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Related Issuers
Rating Action:

Moody's assigns Ba3 to XacBank's proposed USD notes

Global Credit Research - 28 Mar 2012

Hong Kong, March 28, 2012 -- Moody's Investors Service has today assigned a Ba3 rating to XacBank's proposed USD senior unsecured notes, which will be drawn from its US$300 million Euro Medium-Term Note Programme. The notes are on review for downgrade following Moody's decision to place the ratings of four Mongolian banks on review for downgrade on 26 March 2012.

The review reflects Moody's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally, which is further discussed in the rating implementation guidance titled "How Sovereign Credit Quality May Affect Other Ratings" published on February 13, 2012.

Moody's anticipates that, in the case of XacBank, the maximum downgrade will be one notch, which would bring the banks' ratings in line with Mongolia's sovereign rating.

RATINGS RATIONALE

The rating assigned to the notes is subject to the receipt of final documentation, the terms and conditions of which are not expected to change in any material way from the draft documents reviewed by Moody's.

"The rating is underpinned by the bank's growing franchise, well-established expertise in microfinance, improved credit quality, and solid capitalization after a series of capital injections. Moreover, the rating receives support from the supportive position of its international shareholders, which have helped with funding and corporate governance, and have endeavored to enhance the level of risk management," says Hyun Hee Park, a Moody's Analyst.

"On the other hand, the rating takes into account the strong geographical concentration of the bank's operations in Mongolia, which -- with its boom-bust cycle -- results in a volatile operating environment. The bank also has a strong reliance on non-deposit funding and is involved in an aggressive expansion program," she adds.

Moody's further notes that its high net interest margin is based on high lending rates, due in turn to well-established customer relationships on the lending side, and despite a low reliance on deposit funding when compared to its domestic peers.

XacBank has maintained capital levels to support asset growth of 74.6% in 2011. It also received a capital injection of MNT36.8 billion from TenGer Financial Group, an immediate parent.

Its Tier 1 capital ratio had improved to over 14% as of December 2011 and the bank expects to maintain at least 10% despite continued aggressive asset growth in 2012. Earlier pressure on asset quality has dissipated somewhat due to Mongolia's improved economic prospects following the recovery in the mining sector in 2010 and 2011.

Given the bank's traditional portfolio in consumer and SME lending, loan concentration risk is much lower than that of its corporate-focused peers. However, as it grows and serves larger business clients over time, rising levels of concentration risk may affect credit quality.

In addition, its high volume of unseasoned loans will over time translate into a greater vulnerability to any economic dislocations.

The bank's other ratings are:

-placed on review for downgrade: Bank Financial Strength of D-; local currency bank deposits rating of Ba3; issuer rating of Ba3; foreign currency long-term senior unsecured debt of Ba3; and foreign currency senior unsecured MTN of (P)Ba3

-Unaffected ratings: 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

Moody's does not intend to assign ratings to individual notes issued under the Programme, with features linked to the performance of another obligor (credit-linked notes), nor does it intend to assign ratings to notes for which the payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event or the performance of an index (non-credit-linked notes).

The only exception will be for notes whose principal and coupon payments are affected by standard sources of variation. For more information, please see Moody's Special Comment, "Moody's Update on Rating Debt Obligations with Variable Promises," June 2009.

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

XacBank LLC is based in Ulaanbaatar. It is a systemically important bank in Mongolia, with consolidated assets of MNT817.5 billion (US$585.5 billion) as of 31 December 2011.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Hyun Hee Park
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns Ba3 to XacBank's proposed USD notes
No Related Data.

 

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