Moody`s first report on Mongolia`s banking sector

BANKING
APRIL 11, 2013
BANKING SYSTEM
OUTLOOK
SUMMARY OPINION
1
MONGOLIAN BANKS RATED BY MOODY’S 3
KEY DRIVERS OF OUR OUTLOOK
4
Strengths
4
Weaknesses
4
OPERATING ENVIRONMENT
4
Economic Environment
4
Competitive Environment
6
ASSET QUALITY AND CAPITAL
7
Asset Quality
7
Capital
9
FUNDING AND LIQUIDITY
11
PROFITABILITY AND EFFICIENCY
12
SYSTEMIC SUPPORT
13
APPENDICES
14
Appendix 1: Sovereign Credit Opinion
14
Appendix 2: Overview of banking system
outlooks
17
Appendix 3: Global Comparison Charts 18
Appendix 4: BFSR / BCA Mapping Table 21
Analyst Contacts:
+852.3551.3077
Hyun Hee Park
+852.3758.1514
Analyst
[email protected]
Stephen Long
+852.3758.1306
Managing Director - Financial Institutions
[email protected]
1
Our outlook for Mongolia’s banking system is negative. This outlook expresses our expectations
for the fundamental credit conditions in this system over the next 12-18 months.
Summary Opinion
Table of Contents:
HONG KONG
Mongolia
Our outlook for Mongolia’s banking system is negative, reflecting the challenges banks face
in managing what will likely be a period of rapid loan growth in an economy that is
increasingly exposed to commodity-driven boom-bust cycles. Further underpinning our
negative banking system outlook are structural features, such as high loan concentrations,
weak risk-monitoring systems, and the developing nature of the regulatory framework.
Mining and government spending have become the two dominant sources of economic
growth behind the current double-digit growth rates for gross domestic product (GDP) and
loans. These concentrated growth drivers raise concerns over overheating and undermine the
banks’ ability to diversify their loan portfolios. Although current inflation has declined from
the high levels of 2012, it still poses a risk that could hurt confidence in the banking system.
Our analysis also considers the banks’ limited capital resources which provide only a weak
buffer to absorb losses in a downside scenario. Under our central scenario, limited capital will
put a strain on banks’ ability to maintain their current high loan growth.
The negative banking system outlook contrasts with the stable rating outlooks for the four
rated Mongolian banks .These stable bank rating outlooks reflect the view that the current
levels of B1 for all four rated banks already incorporate substantial downside risks.
Nonetheless, we believe that, on balance, negative rating actions are more likely than positive
actions over the next 12-18 months. The stable outlook on Mongolia’s B1 government bond
rating also reflects the risks highlighted in this report, but balanced by improved government
finances and foreign exchange reserves.
Operating environment. Our baseline scenario assumes GDP growth of around 12% in
2013,1 up from 10% in the first nine months of 2012, as Mongolia’s two main mines, Oyu
Tolgoi and Tavan Tolgoi, enter production. Inflation declined to 11.3% year-on-year in
February 2013, well below the peak of 34% seen in August 2008, though still above the
official target of 8%. The central bank has eased its monetary policies and has indicated
further loosening. We also expect expansionary fiscal policies. Under this central scenario,
loan growth will likely rebound to 30%-40% in 2013, up from around 24% in 2012. Such
high growth will test the banks’ ability to control risks, build capital and maintain liquidity.
Moody’s Asia-Pacific 2013 Sovereign Outlook: Resilient to Global Headwinds, 11 January 2013
BANKING
Asset quality and capital. In our view, current low reported non-performing loan (NPL) ratios largely
reflect recent double-digit loan growth which inflates this ratio’s denominator. We expect these ratios
to rise as these new loans season, especially in the fast-growing mortgage and mining-related segments.
Mongolian banks’ loan portfolios continue to exhibit high concentration risks, high inter-related
lending, and under-provisioning, which all add to our asset quality concerns. While the banks exhibit
headline capital ratios that compare well with other systems in Asia, we assess these levels to be weak
relative to the high pace of asset growth and the asset quality challenges apparent. Our analysis
indicates that most rated banks will need to raise capital in the coming 1-3 years.
Funding and liquidity. We expect that funding and liquidity conditions for the banks will remain
tight despite some benefit from further monetary easing. The central bank, the Bank of Mongolia
(BOM), has hinted at further cuts to both its policy rate and to the minimum reserve requirement for
banks. Such cuts will help ease, but will not eliminate, liquidity tensions in this system which saw its
overall loan-to-deposit ratio (LDR) rise to 89.5% at end-September 2012, from 65.7% at end-2010.
The key driver of underlying liquidity pressures is the very high pace of loan growth.
Profitability and efficiency. We expect profitability to stabilize in 2013 after a modest decline in 2012,
based on our assumption that the period will continue to see double-digit loan growth and a slight
widening in margins. Margins will initially benefit from further rate cuts. We expect, however, that
these top-line gains will be offset by rising operating costs in a high-inflation environment, and by
rising credit costs as the banks’ loan books season.
