIFIs provide nancial services (consumer, mi-

croenterprise loans, payments, savings, and in-

surance) to lower-income segments o the

population, but they do not necessarily have a stat-

ed social mission. As they operate largely in the

same market as MFIs, they oer interesting compa-

rables or MFI valuations.

Based on these criteria, 11 listed LIFIs that have

a broad micronance ocus were identied. The

purpose o this section is to answer the ollowing

key questions:

WhatisthecurrentcompositionoftheLIFIIn-

dex?

What is theperformanceof theLIFI Index in

absolute and relative terms?

Do LIFIs continue to outperform traditional

banks?

Cpsitin the lIFI IndeThe LIFI Index is a market cap-weighted index o

11 companies, encompassing various geographies

and business models. The index includes banks that

are not exclusively oering working capital loans to

microentrepreneurs, broadening the scope to in-

clude consumer loans and other nancial services.

It includes the same 11 constituent list o LIFIs as

discussed in last years report.

Basket Methodology and Composition

Companies selected as LIFIs must meet the ollow-ing conditions:

1. Oer nancial services

2. Serve the lower-income segment o the population

3. Be listed on an exchange, with daily liquidity o

at least US$0.1 million10

The individual weightings o each stock depend on

the market capitalization o the companies. That

said, the weight o some stocks was reduced in the

index to reect the percentage o the operations o

the company that correspond to lower income -

nance. For example, the weight o Bank Rakyat is

only 50 percent o what its actual market cap would

correspond to in the index, as roughly 50 percent o

the banks operations and revenues correspond to

lower income nance.

Indonesian stocks constitute the highest weight

~56 percent, while stocks listed in Kenya and India

comprise 4 percent and 1 percent o the basket, re-

spectively. The resulting weights show that Indo-

nesia combines one o the most mature markets or

public equity in micronance (Bank Rakyat was

ounded in 1895) with an especially well-developed

stock market (unlike Bangladesh, or example).

The breakdown o countries in the LIFI Index

(i.e., on public markets) is dierent rom the break-

down on the PE market described in the rst sec-tion o this report. The countries attracting mean-

ingul interest rom PE players in micronance

such as India or Peruare not represented with the

same weight in the LIFI Index. Indiaa major mar-

ket or PE until recentlyrepresents only 1 percent

o the index (via SKS,the only listed LIFI in India).

The weight o SKS reached a peak o 10 percent o

the index in September 2010, but its market capital-

ization, and hence weight in the index, ell signi-

cantly due to the Andhra Pradesh crisis in October

2010.

Figures 5 and 6 show the current breakdown othe LIFI Index, by stock and by country.

Table 6 includes the main country o operations o

those LIFIs as well as their ocus. The last column

indicates the current weight o each institution in

the index.

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 o shares.

Vtin Pbicy listed Cpnies: lIFIs

P a r t

2


11/20

9

TaBlE 6 Instittins in the lIFI Inde

Company Country Focus

Bank Rakyat Indonesia Government-owned bank (57%) ocusing on rural microlending(>4,400 outlets across Indonesia). Micro- and payroll loans represent~50% o the loan book, but a higher stake in revenues.

Bank Danamon Indonesia Consumer mass market lending, with more than 1,000 outlets.Sel-employed entrepreneurs are ~20% o loans, while segmento 2- and 4-wheelers represents ~40% o total loans.

Bank Tabungan Indonesia Mostly ocused on pensioners, while ~20% o loans go toPensiunan microborrowers.

SKS India Largest MFI in India, with loan growth o ~15x beore the crisis.Andhra Pradesh represents ~30% o total loans o SKS.

Arican Bank South Arica Individual consumer lending. Arican Bank owns a urniture retailer(~25% o groups revenues).

Capitec South Arica Individual consumer lending. Capitec oers a ull suite otransactional banking services.

Equity Bank Kenya Microlender oering credit, savings, and und transer services inKenya, southern Sudan, and Uganda. The bank accounts or roughlyhal o Kenyan bank accounts.

