JPMorgan Sansa os" Microfinance CGAP Shedding Light on Microfinance Equity Valuation: Past and Present Se “J.P. Morgan Global Re Nick 0'Donchoe (Global Head ot Reesarn ek odononoe@pmorgan com LLP. Morgan Secutos Lid Frederic Rozeira de Mariz™” Latin amercan Bank Anaijet, Irederc de.maietipmergan.con Banco JP. Morgen SA ‘GAP Elizabeth Littlefield Cie Execute Otoer itbtelievoricoankorg Xavier Reille Lead Mittnance Specie walle@vorébant.org Christoph Kneiding Merona Specat canedéng@wordbank. org This report isthe rosut of collaborative effort between ‘CGAP (Consutative Group to Assis the Poor) and J.P. Morgan. “JP. Morgan analysts ae solely responsible for the investment ‘opinions and recommendations In this report. * Registerediqualified as a research analyst under NYSEINASD rules ‘See page 59 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. organ does and seeks to do business wih companies covered i ts research reports. AS a resul investors shoud be aware ta he frm may have a conflict of inlerest that could afet the objectviy of tis rpc. Investors shoud consider tis repo. as only a single factor in making ther investment decsion, Customers of JP. Morgan inthe Unted Stats can receive independent, hic-party research on the company or companies ‘eovered in this reper, at no cost to them, where such research is avalable. Customers can aocass this independent research at ‘wmearganmarets.com o can call 1-800-477-0405 tol re to request copy ofthis esearch www.morganmarkets.comNick 0 Danone rick eserchoe@ipmorgan.com Elzabet ills slstertaawondbark org ‘obal Research JPMorgan Executive Summary This report isthe result of a collaborative effort between CGAP! (Consultative Group to Assist the Poor) and J.P. Morgan. J.P. Morgan analysts are solely ‘responsible for the investment opinions and recommendations in this report Our objective is to provide benchmarks for valuation of microfinance equity, both private and publicly listed. Our analysis is based on two datasets: a sample of 144 private equity transactions, which represents the largest such dataset gathered to date, and data on 10 publicly traded microfinance institutions (MFIs) and low: income consumer lenders:? ‘MFls will certainly be affected by the financial crisis ricocheting across the ‘globe, but we believe that the sector is fundamentally sound. Larger institutions, ‘especially those with diversified funding sources, such as retail deposits, are best positioned to manage the effects of economic and financial contraction. Valuations ‘may change, but we believe the long-term outlook for equity investment in microfinance is positive. Private equity valuations for MFIs have varied widely over the past few years. Historical median valuations in our private sample have varied between 1.3x and 1.9x historical book, and between 7.2x and 7.9x historical earnings over the four-year period, as shown in Table 1 below. The considerable range of these indicators may indicate the lack of market consensus on MFI valuation, Publicly listed Low-Income Finance Institutions (LIFIs) have outperformed traditional banks. Since its creation in 2003, our Low-Income Finance Index has ‘outperformed the Global MSCI World Financials index® by 238% (and has ‘outperformed this benchmark by 10% since the Lehman bankruptey in September 2008). LIFIs now trade slightly higher than traditional banks on price-to-book basis (1.9x 08 book for LIFIs versus 1.5x for emerging banks as of January 28, 2009), On 2 2009 price-to-earnings basis, LIFIs are trading at a 22% discount to traditional ‘banks, as shown in Table 2. Investors should not value MFIs the same way they value traditional banks. We highlight five characteristics that differentiate MFIs from traditional banks and that, ‘we argue, justify a slightly different valuation approach: 2 double bottom fine that ‘ims for both social and financial returns; excellent asset quality; high net interest ‘margins (NIMs); high operating costs, and longer-term funding available from developmental investors, CGAP is an independent policy and research center dedicated to advancing Financial access for the worlds poor. It is supported by over 30 development agencies and private foundations that share a common mission to alleviate poverty. Housed atthe World Bank, CGAP provides ‘marke intelligence, promotes standards, develops innovative solutions and offers advisory services to governments, microfinance providers, donors, and investors ecause there are few publily sted MFls, we considered a group of 10 financial institutions targeting low-income individuals, and note that their business models are very diverse 2 The Giobsl MSCI World Financials Index isa ftee-float weighted equity index. It was developed witha base value of 100 as of December 31, 1998,Nick © Dononoe rick ederchoe@ipmorgan.com lzabet itll slsteraa@wotdbark org ‘cobal Research JPMorgan Book value and earnings multiples are the most widely used valuation tools but we also recommend the res ycome method, Relative valuation methods, such as price-to-book, and, toa lesser extent, price-to-eamings, multiples remain the most ual ‘common valuation methods in microfinance equity. An absolute valuation method, the residual income method, would also be appropriate for MFIs because it combines the current book value with future earnings. ‘Microfinance valuations should benefit from a lower beta than banks, in our view, but they also deserve a discount for the limited liquidity of the equity. Because of the higher resilience of their business to economic shocks, MFIs” ‘earnings are generally less Volatile than traditional banks", At the same time, valuations merit a liquidity discount because of the small transaction