Systemic support. We do not incorporate any systemic support in our ratings for Mongolian banks,
because we do not consider Mongolia a high-support country. This view is consistent with the
resolution of Zoos Bank and Anod Bank in 2009. In both cases, while the government protected
depositors with blanket deposit guarantees, it also opted to liquidate the banks.
EXHIBIT 1
Overview
Key Credit Drivers
Operating Environment
APRIL 11, 2013
Stable
Asset Quality and Capital
Negative
Funding and Liquidity
Negative
Profitability and Efficiency
Stable
Systemic Support
Stable
Banking System Outlook
2
Assessment (Negative/Positive/Stable)
Negative
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Banking System Outlook Definition
Banking system outlooks represent our forward-looking assessment of fundamental credit conditions
that will affect the creditworthiness of banks in a given system over the next 12-18 months. As such,
banking system outlooks provide our view of how the operating environment for banks, including
macroeconomic, competitive and regulatory trends, will affect asset quality, capital, funding, liquidity
and profitability. Banking system outlooks also consider our forward-looking view of the systemic
support environment for bank creditors.
Since banking system outlooks represent our forward-looking view on credit conditions that factor
into our bank ratings, a negative (positive) outlook suggests that negative (positive) rating actions are
more likely on average.
Mongolian Banks Rated by Moody’s
»
We rate the four largest banks in Mongolia which has a total of 14 banks. The rated banks held a
combined 77.7% of total system loans and 77.6% of total system deposits as of September 2012
(Exhibit 2). We also rate the Development Bank of Mongolia (B1 stable), a government-related
issuer.
»
The four rated commercial banks all have a standalone baseline credit assessment (BCA) of b1.
They also all have local currency deposit ratings of B1 and stable rating outlooks (Exhibit 2).
EXHIBIT 2
Rated Banks in Mongolia
Long-Term Bank
Domestic Deposit Rating
Market Share (Local Currency)
(Deposits, in %) and Outlook
Long-term Bank
Issuer Rating
(Foreign Currency)
and Outlook
Standalone Credit
Strength(1) and
Outlook
Total Assets
(in MNT million)
Domestic
Market Share
(Loans, in %)
Trade and Development
Bank of Mongolia
2,698,878
22.9%
20.3%
B1 / Stable
B1 / Stable
E+ / b1 / Stable
+0
Khan Bank
2,456,862
24.9%
25.2%
B1 / Stable
B1 / Stable
E+ / b1 / Stable
+0
Golomt Bank
2,312,273
21.0%
25.4%
B1 / Stable
B1 / Stable
E+ / b1 / Stable
+0
B1 / Stable
B1 / Stable
E+ / b1 / Stable
+0
Name
XacBank
Total
939,140
9.0%
6.7%
8,407,154
77.7%
77.6%
Notches of Uplift
Reflecting External
Support
Notes:
(1) The table shows the banks’ standalone credit strengths as indicated by our bank financial strength ratings (BFSR) on a scale from A to E, the corresponding trend, and the standalone BFSR
mapped to our long-term scale (in small letters). A bank’s standalone credit strength reflects its creditworthiness without considering support. The long-term bank deposit ratings reflect a
bank’s standalone credit strength and support considerations. For more detail, see Moody’s banking methodology webpage (follow hyperlink).
(2) Data are as of September 2012, which is the latest available public data for the banks.
Source: Banks’ financial statements, Bank of Mongolia, Moody’s Investors Service
3
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Key Drivers of Our Outlook
Strengths
»
Fast-growing economy. Mongolia has enjoyed strong growth, largely owing to its investments in
two large mines. As these mines start production in 2013, they will generate income that will fuel
the next round of economic expansion. Accordingly, the banks have ample opportunities to grow
their assets and earnings.
»
Young demographics. An average age range of 20-24 years means that the economy can look
forward to strong growth in its working-age population.
Weaknesses
»
Still-developing supervision and regulations have contributed to banks being exposed to high
borrower and industry concentration risk and weak governance.
»
High cross-ownership linkages among banks, and between banks and industrial companies
result in related-partly lending, both directly and indirectly, and increase the risks of spillovers.
»
Weak legal framework. Lenders face challenges accessing collateral. Although a registry exists for
lenders to record claims on property, pursuing claims through the courts can be protracted owing
to debtor challenges and the weakness of the legal system.
»
Capital and liquidity under pressure because of rapid loan growth. Credit growth as high as 73%
in 2011 means that general asset-side challenges are apparent on the banks’ balance sheets2.
Banking system assets – as a share of GDP – rose to an estimated 78% at end-2012, from 55.7%
at end-2008, as a result of the 73% growth in credit in 2011.
»
Unhedged borrowers expose system to foreign-exchange risks. Approximately 30% of the
system’s loans and deposits are US dollar-denominated, exposing the banks to losses on foreign
currency loans to unhedged borrowers, if Mongolia’s currency depreciated.
Operating Environment
Economy seen to maintain double-digit growth, but faces risks from overheating and volatile external demand for
Mongolia’s mineral exports.
Economic Environment
»
Our baseline scenario assumes GDP growth of around 12% in 2013.3 GDP grew 10% year-onyear in the first nine months of 2012, and 17% in 2011. Mineral exports, mostly coking coal and
copper, accounted for 91% of Mongolia’s total exports in 2012.
