It seemed appropriate to take a closer look at the bank in the centre of the emerging “incident” in Peru’s beloved microfinance sector. In a later post I may do a comparison of MiBanco to other banks in the sector, but for now I shall focus only on the data presented in the MixMarket. I examined data for the years 2011 and 2012, and the quarterly data to the end of 2013 (i.e. 4th quarter – the most recent, but incomplete data available. Select 2010 for “Start Year” and click all boxes for “Report Type”. Mix data is self-reported and not always entirely reliable, but it’s the best we’ve got).
I must stress here that this analysis is entirely from publicly available information. The results are disturbing. I’ll go through this broadly in the order that the data appears on the Mix.
The Mix Data
- The number of offices has barely changed, from 117 to 119 in two years.
- Leverage (the amount of debt compared to the amount of equity) has increased from 7.5 to 8.1 (2011 to 2013), suggesting MiBanco may struggle to raise additional debt capital. This is not chronically high, but particularly in the circumstances it may struggle to extend this further.
- What is far more worrying is the decline in the number of active borrowers. This is worse than I had previously suggested. From the end of 2012 to Q4 2013 borrowers fell from 505,000 to 364,000, a decline of over 140,000 in a single year, or nearly 30%. The number of loans outstanding fell even further, from 565,000 to 369,000, a decline of 35% in a single year. The gross loan portfolio fell by less (from $1.86 billion to $1.60 billion, as mentioned previously), which is a fall of 14%. The reason why the portfolio fell by less than the client numbers is that MiBanco offered larger loans to its clients.
- The average outstanding loan balance increased from $3,284 to $4,325 from 2012 to 2013. This is quite a notable shift in focus – some may call this mission drift, but we would need to examine the components of the portfolio in more detail to conclude this. The average outstanding loan balance increased by 31.7% in 2013 and by 7% in 2012.
- Looking at the other side of the balance sheet, the number of deposit accounts actually increased dramatically from 2012 to 2013. However, the average deposit account balance fell almost as dramatically, from $3,759 to $836. More people saving less, in a nutshell. The combined effect of this was a 1.7% decline in the total deposits held by MiBanco. However, this should not be underestimated – MiBanco currently holds over $1.4 billion of client deposits, thus a run on the bank would be extremely serious were Peruvians to lose faith in its integrity. This is cause for concern for the regulator – a run on a small Edpyme is not too serious, a run on MiBanco would be dangerous.
- As mentioned previously, profits have plunged. The profit margin was a healthy 12.6% in 2011. By 2012 it had fallen to 2.2%. Of course, this led to reduced dividend payments to the shareholders, which contributed to nudging Grupo ACP into technical default of its loans (the Fitch downgrade occurred this same year). The contagion spread from MiBanco to ACP – this is a critical point to grasp.
- The other expense ratios actually remained relatively healthy – operating expenses as a percentage of loan portfolio (i.e. how much it cost to lend $1) rose marginally from 11.9% to 12.1%, but this is within normal boundaries. The bank is quite efficiently run, operationally, although for a bank of this size perhaps greater economies of scale might be expected. I would need to compare MiBanco to its peers to confirm this.
- Interestingly the number of clients per loan officer or staff member also declined, driven by the fall in the number of clients, but not by a significant amount. This is because MiBanco laid-off substantial staff during the last year. Personnel fell from 4,419 to 3,847 in a single year: 572 lay-offs, or 13% of the workforce. Alas personnel expenses are not reported for 2012 or 2013, but in 2011 they stood at $95 million, i.e. a substantial expense, which has presumably declined. Redundancy payments are alas not reported on the Mix, but in Peru these are likely to have been quite high (and not over yet!).
- I previously mentioned the declining portfolio quality, but I failed to pick up the write-off ratio. This is the amount of the portfolio a bank simply deems uncollectable, and removes from the balance sheet as an expense. Naturally, when portfolio is removed from the portfolio (the “bad loans”), the remaining loans appear better quality. What we see in MiBanco’s case is quite shocking. In 2011 the bank wrote of 5.4% of its portfolio, and an additional 4.6% in 2012. And yet (presumably to the grave disappointment of management) the non-performing portfolio remains at alarmingly high levels by the end of 2013 (7.8% delinquent for over 30 days, and 5.8% at 90 days) despite this purging of the bad loans. So far, according to the Mix data, there have not been any write-offs in 2013, but these are quarterly accounts, we should wait for the annual accounts to verify this. Do not underestimate how serious this is. Later on in the report the amounts are published: MiBanco wrote-off $76 million in 2011 and an additional $78 million in 2012. Write-offs therefore cost the bank of the same order of magnitude as its staff costs. This is chronic. And do not forget that each of these written-off clients represents a poor Peruvian who was unable to repay a loan, essentially went bankrupt, and will have presumably been reported to the credit bureau and is now black-listed. These are not merely numbers but people. All too easily we forget this, particularly from the lovely, air-conditioned head office!
- The impairment loss allowance for 2013 is $117 million. Again, a significant amount.