size in the microfinance space, Unfortunately, no tools are available to quantify this discount ‘Transaction value and net income growth are the main drivers of valuation, as ‘evidenced by our statistical analysis. We underline the importance of eight other factors that we also view as important: (i) the type of buyer and its possible social ‘motivation; i) the country of the MFI; (i) the legal status of the MFI, in particularit itis a fully regulated bank; /iv) operating efficiency; (v) leverage: (vi) the reliance on retail deposits (financial intermediation); (vii) asset quality; and (vit) profitability (as ‘measured by the ROE). ‘Table : Privato Transactions: Valuations Rebounded in 2008 store PE itoreal FBV Sanpie Period Unweighted Median ——-Unweighed Median * ‘era ‘verge iS ¢ m 26 be a ar ‘a za08 Table 2: Public Transactions: Low-income Finance Institutions Exhibit Higher IBV but Lower IE Than Emerging Market Banks PRY PE wate __ oe | ora o_o Towncoma Finance ade 1g 18) 7565) Emerging Markets Banks in Anais 21818 esas Enereng Europe os too 5D a 12 ta 1 8a Ne 1B sa 85 ar ng Markets Banks wos Aas ‘Source: Bloomber, Company da, P. Maran esas Pres as of January 28, 2008. Noles forth Lon income Finance inde: Tha ndexis mare captalzatonwogha index tances sx ‘ancl neuter offing franca ures otha lowar cer sognons oh populate, rarely Bank Rakyat of eenesia (ER, #ankOeraren, Corpariatos Banc, Francia deperderca PF, and Aicen Sank Wie sad JP Morgan etna or stocks cord by J. orga, and loonberg consensus estate fr PF and Independena. We racuca oa hr the wig of Bl ha nde as he bar's micretnance poo epresrss ‘on about tr os tal lan book. The ndxhas a bas of 100 as of Novarbr 10, 203, Notes forthe Gos Emering Maas Banks’ We show matt capalzaon-wsighied averages ofbanks covered by LP. Margan ana, epereing a earl of 141 Danks inal emering mesesNek ©Denonoe ‘ick odonohoegmrgan com Elzabeh Litt sterata@wotdbark org ‘cobal Research JPMorgan 03 Febrry 2008, Table of Contents Executive Summary Introduction .. 4. Microfinance versus Traditional Banking. ‘What Makes Microfinance Financials Differen A, Double Bottom Line..noo . B. High Net Interest Margins Driven by High Lending Rates. C, High Asset Quality Is Driven by Original Collection Method. D, High Operating Costs Are Driven by Small Transaction E. Longer-Term Funding — 2. Technical Overview of Valuation Methods wn Relative Valuation: P/BV Multiple Relative Valuation: P/E Multiples Absolute Valuation: Discounting Future Flows... Remarks on the Cost of Equity... Remarks on Liquidity Valuation Methods Complement Fach Other... 3. Valuation of Private Equity Transactions - Microfinance Institutions 3 ‘Valuation Between 1.3 -1.9x Historical Book; 7.2~ 7.9x Historical Eamings....23 Back to Basies: Drivers of Valuation Are Usually Profitability and Income Growth24 ‘Transaction Size and Net Income Growth Are the Main Drivers of Valuations.....27 4, Valuation of public transactions - Low-Income Finance Institutions Introducing the Low-Income Finance Index. Performance of Individual LIFTs Post Listing. Convergence of Multiples... Impact ofa Listing on an LIFT's Operations Conclusions. Appendices Appendix I: Glossary. Appendix II: Multiples for Private Equity Transactions. Appendix Ill: Listing Information. Appendix IV: Emerging Markets Banks Valuations Appendix V: Description of LIFls in SampleNek ©Denonoe ‘ick odonohoegmorgan com Elzabeh Litt slstertaawondbark org ‘obal Research JPMorgan 03 Febrary 2008, The authors would like to acknowledge the contribution of Christina Leijonhufvud, head of the Social Sector Finance team at .P. Morgan, and Mia Feldman of the Social Sector Finance team; Neil Gupte, analyst in Equity Research for Asian Financials; Thomas Anduze-Acher in the Latin American Financials Equity Research team; Richard Rosenberg, senior advisor at CGAP; Barbara Gahwiler and Mathieu Lebegue, microfinance analysts at CGAP. The authors also acknowledge the contributions at J.P. Morgan of Sunil Garg, head of Equity Research for Asia; Aditya Srinath, head of Equity Research for Indonesia; Victoria Miles, head of Fmerging Markets Corporate Research; Paul Formanko, head of Equity Research for Banks in Emerging Europe and Central Asia; Mervin Naidoo, senior analyst for South African Banks; and Saul Martinez, senior analyst ‘for Latin American Financial Institutions Finally, we are thankful to Adrian Gonzalez from the Microfinance Information eXchange; Deborah Drake and other CMEF members: Alex Silva and Brian Busch of Omtrix: and Clay Obrian of Opportunity International, for sharing their views on the microfinance sector and for their support. ‘The authors remain responsible for the opinions expressed in this report and for anyNick ODononoe rick ecerchoe@ipmorgan.com lzabet itll ‘lsterata@wondbars org ‘cobal Research JPMorgan Introduction Equity investment in microfinance is small, but growing fast. As of December 2008, there were 24 specialized microfinance equity funds with total assets of USS1.S billion under management. Institutional investors are also showing interest in this new market niche, Leading pension funds, such as TIAA CREF in the United States and ABP in Europe, have made microfinance equity allocations of over US$100 million as part of their socially responsible investment (SRI) strategies, (Others ate researching the field and waiting for clearer market conditions to invest Venture capital companies such as Sequoia and a few large private equity funds such as Legatum’ are testing the market with small equity investments in MFIs, with near term potential for an initial publie offering (IPO) in key emerging markets, like India, While interest in microfinance equity investments