Fitch revises Mongolia's Khan Bank's outlook to stable
(The following statement was released by the rating agency)
Feb 22 - Fitch Ratings has revised Mongolia-based Khan Bank LLC's (Khan Bank) Outlook to Stable from Positive. Its ratings, including Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) of 'B' and Viability Rating (VR) of 'b', have been affirmed. A full rating breakdown is provided below.
The Outlook change has taken into account the bank's ongoing rapid loan growth and its potential to moderate improvement in the bank's capitalisation, in light of the challenging market from internal capital generation. Although additional equity raising is expected in 2012, Fitch believes it could be exhausted by strong loan growth. Stronger and sustainable capitalisation both in terms of quantity and quality, which was previously indicated as essential for an upgrade, is therefore less likely to be achieved in the near term. That said, the bank is unlikely to allow excessive loan growth without improving capitalisation, which mitigates the possibility for any downgrades. Hence, the Outlook is Stable.
As the largest bank in the Mongolian banking system, Fitch expects Khan Bank would be the domestic bank most likely to receive state support in case of need. However, despite Fitch's expectation of the sovereign's high propensity to support, the Mongolian government's financial capability to provide timely support to the banking system remains limited as underlined by its IDRs of 'B+'.
Khan Bank's VR - which currently drives its IDRs - reflects its continued liquidity and funding strengths relative to similarly rated banks. This is supported by its leading domestic franchise, despite intensifying competition for funding in Mongolia's banking sector, which could potentially be influenced by a volatile economic and operating environment.
Fitch expects competition for high quality new lending and funding to squeeze the bank's net interest margin (NIM), although Fitch notes that at 7.8% it compares well with similarly rated banks and local peers. Given the agency's forecast for slower economic growth in 2012 and ahead, Fitch believes there is higher risk of loan quality weakening and an increase in loan loss charges (LLCs) in the medium term, albeit manageable.
Khan Bank's loan balance grew 76% yoy in 2011. Although loan growth is likely to slow in 2012 as the bank seeks to reduce pressure on capital and liquidity, Fitch expects it to remain in strong double-digits. This is based on the country's mining investment prospects and infrastructure needs. Based on Fitch's central scenario, Khan Bank's total regulatory capital ratio is unlikely to improve significantly from the current level, even if annual loan growth is limited at 30% and there is additional capital raising. This is based on assumptions that NIM declines and LLCs increase from current levels (NIM: 7.8%, LLC/total loans: 0.2% in 2011). Tier 1/core capital ratio was 10.8% while total capital adequacy ratio was 15.4% in 2011.
Despite strong loan growth, the bank maintained its loan to deposit ratio at 81%, which is conservative compared with other banks in 'B' category. Deposit funding structure remains a strength for the bank, although Fitch notes some deposit concentration. Although the rapid loan growth is pressuring the bank's liquidity, liabilities are comfortably covered by liquid assets.
Khan Bank is Mongolia's largest bank with 24.8% and 26.6% market share in lending and deposits respectively in 2011. It is majority-owned by Japan's Sawada Holdings Co Ltd and its group company. The bank's main businesses are SME, consumer and corporate lending.
Khan Bank's ratings
Long-Term Foreign and Local Currency IDRs affirmed at 'B'; Outlook revised to Stable from Positive.
Short-Term Foreign Currency IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B'
Feb 22 - Fitch Ratings has revised Mongolia-based Khan Bank LLC's (Khan Bank) Outlook to Stable from Positive. Its ratings, including Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) of 'B' and Viability Rating (VR) of 'b', have been affirmed. A full rating breakdown is provided below.
The Outlook change has taken into account the bank's ongoing rapid loan growth and its potential to moderate improvement in the bank's capitalisation, in light of the challenging market from internal capital generation. Although additional equity raising is expected in 2012, Fitch believes it could be exhausted by strong loan growth. Stronger and sustainable capitalisation both in terms of quantity and quality, which was previously indicated as essential for an upgrade, is therefore less likely to be achieved in the near term. That said, the bank is unlikely to allow excessive loan growth without improving capitalisation, which mitigates the possibility for any downgrades. Hence, the Outlook is Stable.
As the largest bank in the Mongolian banking system, Fitch expects Khan Bank would be the domestic bank most likely to receive state support in case of need. However, despite Fitch's expectation of the sovereign's high propensity to support, the Mongolian government's financial capability to provide timely support to the banking system remains limited as underlined by its IDRs of 'B+'.
Khan Bank's VR - which currently drives its IDRs - reflects its continued liquidity and funding strengths relative to similarly rated banks. This is supported by its leading domestic franchise, despite intensifying competition for funding in Mongolia's banking sector, which could potentially be influenced by a volatile economic and operating environment.
Fitch expects competition for high quality new lending and funding to squeeze the bank's net interest margin (NIM), although Fitch notes that at 7.8% it compares well with similarly rated banks and local peers. Given the agency's forecast for slower economic growth in 2012 and ahead, Fitch believes there is higher risk of loan quality weakening and an increase in loan loss charges (LLCs) in the medium term, albeit manageable.
Khan Bank's loan balance grew 76% yoy in 2011. Although loan growth is likely to slow in 2012 as the bank seeks to reduce pressure on capital and liquidity, Fitch expects it to remain in strong double-digits. This is based on the country's mining investment prospects and infrastructure needs. Based on Fitch's central scenario, Khan Bank's total regulatory capital ratio is unlikely to improve significantly from the current level, even if annual loan growth is limited at 30% and there is additional capital raising. This is based on assumptions that NIM declines and LLCs increase from current levels (NIM: 7.8%, LLC/total loans: 0.2% in 2011). Tier 1/core capital ratio was 10.8% while total capital adequacy ratio was 15.4% in 2011.
Despite strong loan growth, the bank maintained its loan to deposit ratio at 81%, which is conservative compared with other banks in 'B' category. Deposit funding structure remains a strength for the bank, although Fitch notes some deposit concentration. Although the rapid loan growth is pressuring the bank's liquidity, liabilities are comfortably covered by liquid assets.
Khan Bank is Mongolia's largest bank with 24.8% and 26.6% market share in lending and deposits respectively in 2011. It is majority-owned by Japan's Sawada Holdings Co Ltd and its group company. The bank's main businesses are SME, consumer and corporate lending.
Khan Bank's ratings
Long-Term Foreign and Local Currency IDRs affirmed at 'B'; Outlook revised to Stable from Positive.
Short-Term Foreign Currency IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B'
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