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BREAKING NEWS: Wednesday, January 8, 2014
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Moody’s Warns on Mongolia’s Banks
January 8 (WSJ) Moody's Investors Service has placed negative outlooks on three Mongolian banks, citing risks from rising bad loans, slower economic growth and a deteriorating operating environment.
Moody’s changed its outlook to negative from stable on Khan Bank LLC, Trade & Development Bank of Mongolia LLC and XacBank LLC while reaffirming the three lenders’ B1 ratings.
The warning on Mongolia’s banking sector follows similar views from other ratings firms, who have noted that lenders in the resource-rich country are vulnerable to an economic slowdown after a period of rapid loan growth.
Because around 90% of Mongolia’s revenues come from mining-product exports, falling commodity prices have hurt growth and the nation’s balance of payments.
“Given the resource-based nature of the economy and a large lending concentration in mining, there is the risk of boom-bust cycles, resulting in a volatile operating environment,” Moody’s said in its assessment.
The credit firm noted that loan growth from January to November 2013 was 55%, much higher than the 23% growth of a year earlier. The nonperforming-loan ratio rose to 5.3% from 4.2%, still not as high as it might be given the pace of lending. But Moody’s noted that the bulk of loan growth was concentrated in the construction sector.
If those loans sour, capital raisings by the banks may be needed.
“The effects of the strong loan growth for 2013 are likely to offset the strong internal capital generated by reported earnings,” Moody’s said. “Therefore, despite an annualized average 26% return on equity before tax over the first nine months of 2013, the banks will need additional capital from external sources to support growth and maintain capital ratios.”
The downbeat assessment comes despite Mongolia’s authorities having projected a bumper year for the economy, led by foreign investment and an expected agreement with the country’s international partner to launch phase II development at the Oyu Tolgoi copper and gold mine, a $6.5 billion project that is projected to eventually account for a large chunk of the country’s gross domestic product. Central bank head Naidansuren Zoljargal said in November that GDP could expand as much as 17% next year from around 11% this year.
Meantime, Mongolia is drawing criticism for its treatment of foreign business executives in the country. In December, authorities moved to block a consultant to Standard Bank Group Ltd. from leaving in a dispute over loan repayment. They eventually allowed him to depart shortly before Christmas.
Around 20 foreign executives are estimated to have been barred from leaving Mongolia over the past two years.
Mongolia Bond Yields at Four-Month Top as Moody’s Cuts Banks
January 8 (Bloomberg)( Mongolia’s borrowing costs rose to near a four-month high as Moody’s Investors Service joined Fitch Ratings Ltd. in downgrading the ratings outlooks for some of the country’s banks.
Yields on the North Asian country’s dollar notes due in 2022 climbed to 7.96 percent today, close to the Jan. 6 level of 7.962 percent, which was the highest since Sept. 17, according to prices compiled by Bloomberg. The country’s debt, including corporate securities, fell to 99.01 on Jan. 6, the lowest since Dec. 10, according to JPMorgan Chase & Co. indexes.
The ratings outlooks of Khan Bank LLC, Trade & Development Bank of Mongolia LLC and XacBank LLC were demoted to negative from stable, because of the negative impact of the global commodity-market slowdown, according to a Moody’s report today. The nation’s economic growth decelerated to 11.3 percent in the first half of 2013 on reduced Chinese demand for its coal, after an expansion of 12.4 percent in 2012.
“Given the resource-based nature of the economy and a large lending concentration in mining, there is the risk of boom-bust cycles, resulting in a volatile operating environment,” said Hyun Hee Park, an analyst at Moody’s. “The system’s non-performing loans ratio only rose to 5.3 percent at the end of November 2013 from 4.2 percent at the end of 2012.”
Khan Bank is the nation’s biggest lender, while Trade & Development Bank has the second-largest loan portfolio, according to the report.
