Moody's downgrades the ratings of four Mongolia banks (Golomt, Khan, TDB, XacBank) to B1
Hong Kong, May 21, 2012 (Moody's) -- Moody's Investors Servicehas downgraded the foreign currency long-term senior unsecured debt ratings of four Mongolian banks to B1 from Ba3.
The rating action follows the revision of their standalone bank financial strength ratings (BFSR) to E+ from D-, which now map to a baseline credit assessment (BCA) of b1 on the long-term scale.
The four banks are: Golomt Bank, Khan Bank, Trade and Development Bank of Mongolia, and XacBank
This downgrade took place in the context of an ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government of the country in which they are domiciled.
The ratings outlook is stable.
This rating action concludes the review for downgrade on the four Mongolian banks that was initiated on 26 March 2012.
RATINGS RATIONALE
The rating action is driven by Moody's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally, which is discussed in the rating implementation guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and further detailed in the special comment "Banks and Sovereigns: Risk Correlations Constrain Standalone Bank Credit Assessments" published on 30 April 2012.
As per the guidance, the downward revision of the four Mongolian banks' standalone ratings reflects our view that a bank's rating ultimately cannot be completely insulated from the credit quality of the government's creditworthiness, taking into account (i) the extent to which their businesses depend on the domestic macroeconomic and financial environment; (ii) the degree of reliance on market-based confidence-sensitive funding; (iii) their direct or indirect exposures to domestic sovereign debt, compared with their capital bases; and (iv) foreign ownership which can provide a critical level of offshore business or substantial permanent funding to the subsidiary.
We believe that the standalone ratings of the four Mongolian banks should be positioned in line with the rating of Mongolian government to capture the appropriate credit risks of the banks given relatively low level of cross-border diversification in their operations.
In Moody's view, the creditworthiness of the sovereign is highly correlated to the banks'. As such, this does not justify rating the banks at one-notch above their sovereign rating.
Mongolia's economy is transforming because of the rapid development of its natural resources industries. While this is having a strongly positive effect on the economy's growth rates, it does create the risk of an overheating of the economy, inflationary pressure, and, ultimately, the risk that boom could be followed by bust.
These risks could affect the banks as well as the sovereign's credit profile, since it is likely that the asset quality and liquidity of banks would be significantly impacted in such a downturn, particularly because of the rapid growth in their lending in the past two years.
On the other hand, Moody's notes that these banks have relatively low direct exposures to the government excluding loans to public sector entities, especially XacBank, Khan Bank, and Golomt Bank. Furthermore, the banks have a low reliance on wholesale funding. These factors may mitigate the correlation between the sovereign credit profile and those of the banks. However, in our view, these considerations are not sufficient to merit rating the banks above the sovereign. Deposits have proved to be quite confidence sensitive in Mongolia, meaning that the banks' liquidity could erode rapidly in a sovereign credit crisis.
We assign a B1 to the long-term local currency deposit ratings as well as issuer ratings of all four banks. The banks' foreign currency ratings are constrained by Mongolia's B1 foreign currency bond rating and B2 foreign currency deposit ceiling.
THE RATINGS OF THE FOUR MONGOLIAN BANKS ARE AS FOLLOWS:
Khan Bank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Khan Bank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; and local currency/ foreign currency long-term senior unsecured MTN/ Subordinate MTN of (P)B1/(P)B2. All other ratings were unaffected: foreign currency bank deposits rating of B2; and local currency/ foreign currency short-term deposits rating of NP.
Golomt Bank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Golomt Bank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; Issuer rating of B1; and foreign currency long-term senior unsecured debt of B1. All other ratings were unaffected: foreign currency bank deposits rating of B2.
Trade Development Bank of Mongolia -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Trade Development Bank of Mongolia are: Bank Financial Strength of E+; local currency bank deposits rating of B1; Issuer rating of B1; foreign currency long-term senior unsecured debt / subordinate debt of B1/B2; and foreign currency long-term senior unsecured MTN/subordinate MTN of (P)B1/(P)B2. All other ratings were unaffected: foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposits rating of NP; local currency/ foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.
