03.09.2014 Mongolia banking system outlook: Mongolian banks face cyclical and structural challenges,...

1Mongolia Banking System Outlook, September 2014

Mongolia Banking System OutlookMongolian Banks Face Cyclical and Structural Challenges

SEPTEMBER, 2014Graeme Knowd, Associate Managing Director


Agenda

1. Executive Summary

2. Operating Environment

3. Key Credit Metrics

4. Systemic Support

5. Key Takeaways


Executive Summary1


Mongolian Banks Face Cyclical and Structural Challenges

» Subdued global commodity demand continues to pressure growth outlook.

» Policy-driven credit boom remains key systemic risk.

» Tight funding conditions to persist amidst strong credit growth.

Our negative outlook for Mongolia’s banking system remains unchanged from 2013


Mongolian Banks Rating Universe

Moody’s rates three largest banks in Mongolia that had a combined 56.1% of total system

loans and 61.1% of total system deposits as of December 2013. All banks have:

» Local currency deposit ratings of B2.

» Negative rating outlooks.

Rated Banks in Mongolia

Name

Total Assets

(in MNT million)

Domestic Market Share (Loans, in %)

Domestic Market Share

(Deposits, in %)

Long-Term Bank Deposit Rating

(Local Currency) and

Outlook

Long-term Bank Issuer Rating

(ForeignCurrency) and

Outlook

Standalone Credit

Strength(1)and Outlook

Notches of Uplift Reflecting External

Support

Trade and Development

Bank of Mongolia

4,751,894 23.6% 24.3% B2 / Negative B3 / Negative E+ / b3 /

Negative

+1/+0

Khan Bank 4,800,956 22.8% 29.1% B2 / Negative B2 / Negative E+ / b2 /

Negative

+0/+0

XacBank 1,811,485 9.6% 7.7% B2 / Negative B2 / Negative E+ / b2 /

Negative

+0/+0

Total 11,736,516 56.1% 61.1%

Notes:

Long-Term Bank Deposit Ratings reflect a bank’s standalone credit strength and support considerations. A bank’s standalone credit strength

reflects its creditworthiness without considering support. The table shows banks’ standalone credit strength as indicated by our Bank Financial

Strength Ratings (BFSR) ratings (on a scale from A to E), the corresponding trend, and the standalone BFSR mapped to our long-term scale (in

small letters). For more detail, see Moody’s banking methodology webpage (follow hyperlink).

Data are as of September 2013, which are the latest available public data for the banks.

Source: Banks’ financial statements, Bank of Mongolia, Moody’s Investors Service

http://www.moodys.com/researchandratings/market-segment/financial-institutions/banking/005001000/4294966439 4294965363/4294966848/0/0/-/0/-/-/en/global/rr


Our Assessment on Key Drivers

Key credit drivers Assessment

Operating environment Deteriorating

Asset quality and capital Deteriorating

Funding and liquidity Deteriorating

Profitability and efficiency Deteriorating

Systemic Support Stable

Banking system outlook Negative

We expect key credit metrics to remain negative


Operating Environment2


Operating Environment

» Our baseline scenario assumes GDP growth of around 10% in 2014, moderately lower

than 11.7% in 2013.

» We see the following risks to the banks’ credit environment in 2014:

– Growth adjustment from continued weak commodity prices.

– A policy-driven credit boom, resulted from the significant macroeconomic stimulus .

– Widened external imbalances which could exert further downward pressure on its exchange rate

and foreign reserves.

Rapid credit growth and a volatile economic outlook remain key risks



Growth adjustment from continued weak commodity prices

Coal Price Trend (January 2010 – June 2014)

Source: Bloomberg

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

US

D p

er

ton

ne

Thermal Coal Coking Coal



A policy-driven credit boom, resulting from a significant macroeconomic stimulus

Source: Bank of Mongolia, Moody’s Investors Service

Real GDP Growth and Credit Growth in the Banking System

8.9%-1.3%

6.4%

17.5%

12.3% 11.7% 10.0%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 2011 2012 2013 2014F

Real GDP (% change) Credit Growth (% change)


Operating EnvironmentBanks saw significant changes in their balance sheets, as they are the primary channel of

the Bank of Mongolia’s policy loans

87.6%83.2% 83.7%

75.6% 77.1%83.8%

79.1%74.0%

56.5%

1.3% 0.9% 0.6%6.8% 4.5%

2.2%3.8%

3.6%

22.0%

4.6%7.5% 3.2%

0.5% 1.6%4.7%

8.1%

2.8% 2.9%2.9%

6.6% 7.0%3.3% 3.1%

3.9%4.0%

3.7% 5.5%9.1% 10.1% 10.4% 10.2% 12.1% 13.4% 9.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013

Deposits Credits from Bank of Mongolia Financial Derivatives

Loans from Foreign Banks Money Market Instruments (bonds) Other Liabilities

Source: Bank of Mongolia


Operating EnvironmentWidened external imbalances which could exert further downward pressure on its

exchange rate and foreign reserves

Sharp MNT Depreciation Drop in Net Foreign Direct Investment

and Foreign Reserves

Source: Moody’s Country Statistics

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Ja

n-1

1

Ap

r-11

Ju

l-11

Oct-

11

Ja

n-1

2

Ap

r-1

2

Ju

l-1

2

Oct-

12

Ja

n-1

3

Ap

r-1

3

Ju

l-1

3

Oct-

13

Ja

n-1

4

Ap

r-1

4

Ju

l-1

4

$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5

0%

10%

20%

30%

40%

50%

60%

Bill

ion

s

Official Forex Reserves (USD billion, right Axis)

Net Foreign Direct Investment/GDP (%, left Axis)


Regulatory Environment

» Still-developing supervision, regulations as well as weak corporate governance

– The July 2013 failure of Savings Bank underscores the high cross-ownership linkage between the

banks and industrial companies, which have resulted in related-party lending and which have

increased the risks of spillovers.

