Microfinance Shows Strong Equity Valuations Despite Crisis

By Cgap, PRNE
Tuesday, March 2, 2010

WASHINGTON, March 3, 2010 - Sustained demand for microfinance equity, in the face of the worst
financial crisis in decades, continued to propel valuations in this sector
higher throughout 2009 and the medium-term outlook remains positive,
according to a new report by CGAP, a microfinance group based at the World
Bank, and J.P. Morgan.

"Microfinance institutions encountered the harshest market conditions in
more than a decade during 2009, with most showing a clear deterioration in
asset quality and profitability," said Xavier Reille of CGAP, co-author of
the report. "And yet most MFIs continued to maintain strong reserve and
capitalization levels, and investors continued to show faith in the sector."

The CGAP/J.P. Morgan report shows that equity valuations continued to
rise across all regions in 2009, with MFIs in the private equity market
trading at a median of 2.1 times book value - a 62 percent increase since
2007. Public investors significantly increased their commitments to
microfinance last year, and the private sector continued to establish new
microfinance equity vehicles, including new funds from Blue Orchard, Triodos,
and Developing World Markets.

"The investor community, both public and private, continues to be
interested in microfinance, though we think that they are becoming more
selective," said Nick O'Donohoe, Global Head of Research for J.P. Morgan and
co-author of the report.

The relative youth of the microfinance equity market means there are few
established performance benchmarks, making assessments difficult. However,
the CGAP/J.P. Morgan report is bridging this gap by drawing on analysis of
200 private equity transactions between 2005 and 2009 and trading information
on eight publicly-listed low-income financial institutions to assess the
strong performance of the microfinance equity market.

Indian MFIs are continuing to attract the strongest investor interest,
comprising 30% of all microfinance equity transactions in 2009. Indeed,
equity valuations for Indian MFIs are trading at nearly six times their book
value, or three times the global median, a performance the CGAP/J.P. Morgan
analysis suggests is not sustainable over the longer term.

The strength of MFI equity valuations masks the impact of the global
financial crisis on the sector. The CGAP/J.P. Morgan report shows that loan
portfolio quality began to deteriorate rapidly after January 2009, with past
due loans over 30 days jumping to a median of 4.7 percent from 2.2 percent
over the first five months of 2009 although it has moderated since then and
thus far remained stable in 2010. The effects of the downturn were far from
uniform however, with MFIs in South Asia and South America showing few signs
of impact, while others in Eastern Europe and Central Asia particularly were
more affected. However, very few MFI failures have been reported and most
institutions remain well capitalized with equity ratio unchanged in the 18 to
20% range.

Judging by the performance of listed low-income financial institutions,
the most comparable listed vehicles to MFIs, investors believe the sector
will emerge from the crisis in good shape. These stocks have strongly
outperformed emerging market banks (as measured by the MSCI Emerging Markets
Bank Index) and by the end of 2009, had rebounded to pre-crisis levels or new
historical peaks.

The CGAP/J.P. Morgan report argues that the decline in asset quality at
MFIs will likely slow, but not curb, growth in their asset base, while
placing a focus on improved risk management. Valuations likely will continue
to be underpinned by continuing public and commercial sector demand in the
medium-term, further buoyed by local bank acquisitions of MFIs and an
expected initial public offering by SKS, India's largest MFI - in 2010.

About CGAP

CGAP (The Consultative Group to Assist the Poor) is the world's leading
resource for the advancement of microfinance. CGAP provides the financial
industry, governments and investors with objective information, expert
opinion, and innovative solutions to effectively expand access to finance for
poor people around the world. More information: www.cgap.org

About J.P. Morgan

J.P. Morgan is the investment banking arm of JPMorgan Chase & Co. (NYSE:
JPM), a leading global financial services firm with assets of $2.0 trillion
and operations in more than 60 countries. JPMorgan Chase is a leader in
investment banking, financial services for consumers, small business and
commercial banking, financial transaction processing, asset management and
private equity. The firm serves millions of consumers in the United States
and many of the world's most prominent corporate, institutional and
government clients under its J.P. Morgan and Chase brands. Information about
J.P. Morgan is available at www.jpmorgan.com.

Una Gallagher Pulizzi of CGAP, upulizzi at worldbank.org, +1-202-473-8869; Tasha Pelio of J.P. Morgan, tasha.pelio at jpmorgan.com, +1-212-270-7441

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