Hong Kong, October 30, 2014 -- Moody's Investors Service has downgraded XacBank LLC's issuer
rating to B3 from B2 and its foreign currency long-term senior
unsecured MTN rating to (P)B3 from (P)B2.
Moody's has also lowered the bank's baseline credit assessment
(BCA) to b3 from b2.
At the same time, Moody's has affirmed XacBank's local
currency bank deposits rating of B2 and foreign currency bank deposits
rating of B3.
The outlooks on the ratings are negative.
A full list of the downgraded and affirmed ratings can be found at the
end of this press release.
RATING RATIONALE
"The action on XacBank's ratings reflects the fact that the
bank's asset quality continues to deteriorate against the backdrop
of adverse developments in its operating environment," says
Hyun Hee Park, a Moody's Assistant Vice President and Analyst.
"At a macro-economic level, the ongoing decline in
foreign direct investment inflows (FDI) -- coupled with
the contraction evident in Mongolian exports in 2012 and 2013 --
have contributed to a rundown in foreign-exchange reserves,
a weakening of the local currency, and a rise in the economy's
vulnerability to external risks," says Park.
To mitigate these risks, Moody's notes that the Bank of Mongolia
(BOM) has implemented pump-priming measures, some of which
are heavily credit driven, including the Price Stabilization Program
and Housing Mortgage Program.
The BOM had provided MNT4.3 trillion ($2.6 billion)
in loans to the banking system as of end-2013, representing
about 40% of all the system's loans.
Mongolian banks then on-lent these loans to targeted industries
and, as a result, their assets grew 74% and loans 54%
in 2013. For XacBank specifically, its own assets and loans
grew 68% and 63% in this same time frame.
However, the BOM began to unwind its Price Stabilization Program
this year, and funding from the BOM for the banks had fallen to
MNT2.9 trillion ($1.6 billion), or 24%
of total banking system loans, as of end-June 2014.
Moody's considers that this development -- against the backdrop
of the deterioration in macro-economic and export conditions --
has materially increased the risks to the asset quality and liquidity
of Mongolian banks, including XacBank.
Firstly, with asset quality, the banking system's problem
loans ratio -- defined as the past-due and below
loans ratio -- and the non-performing loans (NPL)
ratio stood at 8.2% and 4.6% at end-June
2014, compared to 5.4% and 3.7% a year
ago.
Moody's considers that XacBank's asset quality has been impacted
more than that at other rated Mongolian banks because of its problem loans
in the large corporates segment -- disbursed in 2012 and
2013 -- and in the small- and medium-sized
enterprises (SMEs) segment.
Secondly, with liquidity, Moody's notes that such conditions
have tightened as a result of the hike in BOM's policy rate by 150basis
point to 12% and the unwinding of the pump-priming measures.
The system's loan-to-deposit ratio jumped to 101%
at end-June 2014 from 85% at end-2012 when the BOM
had started its Price Stabilization Program and Housing Mortgage Program.
In terms of XacBank's strengths, Moody's identifies:
(1) its growing franchise as the fourth-largest commercial bank
in Mongolia and as the leader in retail and SME lending; (2) its
solid and stable capital position, owing to supportive international
shareholders; and (3) its transparent level of corporate governance,
as supported by its international shareholders, such as the International
Finance Corp and European Bank of Reconstruction and Development.
However, the adverse developments in the operating environment and
the increased level of concentration risk -- because of
its rising share of corporate and SME customers -- challenge
these strengths.
Moody's notes that XacBank's share of corporate and SME customers
rose significantly to 67% of all its customers at end-2013
from 58% at end-2011. As a result, its non-performing
loans ratio rose to 3.8% at end-June 2014 from 1.3%
a year ago.
In terms of funding, traditionally the bank's reliance on
deposit funding is lower than that of other rated Mongolia banks.
Therefore, its loan-to-deposit ratio is normally higher,
standing at 165% compared with the system average of 101%
at end-June 2014.
However, as XacBank's non-deposit funding derives from
international financial institutions and government agencies, such
funds tend to be more stable and show longer tenors than deposits.
Moody's believes that the availability of stable relatively long-term
wholesale funding from its shareholders means that the bank could be more
resilient than its peers in the event of a run on deposits.
Moody's has not incorporated any systemic support notching uplift
to XacBank's B3 issuer rating, given its assessment of the
limited support capacity of the Mongolia government (B2 negative).
Moody's arrives at this assessment despite the systemic importance
of XacBank -- as the fourth-largest lender in terms of loans
-- to the Mongolian banking system.
However, Moody's has incorporated one notch of systemic support
to its local currency deposit rating of B2, given the proven track
record of the Mongolian government in providing support to the depositors
of failed banks. This was the case with the failures of Anod Bank
(unrated), Zoos Bank (unrated) and Savings Bank (unrated).
Moody's expects the government to continue to provide support for
deposits at banks considered as of high systemic importance to the economy.
What Could Change the Rating - Up
Upward pressure on the b3 BCA of XacBank, while unlikely in the
near term, could occur if it improves its asset quality and establishes
a track record of maintaining healthy capital, liquidity and profitability
metrics throughout the economic cycle.
What Could Change the Rating - Down
The following factors could exert negative pressure on the bank's ratings:
(1) a significant deterioration in asset quality; for example,
new NPLs to gross loans exceed 4.0%; (2) a rise in
concentrations, or a rise in exposures to risky sectors, in
particular construction; or (3) the Tier 1 ratio falls below 9%.
The resultant ratings and actions are listed below:
• Baseline credit assessment lowered to b3 -- which
is equivalent to a Bank Financial Strength Rating of E+ --
from b2;
• Issuer rating downgraded to B3 from B2; and
• Foreign currency long-term senior unsecured MTN rating downgraded
to (P)B3 from (P)B2.
All other ratings were affirmed: Bank Financial Strength Rating
of E+; local currency bank deposits rating of B2; foreign
currency bank deposits rating of B3; local currency/foreign currency
short-term deposit ratings of NP; local currency/foreign currency
short-term issuer ratings of NP; and short-term MTN
program rating of (P)NP.
The principal methodology used in these ratings was Global Banks,
published in July 2014. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
XacBank LLC, headquartered in Ulaanbaatar, reported total
assets of MNT1.9 trillion (US$1.0 billion) at end-June
2014.
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
Asst Vice President - 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 downgrades XacBank; lowers BCA to b3
