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BK Blog Post
Posted by Hugh Sinclair, COO - Economist - Author, Alliance Microfinance.
Hugh Sinclair works in turnaround management, helping ailing Microfinance Institutions in accounting, software automation, rescue strategy, and doing due diligence.
Credicorp bought MiBanco for $179m. According to the stated equity on the MixMarket, this would suggest they paid 1.25x the net equity of the bank, for a 61% stake. This is a low price compared to most microfinance transactions, but let’s face it, it wasn’t Peru’s best bank. The owner already has the second biggest microfinance bank in Peru (by number of clients), Edyficar, thus the combined bank is a monster – a fifth of the entire sector. If this was too big to fail before, it’s just got bigger. And of course, while the initial fears over the fate of MiBanco have momentarily subsided, the underlying problems remain identical to last week. Over-indebtedness is still a problem, MiBanco has a poor quality portfolio and is bleeding clients. Shifting shareholders doesn’t change that. Indeed, some might argue that paying any premium over book value for this bank was generous. Obviously Grupo ACP are out of the hole for a while, flush with cash, and there is no danger of defaulting on the bond now.
They’ve sold off the family silver, however. An undignified outcome for both ACP and MiBanco without the underlying problem solved – little to celebrate.
And technically speaking the deal has not yet been approved. Indeed, one might suspect that political manoeuvrings behind the scenes got the deal on the table in the first place, so it is unlikely it will fall at the final hurdle.
Needless to say ACP had another spin on this. This was not a firesale apparently, but part of a cunning plan: “We do also believe that the main goal that motivated us for 45 years has been accomplished.” It is probably true that they set out to financialize the poor of Peru, and have played a stellar role in that process for better or for worse. They have left a mature microfinance sector in their wake. Perhaps too mature? But the reality is that this was a firesale prompted by a looming default on a bond due to declining earnings in their rather undiversified portfolio in a country that looks worryingly over-indebted. I doubt this was the plan hatched nearly half a century ago.
An interesting article appeared in the Peruvian press. Those bright journalists dug up all the data on ACPs other investments, and ACP really had nothing else they could sell:
There were a couple of marginally profitable Peruvian assets, and they had already flogged the Bolivian bank (once again, all part of the plan apparently). To raise the sums ACP required, trying to sell a loss-making Mexican asset in a hurry was hardly ideal. They had no option, but don’t kid yourself – there was nothing either clever or strategic about this deal, their back was against the wall because they had over-leveraged themselves. Ring any bells?
But the Semana Económica article points out some other fascinating items:
What is interesting here is that in fact Credicorp paid relatively little for MiBanco. The once heralded star of Latin American microfinance was sold for a song. (For readers that are not familiar with equity valuation, skip this section). Basically the bank was sold at 1.25x book value, based on the relatively limited data available on Mix. This is at the very lowest end of the 1.3x to 1.9x range suggested by CGAP as the usual pricing. Presumably this incorporates Credicorp’s discount applied to compensate for restructuring costs, write-offs, integration expenses and redundancy payments. To put this in context, Credicorp paid a 25% premium over the book value of MiBanco in 2014. When Credicorp bought Edyficar in 2009 they paid a premium of 150% over book value. This was a firesale.
So, what is Credicorp going to do? First of all, it will probably find that half the clients of MiBanco are their clients already, which will be a little worrying. Paying off your loan at Bank A with a loan from Bank B is one thing, but they are now the same bank.
They will presumably cut a significant portion of the headcount, at all levels of the bank. It will be astonishing if any of the senior management team at MiBanco are allowed to stay on, but friendships run deep in these banks, and likely the main lay-offs will be the junior staff, but we shall see. You don’t need two CEOs, and right now it is pretty clear which one is doing a better job. Redundancy costs will be high in Peru.
Another pertinent question is whether the newly formed entity will operate under the Edyficar brand, or MiBanco’s, or remain separate. Edyficar is a solid, well-run bank and seems the obvious choice, but common sense should not be taken for granted in this sector – MiBanco is bigger and has a stronger brand name, so maybe that is perceived as better?