Compartamos Mexico/Peru Microloans to entrepreneurs in Mexico, Peru, and a greeneldoperation in Guatemala; group lending methodology (more than80% o total loans).

Financiera Independencia Mexico Microloans to individual consumers (~80% o total) and grouplending to entrepreneurs (~20% o total loans).

First Cash Financial Mexico/USA Pawn store, with hal o revenues coming rom interest incomeand hal coming rom inventory sales.

IPF Eastern Europe/Mexico Consumer lending present in six countries, originated throughindependent workorce.

Source: J.P. Morgan.

FIGurE 5 Stck bekdwn the lIFI Inde FIGurE 6 Cnty bekdwn the lIFI Inde

Rakyat38%

African Bk 16%

Danamon 12%

Capitec 12%

Comparc 8%

First Cash 5%

Equity 4%

Tabungan2%

IPF 2%Findep 1%

SKS 1%

Indonesia56%South Africa

24%

Mexico11%

Kenya

4%

Other 4%

India 1%

Source: J.P. Morgan, as o April 24, 2012.11Source: J.P. Morgan, as o April 24, 2012.

11. Others include the operations o International Personal Finance (IPF), present in six countries in Eastern Europe and Mexico. The

category also includes the revenues derived rom the U.S. operations o First Cash Financial (approximately hal o the total or

First Cash).


12/20

10

lIFI Inde geney tpes,bt nt in the fst nths 2012

The LIFI Index has outperormed signicantly the

MSCI World Financials Index and the MSCI EMBanks Index since its inception and over dierent

time periods. In Figure 7, the perormance o the

LIFI Index is compared to global nancial institu-

tions (as measured by the MSCI World Financials

Index) and emerging markets banks (as measured

by the MSCI EM Banks Index).

The annualized return o the LIFI Index was

+26 percent since its inception in November 2003,

while the annualized MSCI World Financials In-

dex and the MSCI EM Banks Index during the

same period were -3 percent and +13 percent, re-

spectively.

As in previous editions o this report, LIFIs have

generally outperormed both emerging markets

and developed markets banks over dierent time

periods. Table 7 summarizes the compound annual

growth rate (CAGR) o the three indices over our

distinct time periods: since its inception (Novem-

ber 2003), since the precrisis peak (November

2007), since the Lehman ailure (September 2008),

and since the Andhra Pradesh crisis (October 2010).

In those our time periods, the LIFI Index mostly

outperormed the other two indices.Table 8 shows the annual perormance o the

indices considered (LIFI, MSCI World Finan-

cials, and MSCI EM Banks) since January 2004.

LIFIs outperormed World Financials and EM

banks or six o the nine years since 2004, all but

2005 and 2007.

Figure 8 shows the perormance o each o the

11 individual stocks comprising the LIFI Index

since the last edition o this report (July 2011). The

chart shows that the perormance o stocks has

been unequal and mostly driven by country spe-

cic actors.The top three outperormers since 1 July 2011

were Capitec (South Arica, +42 percent), Dana-

mon (Indonesia, +19 percent), and Tabungan (In-

donesia, +13 percent). South Arican and Indone-

sian stock markets were up, outperorming global

markets, at +6 percent and +6 percent versus +2

percent or the S&P500 (all perormance since 1

July 2011). South Arican banks did well in 2011 on

resilient earnings and stable revenue delivery. Indo-

nesian banks remained immune to Europe-related

stress in 2011 and received positive impetus rom

the central bank moving to an easing bias in theourth quarter o 2011, and a sovereign upgrade to

investment grade.

The top three underperormers were SKS (In-

dia, -69 percent), Findep (Mexico, -51 percent), and

Compartamos (Mexico, -33 percent). The micro-

nance crisis in India continued, with signicant

write-os in banks portolios, despite new deci-

sions taken by the Reserve Bank o India (RBI) to

help the sector ollowing the Andhra Pradesh crisis

o October 2010. In Mexico, the ocus over the past

ew months has been on increasing competition in

the sector, increasing loan delinquencies (still at arelatively low level, however), and general elections

(due July 2012).