soars, the actual microfinance ‘equity market is still in its infancy. Primary issuances are still limited by the small ‘pool of investable MFIs and by the absence of an organized secondary market. A vast majority of transactions are in the form of private placements, To date, only two pure microfinance IPOs have taken place (Compartamos in Mexico and Equity Bank in Kenya), and current market conditions are not favorable to new ones, ‘The scarcity of information on microfinance valuation is a major challenge to establishing microfinance equity as an investment niche, Investors and MFIs are looking for reliable and accessible market references to improve equity pricing. However, little research has been done on microfinance equity valuation, duc fo the difficulty in accessing private data ‘This paper is an attempt to offer some useful benchmarks to investors, microfinance ‘managers and analysts and help build market transparency, As we write this paper, we are caught up in an unprecedented financial crisis and a truly global economic contraction. Liquidity shortages, currency dislocations and. ‘global recession will all affect MFIs and their clients in different ways. The impact, of the crisis should become clearer over the course of 2009, Inthe short run, we expect to see higher costs of funding due to tighter credit and to weaker emerging ‘markets currencies relative to dollar-denominated loans. In the medium term we can foresee slower growth and lower earnings power. ‘MFIs will have to seek funding from public agencies and development finance institutions’ to maintain their liquidity as commercial funders withdraw. They will need to strengthen their asset and liability management capabilities and be ever more vigilant about credit standards to maintain their outstanding asset quality. The crisis ‘may force some consolidation in the sector and it will almost certainly put pressure ‘on valuations. We anticipate no new listings in the short term. As for Valuations, we ‘expect multiples of private transactions to drop toward 1x book value in 2009 from a # Sequoia invested USS11.5 million in SKS, leading Indian MFT, and Legatum invested in Share, another microfinance leader i Indi, 5 Barclay O'Brien, Valuing Microfinance Institutions, Savings and Development: Quaterly Review Issue 3-2006, Milan ° See CGAP Virtual Conference: “Microfin 2008, * please see the glossary in Appendix I fora definition of development finance institutions. ce and the Financial Crisis", November 18-20,Nick © Dononae ‘ek eserchos@iemorgan.com lzabet ills sterela@wondbarorg Table 8: Our Sample Represents the Largest Available Dataset to Date Traction Transactions ® uss) 5 2 707 969.182 206 a ssa 207 sr 440.950 208 8 sogacaars NR 4 3307321 Tea a4 518451 ‘obal Research JPMorgan ‘median of 1.9x in 2008, However, the strong fundamentals of the mierofinanee industry and the commitment of public and socially responsible investors should bolster pricing going forward, MFls with a solid funding base and strong asset ‘quality should emerge stronger from this turbulence, and we can expect valuations 10 bounce back in 2010, ‘Our ambition is to provide a benchmark for valuation, In this paper, we intend to address some of the key questions facing microfinance investors and MFIs: What is unique about the microfinance sector that may justify an original valuation approach? ‘What are the valuation methodologies used? What are the key valuation drivers for private placements in microfinance? What is the performance of microfinance on the private and public markets, in both absolute and relative terms? What arc the challenges ahead for this new market niche in the context of the financial crisis? ‘This paper consists of four parts. In te first part, we underline what makes MFIs . Maren aaj er, urges ep Ana), ans aan oid sage a merce an, erg oD In terms of indicators, the ratios of operating expenses to total assets or operating ‘expenses fo total loans appear to be the most relevant. Other popular measures are the cost per borrower (Operating Expenses / Average Number of Active Borrowers),Nick ODoronoe rick eaerchoe@ipmergan.com Elzabeth ills slsterata@wondbareorg ‘opal Research JPMorgan staff productivity (Number of Active Borrowers / Total Staff) and the loan officer productivity (Number of Active Borrowers / Number of Loan Officers). Effect of the crisis on operating costs (MFIs have seen their operating costs increase in the first half of 2008 as a result of inflation and higher input costs, Staff costs and transportation costs have been affected the most, with a spike of over 30% reported in Latin American countries, In 2009, we expect inflation to return to Tower levels, thus reducing the pressure on ‘wage increases and transportation costs. However, operational efficiency, as ‘measured by operating expenses to loans, may decrease as a result of slow or even negative growth in the microfinance portfolio, MFI staff productivity might also suffer as credit agents allocate more time to loan monitoring and collection, E, Longer-Term Funding In some markets, the eredit squeeze is affecting MFIs by making funds more difficult to obtain, more costly, and available in shorter maturity, Therefore, in our analysis, ‘we paid special attention to the liabilities side of MFIs" balance sheets: equity, deposits, and other funding. Microfinance exhibits three major differences vis-a-vis traditional banks. Figure 4: Breakdown of Funding or Microfinance Banks « co os ‘Sere: Merkin Bln for al ais 7 Deposits crs demand, sigs, ie deans, an eos rom as, (MFls have overall lower leverage than traditional banks ‘Overall, MFls tend to have lower leverage (measured as total equity to