Written by Xavier Reille, Christoph Kneiding, Daniel Rozas, Nick O’Donohoe and Frederic Rozeira de Mariz, published by CGAP (Consultative Group to Assist the Poor), March 2010, 40 pages, available at: http://www.cgap.org/gm/document-1.9.42531/OP16R.pdf
The authors of the paper aim to provide the investor community with benchmarks for the valuation of microfinance assets using two datasets, one being a sample of 200 private equity transactions between 2005 and 2009, the other being data on eight publicly listed low-income financial institutions (LIFIs). Four development finance institutions, 13 microfinance investment vehicles (MIVs) and 14 microfinance institutions (MFIs) contributed information on their transactions from 2005 to September 2009 to create the private equity transaction dataset. The eight publicly listed LIFIs were chosen as proxies for MFIs because their client base closely overlaps with MFIs and the eight chosen in particular have a broad microfinance focus. However according to the authors, “LIFIs do not necessarily have an explicit social agenda, and their loan portfolios tend to feature more consumer loans than microenterprise ones.” As the datasets carry through to September 2009, it encompasses a large portion of the global financial crisis.
The first part of the paper describes MFI asset quality over time and how it has affected profitability. For their analysis, the authors used the Sym50 data set, which includes data from 50 MFIs that Symbiotics, a Swiss microfinance investment intermediary, collects. The key factor the authors looked at to judge asset quality was portfolio at risk (PAR), which is defined as “the value of all loans outstanding that have one or more payments of interest or principal past due by more than a specified number of days” (typically 30 days) divided by total loans outstanding. Starting in January 2009, PAR30 increased rapidly; by May 2009 half of the MFIs reported PAR30 of 4.7 percent or higher compared to 2.2 percent at the beginning of 2009. According to benchmarks from Microfinance Information Exchange (MIX), the microfinance information clearinghouse, the highest sector-wide PAR30 reached in the previous five years was 3.2 percent in 2003. The authors found that, as expected, there was a close parallel in between the rise in delinquency and the fall of profitability represented by both return on equity (ROE) and return on assets (ROA). Since hitting a three-year low in mid-2009 of around 7 percent, ROE has slowly started to come back, with ROE at around 10 percent, which is about half the level recorded over the two previous years.
The second part of the paper looks at trends in valuation benchmarks in microfinance private equity transactions and the key drivers thereof. Surprisingly, the authors found that although asset quality and profitability of MFIs have dropped significantly in 2009, valuations have not. Median price-to-book-value multiples were 2.0x in 2008, and they actually increased in 2009 to 2.1x. This trend was consistent across all regions. The analysis indicates there is a correlation between price-to-book-value transaction multiples and asset quality, net income growth and age of the MFI. However, there was no correlation found between price-to-book-value and profitability (ROE). (The authors did not provide information on the correlation between price-to-book-value and ROA.) The authors believe because investors concentrated their investments in the top “more than 400” high-quality MFIs, valuations were pushed upwards.
Finally, the paper uses the eight publicly listed LIFIs to compare the MFI equity market to the broader equity market. From November 2003, the stocks comprising the LIFI index outperformed traditional banks (represented by the MSCI World Financials Index) by 714 percent. (The indices are started at a base of 100 in November 2003, and the LIFI index increased to around 800, while the MSCI World Financials Index decreased to around 86 at the end of the period.) Since September 2008, the start of the global financial crisis, the LIFI index outperformed the MSCI World Financials Index by 79 percent. The authors found that although LIFIs outperformed traditional banks, on price-to-earnings trading multiples they still trade on the public market at a discount of approximately 23 percent. The same trend is seen in price-to-book trading multiples, where LIFIs trade at a discount of 13 percent compared to mainstream banks.
By: Christine Chang, Research Associate
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