»
The following will be the main drivers of economic growth in 2013:
–
The start of production at the Oyu Tolgoi mine and expansion of the Tavan Tolgoi mine. 4
According to the International Monetary Fund (IMF), export earnings from these mines
2
Consolidated Balance Sheet of Banks, Bank of Mongolia, December 2011
3
Moody’s: Asia-Pacific 2013 Sovereign Outlook: Resilient to Global Headwinds, published on 11 January 2013.
4
The Oyu Tolgoi copper mine in the Gobi Desert is the world’s largest underdeveloped copper-gold mine, while Tavan Tolgoi – which is in southern Mongolia and close
to China -- is one of the world’s largest untapped coal deposits.
4
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
could total $2 billion in 2013, or one-fifth of the country’s 2012 nominal GDP projection5.
While we expect copper prices in 2013 to trend below 2012, they will likely remain at a level
that will support Mongolia’s economy.6
»
–
Large infrastructure investments by the government and the Development Bank of
Mongolia (DBM). The investments include transportation and utility projects, urban
housing and industrialization. Expenditure by DBM is expected to total $1.6 billion in 2013.
–
Monetary easing. The BOM shifted to an easing stance in 2013 for the first time since 2009
after determining that the outlook for inflation was “consistent with its target.” It cut its
policy rate by a cumulative 175 basis points in January and April to the current level of
11.5%.
–
Housing construction. The government is trying to promote home ownership. Its “100,000
Homes” project, unveiled in 2011, includes preferential mortgages rates and subsidies and a
plan to build 100,000 homes which would – based on current production volumes – take 10
years.
The following are downside risks:
–
Overheating. The risk of overheating has receded as a result of the policy tightening evident
in 2012, but remains a concern, given our growth assumptions. In particular, despite the
implementation of the 2010 Fiscal Stability Law (FSL) in 2013, the government may
continue its expansionary fiscal policy by running capital spending off-budget, through the
DBM, or under build-transfer arrangements, thereby side-stepping the FSL’s limits on the
country’s structural deficit or expenditure growth. The potential rapid increase in home
construction could also distort supply and demand in the housing market.
–
Inflation. The latest headline inflation of around 14% for 2012 compares with the BOM’s
target of 8% for 2013. The BOM has shifted to an easing stance, due to its confidence that
inflation will continue to trend down from its peak of 34% in August 2008, but the risk of a
rebound is clearly present.
–
External demand shock. With its two new mines, the economy is increasingly exposed to the
commodity cycle in general, and to commodity demand from China in particular. Of its total
exports in 2012, some 91% were mineral exports of mostly coking coal and copper, of which,
93% went to China.7 This lack of diversification exposes the economy to downturns in either
China or the global environment.
–
Pressure on short-term external position. We expect the pipeline of public infrastructure
projects to add to the government’s borrowing needs. This contrasts with the mining sector
investments in recent years that have largely been Foreign Direct Investment (FDI)-funded,
and could subject the economy to additional short-term payment pressure. We note in
particular that a substantial portion of the country’s coming mining income will be diverted
to repay investment costs, and thus may not be available for covering the government’s new
spending plans.
5
IMF: Staff Report for the 2012 Article IV Consultation and Third Post-Program Monitoring, published in November 2012.
6
See Moody’s Industry Outlook: Base Metals Industry Faces Challenging Road in 2013, published on 13 December 2012, where we state: “Copper remains the bestpositioned of the base metals over the medium-to long-term, based on its favorable supply and demand characteristics, the declining grades and recoveries, and absence
of new greenfield developments in more politically stable countries.”
7
IMF: Mongolia Balance of Payment, 2012 Article IV Consultation and Third Post-Program Monitoring, published in November 2012.
5
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Credit growth to rebound after recent slowdown. We anticipate loan growth of 30%-40% in
2013, versus 24% in 2012, supported by a rebound in headline growth and accommodative fiscal
and monetary policies. The banks are likely to face the strongest growth in demand for credit from
the construction and mining sectors.
Competitive Environment
»
Top five banks to remain dominant. As Exhibit 3 shows, the five largest banks – Khan, TDB,
Golomt, XacBank, and Savings8 – commanded 84.8% of loans as of September 2012. We expect
their market positions to remain strong in the coming 12-18 months. Of the five large banks,
TDB, the second-largest player, could see the fastest rate of asset growth, after it tapped the capital
markets with a $300 million bond issuance in 2012.
»
Consolidation may occur among the smaller banks, as some may face difficulties in meeting the
minimum capital ratio targets set by the BOM.
EXHIBIT 3
Distribution of Loan Market Share, as of September 2012
Khan
Savings
Chinggis Khan
Transport Development bank
TDB
Ulaanbaatar City
Capitron
Credit
State
3%
Capital
3%
Golomt
Capital
Erel
Zoos (failed bank)
XacBank
State
National Investment Bank
Anod (failed bank)
Khan
25%
Ulaanbaatar City
5%
Savings
7%
XacBank
9%
Golomt
21%
TDB
23%
Source: Bank of Mongolia
»
8
6
Mortgage business to become a key growth focus. Mortgages accounted for 11.5% of total loans
as of end-September 2012 (Exhibit 4 below), but could grow in importance as incentives under
the “100,000 Homes” program boost demand. However, the role of the Mongolia Housing
Finance Corporation (MHFC) in channeling related credits is unclear. Currently, the MHFC
provides subsidized loans to first-time home buyers, but the scale of its lending is limited.