Trade & Development Bank is considering an offshore yuan bond sale, according to a person familiar with the matter, who asked not to be identified because the matter is private. The bank is starting on a series of fixed-income meetings from tomorrow, the person said.
Fitch revised the outlook of Khan Bank and XacBank LLC to negative from stable last month.
Moody's changes ratings outlooks of Mongolia banks to negative and affirms ratings
Hong Kong, January 08, 2014 -- Moody's Investors Service has today changed the ratings outlooks for three Mongolian banks to negative from stable, reflecting intensifying adverse developments in their operating environment.
The banks are Khan Bank LLC, Trade and Development Bank of Mongolia LLC (TDBM), and XacBank LLC. See below for a full list of their ratings, and which Moody's has affirmed.
At the same time, Moody's has lowered TDBM's baseline credit assessment (bca) to b2 from b1 because of the high credit risks evident in its portfolio. On this last point, Moody's notes a high level of borrower concentration and relatively higher exposure to risky sectors, such as construction and mining.
Despite the lowering of the bca, Moody's has affirmed TDBM's B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM -- as the second largest lender in terms of loans -- in the Mongolia banking system.
RATINGS RATIONALE
Moody's change in the ratings outlooks to negative reflects the fact that the banks remain vulnerable to a deterioration in asset quality and high borrower concentration against the backdrop of intensifying adverse developments in the operating environment.
Given the resource-based nature of the economy and a large lending concentration in mining, there is the risk of boom-bust cycles, resulting in a volatile operating environment.
An expansionary fiscal policy and a loose monetary policy have somewhat mitigated the negative impact of the slowdown in global commodities markets on the operating environment.
However, given the prolonged slowdown, risk in the banking sector is increasing, as the continued efficacy of such policies is uncertain.
In this context, Moody's notes that the banking system's loan growth for January-November 2013 was 55%, much faster than 23% for the same period in the previous year. The system's non-performing loans (NPL) ratio only rose to 5.3% at end-November 2013 from 4.2% at end-2012. However, the increase was tempered by the denominator effect, which raises our concerns about the sustainability of the country's rapid credit growth.
Moody's further notes that much of the loan growth of 2013 was concentrated in the construction sector, following the disbursement of policy loans from the Bank of Mongolia (BOM) through its price stabilization and mortgage financing programs starting from early 2013.
As a result, loans to the construction sector started to jump 67.7% in 2Q 2013 from 1Q 2013, much higher than the overall system loan growth of 16.6%.
Moreover, it is difficult for the banks to fully price in the credit risks of borrowers in their policy loans due to rate caps on such loans. As a result, the buffer to absorb credit costs is lower than in the case of a normal commercial loan.
The effects of the strong loan growth for 2013 are likely to offset the strong internal capital generated by reported earnings. Therefore, despite an annualized average 26% return on equity before tax over the first nine months of 2013, the banks will need additional capital from external sources to support growth and maintain capital ratios.
Moody's has lowered TDBM's bca to b2 -- as indicated -- from b1 to reflect pressure on its credit profile, due to its relatively higher concentration risk and exposure to borrowers in risky sectors.
Despite the lowering of the bca, Moody's has affirmed TDBM's B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM -- as the second largest lender in terms of loans -- in the Mongolia banking system.
Below we discuss each individual bank.
Trade and Development Bank of Mongolia
TDBM's bca of b2 reflects its: (1) solid market position as a leading corporate lender in foreign exchange and trade-related businesses; (2) sound profitability and good operating efficiency; and (3) diversified funding sources from both domestic depositors and foreign financial institutions.
However, the ratings are constrained by the bank's vulnerability to a deterioration in asset quality, given its high loan concentration and portfolio of corporate loans.
TDBM's top 20 group borrower exposures were equivalent to 42% of its total loans at end-September 2013. More than 50% of these borrowers are also in risky sectors, such as mining and construction. The latter accounted for 17.2% and 16.2% of its total loans, respectively at end-September 2013.
