For publically traded retail banks, valuations are at historic lows. In the microfinance industry, 2011 also saw the continued compression of valuation multiples from 2009 highs, according to the recently released Global Microfinance Equity Valuation Survey, Volume Growth and Valuation Contraction. CGAP and J.P. Morgan, with support from the Council of Microfinance Equity Funds (CMEF), publish this report annually to address the scarcity of valuation data available in the public domain.
Including valuation data for both MFI private equity (PE) transactions as well as Lower Income Finance Institutions (LIFIs), which are publically listed companies providing financial services to lower-income clients, but not necessarily having a stated social mission, this report aims to provide benchmarks for the valuation of both private and publicly listed microfinance equity, promote market transparency and identify industry trends.
This year the survey finds a “wider trend where LIFI and microfinance valuations in the public and private markets are beginning to converge toward those of traditional financial institutions in emerging markets, and are probably closer to their true value.”
MFI asset quality began to recover from a crisis of client over-indebtedness and unsustainable growth in India, Bosnia, and Nicaragua toward the end of 2010. This recovery helped the microfinance private equity market experience stronger deal flow in 2011, with almost twice the number of transactions, and the largest flow of equity capital into microfinance to date, reaching US$292 million across 68 transactions, as reported by 29 investors.
Latin America continues to be the leading region, accounting for more than half of the amount of investments in private equity, followed by Asia. Notably, Peru and India account for around 70 percent of the total volume globally.
The report concludes that this strong growth in transaction numbers and overall volume in 2011 was driven by:
- Several large transactions (mainly in Latin America),
- Expectations of an improved regulatory environment in India, and
- Lower valuations, which continued to decline in 2011 (except Europe and Central Asia), having a positive effect on the number and size of transactions.
Valuations contracted in 2011 are measured by the forward book value multiple. The forward book value multiple, the key benchmark for equity valuation in the microfinance private equity market, dropped to an average of 1.4x book value from a high of 1.7x in 2009. Likewise, the price-to-earnings (P/E) ratio, a measure of the market price/share relative to the annual earnings/share, dropped to an average of 11.4 from the 2010 highs of 20.1.
So why did 2011 see the continued compression of valuation multiples for MFIs? Well, this is likely due to lingering uncertainties about asset quality in some markets and continued public scrutiny.
As for the public equity market, the comparables also declined with a drop in the average valuation of the Lower Income Finance Institutions (LIFIs) Index. The report found that the expected return on equity (ROE) of institutions included in the LIFI Index has been relatively stable around 27 percent, but book value contracted from 4.2x in last year’s edition to 2.7x using most recent data.
For 2012, the report concludes that microfinance equity valuations are not expected to decouple significantly from the valuation of emerging market banks. It predicts valuations will be stable in most markets, with the exception of Africa and certain countries of Latin America, which could see some increase in valuations.
Image Credit: mspmentor.net
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