These banks are classified by the regulator as systemically important banks, or SIBs.
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Asset Quality and Capital
Our negative assessment of asset quality and capital reflects the rising risks from cyclical and structural factors.
These risks are important factors underpinning our negative banking system outlook.
Asset Quality
»
Banks to see weaker asset quality following strong lending. We believe the strong spurt of
unseasoned loans originating in 2011 and 2012 occurred in an underwriting environment that
was more relaxed compared with that of 2008 and 2009, when banks were more cautious owing
to the global crisis. As a result, the NPL ratio of 4.5% as of September 2012 likely understates the
true extent of problem assets in the banks’ loan portfolios, and could increase in the coming 12-18
months. As our earlier assessment suggests, this cyclical risk is exacerbated by the boom/bust
commodity-driven operating environment.
»
Supervision, regulation and transparency issues also weigh on our asset quality assessment.
Mongolian banks have not adopted a forward-looking approach in their provisioning rules – a
practice common for other Asian banks – and may be under-provisioned. Transparency is also an
issue, as the BOM does not publish data on loan-loss reserves. Consequently, NPL coverage levels
are difficult to estimate.
»
Concentration risks are increasing. The economy’s rising dependence on mining-related sectors
also contributes to high and increasing concentration risks. (Mining-related exposures include
ancillary industries and are much larger than the 12.4% of total loans classified as direct mining
exposures in Exhibit 4 below.)
EXHIBIT 4
Loan Book Composition as of September 2012
Mortgage
11.5%
Mining
12.4%
Wholesale and Retail Trade
11.8%
Loans to Individuals
32.8%
Construction
10.2%
Manufacturing
9.7%
Others
5.9%
Financial and Insurance
0.6%
Real Estate
1.2%
Agriculture
1.6%
Transportation
2.2%
Source: Bank of Mongolia Loan Report
Note: Loans to Individuals include small business loans and personal loans.
»
Specific areas of asset quality concerns include:
–
7
APRIL 11, 2013
Mining – Nominal NPLs in the mining sector have risen, despite a fall in the overall NPL
ratio (Exhibits 5 and 6). The risks that could heighten credit stress in this sector are a fall in
global commodity demand, especially from China, and a delay in the government’s
infrastructural spending pipeline. The risk of volatile demand from China is highlighted by
recent trade numbers which indicate a sharp 27% year-on-year fall in shipments in January-
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
February 20139. A sustained decline would adversely affect the cash flows of companies and
undermine their credit positions.
–
Housing-related sectors such as construction, real estate and mortgage
»
Construction companies. Despite the onset of a strong housing boom, the construction
sector is under pressure from capacity constraints, with labor shortages and increasing
input costs threatening to narrow the industry’s margins.10
»
Mortgages. Rapid mortgage market growth increases credit risk pressure on households.
Household indebtedness has risen in recent years. The household debt-to-income 11 ratio
of 50%-70% is high in historical terms. This has been driven by an almost four-fold
increase in total mortgages outstanding between 2009 and 2012 on the back, in turn, of
strong property price appreciation. Increasing leverage exposes households to potential
setbacks in the economy and property market. Nonetheless, the banks’ mortgage
portfolios are buffered against the direct impact of falling house prices by their
comparatively low loan-to-value ratios, which averaged 56.4% in 201212.
EXHIBIT 5
NPLs in Mining, Construction, Transportation
and Real Estate
2008
2009
2010
2011
3Q 2012
EXHIBIT 6
NPL Ratio by Industries
Mining
Construction
Real Estate
Transportation
Total NPL ratio
30.0%
120
25.0%
MNT Billions
100
20.0%
80
15.0%
60
10.0%
40
5.0%
20
0.0%
2008
2009
Source: Bank of Mongolia
Mining
Construction Transportation
2010
2011
3Q 2012
Real Estate
Source: Bank of Mongolia
–
Unhedged foreign-currency borrowers expose system to foreign exchange-induced credit
risks. Approximately 30% of system deposits and loans are USD-denominated (Exhibit 7),
which raises the risks that some foreign-currency borrowers, in particular retail borrowers,
may suffer repayment pressure if the local currency depreciates.13
9
Imports of almost all major commodities fell significantly in Jan-Feb 2013. The value of unwrought copper and copper products fell by 27.2% from a year ago. The fall
of major commodity imports suggest that China’s economic recovery remains weak.
10
Mongolia Quarterly Economic Update, World Bank, published in October 2012.
11
Net-of-tax payment-to income ratio; Housing Finance Technical Note, World Bank, published in June 2012.
12
Data from the Mongolia Mortgage Corporation.