LIFIs show a high correlation with EM Banks

The correlation o the LIFI Index to the MSCI EM

Banks Index returns has been 66 percent on aver-

age since November 2003. Figures 9 and 10 show

the correlation o the LIFI Index to the MSCI EM

Banks Index. The correlation between the two indi-

ces decreased meaningully in the second hal o

2011 to reach a low o 41 percent and is now back to

average levels o 89 percent. This was mostly due to

the LIFI Index being relatively resilient to global

turmoil (U.S. rating downgrade and European sov-

ereign crisis) in August and September 2011.

Cent Vtin the lIFI Inde

Table 9 shows the current valuation o the constitu-

ents o the index and o the index itsel. We also

compare these to global nancial companies.12

The LIFI Index currently trades at 13.5x 2011Aearnings and 2.7x 2012E book value.13 This repre-

12. For the historical valuation o the LIFI Index, please see the

previous editions o this report.

13. 2012E stands or expected at the end o 2012 and is used or

uture expectations o earnings or book value. By contrast,

2011A corresponds to actual data, as nancial inormation or

2011 is already known.


13/20

11

TaBlE 7 annized pence indices ve tie peids (%)

MSCI World MSCILIFI Index Financials EM Banks

Since launch 26 3 13(November 2003)

Since precrisis peak 6 14 4(November 2007)

Since Lehman 20 6 7(September 2008)

Since AP crisis 4 2 9(October 2010)

Source: J.P. Morgan, Bloomberg prices as o April 24, 2012.

1000

800

600

400

200

0

Nov

2003

Nov

2004

Nov

2005

Nov

2006

Nov

2007

Nov

2008

Nov

2009

Nov

2010

Nov

2011

LIFI Index

MSCI Global Fin

MSCI EM Banks

FIGurE 7 lIFI Inde tpeed hs thebnks indices since inceptin (Nvebe 2003)

Source: J.P. Morgan, Bloomberg, as o April 24, 2012. The index is setwith a value o 100 in November 2003.

TaBlE 8annized pence indices ech ye (%)

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 o April 24, 2012. We highlight the top perorming index or each year. * year-to-date (YTD)perormance.

FIGurE 8 Pence the ndeying stcks in the lIFI Inde

Since July 2011 (the last edition of this report)

180

160

140

120

100

80

60

40

20

0

Jun 2011 Oct 2011 Feb 2012

ABL SJ Equity

CPI SJ Equity

COMPARC* Equity

FINDEP* Equity

BBRI IJ Equity

BDMN IJ Equity

BTPN IJ Equity

IPF LN Equity

FCFS US Equity

SKSM IN Equity

EQBNK KN Equity

Source: J.P. Morgan, Bloomberg data since July 1, 2011, as o April 24, 2012. ABL: Arican Bank; CPI: Capitec; COMPARC*: Compartamos;FINDEP*: Financiera Independencia; BBRI IJ: Bank Rakyat Indonesia; BDMN IJ: Danamon; BTPN IJ: Tabungan; IPF: International PersonalFinance; FCFS: First Cash Financial; SKSM IN: SKS; EQBNK KN: Equity Bank.


14/20

12

FIGurE 9 lIFI Inde vs. mSCI Em Bnks:

12m cetin is centy 89%

FIGurE 10 Diy etns the lIFI Inde vs.

mSCI Em Bnks Inde etns: avege cetin 66%

Source: J.P. Morgan, Bloomberg prices through Apriil 24, 2012.

Source: J.P. Morgan, Bloomberg prices through April 24, 2012. Sample since November 2003.

