Hong Kong, July 18, 2014 -- Moody's Investors Service has downgraded the local currency long-term
deposit ratings for Khan Bank LLC, XacBank LLC, and Trade
and Development Bank of Mongolia LLC (TDBM) to B2 from B1. At the
same time, Moody's has downgraded the foreign currency long-term
senior unsecured debt ratings for TDBM to B3 from B1.
The outlook for all the ratings is negative.
See below for a full list of the ratings, both downgraded and affirmed.
The rating action follows Moody's downgrade of Mongolia's
sovereign ratings to B2 from B1 on 17 July 2014. Please see the
related press release on www.moodys.com.
RATINGS RATIONALE
The rating action on the three banks' ratings is based on the consideration
that the creditworthiness of the Mongolian banking system is highly correlated
to the sovereign. The sovereign downgrade was driven by its strained
external liquidity position, as reflected by a sharp loss in foreign-exchange
reserves.
Furthermore, expansionary monetary and fiscal policies have added
to demand pressures, fuelled inflation, and heightened spillover
risks to the banking system and the balance of payments. Accompanied
by a continued rise in the external debt burden, these factors increase
the country's vulnerability to external and domestic shocks relative
to rating peers.
Separately, Moody's rating action on the three banks also
takes into account the risks to the banks stemming from the Mongolian
government's pump-priming measures, some of which are
heavily credit-driven.
Specifically, the Bank of Mongolia -- in addition to policy-rate
reductions and fiscal spending -- provided MNT4.3 trillion
($2.6 billion) in loans to the banking system as of end-2013,
representing about 40% of total credit for the banking system.
The banks on-lent these loans to targeted industries and their
assets accordingly grew by 74% and loans by 54% during 2013.
These developments -- against the current backdrop of macro-economic
and export deterioration -- have increased the risks to the banks'
liquidity, profitability, asset quality and ultimately --
their capital adequacy.
Liquidity conditions for the banks continue to tighten as loan growth
exceeds deposit growth. The system's loan-to-deposit
ratio jumped to 97% at end-2013 from 85% a year ago.
Meanwhile, profitability is shrinking, as the banks lower
lending rates to support the government's accommodative policies,
while maintaining relatively high deposit rates to stem the deterioration
in their funding profiles.
Moody's expects the banks' asset quality performance to deteriorate
further during the rest of 2014 and into 2015, as the economy remains
under pressure, and as loans booked during the continuing credit
boom season.
For example, asset quality has deteriorated in the mining and manufacturing
sectors, whose NPL ratios stood at 17.9% and 6.4%
at end-March 2014, compared to 12.2% and 3.3%
a year ago.
The construction sector has not shown a material deterioration and the
NPL ratio for the sector stood at 2.9% at end-March
2014. However, loans to the sector grew by 123.7%
year-on-year at end-March 2014, twice as fast
as systemic loan growth at 54.5%. Once the loans
season, we expect substantial asset quality deterioration.
Moreover, the mining sector remains vulnerable to continued slides
in commodity prices and demand, while the manufacturing and construction
sectors remain exposed to the subdued state of domestic economic growth.
Below we discuss each individual bank.
Trade and Development Bank of Mongolia
Moody's has lowered TDBM's baseline credit assessment (BCA)
to b3 from b2. TDBM's BCA of b3 reflects its: (1) solid market
position as a leading corporate lender in foreign exchange and trade-related
businesses; and (2) 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 366%
of its Tier 1 capital, two times higher than those of Khan Bank
and XacBank at end-March 2014. More than 50% of these
borrowers are also in risky sectors, such as mining and construction.
These sectors accounted for 19.4% and 18.1%
of its total loans, respectively, at end-March 2014.
TDBM's BCA of b3 also reflects potential challenges related to corporate
governance that could arise from its narrow shareholding structure.
Moody's has not incorporated any systemic support notching uplift
to TDBM's B3 foreign currency unsecured debt rating, given
its assessment of limited foreign currency support capacity of the Mongolia
government. This is despite the systemic importance of TDBM --
as the second-largest lender in terms of loans --
in 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 of providing support to depositors
of failed banks such as Anod Bank (unrated), Zoos Bank (unrated)
and Savings Bank (unrated). Moody's expects the government
to support deposits at banks that are considered to be of high systemic
importance to the economy.