assets) than traditional banks. Our unweighted average leverage for the 45 largest MFIs (with assets above US$150 million) stands at 19%, significantly lower than the JPM ‘emerging markets benchmarks.” However, leverage is increasing over time, and large and older MFls are reaching ‘equity leverage levels comparable to traditional banks, as shown in Figure 5. ” those benchmarks represent a wide selection af banks covered by J.P. Morgan analysts across emerging markets (except Asis)Nek 0 Donohoe nek ogenchoedismorgan.com tasbeth Litfld ‘tterlagwotdbank arg Seta nce JPMorgan Figure §: The Largest MFls Have Similar Leverage to Traditional Banks. However, on Average, the Equity-to-Assets Ratio ls Lower at Banks, as of 2007 Hiei boi ft ' pp bd Hep ba PPG ‘ruck Mian evento Bet aaub, Sarl bape NFS ose colons 9 meaner ‘ies how he vag le MF whl sae ove USGS lan eur 207, Fede "anplectne 45 te, od dion el rare, Aves ea 45 rr EM ars ei [tarsi cosesecn fark owt >. Magn aa rer rans (gt AS), Deposits are not necessarily a more stable and less expensive source of funding ‘The cost of funding through retail deposits (in particular, demand deposits, which typically are not remunerated) is not necessarily lower than other types of funding. This is because capturing and servicing small deposits requires a physical infrastructure, the cost of which negatively impacts operational expenses. ‘As with traditional banks, some types of MFIs’ deposits are less stable than oxhers. Large institutional deposits and interbank deposits can mave quickly, whereas retail Ord (nex)Nick ODorenoe ‘opal Research ‘Nok edenchoe@emerga.com lzabeth ills ‘atterela@wodbareorg Equity Bank hips. equitybank, co kel Company description Equity Bank started operations in 1984 as a building society to target previously unbanked segment of the population. After a brush with insolvency in 1992, the institution has become one of Africa's leading MFIs. Equity Bank is the largest bank in Kenya, with total assets of $833 million and total loans of $348 million as of December 2007, The bank offers deposits, SME loans, and mortgages and issues VISA cards. The main strength of the bank is savings mobilization and not lending. A majority of ‘the bank's loans are salary advances and SME credits. Typical microfinance makes up only a minor portion of Equity's lending operations, in the form of farm input loans and small business loans. In 2006, the institution converted into @ bank and was listed on the Nairobi Stock Exchange (it was already listed before and traded on the OTC market only), raising about US$87 million. In April 2008, the bank acquired the largest MFT in Uganda (UML), which offers savings and loans products to low-income elients| ‘with informal collateral conditions and flexible repayment schedules, KES in millons, year-end December Fa a Tae a Tat arencone 7 co THE 760 encore eo Tr 88 82 Psa nome ne a nia ie 6 HS cs si00 ne 30 2m 68 nie na 200 200 VPS KES) nia 1760 08 428 Total ests err 11487 ana s7e Loans 2are 528 ‘0ls30 21836 ‘Sharer Egy tan 1534 201 usi7 Loan YoY Grow nia a2 i 100% "YoY Growth ne na aM 18% ROE () 107% 218% Pre iar NM. eas ro em 5% JPMorgan Not Covered EQBNK KN. Price: KES 159 Banks: Kenya Price performance ™ wa esate S1% 2% 319% Vs. Naob SE 325% 109% 19% ‘ce Bente Company data Ezek rage WON) 116-3 Ik cep. (USS¥M) m3 gaa vate (USE on bee seuswinx ot 8) Sauce Beorbag, Pao ‘Auditor: Emst& Young Ratings: MiroRate alpha minus) 51Nick ODorenoe ‘opal Research ‘ok edenohoe@emerga.com 03 Febrry 2008, lzabeth ills ‘asterela@wondbareorg Capitec Bank wanw.capitecbank.co.za Company description Capitee Bank isa retail bank that focuses on providing accessible and affordable banking services to clients in South Africa, Capitee is the largest microfinance ‘bank in South Africa and listed on the JSE in February 2002, As of February 2008, Capitec had total assets of $380 million and a gross loan portfolio of $283 ‘million, and it served over $70,000 clients. The bank has a technology-driven business model and uses retail outlets for cost-effective distribution. Capitec’s short-term and long-term ratings have been upgraded within the last year and are ‘on par with major corporate, retail, and lending banks in South A fica, Capitec has a broad branch network and offers @ full range of financial products to its customers, unlike many of its competitors. Capitec is one of the main players in the South African microlending industry and has been recognized for its streamlined products and strong risk and liquidity management systems. FYE Fro6 Har Foe aT Tae ae co Fee income 4 5 1m 53 Ipsuranee nome ne na tia aia Netcom Gi 15 167 za os 158 210 250 030 ous 80 ons eae 156 470 ar Tosl asses 5 1251 202 2986 Loans 28 455 3 2o19 ‘Sharenoes Equity 3 st an sa Loan YoY Grow) Hi 113% 7% 151% "3 YoY Growth) 35% 23% =e 88 ROE (%) 142% me 4% 8% NM 285% maa 456% 2% ‘Sarr Conny, hog, Shr pen ar ae 78 say, 708, JPMorgan Not Covered opis: Price: ZAR 30 Banks: South Africa Price performance wae Dowaite 10% 00% 63% Vs.dohamesbupSE 49% 249% 16.1% VeMSClFiancile 38% 39% 17% Sauce Beers ‘Company data zoek age NON) 25-88 Mk cap. (USSHM) a vg daly vole (USS) 008 Index JAlsH at nia Seu Bherbag, 7 ams Auditors: PwC Ratings: A2za (Moody)‘ok edenohoe@lemerga.com Nek oDontce boat Resear JPMorgan lzabeth ills ‘asterela@wondbareorg African Bank Neutral BL ABL Sd ww atticanbank investoreports,comleorporate Brie: ZAR 27.65 Prog target 3.2596 Company description Banks: South Africa African Bank Investments Limited isa Top 40 ISE Securities Exchange listed Mervin Naidoo" company comprising two underlying operations: African Bank Limited and Denjaorone Ellerines Holdings Limited. African Bank isa leader in South AVfica’s