MOODY’S DISCLOSURES ON CREDIT RATING OF TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC
Hong Kong, May 09, 2012 — The following release represents Moody’s Investors Service’s summary credit opinion on Trade and Development Bank of Mongolia LLC and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody’s ratings or rating rationale for Trade and Development Bank of Mongolia LLC.
Moody’s current ratings on Trade and Development Bank of Mongolia LLC are:
Senior Unsecured (foreign currency) ratings of Ba3, on review for downgrade
Senior Unsecured MTN Program (foreign currency) ratings of (P)Ba3, on review for downgrade
Long Term Bank Deposits (domestic currency) ratings of Ba3, on review for downgrade
Long Term Bank Deposits (foreign currency) ratings of B2
Long Term Issuer Rating (domestic and foreign currency) ratings of Ba3, on review for downgrade
Bank Financial Strength ratings of D-, on review for downgrade
Subordinate (foreign currency) ratings of B1, on review for downgrade
Subordinate MTN Program (foreign currency) ratings of (P)B1, on review for downgrade
Short Term Bank Deposits (domestic and foreign currency) ratings of NP
Other Short Term (foreign currency) ratings of (P)NP
Short Term Issuer Rating (domestic and foreign currency) ratings of NP
RATINGS RATIONALE
Moody’s assigns a bank financial strength rating (BFSR) of D- to the Trade and Development Bank of Mongolia (TDB), which maps to a standalone rating of ba3 on the long-term rating scale. The rating reflects the bank’s: (1) solid market position, (2) sound profitability, and (3) good operating efficiency.
The rating is offset by the bank’s: (1) high concentration risk, given the less-diversified and volatile nature of Mongolia’s economy, (2) substantial Tier 1 core capital needs, in case it repeats its rapid growth over the next few years, and (3) relatively weak corporate governance on a global basis.
The operating environment has been improving due to the recovery in the mining industry. We believe that the benefits of the Oyu Tolgoi copper and gold project, as well as the Tavan Tologoi coking coal project, will be transformational for the economy. But the historic boom-bust cycle of the economy adds to the volatile operating environment for the banking business.
According to the IMF, the Mongolia’s economy is overheating currently, raising concerns of a hard landing if external shocks hit the country. The European sovereign crisis could also lead to a significant drop in copper and coal prices.
The IMF believes that the size of the country’s foreign currency reserves and its swap line with the People’s Bank of China (PBOC) are not enough to defend an exchange rate target. In addition, inflation of 15%-16% may accelerate as fiscal policy is expected to be challenged by political pressure for pro-cyclical spending.
TDB is 73.1% owned, directly and indirectly, by US Global Investment LLC, an intermediate parent company, which is in turn owned equally by an individual, Erdenebileg Doljin, and Central Asia Mining LLC. The latter is the ultimate parent company, and is owned by two individuals. Goldman Sachs acquired a 4.8% stake in TDB in February 2012.
Apart from the treasury stock of 3.4%, the bank’s remaining stake of 18.3% is owned by a number of individuals, who are minority shareholders.
We believe that the probability of systemic support for TDB is high, given the bank’s large market presence in Mongolia. The systemic support indicator for Mongolia (i.e. the government bond rating) is B1, which leaves the bank’s local currency bank deposit rating at its standalone rating of ba3. TDB’s foreign currency deposit rating is B2, and is constrained by the country ceiling.
Moody’s also assigns a foreign currency Ba3 rating to the bank’s senior unsecured debt, and a B1 rating to dated subordinated debt in its medium-term note program. Its short-term ratings are not-prime.
TDB’s deposit and debt ratings incorporate three main elements: (1) the bank’s BFSR of D-, (2) Moody’s assessment of high systemic support from the Mongolia government, a component of the Joint Default Analysis (JDA), with the systemic support indicator of B1, and (3) the seniority of its deposits and debt.