Khan Bank
Moody's has lowered Khan Bank's BCA to b2 from b1.
Its BCA of b2 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; and (2) relatively
granular loan book given that retail borrowers accounted for over 60%
of its total loan portfolio at end-March 2014.
The ratings do not incorporate any uplift for systemic support because
Mongolia's sovereign rating is also B2.
XacBank
Moody's has lowered XacBank's BCA to b2 from b1. The
bank's b2 BCA reflects its (1) growing franchise and well-established
expertise in micro-finance; and (2) relatively low credit
concentration risk.
The bank's local currency deposit rating does not incorporate any uplift
for systemic support because the sovereign rating for the Mongolian government
is the same as the bank's standalone rating of B2.
What Could Change the Rating - Up
Given that the B2 issuer ratings assigned to Khan Bank and XacBank are
the same as the sovereign rating, an upgrade of the banks'
ratings is unlikely. A return to a stable outlook would require
a return to a stable outlook on the sovereign rating, as well as
evidence that asset quality pressures can be contained as loan books season.
Upward pressure on the B3 issuer rating of 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 a deposit flight; (2) a significant deterioration in asset quality;
for example new NPLs to gross loans exceeding 4.0%;
(3) a rise in concentrations, or a rise in exposures to risky sectors,
in particular construction; (4) the Tier 1 ratio falling below 9%;
or (5) a significant deterioration in profitability, such that net
income is less than 1.4% of average risk weighted assets.
The resultant ratings and actions are listed below:
Trade Development Bank of Mongolia --
• baseline credit assessment of b2 lowered to b3;
• local currency bank deposits rating of B1 downgraded to B2;
• foreign currency bank deposits rating of B2 downgraded to B3;
• issuer rating of B1 downgraded to B3;
• local currency long-term senior unsecured of B1 downgraded
to B3;
• foreign currency long-term senior unsecured debt/subordinated
debt of B1/B2 downgraded to B3/Caa1; and
• foreign currency long-term senior unsecured MTN/subordinated
MTN of (P)B1/(P)B2 downgraded to (P)B3/(P)Caa1.
The revised ratings all carry negative outlooks.
All other ratings were affirmed: Bank Financial Strength of E+;
local currency/foreign currency short-term deposits rating of NP;
local currency/foreign currency short-term issuer rating of NP;
and ST MTN program rating of (P)NP.
Khan Bank --
• baseline credit assessment of b1 lowered to b2;
• local currency bank deposits rating of B1 downgraded to B2;
• foreign currency bank deposits rating of B2 downgraded to B3;
• issuer rating of B1 downgraded to B2; and
• local currency/foreign currency long-term senior unsecured
MTN/subordinated MTN of (P)B1/(P)B2 downgraded to (P)B2/(P)B3.
The revised ratings all carry negative outlooks.
All other ratings were affirmed: Bank Financial Strength of E+;
and local currency/foreign currency short-term deposits rating
of NP.
XacBank --
• baseline credit assessment of b1 lowered to b2;
• local currency bank deposits rating of B1 downgraded to B2;
• foreign currency bank deposits rating of B2 downgraded to B3;
• issuer rating of B1 downgraded to B2; and
• foreign currency long-term senior unsecured MTN of (P)B1
downgraded to (P)B2.
The revised ratings all carry negative outlooks.
All other ratings were affirmed: Bank Financial Strength of E+;
local currency/foreign currency short-term deposit rating of NP;
local currency/foreign currency short-term issuer rating of NP;
and ST MTN program rating 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 MNT5.1 trillion (US$3.1
billion) as of end-2013.
Khan Bank LLC, based in Ulaanbaatar, reported total assets
of MNT4.8 trillion (US$2.9 billion) as of end-2013
XacBank LLC, headquartered in Ulaanbaatar, reported total
assets of MNT1.8 trillion (US$1.1 million) as of
end-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 downgrades three Mongolian banks following sovereign downgrade