large, Irersnco@jpmorgon.com ‘unsecured credit market; while Ellerines offers a quality retail product powered by an affordable credit proposition through various consumer brands. In 2007, the company rebranded itself as African Bank. The company focuses on providing unsecured credit toa growing middle-income market in South Africa. Afvican Bank services approximately 1.5 million clients through its $50 branches and has a gross loan portfolio of $1.6 billion. aa Roiae 2h 20% 24% 9Ok 721% 247% 79% 19% 104% AAP. Morgan Equtes id Risks The main risks to our valuation relate to funding (in particular from institutional investors) and asset quality. Also, retail is an unexplored area for African Bank and we believe successful retail operations depend on retaining key Ellerines staff. Much of the forecasting risk depends on top-line growth in retail operations, and this isa significant risk to near-term earnings, An economic slowdown and rising unemployment should significantly worsen bad debt experience and advances growth. On the positive side, we expect cost savings from brand rationalization and optimization initiatives at Ellerines. Ellerines also should benefit from the transfer ofits book to African Bank (expected in March 2009) and full integration by FY09. This should benefit pricing, impairments and costs, Valuation ‘We overlay our economic profit valuation model with our sum-of-the-parts model. We cap the price target at the lower of economic profit and its SOTP valuation, rolled forward 12 months atthe relevant cost of equity SAR in millon, yea-onéFebruay ‘Company data nig rs na re Tretia ‘S050 TAT Seok rage NON) 219-226 eine 3 Sr Gm 7348 1 cap. (USS) 2236 Insurance Ino nla Ne ‘a day ane hear ams tay rae ‘rade un (a) ua 5 (SAR) 258 zat Sat a7 Index saLsi 08 (SAR) 225 268 ae 416 Fro oat 8) VPS (SAR) top i559 as 188 Sours: hata, Tala ss ere ate nT ans eis emote 27 8B Satoh Eauty 2a 12950 Hse Auditor: Debit & Touche can YoY Goth (4) 30% 80% HAD SL 10% ings: At 2a, sable (Mood 250% 300% SAIN. Ratings: A1.z, etl (Mods) anso% © Sa60% «amar 560% 490K BH _—_ 22108, Sear Conary, rer, JP Nera tals. Nis: Sue piesa ates ara of 28 ray, 208 5Nick ODorenoe ‘opal Research ‘ok edenohoe@iemergan.com lzabeth ills ‘asterela@wondbark org Blue Financial Services way. blue.coza Company description Blue Financial Services was founded in 1996 as a lender to low-income salaried Airican borrowers. It currently operates in 12 countries and has plans to launch operations in four more. It employs more than 1700 people in 175 branches. In response to the rapid expansion ofits business, the company went public in Cctober 2006, listing on the JSE’s Altx. Blue has one of the broadest product portfolios among African MFIs, Its key products include salary advances, home improvement financing, mortgages, and pension/provident fund backed loans. Biue’s target market comprises low-salary, employed persons, who are generally considered “unbankable” by mainstream financial institutions. This provides a ready-made market with comparatively less competition, Given Africa's history of volatility, Blue's geographic reach also is an advantage over peers, because this reduces the impact of volatility in uny one market or ceurreney on their overall business. Foreign institutional investors inelude AIG and IFC, SAR nmillons,yeat-oné February os ns a re Tet inarencone Cy 17 Income nia ne IrsuraneeIneome sao 14834 Natlcame 2 20 5 (SAR) ato one 28 (SAR) 200 00 VPS (SAR 140 147 Total poses sn 1.09 as 21 an ‘Sparen Equity a2 ei can YOY Grow), nia 245% EPSYoY Growth (3) mene 732% ROE (i) 748%, ars NM. 0.0 17.38% Sear Conary, honing Nee Shr fen an ato ae 28 any, 208 JPMorgan Not Covered ars ss. Price: ZAR 3.95, Banks: South Africa Price performance ™ wa esate 352% 342% 120% Vs.dohamesbugsE 415% 99% 103% 25% 403% 41% Company data Sewerage NON) 38-8) Mk cap. (USSU) 28 ‘gay vate (USB 08 bade alse oat (8) Sue Berto, ae ‘Autor: PAF Io, fo South Ais) Ratings nlaNek oDontce teal Resear JPMorgan ‘ok edenohoe@emerga.com 03 February 2008, lzabeth ills ‘sterelawonbarorg BRAC Bank Not Covered BRAC BD http:sww bracbank, com) Price: BDT 7025 Company description Banks: Bangladesh BRAC Bank (BRAC) is a commercial bank that was founded in 2001 by BRAC NGO. The bank’s main portfolio products include loans for small and! medium- sized entrepreneurs; personal loans, eredit eards, deposit aecounts for retail Prive performance customers, specialized real products tailored to religious restrietions, and — remittances (where is a market leader), BRAC is one of the three largest ee ‘Westem Union agents in the whole south Asian region orale 69% 478% 429% Vs Dacca SE 23% 84% 64% BRAC’s distribution network of 22 branches, 350 small and medium enterprise (SME) unit offices, and 19 ATM sites span across Bangladesh and reach more Sree Beebo, than 40,000 borrowers, BRAC has the largest SME loan portfolio in the country. To date, it has financed over 100,000 SME borrowers, and over 90% of BRAC Bank's SME credit portfolio is free from collateral security 207i ions, yea-nd Deer Company data a He Fe Har ———— ca ar 082 Seek rage ON) so ar 27 7 cep (USS 185 tse eae ne fa ia nia ig dat abe Nathoame % 9 Be oe gay a(S) a 561) ais west 2339 5495 tne BoTALsH 2°86) ve 200 ‘0 fe Feta aia 5175.81) ne ssese ss aan Se Brg TP Maga Tatas woe teers, tapee as Loans sao Tet 55) ast ‘Strecles Egy 500 73 Bat a Auditors: SF. Amed 8. YoY Gro) ne a a Ratings na = ¥9Y Gow) ne say Ae aT " OE 8) ‘sax eR MR ne Som ‘se atek aT Sear Strep tangs Caparalin Company, Sontag, Nx Shire re anatase ah 28 ray, 08, 55Nick ODorenoe ‘opal Research ‘Nok edenchoe@emerga.com lzabeth ills ‘sterela@wodbark org Bank Rakyat Indonesia (BRI) wanw.brico.id