13
According to interviews with the four banks, they tend to extend loans in foreign currency to borrowers with foreign-currency earnings and/or foreign-currency working
capital requirements. However, in practice, the banks cannot check whether every obligor with foreign currency loans has cash flows in foreign currency, especially in the
case of individual borrowers.
8
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
EXHIBIT 7
Deposit and Lending Dollarization (Foreign-Currency Deposits as a % of Total Deposits)
Total Deposits (MNT bn)
Total Loans (MNT bn)
FC Deposit to Total Deposits (%)
FC Loans to Total Loans (%)
10,000.0
60.0%
9,000.0
50.0%
8,000.0
7,000.0
40.0%
6,000.0
5,000.0
30.0%
4,000.0
20.0%
3,000.0
2,000.0
10.0%
1,000.0
0.0%
2005
2006
2007
2008
2009
2010
2011
3Q2012
Source: Bank of Mongolia
FC: Foreign currency
Capital
14
9
»
Our negative assessment of capital reflects our expectation that capital will be under pressure to
support loan growth and rising credit costs. We expect loan growth to measure 30%-40% for
2013 versus 24% in 2012. This pace, if attained, will likely offset even the strong internal capital
generated by reported earnings in 2012. Despite an average 16.8% return on equity before tax at
end-September 2012, the banks will need additional capital from external sources in the coming
1-3 years.
»
Headline ratios likely overstate the banks’ capital positions. The system’s Tier 1 ratio and capital
adequacy ratio were 11.3% and 15.1% as of September 2012, with the five largest banks well
above the new capital requirements.14 However, we do not view this situation as indicating strong,
resilient capital levels because:
–
The capital positions of many Mongolian banks may be overstated because of: 1) likely
under-provisioning due to inadequate classification of impaired loans; and 2) the low risk
weights assigned to their calculation of interbank exposures.
–
To sustain rapid loan growth and cushion themselves against the volatility inherent in
Mongolia’s frontier economy, we consider that Tier 1 ratios above 10% are prudent for
Mongolian banks.
–
Moreover, as Exhibit 8 shows, Mongolian banks’ capitalization levels between 2008 and 2012
were only average relative to peer systems with similar high growth patterns.
The five systemically important banks (SIBs), Khan, TDB, Golomt, XacBank, and Savings, were required to raise their Tier 1 ratios and CAR to 8% and 13%,
respectively, by December 2012 and to 9% and 14% by June 2013.
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
EXHIBIT 8
Tier 1 Capital Ratio for Moody’s Rated Banks, by System
2008 YE
2009 YE
2010 YE
2011 YE
2012 H1
2012 Q3
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
INDONESIA
KAZAKHSTAN
MALAYSIA
MONGOLIA
PHILIPPINES
Note: Averages for rated banks; data as of year-end. Source: Moody’s Banking Financial Metrics
Source: Bank of Mongolia, Moody’s Investors Service
»
SRI LANKA
THAILAND
VIETNAM
Stress test outcomes underscore the fragility of the banking sector and the need to strengthen
capital. In our scenario analyses (Exhibit 9), the estimated Tier 1 ratio fell by as much as 3.7
percentage points under an adverse scenario where we assumed a 30% increase in NPLs from
2011. In our highly adverse scenario, which calibrates the extremely stressed period evident during
the 2008-09 financial crisis, the system reports net losses, and the Tier 1 ratio would drop by
seven percentage points. These results support our view that the banks require Tier 1 ratios well
above 10% in order to secure adequate buffers for frontier-market risks and to sustain high loan
growth.
EXHIBIT 9
Stress Test Assumptions
Loan Type (MNT Billion)
Adverse Scenario
Actual NPL
Portfolio on Sep 30, Probability
Weight
2012* of Default
Agriculture
LossGivenDefault
Highly Adverse Scenario
Expected Probability
Loss of Default
LossGivenDefault
Expected
Loss
108.8
6.7%
37%
40%
15%
50%
50%
25%
Mining and Quarrying
847.3
12.3%
20%
60%
12%
28%
80%
22%
Manufacturing
664.0
6.0%
9%
50%
4%
20%
70%
14%
Construction
692.3
5.2%
10%
50%
5%
30%
70%
21%
Wholesale and Retail Trade
801.7
4.1%
7%
50%
3%
16%
70%
11%
Transportation and Storage
152.4
8.1%
14%
55%
7%
28%
80%
22%
Financial and Insurance
42.0
3.3%
3%
50%
1%
8%
70%
6%
Real Estate
82.4
12.9%
27%
40%
11%
30%
60%
18%
404.8
3.9%
6%
50%
3%
13%
60%
8%
2,236.4
1.5%
4%
40%
2%
10%
50%
5%
787.2
0.7%
3%
40%
1%
9%
50%
5%
4.5%
15
46.6%
4.2%
17.3%
61.6%
11.4%
Other Corporate Loans
Individual Loans
Mortgages
Weighted Average
100.0%
8.4%
Source: Bank of Mongolia, Moody’s Investors Service
15
10
NPL projections are based on an assumption of an absence of NPL disposals in both stress scenarios.
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Funding and Liquidity
Funding and liquidity conditions for the banks will remain tight despite some benefit from current monetary
easing.