Credit Strengths
- Solid franchise in Mongolia as the country’s third largest bank in terms of loans and deposits
- Leading position in corporate banking, foreign exchange, as well as the trade-related and project finance business
- Sound profitability with good operating efficiency
Credit Challenges
- Maintaining good asset quality, while pursuing loan growth in a volatile economy
- Lack of geographic diversification
- High risk from customer concentrations and potential corporate governance issues
- Core capital under pressure if the bank repeats its rapid growth in coming years
Rating Outlook
The BFSR, local currency bank deposits rating, issuer rating, foreign currency long-term senior unsecured debt rating, foreign currency long-term senior unsecured MTN/ subordinate MTN are on review for downgrade. The foreign currency deposit rating carries a stable outlook.
What Could Change the Rating – Up
There is no upside pressure on the rating in the short term, as reflected in the review for downgrade. The current standalone credit assessments– which are above the sovereign level– are likely to decline, under global guidance.
The review of Mongolian banks is in accordance with Moody’s re-assessment of the correlation between the sovereign and banking sector. It is not due to any changes in TDB’s standalone credit profile.
During the review, Moody’s will focus on the following factors that could mitigate TDB’s credit correlation with that of the sovereign: (1) its relative low direct exposure to government debt, apart from central bank bills, (2) the sizeable presence of foreign shareholders, (3) any changes in the vulnerability of the Mongolian banking system to shocks when compared to the 2008 crisis, and (4) the size of the liquidity buffers – in both domestic and foreign currency – held by TDB.
What Could Change the Rating – Down
Additional factors that could exert negative pressure on the rating include (1) asset quality deteriorating significantly, possibly due to aggressive expansion, (2) NPLs surpassing 4.5%, (3) the new NPL formation rate of gross loans exceeding 8%, (4) its Tier 1 ratio falling below 9%, (5) profitability deteriorating significantly, with net income less than 1.4% of average RWA, or (6) signs of strain in the bank’s liquidity position, a decline in the Mongolian economy, or a system-wide confidence crisis, which could threaten the bank’s franchise.
The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: Global Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued by one of Moody’s affiliates outside the EU are endorsed by Moody’s Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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.
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 current ratings on Trade and Development Bank of Mongolia LLC are:
Senior Unsecured (foreign currency) ratings of Ba3, on review for downgrade
Senior Unsecured MTN Program (foreign currency) ratings of (P)Ba3, on review for downgrade
Long Term Bank Deposits (domestic currency) ratings of Ba3, on review for downgrade
Long Term Bank Deposits (foreign currency) ratings of B2
Long Term Issuer Rating (domestic and foreign currency) ratings of Ba3, on review for downgrade
Bank Financial Strength ratings of D-, on review for downgrade
Subordinate (foreign currency) ratings of B1, on review for downgrade
Subordinate MTN Program (foreign currency) ratings of (P)B1, on review for downgrade
Short Term Bank Deposits (domestic and foreign currency) ratings of NP
Other Short Term (foreign currency) ratings of (P)NP
Short Term Issuer Rating (domestic and foreign currency) ratings of NP
RATINGS RATIONALE
Moody’s assigns a bank financial strength rating (BFSR) of D- to the Trade and Development Bank of Mongolia (TDB), which maps to a standalone rating of ba3 on the long-term rating scale. The rating reflects the bank’s: (1) solid market position, (2) sound profitability, and (3) good operating efficiency.
The rating is offset by the bank’s: (1) high concentration risk, given the less-diversified and volatile nature of Mongolia’s economy, (2) substantial Tier 1 core capital needs, in case it repeats its rapid growth over the next few years, and (3) relatively weak corporate governance on a global basis.
The operating environment has been improving due to the recovery in the mining industry. We believe that the benefits of the Oyu Tolgoi copper and gold project, as well as the Tavan Tologoi coking coal project, will be transformational for the economy. But the historic boom-bust cycle of the economy adds to the volatile operating environment for the banking business.