Company description BRI is Indonesia’s third largest bank, with total assets of USS2 billion as of December 2007, BRI is a nationwide commercial bank with a special history and focus on microfinance and SME. I's produets include lending and voluntary savings products, fund transfer services, training, and consulting services. We estimate that only a third ofits loan book targets microentrepreneurs, the ‘remainder is offered to individuals, SMEs, or corporate clients. The bank lends to approximately 30 million retail clients through its over 4,000 branches, units, and rural service posts. I also has a comparatively small, but growing, corporate business. It's currently a 70% government-owned operating company (Persero) and was government owned since the War of Independence (1945 to 1949) to November 2003, when 30% of its shares were sold through an IPO. BRI’s IPO happened in a context of state privatizations, along with other banks, Risks BRI’s strength accrues from its robust microlending model. Key risks are related to the recent rapid loan growth. Our main concem about BRI is its recent rapid Joan growth from (i) the subsidized KUR scheme (disbursement of Rp10T in 2Q08) and (i) its portfolio of corporate loans. Because these are recent additions to BRI's books, we believe that the credit behavior of these two segments has not been fully tested yet and could potentially pose risks for asset quality down the line, which could affect our PT and outlook on the stack, Valuation ur June 2009 PT of Rp6,750 is derived from a DDM model. Key risks to our PT include forex volatility, NPL uptick, and growth capital IDR in milions, yearend December FO FYE FYOBE Tat arentncone Taina Tames Tigre Fee Income 2829.18 314006 Ipsuanee Inome ne " aia Netcom gagoot 5757820 atzzts EPS HN) waz era 53.04 28 (XN) toe 10638 man VPS (NX 1578 1798 2a Total assets 2Oa73A936 —228953.128 252448254 77286 BO Loans siggrdess saszsez8 89306237 © sTeare a2 ‘Sharenollers Egy toas7sss 7141864 25074054 31.308 888 Loan YoY Growth We2t% 258% ‘ait ‘aes "YoY Growth 2m% tee 181% sa7% wets = 2128288, a5 soy 126 070% 120%. Seu Company, rey Whbeda, Parga sats. Net Sha ples arden ao ef 28a, 2 JPMorgan Overw BBRLIK Price: Rp 4250 Price target: RpB,750 Banks: Indonesia ‘Aditya Srinath, CFA‘ (6221) s2srasrs adiyassenataipmargencem Price performance wa Revatte e0a% 208% 80% 217% 123% 14% 507% 49% 20% Company data Eee age NON) 25-7600 icp. (USS¥) «a6 ‘gaa vate (USB e73 bade ac Free fot) 87% Sauce Beorbag, Pama ‘Auditor: Ernst 8 Young Ratings: 83 (Fitch, lable, forlngrm forign cureney)Nick ODorenoe ‘opal Research ‘ok ederohoe@iemrga.con lzabet ills ‘asterela@wonbarkorg Bank Danamon waww.danamon.co.id Company description Established in 1956, PT Bank Danamon Indonesia (Danamon) is the second largest private national bank and the fifth largest commercial bank in Indonesia, ‘with a 5% share of domestic system loans and deposits. Danamon has the widest geographic distribution network of all Indonesian banks, with 500 branch offices and 790 ATMs; it is well-supported by more than 13,000 employees. Danamon is recognized as Indonesia’s leading SME and consumer bank and also serves corporate and institutional customers across Indonesia, Presently, Asia Financial Indonesia Pte, Ltd (AFT) owns 66% of Danamon shares. Holders of the AFI shares are Temasek Holdings Ltd. and Deutsche Bank AG. Temasek Holdings is a Singapore investment holding company with many renowned companies, such as Singapore Airlines and DBS Bank, one of the biggest financial services assembling in Asia. Ten percent of Danamon's shares are owned by the Republic of Indonesia (Ministry of Finance); the remaining 24% are publicly owned. As of September 2008, Danamon had total assets of $11.0 million and a gross loan portfolio of $7.0 million. Risks ‘Rising expenses and declining margins represent two key risks to earnings. We think that BDMN’s recent underperformance reflects investors’ concem on its business model and high LDR in a period of tightening liquidity and risk to asset quality. However, we view these risks as cyclical rather than structural ‘Valuation ur June 2009 PT of Rp6,600 is derived from a DDM model. Key risks to our PT include margin compression, slowing two-wheeler sales, and asset quality. IDR in milions, yearend December FO FYE FYOSE FRE Tat rarestincone Taos: —agirsi —Topeaast Tae 08 Fee Income 1818720 zszei 3117360 Ipsuanee Inome ne aia na Netcom 2areors 24a 2stza20 3423808 EPS (HN) zaze 8621 7867 28 (XN) 13281 21008 ma VPS (NX 282 2281 2.596 312 Total Assets sacosacr to4te9s80 114742808 125,700 500 Loans 5036026 3600023 7adster! BB 386 248 ‘Sharenollrs Egy Toassaas 11557865 tates 155078 Loan YoY Growth 2406% 258% ‘5.0% 11.28% "YoY Growth 70% Mee ask 245% moses 28S 218 now ee ie 130% aim. Seu Company reg, Whbeda, Parga als. Net Sha pes arts ao of 8 Janay, 2 JPMorgan BOMN.IK, BOMN IJ Price: Rp 2225 Price target: Rp8,600 Banks: Indonesia ‘Aditya Srinath, CFA‘ (6221) s2srasrs adiyassenatnaipmargencem Price performance wu evaire 589% Vs.sct 179% 343% Company data eave age ON) 1125-7800 ik cp. (USS¥) 1.000 vg aay vate (USB us bndex ac Free fot) st Sauce Beorbag, Pam Auditor: KPMG Ratings nla srNick ODorenoe ‘opal Research ‘ok ederohoe@iemrga.con lzabeth ills ‘asterela@wondbark org International Personal Finance (IPF) wanw.ipfin.co.uk Company description Established in 1997 as a division of Provident customers Worldwide, and was listed on the LSE in July 2007. While based in the United Kingdom, IPF’s primary markets are Central Europe (Poland, Czech Republic, Hungary, and Slovakia), Mexieo, and Romania. The firm entered Russia in December 2007. India and Ukraine are next on IPF’s radar for expansion. IPF