»
The central bank’s policy easing will improve the banks’ liquidity. The large banks will benefit
most from monetary policy easing (specifically, as stated, we expect further cuts in central bank
rates and minimum reserve requirements), owing to their stronger deposit franchises.
»
Nonetheless, the relief provided by monetary easing has to be considered in the context of
overall tight liquidity and funding pressures. Credit growth as high as 73% in 2011 and a
deceleration in deposit inflows have challenged liquidity positions, as reflected in the rise in
system-wide loan-to-deposit ratios (LDR) to 89.5% at end-September 2012 from 65.7% at end2010 (Exhibit 10).
»
Two other developments have further exacerbated the pressure on liquidity, namely the central
bank’s policy tightening during 2011-12 and the increase in the regulatory liquidity ratio to 25%
in January 2012 from 18%.
EXHIBIT 10
Loans, Deposits, and Loan-To-Deposit Ratio
Total Deposits (MNT bn)
Total Loans (MNT bn)
Loan-to-Deposit Ratio
99.1%
18,000
89.5%
78.4%
75.3%
15,000
66.1%
67.2%
80%
65.7%
12,000
6,819
5,598
9,000
3,000
0
798
1,207
1,131
1,684
2005
2006
1,895
2,480
2,533
2,516
2,503
3,231
2007
2008
2009
4,914
60%
40%
3,228
6,000
100%
81.3%
6,881
7,617
2011
3Q 2012
20%
0%
2010
Source: Bank of Mongolia
»
11
APRIL 11, 2013
Foreign-currency liquidity conditions eased in 2012, owing to the strong foreign direct investment
inflows (Exhibit 11, green bars). By contrast, domestic-currency liquidity tightened because of the
government’s monetary tightening stance at that time (Exhibit 11, orange bars).
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
EXHIBIT 11
Foreign -Currency Liquidity and Domestic-Currency Liquidity
Foreign Currency Loan-to-Deposit ratio (%)
Domestic Currency Loan-to-Deposit ratio (%)
120.0%
101% 98%
100.0%
80.0%
60.0%
88%
84%
76%
87%
76%
75%
71%
59%
91%
96%
84%
63%
67%
56%
40.0%
20.0%
0.0%
2005
2006
2007
2008
2009
2010
2011
3Q2012
Source: Bank of Mongolia
»
Increased dependency on wholesale funding. The banks have managed their liquidity pressures
by: (1) raising deposit rates to attract additional funds; and by (2) raising wholesale funding. The
four banks we rate have paid higher deposit rates to obtain additional domestic currency liquidity,
and raised funds through either syndicated loans, private subordinated bond offerings or public
bond offerings in foreign currency.
»
Mortgage funding mismatch is a concern. The banks are challenged in asset and liability
management, as they grow their mortgage businesses. Fixed-rate long-term mortgages, with
maturities of 5-15 years, are common even though banks started to introduce variable-rate longterm mortgages in 2011. But, according to the BOM, banks finance 98% of such lending from
short-term deposits and bank capital. This potential funding mismatch is more pronounced now
than in previous years, and is likely to continue, given the strong growth in mortgages. While
some relief is provided by the Mongolia Mortgage Corporation, which purchases mortgage loans
from originating banks, such support accounted for less than 1% of total mortgages in 2011.
Mongolia’s undeveloped asset backed securities (ABS) market is unlikely to provide a source of
stable long-term funding for mortgages.
Profitability and Efficiency
Profitability is likely to be stable on rapid loan growth, despite rising costs.
12
APRIL 11, 2013
»
Profitability to remain stable. We expect pre-provision income to be driven by double-digit loan
growth and improving lending margins, the latter a result of the banks re-pricing liabilities
downwards faster than loans in a falling interest rate environment.
»
This development, in turn, will be partly offset by rising operating costs from: 1) continued efforts
by the banks to retain domestic currency deposits in order to maintain liquidity; 2) ongoing wage
pressures as a result of inflation; and 3) ongoing capital spending for branch expansions and
technology upgrades. The first two factors were the main reasons the banks reported a decline in
returns in 2012, with a return on assets of 2.5% in 3Q 2012 versus 2.9% in 2011, and a return on
equity of 16.8% in 3Q 2012 versus 18.6% in 2011. Going forward, we also expect rising credit
costs, as newly booked loans season (Exhibit 12 and 13).
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
EXHIBIT 12
Profitability(ROE) Trend
(2005 – September 2012)
EXHIBIT 13
Profitability(ROA) Trend
(2005 – September 2012)
Return on assets (before tax) (%)
Return on equity (before tax) (%)
40.0
4.0
20.0
3.0
2.0
0.0
1.0
-20.0
(%)
0.0
-40.0
(%)
-60.0
-1.0
-2.0
-3.0
-80.0
-4.0
-100.0
-5.0
-120.0
-6.0
-140.0
2005 2006 2007 2008 2009 2010 2011 Sep 12
Source: Bank of Mongolia
-7.0
2005 2006 2007 2008 2009 2010 2011 Sep 12
Source: Bank of Mongolia
Systemic Support
We believe there is a low probability that the government would extend support to bank creditors.