» We expect the government’s latest legislation to result in some improvements in the

investment and capital market environments towards the latter part of this outlook:

– A new Foreign Investment Law

– A new Securities Market Law

– The Mongolia Mortgage Corporation (MIK)’s expanding its capacity to purchase mortgage loans.

Regulatory environment will remain challenging for Mongolian banks


Competitive Environment

The five largest banks – Khan, TDBM, Golomt, XacBank, and State Bank – commanded

89.3% of loans as of September 2013. We expect their market positions to remain strong in

the coming 12-18 months

Khan25.9%

TDB23.2%Golomt

20.7%

XacBank10.4%

State9.1%

Ulaanbaatar City5.2%

Capital2.5%

Chinggis Khan1.2%

Capitron1.1% Others

0.7%

Khan TDB Golomt XacBank State

Ulaanbaatar City Capital Chinggis Khan Capitron Others

Source: Banks’ Data


Key Credit Metrics3


Asset Quality

We expect asset quality to be most vulnerable in Mining, Manufacturing, Construction, and

Mortgages

NPLs in

Mining, Manufacturing, Construction, an

d Mortgages

NPL Ratio by Industries


NPL: Non-performing loan

0%

5%

10%

15%

20%

25%

30%

35%

2008 2009 2010 2011 2012 2013 1Q 2014

Mining and quarrying Manufacturing

Construction Mortgage

Total NPL ratio

0

50

100

150

200

250

300

MN

T B

illio

ns

2009 2010 2011 2012 2013 1Q 2014


Asset Quality (continued)

The World Bank estimates that 60% of the policy-related credits have gone into the

construction and mortgage sectors

Loan Book Composition Trend

Source: Bank of Mongolia Loan Report

Note: Loans to Individuals include small business loans and personal loans.

6.9% 6.1% 6.9% 5.7% 7.2% 6.9%

26.1% 31.0% 31.9% 32.1% 30.0% 33.9%

10.7%12.3% 12.1% 11.9% 13.2% 14.5%

8.5%10.3% 11.7% 12.2% 16.0% 16.0%

13.6%9.3% 10.1% 10.7% 13.5% 14.4%

14.0% 12.2% 9.8% 10.3% 9.5% 8.7%12.9% 11.5% 10.9% 11.2% 12.8% 13.5%

2.5% 2.2% 1.8% 1.8% 1.4% 1.5%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 1Q 2014

Others Individual loansFinancial and insurance Transportation and storageWholesale and retail trade Real EstateMortgage ConstructionManufacturing Mining and quarrying


Capital

The banks will remain pressured to maintain sufficient capital to support rapid loan growth

and rising credit costs

Tier 1 Capital Ratio and Capital Adequacy Ratio for the Mongolia Banking System

Note: Averages for rated banks; data as of year-end. Source: Moody’s Banking Financial Metrics

Source: Bank of Mongolia, Moody’s Investors Service

15.8 15.6

11.8

8.7

2.3

11.911.0

11.6 11.3

2.4 2.5

2.2

2.9

3.2

4.43.9

4.5 4.4

18.2 18.1

14.0

11.6

5.5

16.214.9 16.1 15.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2005 2006 2007 2008 2009 2010 2011 2012 Sep-13

Tier 1 Capital Ratio (%) Tier 2 Capital Ratio (%) Total Capital Adequacy Ratio (%)


Funding and Liquidity

Tight funding conditions will persist, given the current strong pace of credit growth and

sluggish foreign capital inflows

Loans, Deposits, and Loan-To-Deposit Ratio


1,207 1,684 2,516 2,503 3,231 4,9146,881 8,148

11,050

7981,131 1,895 2,480 2,400

2,995

5,2076,941

10,71666.1% 67.2%

75.3%

99.1%

74.3%

61.0%

75.7%85.2%

97.0%

0%

20%

40%

60%

80%

100%

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

MN

T B

illio

ns

Total Deposits (MNT Billions) Total Loans (MNT Billions) Loan-to-Deposit Ratio


Profitability

Profitability is likely to decline owing to a decline in net interest margin, rising operating

costs, and rising credit costs

Profitability (ROE) Trend

(2005 – September 2013)

Profitability (ROA) Trend

(2005 – September 2013)


-140

-120

-100

-80

-60

-40

-20

0

20

40

(%)

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

(%)


Systemic Support4


Systemic Support

» In our assessment, Mongolia has a low-support system.

» No uplift has been incorporated in the deposit ratings of Khan Bank and XacBank as

their current BCAs of b2 and deposit ratings of B2 are the same as Mongolia’s sovereign

rating.

» We have incorporated one notch of systemic support to the local currency deposit of

TDBM, which has a BCA of b3.

We expect the Mongolian government to be selective and to restrict its support to

systemically important banks


Key Takeaways5


Our Negative Outlook for Mongolia’s Banking System Remains Unchanged from 2013

» Subdued global commodity demand continues to pressure growth outlook.

» Policy-driven credit boom remains key systemic risk.

» Ongoing pressure on banks to maintain enough capital to support their rapid loan

growth.

» Tight funding conditions will persist amidst strong credit growth.

» Profitability will fall on declining margins and rising costs.


Graeme Knowd

Associate Managing Director - Japan

Corporate & Financial Institutions Group

Associate Managing Director - Korea/Mongolia

Financial Institutions Group

Moody’s Investors Service

Tel. +81.3.5408.4149

[email protected]

mailto:[email protected]




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03.09.2014 Mongolia banking system outlook: Mongolian banks face cyclical and structural challenges,...

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