uses the home-collected credit model, working with a large force of agents to ensure customer contact. This approach works well with the target customer segment and enables the agents to collect additional information that makes appraisals more accurate. IPF typically disburses loans within 48 hours of making customer contact. Repayments are typically collected weekly, and very often, no penalty is levied for late repayments—thus ensuring the total amount o not increase. Pin mons, year-end December Free Tal aes cone 7 Income nie Ipsuanee come ne NatIeame ne EPS iM) 2 298 (XN) ne VPS (MXN) Total este ‘Sharenollers Equity oan YOY Grn) na EPSYOY Growth ne ROE) na NM ne Sear Strep Ecange Capalin Company Sontag, Nox Sire re anabaon wea 28 ray, 208 i Ht 2 08 000 0 2 31 2 nat sak FT 38 3 os as en 43 ae a3a% ae 160% aK sd docs JPMorgan Not Covered IPF UN? Price: GBP 1.28 Banks: United Kingdom Price performance wae ovate 117% 59% 280% Vs. Londen SE 105% 2% 24% VeMSCIFiancdle _S27% 66% 775% Sauce Beers Company data Seek rage WON) 14-328 Mk cap. (USS¥ 6 ‘gaa vate (USE 404 Index Ls Free st sar, Sauce Bhorbag, Page Autor: Pac Ratings nieNick © Donohoe Global Researen "ok oaonahoetemergan com 13 Febuary 2008, JPMorgan Elzabah Lites slivebatsawordbank oo Companies Recommended in This Report (all prices in this report as of market close on 30 January 2009, unless otherwise indicated) African Bank Investments Ltd (ABLJ.J/2,630ciNeutral), Bank Danamon (BDMN.JK/Rp2,200 [02-February- 2009}/Overweight), Bank Rakyat Indonesia (BBRIJK/Rp4,350 [02-February-2009}/Overweight), Compartamos Banco (COMPARTO.MX/PS26.76/0verweight) Analyst Certification: The research analysts) denoted by an “AC onthe cover af this report contifis (or, where multiple rescarch analysts are primarily tesponsible fr this report, the research analyst denoted by an “AC on the cover ot within the document individually certifies, with ‘espect to each security oF issuer thatthe rescarch analyst covers in this rescarch) tat: I) all ofthe views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any ofthe research analyst's compensation was, i, oF will be directly or indirectly related to the specific recommendations or views expressed by the research analyst() in this report. In compliance with Instruction 388 dated April 30, 2003, issued by CVM - Comissio de Valores Mobiliris (the Brazilian securities commission), which egulates analyst’ activities and certification, and except as otherwise already specifically provided for in any previous disclaimer herein, the Brazilian primary analyst signing the present report declare that: (1) all the views expressed herein accurately reflect his or her personal views about the securities and isuers decribed herein, All recommendations issued by him or her ‘were independently produced; (2) tothe best of his or her knowledge, he or she does not maintain any relationship with any person who ‘works forthe subject companies whose securities are mentioned in the present report; (3) tthe best of his or he knowledge, Banco J.P. Morgan S.A. andr funds, portfolios and securities investment elubs managed by such mentioned entity do not own, directly or indirectly, 1% or more ofthe total capital stock of the subject companies and is not involved in the acquisition, sale or acting as intermediary of such securities in the market; (4) he or she docs not own, directly or indirectly, securities ofthe subject companies in an amount equivalent or superior to 5% of his or her net worth and he or she is not involved in the acquisition, sale or acting as intermedia ‘of such securities inthe market; (S) neither the analyst nor Banco J.P. Morgan S.A , othe best of his or her knowledge, receive any ‘compensation for services rendered or maintain any commercial relationship with any ofthe subject companies or any individual, legal entity, fund or communion of rights which represents the same interests ofthe companies; (6) no part ofthe research analyst ‘compensation was, i, or will be directly ot indirectly related to the pricing of any ofthe secuities issued by any ofthe subject companies and, part of the analyst's compensation may come from the profits of Banco JP. Morgan S.A. andior is subsidiaries and, consequently, revenues arisen from transactions held by Banco LP. Morgan S.A. and/or its subsidiaries. Important Disclosures + Market Maker/ Liquidity Provider: IPMSL and/or an afliliate i # market maker andl liquidity provider in Afrian Bank Investments Ltd, Bank Danamon, Bank Rakyat Indonesia ‘+ Analyst Position: Tho following analysts (andor thei associates or household members) own a long position in the shares of African Bank Investments Ltd: Jason Swartz, Andrew Cutie + Client ofthe Firm: African Bank Investments Ltd is or was in the past 12 months a cient of JPMSI. Hank Danamon is or was inthe past 12:months a clint of JPMSI; during the past 12 months, JPMSI provided tothe company non-investment banking securities- related sevice and non-securities-elated services. Bank Rakyat Indonesia is or was inthe past 12 months a client of IPMSI; during the past 12 months, JPMSI provided to the company non-securities-elated services. Compartamos Banco is or was inthe past 12 moths a client of IPMS. + Investment Banking (next 3 months): JPMSI or ts affiliates expeet to receive, or intend to seek, comy banking services in the next three months ftom Bank Danamon, Bank Rakyat Indonesia. ‘+ Non-Investment Banking Compensation: JPMSI has reecived compensation inthe past 12 months for products or services other ‘han investment banking from Benk Danamon. An afiliate of JPMSI has received compensation inthe past 12-months for products ‘or services other than investment