100%

80%

60%

40%

20%

0%

20%

Nov

2008

Nov

2010

Nov

2006

Nov

2004

15%

10%

5%

0%

5%

10%

15%

LIFIdailyreturn(%

)

0%20% 20%10% 10%

MSCI EM Banks Daily Return (%)

TaBlE 9 Vtin sy: Cping the lIFI inde with tditin bnksEPS ROE

Country of Mkt. Cap ADTV Local growth (%) P/E P/BV (%)Company Ticker Listing (US$ mm) (US$ mm) Price 201112E 11A 12E 12E

Arican Bank ABL SJ S. Arica 3,965 18.8 3,845.00 25 12.9x 2.1x 21

Capitec CPI SJ S. Arica 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

Mke Cp. Weighed aveges fo Bnks Coveed by J.P. Mogn 201112E 12E 12E 12E

Middle East/Arica 15 11.0x 1.8x 17

Developed Asia Pacic 5 11.2x 1.5x 14

Emerging Asia Pacic 15 7.9x 1.6x 21

Emerging Europe 23 9.4x 1.1x 17

LAC 12 10.9x 1.8x 19Source: J.P. Morgan, Bloomberg estimates, prices as o April 24, 2012. ADTV = average daily trading volume or 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) or 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 o banks covered by J.P. Morgan analysts,representing a sample o 109 banks across global markets.


15/20

13

sents higher earnings and book multiples than tra-

ditional global banks. We ocus more on the book

value multiples, as earnings o traditional banks

have been under pressure, thereore inating earn-

ings multiples. In act, global banks, as measured byan average o 109 banks covered by J.P. Morgan ana-

lysts, trade at average multiples o 10.1x 2012E earn-

ings and 1.6x 2012E book value.

The LIFI Index currently trades at 2.7x 2012E

book value, or an average expected return on eq-

uity (ROE) in 2012 o 27 percent. As Figure 11 shows,

this suggests that the valuation o the index is close

to air value (i.e., close to the trend line) in 2012. In

2010 and 2011, the LIFI Index was above the trend

line, suggesting a slight overvaluation. This indi-

cates that current valuations are in line with the

broader emerging market banks universe reectedin the regression.

Interestingly, the main dierence rom last year

is that the expected ROE o institutions included

in the LIFI Index is relatively stable around 27

percent, but book value valuations contracted

rom 4.2x in last years edition to 2.7x using mostrecent data.

We think this correction in average multiples

is mostly due to the pressure on the individual

stock valuations o Bank Rakyat (38 percent o

the LIFI Index) and Compartamos (8 percent o

the index). In the case o Bank Rakyat, the P/BV

multiple contracted rom 4.7x actual book in last

years edition o this report to 3.6x actual book.

For Compartamos, the multiple decreased rom

6.6x to 3.4x actual book. Other stocks multiples

were also down, although not as much as the two

banks mentioned.

FIGurE 11 lIFIs e bew the egessin ine;

i.e., lIFIs e ndeved

Regression of ROE and price-to-book multiples for109 banks across global markets

Source: J.P. Morgan estimates, Bloomberg. Prices as o April 24, 2012. Price-to-bookmultiples use the current price divided by 2012-end estimated book value per share. Theaxis or ROE uses the average o ROE or those institutions or 2012e and 2013e.

TaBlE 10 mti eqivence gb bnks

Theoretical ROE (%) Corresponding P/BV

0 0.4x

5 0.6x

10 0.9x

15 1.3x

20 1.8x

25 2.7x

30 3.9x

Source: J.P. Morgan estimates, using the relation between ROE andprice-to- book multiples. The correlation reaches 68%.

Note: According to this matrix, a bank with a ROE of 20% would tradeat a fair multiple of 2.0x book.

0

1

2

3

4

5

6

0% 5% 10% 15% 20% 25% 30% 35%

ForwardPrice-to-BookMult

iple

ROE (Average 201213E)

2009

2010

2011

2012


16/20

14

Overall, the micronance PE market experienced stronger activity in

2011, picking up rom 2010, with an increase in the volume o transac-

tions. However, some lingering eects o the crisis remain, and 2011

saw the continued compression o valuation multiples or MFIs and

LIFIs rom the highs in 2009. We believe there is a wider convergence

trend between the valuation o emerging market banks and micro-

nance providers, be it specialized MFIs or LIFIs.