TDBM's bca of b2 also reflects potential challenges related to corporate governance that could arise from its narrow shareholding structure.
Khan Bank
Moody's has affirmed Khan Bank's B1 local currency deposit ratings, and the bca remains at b1. Its bca of b1 reflects its (1) strong franchise in Mongolia as the largest bank in terms of loans, as well as its extensive nationwide branch network, the largest among all domestic banks; (2) adequate capital position, as expressed by its Tier 1 capital ratio of 10.4% at end-September 2013; and (3) stable asset quality, mainly attributable to its large retail customers, which accounted for 64% of its total loan portfolio at end-September 2013.
The ratings do not incorporate any uplift for systemic support because Mongolia's sovereign rating is also B1. However, we believe that there is a high probability that the bank would receive support, in case of need, due to its importance to the domestic economy.
XacBank
Moody's has affirmed XacBank's B1 local currency deposit ratings, and its bca remains at b1. The b1 reflects its (1) growing franchise and well-established expertise in micro-finance; (2) solid capitalization after a series of capital injections; and (3) conservative risk positioning, given its low credit concentration risk.
The bank's local currency deposit rating does not incorporate uplift for systemic support because the sovereign rating for the Mongolian government is the same as the bank's standalone rating of B1. However, we believe that there is a high probability that the bank will receive support, in case of need, because of its importance to the domestic economy.
In the absence of any improvement in the operating environment, a return to a stable rating outlooks at any of the three banks would require substantially reduced levels of borrower concentration, as well as the achievement of substantially above-average profitability, capital adequacy and liquidity.
What Could Change the Rating - Up
Given that the B1 ratings assigned to the three banks are the same as the sovereign rating, an upgrade of their ratings is unlikely.
However, upward pressure on the bca at TDBM could occur if it substantially reduces its borrower concentration and exposure to risky sectors.
What Could Change the Rating - Down
The following factors could exert negative pressure on the three banks' ratings: (1) corporate governance-related problems that cause a loss of depositor confidence, therefore increasing the threat of deposit flight; (2) a significant deterioration in asset quality; for example new NPLs to gross loans exceed 4.0%; (3) a rise in concentration, or a rise in exposures to risky sectors, in particular construction; (4) Tier 1 falls below 9%; or (5) a significant deterioration in profitability, such that their net income is less than 1.4% of their average risk weighted assets.
AFFIRMED RATINGS OF THE THREE BANKS ARE AS FOLLOWS:
Trade Development Bank of Mongolia -- Bank Financial Strength of E+; local currency bank deposits rating of B1; Issuer rating of B1; foreign currency long-term senior unsecured debt / subordinate debt of B1/B2; and foreign currency long-term senior unsecured MTN/subordinate MTN of (P)B1/(P)B2; foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposits rating of NP; local currency/ foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.
Khan Bank -- Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; and local currency/ foreign currency long-term senior unsecured MTN/ Subordinate MTN of (P)B1/(P)B2; foreign currency bank deposits rating of B2; and local currency/ foreign currency short-term deposits rating of NP.
XacBank -- Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; and foreign currency long-term senior unsecured MTN of (P)B1; foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposit rating of NP; local currency/ foreign currency short-term issuer rating of NP; and Euro MTN program of (P)NP.
The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Trade and Development Bank of Mongolia LLC, based in Ulaanbaatar, reported total assets of MNT4.2 trillion (US$2.6 billion) as of end-September 2013.
Khan Bank LLC, based in Ulaanbaatar, reported total assets of MNT4.2 trillion (US$2.6 billion) as of end-September 2013
XacBank LLC, headquartered in Ulaanbaatar, reported total assets of MNT1,573 billion (approximately US$950.2 million) as of end-September 2013.
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Munkhdul Badral Bontoi
Founder & CEO
Email: mogi@covermongolia.mn
Mobile: +976 9999 6779
Skype: mogibb
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