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Rating Action:

Moody's assigns B1 to Trade and Development Bank of Mongolia's proposed USD notes

07 Sep 2012

Hong Kong, September 07, 2012 -- Moody's Investors Service has assigned a B1 rating to Trade and Development Bank of Mongolia (TDB)'s proposed fixed rate US dollar senior unsecured notes, which will be drawn from its US$700 million Euro Medium-Term Note Programme.

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 TDB's good franchise value as one of the largest banks with expertise in corporate banking in Mongolia where it held 22% and 23% of total deposits and loans respectively at end-June 2012, improved asset quality, and good operating efficiency.," says Hyun Hee Park, a Moody's Analyst.

"The rating is supported by the bank's Non-performing Loan (NPL) ratio -- defined as the ratio of loans sub-standard and below -- of 1.3% as of June 2012, which was substantially recovered from 4.1% as of December 2010. However, the rating also considers the bank's concentrated loan portfolio, given that it is one of the biggest lenders to the country's industrial sectors," She adds.

As a result of the high loan growth of 142% in 2011, TDB's Tier 1 and total capital adequacy ratios (CAR) declined to 8.2% and 12.7% at end-2011 from 10.2% and 16.3% at end-2010, respectively. Despite significant loan growth during 1H 2012, its Tier 1 and total CAR improved to 9.1% and 14.5%, respectively, as of June 2012 helped by a capital injection from Goldman Sachs in February 2012. We expect that the bank will continue to need to raise additional Tier 1 core capital over the next few years given the rapid growth of the Mongolian economy and the accompanying expansion of credit.

"The rating also takes into account the strong geographical concentration of the bank's operations in Mongolia. Given the resource-based nature of the economy and the rapid growth of the mining sector, there is the risk of boom-bust cycles, resulting in a volatile operating environment. In this context, TDB's high volume of unseasoned loans creates some vulnerability to any economic dislocations," Park says.

Given the bank's traditional portfolio in corporate lending, loan concentration risk is relatively high. Moody's notes that TDB's exposure to its top 20 borrowers was over 888% of pre-provision profit, and over 349% of Tier 1 capital in 2011.

We consider that upside pressure on the rating is unlikely in the foreseeable future given the recent downgrade in May 2012 following Moody's updated assessment on the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign, which is discussed in the rating implementation guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and further detailed in the special comment "Banks and Sovereigns: Risk Correlations Constrain Standalone Bank Credit Assessments" published on 30 April 2012. TDB's ratings were lowered to B1 from Ba3 to be positioned in line with the B1 rating of Mongolian government, to capture the appropriate credit risks of the bank given relatively low level of cross-border diversification in its operations.

However, an upgrade of the sovereign rating could be positive for the banks ratings, especially if it can maintain its currently healthy asset quality, capital, and profitability metrics throughout the economic cycle.

Additional factors that could exert negative pressure on the rating include (1) asset quality deteriorating significantly, possibly due to aggressive expansion, (2) NPLs surpassing 4.5%, (3) the new NPL formation rate of gross loans exceeding 8%, (4) its regulatory Tier 1 ratio falling below 9%, (5) profitability deteriorating significantly, with net income less than 1.4% of average RWA, or, (6) signs of strains in the bank's liquidity position, a decline in the Mongolian economy, or a system-wide confidence crisis, which could threaten the bank's franchise.

The bank's other ratings are:

- Bank financial strength of E+; local currency bank deposits rating of B1; foreign currency bank deposits rating of B2; 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

- Local currency/ foreign currency short-term deposit rating of NP; local currency/ foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Trade and Development Bank of Mongolia LLC is based in Ulaanbaatar, Mongolia. It is one of the largest Mongolia banks with consolidated assets of MNT2.4 trillion (USD1.7 billion) as of 30 June 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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.

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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 B1 to Trade and Development Bank of Mongolia's proposed USD notes
No Related Data.
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