- Total liabilities over the period increased by 14.5% from 2011 to 2012, as MiBanco took on more debt ($143,617,700 more to be precise). But liabilities actually declined marginally (by 1.5%) in 2013. However, currently liabilities are $1.9 billion. Think about this for a moment – MiBanco owes more money than its entire loan portfolio is worth. Does that sound healthy? Admittedly the majority of this is the deposit balances of the clients, but “borrowing”, which I assume is external debt, is a whopping $382 million ($13 million more than in 2012). With this structure of the balance sheet, and the increased leverage mentioned previously, one wonders if MiBanco can easily raise additional borrowings currently. And indeed, what happens when lenders start refusing to roll-over or make new loans, as BlueOrchard did? Things could get uncomfortable for MiBanco – the most obvious way it can repay this debt is by winding down its portfolio, i.e. shrinking, which is what we have seen quite obviously in 2013. Thus as ACP flogs its assets to pay its loans, is MiBanco essentially doing the same? If MiBanco refuses to extend loans to well-repaying clients, they will simply leave and take their savings with them, further worsening the problem. It is a slippery slope.
- And then we have the all-important equity, the single item that keeps the shareholders excited. This fell by $17.4 million in 2013, or 6.9%. Although this is unlikely to please the shareholders, MiBanco does still retain a healthy equity cushion of $234 million, so collapse is not imminent. But the board of directors, and the shareholders, will presumably want a decent explanation of why senior management wiped off nearly 7% of the equity in a single year in a country that is apparently the best in the world for microfinance.
- Fees and interest paid by the clients amounted to $380 million in 2011, and rose to just below $400 million by 2012. Unfortunately 2013 data is not reported. Although the portfolio declined substantially in 2013, the average portfolio in 2013 was not significantly different to the average in 2012, so gross income could be of a similar order of magnitude. We await the annual accounts to verify this. While this may sound like a lot of money extracted from the pockets of poor Peruvians, it is not all profit, as the lion’s share goes to covering the operating expenses ($205 million in 2012, a 23% increase from 2011, 2013 not reported yet). But MiBanco also pays interest, and in 2012 its own financing expenses rose to over $80 million, to both depositors (who earn interest) and to external lenders such as the microfinance funds. But, to present a single rather worrying trend, net operating income in 2011 was $48,471,636. This fell an impressive 82% to a mere $8,620,165 a year later, and things appear to have worsened since.
- Alas the lack of complete 2013 data makes more observations impossible. The rest of the data presented is of mild interest. From zero female members on their board this fortunately increased to 1 in 2012 (with 11 men). Women account for a little over one third of managers and staff, and marginally over half the clients. Call me biased, but perhaps a few more women running this bank not be a bad idea!
While it is true to say that the current problem was sparked not by MiBanco but by its main shareholder, who is clearly not doing very well, MiBanco is far from healthy. Would you buy shares in this company? Would you lend them money? Would you entrust your savings to them? This is not a backward country without regulations run by cowboys, this is the best country on Earth for microfinance according to the Economist Intelligence Unit. This is not some struggling NGO with a few thousand clients – this is one of the largest MFIs on Earth. Problems with the portfolio are not minor – it wrote-off 1 in 20 loans in both 2011 and 2012, before the current problems emerged. 140,000 active borrowers left the bank in 2013 alone, and even more than this if you consider number of loans rather than number of people. By the end of 2013 1 in every 13 clients was in default over 30 days. 1 in 17 hadn’t made a payment for three months. This is a terrible situation.
The only thing I can suggest here is a change of management. This is not a game – if MiBanco goes down, it will take a lot of people down with it, most of whom are largely innocent. The main shareholder is sufficiently reckless to land itself in default on a senior bond, so there is not much hope there. This is not a country such as Greece suffering major structural problems, Peru grew 6.3% in 2012. Triodos and the IFC may be slightly more prudent, but they have minority stakes. In my personal opinion Grupo ACP has a lot of answering to do, and flogging a few marginal assets in Bolivia or El Salvador to keep its bondholders happy is not enough to resolve the underlying problem.
As we have seen in the recent financial crisis, mis-management in large financial institutions can have a catastrophic impact on entire societies, and I must beg to disagree with the Economist Intelligence Unit that Peru is a well-regulated country. Any regulator that allowed the current situation to arise under its watch should be questioned. MiBanco, the largest MFI in Peru, and its main shareholder, are dangerously close to requiring a bail-out. How can that possibly be considered good governance? It may have been good for investors for a few years, but a regulator has a slightly broader gambit than protecting return on equity for investors. Where was the client protection in all this? What is a multilateral such as the IFC doing investing in such a shoddy institution with tax-payer funding? Who is going to pick up the pieces if MiBanco collapses? What is going to happen to the entire Peruvian microfinance sector (which extends into the mainstream commercial banking sector) if there is a crisis such as Pakistan, Nicaragua, Bolivia, Morocco, Andhra Pradesh, Bosnia etc? What is going to happen to the genuine entrepreneurs who rely on capital to run their businesses?
This looks like gross incompetence to me. And while I’m ranting about the regulator’s deficiencies, the Economist specifically praised it for not using interest-rate caps (i.e. regulating against usury) – MiBanco doesn’t charge very high interest rates, but some MFIs in Peru are charging rates over 200%. What on Earth inspired the regulator to think that was going to help Peruvians grow their businesses? These people are on a different planet.
And are we to believe that MiBanco is the only bank in trouble?