By Elena Fehrbach
Jan. 22 – Moody’s Investor Services (Moody’s) has issues a revised rating for three Mongolian ban, downgrading them from “Stable” to “Negative”. The Banks under study are: Khan Bank, Trade and Development Bank and Xac Bank. Other than that, Trade and Development Bank’s baseline credit assessment (BCA) was downgraded from B1 to B2. Moody’s opinion about TDB’s rating downgrade is that the loan portfolio of this bank is too much overweighed against risky sectors, such as construction and mining. Moody’s has also affirmed TDB’s B1 senior unsecured bond and local currency deposit ratings based on assessment of TDB’s systematic importance being the second largest lender in terms of loans in the Mongolian Banking System.
Moody’s has commented that the rationale behind the ratings downgrade is that the banks remain vulnerable to deterioration is assets quality and high amount of borrowers against highly intensive changing operating environment. The industrial peculiarity of Mongolia also plays its role. Resource-based industry constitutes the significant part of the economy and due to boom-bust cycles characteristic to such sectors, the operating environment is highly volatile.
Though the loose monetary policy has mitigated the unfavorable impact of the global commodities market slowdown to some extent, the overall risk in the banking sector is increasing. The loan growth situation in Mongolia has changed dramatically, the loan growth in the period from January to November 2013 was 55 percent compared to 23 percent for the same period in 2012. And the non-performing loans (NPL) ratio grew to 5.3 percent by end of 2013 compared to 4.2 percent for the end of 2012.
Based on Moody’s analysis of the banking sector, one of the serious issues is the huge loan growth concentration in the construction sector, following the disbursement of policy loans from the Bank of Mongolia through its price stabilization and mortgage programs that started in the beginning of 2013. It has resulted in the growth of construction loans by 67.7 percent in the Q2 2013 compared to the Q1, which is in its turn much higher than the general banking system loan growth of 16.6 percent. As mentioned in the beginning of the article, this is the particular reason why the baseline credit assessment (BCA) at TDB has been downgraded to B2.
In addition to above said, it is very difficult for the banks to fully price in the credit risks of borrowers in their policy loans due to rate restrictions on these loans. As a result, the provision to absorb the credit costs is lower than in the case of a typical commercial loan.
The other downside effect of the situation is that banks in Mongolia would need a strong additional capital injection from external sources to support the growth despite good levels of the capital growth from banks’ earnings. This is an offset generated by deteriorating loan growth situation.
Possible game-changing factors
Moody’s comments that the B1 rating currently held by three banks is the same as sovereign rating, the upgrade of these ratings is unlikely. TDB can obtain upward pressure on the BCA in case the substantial reduction of exposure into risky sectors of economy.
Factors creating a negative pressure on rating
- Corporate governance resulting in the loss of depositor confidence
- Deteriorating deposits’ quality
- Growing NPL ratios
- Growing exposure in risky sectors, construction in particular
- Decreasing Tier 1 Capital level
- Decrease in profitability, such as for example, the net income can be less than 1.4 percent of the average risk weighted assets.