For 2012, we do not expect micronance equity valuations to de-

couple signicantly rom the valuation o emerging market banks. We

expect valuations to be stable in most markets, with the exception o

SSA and certain countries o LAC, which could see some increase in

valuations.

Cncsin


17/20

15

De Mariz, Frederic, Xavier Reille, Daniel Rozas. 2011. Discovering Limits:

Global Micronance Valuation Survey 2011. Washington, D.C.: J.P. Morgan

and CGAP, July.

Reille, Xavier, Christoph Kneiding, Daniel Rozas, Nick ODonohoe, and

Frederic Rozeira de Mariz. 2010. All Eyes on Asset Quality: Micronance

Global Valuation Survey 2010. Occasional Paper 16. Washington, D.C.: CGAP

and J.P. Morgan, March.

ODonohoe, Nicholas P., Frederic Rozeira de Mariz, Elizabeth Littleeld,

Xavier Reille, and Christoph Kneiding. 2009. Micronance: Shedding Light

on Micronance Equity Valuation Past and Present. Occasional Paper 14.

Washington, D.C.: CGAP and J.P. Morgan, February.

reeences


18/20

16

We would like to thank the ollowing survey participants or contributing valu-

able data or the 2012 Global Micronance Equity Valuation Report. Data pub-

lished in this report is only at the aggregate level.

appendi: Svey Pticipnts

Aavishkaar Goodwell India Micronance Development Company

ACCION

Advans SA SICAR

BlueOrchard Investments

CAF Development Bank o Latin America

Caspian Advisors Private Limited

Compartamos SAB de CV

Creation Investments Capital Management, LLC

Developing World Markets (DWM)

Dveloppement International Desjardins (DID)

Elevar Equity, LLC

European Bank or Reconstruction and Development (EBRD)

FINCA

FMO, Netherlands Development Finance CompanyFundacin Micronanzas BBVA

Incon Investment Management

MicroCred

MicroVentures Investment SICAR

MicroVest Capital Management, LLC

Norwegian Investment Fund or Developing Countries (Norund)

Norwegian Micronance Initiative AS (NMI)

Omidyar-Tuts Micronance Fund

OXUS Group

PROPARCO

Prospero Micronanzas GP

responsAbility Social Investments AG

Solidarit Internationale pour le Dveloppement et lInvestissement(SIDI)

Triodos

Triple Jump B.V


19/20

Iptnt Discses

J.P. Morgan (JPM) is the global brand name or J.P. Morgan Securities LLC(JPMS) and its afliates worldwide. This research is written by Social FinanceResearch and is not the product o J.P. Morgans research departments.

MSCI: The MSCI sourced inormation is the exclusive property o Morgan Stanley

Capital International Inc. (MSCI). Without prior written permission o MSCI, thisinormation and any other MSCI intellectual property may not be reproduced, redis-seminated or used to create any nancial products, including any indices. This inor-mation is provided on an as is basis. The user assumes the entire risk o any usemade o this inormation. MSCI, its afliates and any third party involved in, or re-lated to, computing or compiling the inormation hereby expressly disclaim all war-ranties o originality, accuracy, completeness, merchantability or tness or a par-ticular purpose with respect to any o this inormation. Without limiting any o theoregoing, in no event shall MSCI, any o its afliates or any third party involved in,or related to, computing or compiling the inormation have any liability or any dam-ages o any kind. MSCI, Morgan Stanley Capital International and the MSCI indexesare services marks o MSCI and its afliates.

Legal Entities Disclosures

U.S.: JPMS is a member o NYSE, FINRA, SIPC and the NFA. JPMorgan ChaseBank, N.A. is a member o FDIC and is authorized and regulated in the UK by theFinancial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a membero the London Stock Exchange and is authorized and regulated by the Financial Ser-vices Authority. Registered in England & Wales No. 2711006. Registered Ofce 125London Wall, London EC2Y 5AJ. South Arica: J.P. Morgan Equities Limited is a