According to the IMF, the Mongolia’s economy is overheating currently, raising concerns of a hard landing if external shocks hit the country. The European sovereign crisis could also lead to a significant drop in copper and coal prices.
The IMF believes that the size of the country’s foreign currency reserves and its swap line with the People’s Bank of China (PBOC) are not enough to defend an exchange rate target. In addition, inflation of 15%-16% may accelerate as fiscal policy is expected to be challenged by political pressure for pro-cyclical spending.
TDB is 73.1% owned, directly and indirectly, by US Global Investment LLC, an intermediate parent company, which is in turn owned equally by an individual, Erdenebileg Doljin, and Central Asia Mining LLC. The latter is the ultimate parent company, and is owned by two individuals. Goldman Sachs acquired a 4.8% stake in TDB in February 2012.
Apart from the treasury stock of 3.4%, the bank’s remaining stake of 18.3% is owned by a number of individuals, who are minority shareholders.
We believe that the probability of systemic support for TDB is high, given the bank’s large market presence in Mongolia. The systemic support indicator for Mongolia (i.e. the government bond rating) is B1, which leaves the bank’s local currency bank deposit rating at its standalone rating of ba3. TDB’s foreign currency deposit rating is B2, and is constrained by the country ceiling.
Moody’s also assigns a foreign currency Ba3 rating to the bank’s senior unsecured debt, and a B1 rating to dated subordinated debt in its medium-term note program. Its short-term ratings are not-prime.
TDB’s deposit and debt ratings incorporate three main elements: (1) the bank’s BFSR of D-, (2) Moody’s assessment of high systemic support from the Mongolia government, a component of the Joint Default Analysis (JDA), with the systemic support indicator of B1, and (3) the seniority of its deposits and debt.
Credit Strengths
- Solid franchise in Mongolia as the country’s third largest bank in terms of loans and deposits
- Leading position in corporate banking, foreign exchange, as well as the trade-related and project finance business
- Sound profitability with good operating efficiency
Credit Challenges
- Maintaining good asset quality, while pursuing loan growth in a volatile economy
- Lack of geographic diversification
- High risk from customer concentrations and potential corporate governance issues
- Core capital under pressure if the bank repeats its rapid growth in coming years
Rating Outlook
The BFSR, local currency bank deposits rating, issuer rating, foreign currency long-term senior unsecured debt rating, foreign currency long-term senior unsecured MTN/ subordinate MTN are on review for downgrade. The foreign currency deposit rating carries a stable outlook.
What Could Change the Rating – Up
There is no upside pressure on the rating in the short term, as reflected in the review for downgrade. The current standalone credit assessments– which are above the sovereign level– are likely to decline, under global guidance.
The review of Mongolian banks is in accordance with Moody’s re-assessment of the correlation between the sovereign and banking sector. It is not due to any changes in TDB’s standalone credit profile.
During the review, Moody’s will focus on the following factors that could mitigate TDB’s credit correlation with that of the sovereign: (1) its relative low direct exposure to government debt, apart from central bank bills, (2) the sizeable presence of foreign shareholders, (3) any changes in the vulnerability of the Mongolian banking system to shocks when compared to the 2008 crisis, and (4) the size of the liquidity buffers – in both domestic and foreign currency – held by TDB.
What Could Change the Rating – Down
Additional factors that could exert negative pressure on the rating include (1) asset quality deteriorating significantly, possibly due to aggressive expansion, (2) NPLs surpassing 4.5%, (3) the new NPL formation rate of gross loans exceeding 8%, (4) its Tier 1 ratio falling below 9%, (5) profitability deteriorating significantly, with net income less than 1.4% of average RWA, or (6) signs of strain in the bank’s liquidity position, a decline in the Mongolian economy, or a system-wide confidence crisis, which could threaten the bank’s franchise.
The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: Global Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued by one of Moody’s affiliates outside the EU are endorsed by Moody’s Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information.
Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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.
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
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