Edyficar is in far better shape than MiBanco. According to the MixMarket its return on assets is 4.23%, return on equity is 40.95%. MiBanco wrote off approximately 5% of its portfolio in each of the last two years, while Edyficar wrote off a mere 2.22% in 2012 (2013 data not available). Only 4.38% of Edyficar’s clients are overdue on loan repayments by more than 30 days, and 3.16% at 90 days – a little over half the levels reported by MiBanco.
The deal may provide some respite to ACP, but there are two major problems that have not vanished. They are exactly the same as before this crisis struck Grupo ACP. Over-indebtedness is high, and MiBanco’s non-performing loans are high. Its clients are not repaying their loans. Just because the shareholder abruptly changed will not change that. Compared to MiBanco, Edyficar is well-run, its portfolio is notably better quality, with fewer write-offs. Merging the portfolio of MiBanco is going to deteriorate the overall picture. And it seems unusual to suppose that Credicorp bought MiBanco in order to slow down lending, in all likelihood it will clean up the mess and ramp up the growth once again. Whatever the strategy is, do we expect the merged company will somehow try to manage, or even reduce, over-indebtedness? And now Peru is debatably even less prepared for a systemic crisis in the microfinance sector. A collapse of MiBanco could have triggered a broader collapse across the sector, and now the MiBanco/Edyficar union is even bigger. Too big to fail?
Frankly, anyone thinking this problem is over is deluded. This might be just the beginning.
So, is there a crisis looming? I don’t know. Many ingredients for a storm are present while others are notably absent, as I blogged previously. All it would take is a spark, as in previous crises, often from unexpected sources. There are certainly warning signs, but hopefully this “incident” will send a valuable warning signal to the sector, and in particular to the regulator, that they need to do something. What could this be? I reckon there are a few key steps here that would reduce the chance of the situation deteriorating.
There will be a continued “period of consolidation” in the sector. This is investor-talk for a period of collapses, with a nice spin applied. This is not necessarily a bad thing, but it has to be managed in a controlled way. A string of collapses is never nice, better to anticipate this and wind them down slowly. A bit like demolishing a building.
The banks need to calm down the relentless competitiveness and desire to perpetually steal one another’s clients, constantly rise in the ranking tables and retain market share. In the short-run such behaviour may produce results, in the long run it is cannibalism and leads to over-indebtedness and possible crisis. Is it too much to ask that they collaborate somehow? Fierce competition is so engrained in the Peruvian microfinance sector (for better and for worse) that this will be a hard cultural shift to initiate. External prompting from the regulator will be required, but soft intervention can also work. Ideally this would also come from the investors, who may have the prudence to suggest that a healthy 10% growth rate is preferable to a 30% dash towards an imaginary finish line. But here I am entering into the role of pure fantasy, the odds of investors with the whiff of profit in their nostrils turning down a quick buck is not the most likely outcome highlighted here.
The fact that the Economist Intelligence Unit declared, for the sixth year in a row, that Peru is the best regulated microfinance country on Earth suggests at least one word in their name might not be entirely valid. Any false confidence this imparts upon the regulator should be re-assessed in light of this recent mess.
But there is no crisis yet. There is time to fix this. It is not too late. But the warning signs are clearly visible, the fact that the entire sector hasn’t collapsed does not imply the warning signs should be ignored. Alas the global microfinance sector has established an incredible tendency to ignore such warnings and wonder aimlessly off cliffs. But this is neither inevitable nor unavoidable.
There are no doubt 100 other measures that the regulator is looking into currently that I am unaware of, and I sincerely hope they can act wisely in the best interests not only of investors but also of the Peruvian public. The trick is confidence. The SBS should activate all the tools at its disposal to fine-tune the sector – no brash moves that could trigger a crisis/exodus/bankruptcy etc. Subtle moves that restore confidence and protect not only the banks, and their investors, but also the poor.
Too much to hope for? Yes, probably.
Correction to previous post: Accion had already been flogged to Bamboo some years ago. Thanks to an anonymous reader for the correction.