13
APRIL 11, 2013
»
We do not assess Mongolia to be a high support system and, as such, have not incorporated
systemic support in our ratings.
»
The B1 deposit ratings of the four banks we rate are at the same level as their b1 standalone BCAs.
Nonetheless, we believe it is reasonable to expect that the government would have incentives to
support the four banks to some extent, if necessary, because of their systemic importance to the
economy.
»
Our view on government support is consistent with the resolution of Zoos Bank and Anod Bank
in 2009. In both cases, while the government protected depositors with blanket deposit
guarantees, it also opted to liquidate the banks.
»
The two banks were taken into receivership by the BOM. Eventually, the government transferred
the good assets and accounts of Zoos Bank to the newly established State Bank. It dissolved Anod
Bank and transferred all its accounts into Mongolia’s fifth-largest bank by assets, Savings Bank.
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Appendices
Appendix 1: Sovereign Credit Opinion
Credit Strengths
Support factors for Mongolia include:
»
Early progress in developing abundant mineral resources
»
A fiscal stability law
»
Access to concessional bilateral and multilateral external financing
Credit Challenges
Concerns are focused in the following areas:
»
Fiscal and BOP dependence on cyclical mining revenues
»
A narrow economy vulnerable to commodity price shocks
»
Livestock sector vulnerable to harsh weather cycles
»
Low per-capita income and high social welfare demands
»
Unpredictability of the investment regime
Rating Rationale
Mongolia’s B1 government bond rating is consistent with our methodology scores of low economic
and institutional strengths, moderate government financial strength and high event risk. Long-term
economic prospects are potentially bright, but the near-term fiscal outlook is clouded by spending
pressures.
Mongolia’s rating has been constrained by susceptibility to destabilizing boom-bust cycles stemming
from (1) an undiversified, dual mining/agricultural economy subject to mineral price vulnerability on
one front and occasional extremely severe winters on the other, and (2) pro-cyclical monetary and
fiscal policies.
Mongolia pulled through the 2008-2009 boom-bust cycle with the assistance of an 18-month IMF
Stand-by-Arrangement, successfully completed in the fall of 2010. Under the program, inflation was
reined in and international reserves were rebuilt. The health of government finances over the long term
will in large part depend on the implementation of the country’s fiscal stability law, key measures of
which come into play in 2013-2014.
Predictability with foreign investment agreements would ensure benefits to Mongolia from the
country’s substantial mineral endowments. After many years of delay, Mongolia’s parliament approved
the government’s agreement with Ivanhoe Mines and Rio Tinto in October 2009 to develop the very
rich Oyu Tolgoi copper and gold deposit; although the terms of the project have recently been under
dispute. The exploitation of this and other large mineral deposits, such as high-grade coking coal in
Tavan Tolgoi will be transformational for the Mongolian economy, but the management of the
windfall will pose considerable challenges to the authorities.
14
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Rating Outlook
The change in the rating outlook to stable from negative in October 2009 was prompted by a shoring
up of official foreign exchange reserve holdings, the containment of the burgeoning budget deficit and
the elimination of nearly runaway inflation. Also, the enactment into law of a fiscal responsibility rule
holds promise for avoiding future boom-bust cycles in government finances. However, spending and
overheating pressures may set in ahead of the full implementation of the fiscal responsibility law in
2013-2014. Ongoing mining disputes are a threat to operations and foreign investment, and any
significant escalation would be credit negative.
What Could Change the Rating - Up
Credit positive events over the rating outlook horizon include the maintenance of price and exchange
rate stability and a further replenishment of official foreign exchange reserves. A track record of
adherence to the fiscal rule would be credit positive. Furthermore, steady mineral resource
development under a stable and predictable investment regime would improve the country’s long-term
fiscal and economic prospects.
What Could Change the Rating - Down
A significant setback in the development of the mining sector. A relapse into economic instability. A
collapse of the newly adopted fiscal policy framework as seen in an inability to maintain budgetary
discipline against rising social welfare demands.
Recent Developments
Preliminary estimates of full year 2012 economic growth show real GDP moderating to 12.3% yearon-year, from a high of 17.3% in 2011. These results are in line with projections made by the IMF
that growth would recede, as prices decline for the Mongolia’s largest commodity exports and growth
slows in China - the country’s main trading partner.
Monetary tightening to curb signs of overheating, combined with the slowing growth in 2012,
contributed to a moderation of CPI inflation from a peak of 17.8% year-on-year in April 2012 to
11.1% in February 2013. Likewise, the growth of bank credit declined throughout the year from highs
of close to 70% year-on-year in early 2012 to average 35% in the first two months of 2013. In this
context, and although inflation had not yet reached the central bank target of under ten percent, the
Bank of Mongolia cut its policy rate to 12.5% from 13.25% in January of this year.
The budget deficit in 2012 widened to an estimated 4.7% of GDP, largely due to revenue shortfalls
from lower than expected earnings from coal and copper exports, as well as elevated public spending.
