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.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit 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 changes ratings outlooks of Mongolia banks to negative and affirms ratings