member o the Johannesburg Securities Exchange and is regulated by the FSB.Hong Kong: J.P. Morgan Securities (Asia Pacic) Limited (CE number AAJ321) isregulated by the Hong Kong Monetary Authority and the Securities and FuturesCommission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, SeoulBranch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Mor-gan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated byASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Li-cence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant o the Taiwan StockExchange (company-type) and regulated by the Taiwan Securities and Futures Bu-reau. India: J.P. Morgan India Private Limited, having its registered ofce at J.P.Morgan Tower, O. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a mem-ber o the National Stock Exchange o India Limited (SEBI Registration Number -INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Lim-ited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulatedby Securities and Exchange Board o India. Thailand: JPMorgan Securities (Thai-land) Limited is a member o the Stock Exchange o Thailand and is regulated by theMinistry o Finance and the Securities and Exchange Commission. Indonesia: PTJ.P. Morgan Securities Indonesia is a member o the Indonesia Stock Exchange andis regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities PhilippinesInc. is a member o the Philippine Stock Exchange and is regulated by the Securitiesand Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by theComissao de Valores Mobiliarios (CVM) and by the Central Bank o Brazil. Mexico:J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member othe Mexican Stock Exchange and authorized to act as a broker dealer by the Na-tional Banking and Securities Exchange Commission. Singapore: This material isissued and distributed in Singapore by J.P. Morgan Securities Singapore PrivateLimited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is amember o the Singapore Exchange Securities Trading Limited and is regulated bythe Monetary Authority o Singapore (MAS) and/or JPMorgan Chase Bank, N.A.,Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia:This material is issued and distributed in Malaysia by JPMorgan Securities (Malay-sia) Sdn Bhd (18146-X) which is a Participating Organization o Bursa Malaysia Ber-had and a holder o Capital Markets Services License issued by the Securities Com-mission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a membero the Karachi Stock Exchange and regulated by the Securities and Exchange Com-mission o Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by theCapital Market Authority o the Kingdom o Saudi Arabia (CMA) to carry out deal-ing as an agent, arranging, advising and custody, with respect to securities businessunder licence number 35-07079 and its registered address is at 8th Floor, Al Faisali-yah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom o Saudi Arabia.

Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Finan-cial Services Authority (DFSA) and its registered address is Dubai International Fi-nancial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specifc Disclosures

U.K. and European Economic Area (EEA): Unless specied to the contrary, issuedand approved or distribution in the U.K. and the EEA by JPMSL. Investment re-search issued by JPMSL has been prepared in accordance with JPMSLs policies ormanaging conicts o interest arising as a result o publication and distribution oinvestment research. Many European regulators require a rm to establish, imple-ment and maintain such a policy. This report has been issued in the U.K. only topersons o a kind described in Article 19 (5), 38, 47 and 49 o the Financial Servicesand Markets Act 2000 (Financial Promotion) Order 2005 (all such persons beingreerred to as relevant persons). This document must not be acted on or relied onby persons who are not relevant persons. Any investment or investment activity towhich this document relates is only available to relevant persons and will be engagedin only with relevant persons. In other EEA countries, the report has been issued to

persons regarded as proessional investors (or equivalent) in their home jurisdic-tion.Australia: This material is issued and distributed by JPMSAL in Australia towholesale clients only. JPMSAL does not issue or distribute this material to retailclients. The recipient o this material must not distribute it to any third party oroutside Australia without the prior written consent o JPMSAL. For the purposes o

this paragraph the terms wholesale client and retail client have the meaningsgiven to them in section 761G o the Corporations Act 2001. Germany: This materialis distributed in Germany by J.P. Morgan Securities Ltd., Frankurt Branch andJ.P.Morgan Chase Bank, N.A., Frankurt Branch which are regulated by the Bunde-sanstalt r Finanzdienstleistungsausicht. Hong Kong: The 1% ownership disclo-sure as o the previous month end satises the requirements under Paragraph 16.5(a)o the Hong Kong Code o Conduct or Persons Licensed by or Registered with theSecurities and Futures Commission. (For research published within the rst tendays o the month, the disclosure may be based on the month end data rom twomonths prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker or derivative warrants, callable bull bear contracts and stock optionslisted on the Stock Exchange o Hong Kong Limited. An updated list can be ound onHKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may oc-cur due to a change in the price o the shares in the case o share trading, and that aloss may occur due to the exchange rate in the case o oreign share trading. In thecase o share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a bro-kerage ee and consumption tax (shouhizei) calculated by multiplying the executedprice by the commission rate which was individually agreed between JPMorganSecurities Japan Co., Ltd., and the customer in advance. Financial InstrumentsFirms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho)