The execution of the 2013 budget will be closely watched, given that a key requirement of the 2010
Fiscal Stability Law - the limitation of the structural budget deficit to 2% of GDP - comes into effect
this year. However the revenue assumptions appear optimistic, and are premised on : (1) a real GDP
expansion of 18.5% in 2013, and (2) a renegotiation of the Oyu Tolgoi mining agreement. Although
we also forecast real GDP to accelerate in 2013, the authorities’ assumptions are significantly higher
and hence we expect revenues will reflect the somewhat slower expansion. Moreover, these levels of
growth are contingent on the successful operation of the Oyu Tolgoi mine, as commercial shipments
are scheduled to begin in June 2013, but it is still unclear if this timeline will be met.
15
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Oyu Tolgoi mine operator Rio Tinto, and the government are currently engaged in a dispute over
management fees, cost-overruns, and transparency. The government’s effort to claim management of
the mine has mounted since late last year, even while Rio Tinto has been rejecting attempts to alter the
mining agreement. Talks between the mining company and the government began earlier this year and
may continue until June.
Gross international reserves were close to $4.0 billion in February 2012, up from $2.6 billion in
October, as the funds from the $1.5 billion Chinggis bond flowed into Mongolia. Proceeds from the
debut sovereign issuance will go towards financing power plants near the capital city of Ulaanbaatar
and the large mining projects in the South Gobi, as well as other needed infrastructure projects.
16
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Appendix 2: Overview of banking system outlooks
Banking System Outlook Table
As of 14 February 2013
Banking System
Positive
Stable
Argentina
Negative
Negative
Banking System
Positive
Stable
Poland
Australia
Stable
Portugal
Azerbaijan
Stable
Qatar
Negative
Negative
Stable
Bahrain
Negative
Russia
Baltic Countries
Negative
Saudi Arabia
Stable
Belarus
Negative
Singapore
Stable
Belgium
Negative
Slovakia
Bolivia
Stable
Slovenia
Brazil
Stable
South Africa
Bulgaria
Negative
Negative
Negative
Negative
Negative
e
Spain
Negative
Negative
Chile
Stable
Sweden
Stable
China
Stable
Switzerland
Stable
Colombia
Stable
Taiwan
Stable
Negative
Cyprus
Negative
Thailand
Stable
Czech Republic
Negative
Turkey
Stable
Denmark
Negative
Ukraine
Negative
Egypt
Negative
United Arab Emirates
Negative
Finland
Negative
United Kingdom
Negative
France
Negative
United States
Germany
Negative
Uruguay
Stable
Uzbekistan
Stable
Greece
Negative
Hong Kong
Stable
Hungary
Vietnam
Negative
Negative
India
Negative
Indonesia
Stable
Ireland
Negative
Israel
Negative
Italy
Negative
Japan
Stable
Kazakhstan
Negative
Korea
Stable
Kuwait
Stable
Lebanon
Negative
Luxembourg
Negative
Malaysia
Stable
Mexico
Stable
Netherlands
Negative
New Zealand
Stable
Norway
Stable
Oman
Stable
Pakistan
Negative
Negative
Peru
Stable
Philippines
17
Negative
APRIL 11, 2013
Positive
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Appendix 3: Global Comparison Charts
18
APRIL 11, 2013
A
A-
B+
B
B-
C+
C
C-
D+
D
D-
E+
E
Asset-Weighted Average Bank Financial Strength Ratings (as of 9 April 2013)
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
19
APRIL 11, 2013
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Asset-Weighted Average Local Currency Long-Term Bank Deposit Ratings (as of 9 April 2013)
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
20
APRIL 11, 2013
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Asset-Weighted Average Foreign Currency Long-Term Bank Deposit Ratings (as of 9 April 2013)
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Appendix 4: BFSR / BCA Mapping Table
BFSR/Baseline Credit Assessment Mapping
21
APRIL 11, 2013
BFSR
Baseline Credit Assessment (BCA)
A
aaa
A-
aa1
B+
aa2
B
aa3
B-
a1
C+
a2
C
a3
C-
baa1
C-
baa2
D+
baa3
D+
ba1
D
ba2
D-
ba3
E+
b1
E+
b2
E+
b3
E
caa1
E
caa2
E
caa3
BANKING SYSTEM OUTLOOK: MONGOLIA
BANKING
Report Number: 151325
Author
Hyun Hee Park
Production Specialist
Kerstin Thoma
© 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY’S INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT
OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE
SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S
PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES,
CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN
ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED
FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT
NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S
OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT
RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND
CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE,
SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE
SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND
PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL
MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE,
HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND
NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED,
TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN
WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S
PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the
possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS”
without warranty of any kind. MOODY’S adopts all necessary measures so that the information it uses in assigning a credit rating is
of sufficient quality and from sources MOODY’S considers to be reliable including, when appropriate, independent third-party
sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in
the rating process. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in
whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency
within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement,
collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct,
indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if
MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information.
The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained
herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell
or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may
consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS
FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY
MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt
securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have,
prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to
approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and
rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between
entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is
posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and
Shareholder Affiliation Policy.”
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of
MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty
Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within
the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you
nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning
of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of
the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for
retail clients to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other
professional adviser.
22
APRIL 11, 2013
BANKING SYSTEM OUTLOOK: MONGOLIA