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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Credit Ratings Update from Moody’s and Fitch

By Elena Fehrbach

Moody’s: Outlook for Mongolia’s banking system remains negative

Moody’s Investors Services (Moody’s) announce that the outlook on Mongolian banks remain negative due to expectations of continued weakness in Mongolia’s key commodity exports. Key commodities in Mongolia are coal and copper with the exports of both commodities accounting for 88 percent of total exports and 20 percent of Mongolia’s GDP.

Moody’s analyst comments in the announcement, “While oversupply and weak global prices in the steel and coal sectors constitute a primary and external pressure point, our outlook also takes into account the Mongolian government’s aggressive macroeconomic measures to support the economy against the resultant growth headwinds.”

Moody’s assessment of the banking system is based on five categories: asset quality and capital, operating environment, funding and liquidity, systematic support and profitability and efficiency. Only systematic support is considered to be stable out of the five categories. The other categories are deteriorating based on Moody’s analysis.

Moody’s assumes that the Mongolian economy will develop at an annualized real growth rate of 11 percent in the coming 12-18 months. The growth rate is based on the assumption that the Mongolian economy will continue to be powered by the government-sourced financial measures. At the end of 2013, the Government of Mongolia had already injected 4.3 trillion MNT (equivalent to US$2.6 billion) into the banking system in the form of loans. This amount represented about 40 percent of the total credit in the system. Loans were extended to the banking system for on-lending to targeted industries. As a result of cash injection, total banks’ assets grew by 74 percent and loans grew by 54 percent in 2013. Such a credit creation strategy might increase risk to the banks’ liquidity, capitalization and profitability, as mentioned by Moody’s analyst.

Based on the current situation, growth of vulnerability levels in the banking system and the continuing weakness of the mining sector, Moody’s expects the assets performance to deteriorate further in 2014. The loans growth in the banking system has exceeded the natural growth in deposits and the internal capital. The foreign currency loan-to-deposit ratio jumped to 112 percent at the end of 2013. Foreign currency deposits account for about 23 percent of the total loans.

Another issue for the current banking system is a decrease in profitability due to support from the government’s housing mortgage policy, which provides low interest rate loans to people.

It is reasonable to expect that the government will support deposits at those banks due to their high systematic importance for the economy. On the other hand, it might be difficult to predict the support of the non-deposit creditors based on the bank resolutions in Mongolia.

Despite the negative outlook for the banking system, Moody’s sovereign outlook remains stable.

Fitch: Weak condition of the mining sector emphasizes risks for banks

Mongolian Mining Corporation (MMC), which recently extended its debt payment terms, is a good example of a particularly strong pressure currently on the mining sector in Mongolia. At the end of 2013, banks’ exposure to mining loans was about 12 percent, which is not a high rate, but the overall deterioration of the main sector of the economy is widening macro risks influence on the banking system. It does not imply the direct influence on the banking sector, as “B/Negative” ratings of Khan Bank and XacBank already reflect the harsh economic environment factors.

Banks in Mongolia are sensible to the level of profitability in the mining sector as it directly influences the broader economy. It also has a negative impact on the rate of Mongolian MNT, which has already depreciated 20 percent in 2013. Foreign currency loans are only 30 percent of the total loan portfolio in the banking system which leads to a credit risk from a weaker local currency, even with foreign currency lending largely in corporations with natural or financial hedges.

Non-performing loans have grown by 93 percent in March 2014 as opposed to 54 percent in 2013. The key figure for non-performing loans is the same as in 2013- 5.2 percent, but according to Fitch, this number only includes loans that are “90 days or longer overdue.”

Lending to the mining industry has only been 12 percent in 2013 due to restriction on the capacity of the local banks to lend bigger amounts. The Trade and Development Bank of Mongolia has a US$40 million unsecured loan to MMC. This loan comprises 18 percent of the bank’s equity. Golomt Bank’s loans in the mining industry are 11 percent of total loans, Khan Bank has 4 percent of mining loans and XacBank has 3 percent of mining loans.

The development Bank of Mongolia partially guarantees mining loans in some occasions and it mitigates some of the credit risk. But the overall pressure on Mongolia’s economic and financial stability underpins the negative outlook on Fitch’s “B+” sovereign rating. Mongolia also has a macro-prudential risk indicator of “MPI3” that reflects a high risk of systemic stress from speedy credit growth and appreciation of exchange rate.

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