banking from Bank Danamon, Bank Rakyat Indonesia, © MSCI: "The MSC! sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSC1. Without prior ‘written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or ‘used to create any financial prodsets, including any indices. This information is provided on an'as is’ basi, The user astumes the entire risk of any use made of this information. MSCI, is affiliates and any third party involved in, or related to, computing or ‘compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness Tora particular purpose with respect to any of this information. Without limiting any ofthe foregoing, in no event shall MSCI, any of its aliiates or any third part involved in, or related to, computing or compiling the information have any ability for any damages of any kind. MSCI, Morgan Stanley Capital International andthe MSCI indexes are services marks of MSCI and is affiliates ation for investment 50Nek oDontce teal Research JPMorgan ‘ok ecenchoe@ipmergan.com 03 Febrry 2008, lzabeth ills ‘lsterela@wondbareorg ‘African Bank investments Ltd(ABLI!) Price Chart ors Bais Raing Share rca Pres Torah vo owasase]_ [owaar i & ane} ow ae [owes eieet oe aoe ss owarndows 25Sep07 OW 31803870 swe Tenono7 OW 36495 Pret s1Fe008 OW 2am) 495 aa} oaway08 Ow 24703887 * 2008 OM 24503885 Seat oc ee cee Bank Danamon@OMNLK) Price Char Baie Rang Share Price Pris Tash us owns mn) ow none ot) r Beagros_ow 59004750 sre [reer] owapsam won zesgros N 5250750 sae OH OAT owe] wera] _ [Wrens owners] | Zee oN ee rc) 12Fe07 OW S800 vapor N TOs 7250 7 ziNowaT N 6550 e275 aos a en) ° 255008 OW 5400. ost0 aera, tnd wh tnNek ODonstce lsat Research JPMorgan rok ecenohoe@iemergn.com 03 Febrary 2008, lzabet itil ‘asterela@wondbarkorg Bank Rakyat Indonesia (BBRL.IK) Price Chart sssef Date Price Pree Target siaue} Deapras OW 41254805 oe enon] on mas ‘Ow Rere][ ow pease] [ow Rese] ownnarsa] | ‘MeO? OW G02 7200 ase m= 31-08-07 OW 7900 6900 Pee) ‘SAer08 OW 5000-8000 seer 25-Sep-08 OW S600 6750 ‘i= Orrih = Neal UN = Una ‘Compartamos Banco (COMPARTO.MH) Price Chart Date Rating Share Price Price Target on pea (a) (es) 108 Peapras OW 4500 60.00 ow 2oNaya8 OW 4337 “. i aeoi0e OW ars S00 ow reo [ow rs] 2z0eo OW 21423500 Pras) pr Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: 4.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total retumn ofthe stocks inthe analysts (or the analyst's team's) coverage univers, Neutral [Over the next six to twelve months, we expect this stock will perform inline with the everage total ret ofthe stocks in the analysts (or the analyst's team’s) coverage universe.) Underweight (Over the next six to twelve months, we expect this stock will underperform the average total retum of the stocks inthe analysts (or the analyst's team’s) coverage universe.) The analyst or analyst's team's coverage universe is the sector andlor country shown on the caver of each publication, See below forthe specific stocks in the certifying analyst(s) coverage univers.Nec ODoraoe crepe Rasa JPMorgan ‘ekodonohoegmongan com 03 Febrry 2008, lzabet ills stereta@wondbar org LP. Morgan Equlty Research Ratings Distribution, as of December 31, 2008 Overweight Neutral Underweight rs (old) el TPS Global guy Research Coverage Se 19% liens? 9%, JPMSI Equity Recaro Coverage 10% tients? om ‘Percentage of investment banking cients in each ating category. For purposes only of NASDYNYSE rang dssibution rules, cur Oversight rating falls int a buy rating category; our Neal ing falls into hold rating category, and our Underweight rating fas into a se rating category Valuation and Risks: Please see the most recent company-specitic research report for an analysis of valuation methodology and risks on any securities recommended herein, Research is available at hip: www morganmarksts com , or You can contact the analyst named on ‘the front of this note or your LP. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation ofthis report receive compensation based upon ‘various factors, including the quality and accuracy of research, client feedback, competitive factors and overall fim revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed onthe front ofthis report are employees of non-US alates of IPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rie 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a esearch analyst account Other Disclosures LP. Morgan isthe global brand name for .P. Morgan Securities Inc. JPMSI) and its non-US affiliates worldwide Options related research: I the information contained hers regards options related research, such information i available only to persons who Ihave recived the proper option rsk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Riss of Standardized Options, please contact your LP, Morgan Representative or visit the OCC's website st tip:/worw optionsclearing com/publiationsiisks'skstoc pal |S JPMSI isa member of NYSE, FINRA and SIPC. 3P, Morgan Futures Inc. is a member of the NEA. JPMorgan Chase Bank, NA sa rember of FDIC nd is authorized and regulated in the UK by the Financial Services Authority. U-K.: JP. Morgen Seewities Lud (PMSL) is member ofthe London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered in England & Weles No, 2711006, Registered Office 125 London Wal, London EC2Y SAI, South Africa: JP, Morgaa Equities Limited isa member ofthe Jobinnesbarg Securities Exchange and is regulated by the FSB. Hong Kong: )P. Morgan Securities (Asia Pacific) Liuted (CE number AASS21) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: .P. 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This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. cyMaegan aera JPMorgan lzabeth itil slsterelagwodbank org