No. 82 Participating Association / Japan Securities Dealers Association, The Finan-cial Futures Association o Japan, Type II Financial Instruments Firms Associationand Japan Securities Investment Advisers Association. Korea: This report may havebeen edited or contributed to rom time to time by afliates o J.P. Morgan Securities(Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its afliates may have aholding in any o the securities discussed in this report; or securities where theholding is 1% or greater, the specic holding is disclosed in the Important Disclo-sures section above. India: For private circulation only, not or sale. Pakistan: Forprivate circulation only, not or sale. New Zealand: This material is issued and dis-tributed by JPMSAL in New Zealand only to persons whose principal business is theinvestment o money or who, in the course o and or the purposes o their business,habitually invest money. JPMSAL does not issue or distribute this material to mem-bers o the public as determined in accordance with section 3 o the Securities Act1978. The recipient o this material must not distribute it to any third party or outsideNew Zealand without the prior written consent o JPMSAL. Canada: The inorma-tion contained herein is not, and under no circumstances is to be construed as, aprospectus, an advertisement, a public oering, an oer to sell securities describedherein, or solicitation o an oer to buy securities described herein, in Canada or anyprovince or territory thereo. Any oer or sale o the securities described herein inCanada will be made only under an exemption rom the requirements to le a pro-spectus with the relevant Canadian securities regulators and only by a dealer prop-

erly registered under applicable securities laws or, alternatively, pursuant to an ex-emption rom the dealer registration requirement in the relevant province orterritory o Canada in which such oer or sale is made. The inormation containedherein is under no circumstances to be construed as investment advice in any prov-ince or territory o Canada and is not tailored to the needs o the recipient. To theextent that the inormation contained herein reerences securities o an issuer incor-porated, ormed or created under the laws o Canada or a province or territory oCanada, any trades in such securities must be conducted through a dealer registeredin Canada. No securities commission or similar regulatory authority in Canada hasreviewed or in any way passed judgment upon these materials, the inormation con-tained herein or the merits o the securities described herein, and any representa-tion to the contrary is an oence. Dubai: This report has been issued to persons re-garded as proessional clients as dened under the DFSA rules.

General: Additional inormation is available upon request. Inormation has beenobtained rom sources believed to be reliable but JPMorgan Chase & Co. or its afli-ates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completenessor accuracy except with respect to any disclosures relative to JPMS and/or its afli-ates and the analysts involvement with the issuer that is the subject o the research.All pricing is as o the close o market or the securities discussed, unless otherwise

stated. Opinions and estimates constitute our judgment as o the date o this mate-rial and are subject to change without notice. Past perormance is not indicative outure results. This material is not intended as an oer or solicitation or the pur-chase or sale o any nancial instrument. The opinions and recommendations hereindo not take into account individual client circumstances, objectives, or needs and arenot intended as recommendations o particular securities, nancial instruments orstrategies to particular clients. The recipient o this report must make its own inde-pendent decisions regarding any securities or nancial instruments mentionedherein. JPMS distributes in the U.S. research published by non-U.S. afliates andaccepts responsibility or its contents. Periodic updates may be provided on compa-nies/industries based on company specic developments or announcements, mar-ket conditions or any other publicly available inormation. Clients should contactanalysts and execute transactions through a J.P. Morgan subsidiary or afliate intheir home jurisdiction unless governing law permits otherwise.

Other Disclosures last revised April 18, 2012.Copyright 2012 JPMorgan Chase & Co. and CGAP.


20/20

volume growth and valuation contraction: global microfinance equity valuation survey 2012

Documents