XacBank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of XacBank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; foreign currency long-term senior unsecured debt of B1; and foreign currency long-term senior unsecured MTN of (P)B1. All other ratings were unaffected: foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposit rating of NP; local currency/ foreign currency short-term issuer rating of NP; and Euro MTN program of (P)NP.
The methodologies used in these ratings 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 rating action follows the revision of their standalone bank financial strength ratings (BFSR) to E+ from D-, which now map to a baseline credit assessment (BCA) of b1 on the long-term scale.
The four banks are: Golomt Bank, Khan Bank, Trade and Development Bank of Mongolia, and XacBank
This downgrade took place in the context of an ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government of the country in which they are domiciled.
The ratings outlook is stable.
This rating action concludes the review for downgrade on the four Mongolian banks that was initiated on 26 March 2012.
RATINGS RATIONALE
The rating action is driven by Moody's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally, which is discussed in the rating implementation guidance "How Sovereign Credit Quality May Affect Other Ratings" published on 13 February 2012, and further detailed in the special comment "Banks and Sovereigns: Risk Correlations Constrain Standalone Bank Credit Assessments" published on 30 April 2012.
As per the guidance, the downward revision of the four Mongolian banks' standalone ratings reflects our view that a bank's rating ultimately cannot be completely insulated from the credit quality of the government's creditworthiness, taking into account (i) the extent to which their businesses depend on the domestic macroeconomic and financial environment; (ii) the degree of reliance on market-based confidence-sensitive funding; (iii) their direct or indirect exposures to domestic sovereign debt, compared with their capital bases; and (iv) foreign ownership which can provide a critical level of offshore business or substantial permanent funding to the subsidiary.
We believe that the standalone ratings of the four Mongolian banks should be positioned in line with the rating of Mongolian government to capture the appropriate credit risks of the banks given relatively low level of cross-border diversification in their operations.
In Moody's view, the creditworthiness of the sovereign is highly correlated to the banks'. As such, this does not justify rating the banks at one-notch above their sovereign rating.
Mongolia's economy is transforming because of the rapid development of its natural resources industries. While this is having a strongly positive effect on the economy's growth rates, it does create the risk of an overheating of the economy, inflationary pressure, and, ultimately, the risk that boom could be followed by bust.
These risks could affect the banks as well as the sovereign's credit profile, since it is likely that the asset quality and liquidity of banks would be significantly impacted in such a downturn, particularly because of the rapid growth in their lending in the past two years.
On the other hand, Moody's notes that these banks have relatively low direct exposures to the government excluding loans to public sector entities, especially XacBank, Khan Bank, and Golomt Bank. Furthermore, the banks have a low reliance on wholesale funding. These factors may mitigate the correlation between the sovereign credit profile and those of the banks. However, in our view, these considerations are not sufficient to merit rating the banks above the sovereign. Deposits have proved to be quite confidence sensitive in Mongolia, meaning that the banks' liquidity could erode rapidly in a sovereign credit crisis.
We assign a B1 to the long-term local currency deposit ratings as well as issuer ratings of all four banks. The banks' foreign currency ratings are constrained by Mongolia's B1 foreign currency bond rating and B2 foreign currency deposit ceiling.
THE RATINGS OF THE FOUR MONGOLIAN BANKS ARE AS FOLLOWS:
Khan Bank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Khan Bank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; and local currency/ foreign currency long-term senior unsecured MTN/ Subordinate MTN of (P)B1/(P)B2. All other ratings were unaffected: foreign currency bank deposits rating of B2; and local currency/ foreign currency short-term deposits rating of NP.
Golomt Bank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Golomt Bank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; Issuer rating of B1; and foreign currency long-term senior unsecured debt of B1. All other ratings were unaffected: foreign currency bank deposits rating of B2.
Trade Development Bank of Mongolia -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of Trade Development Bank of Mongolia are: Bank Financial Strength of E+; local currency bank deposits rating of B1; Issuer rating of B1; foreign currency long-term senior unsecured debt / subordinate debt of B1/B2; and foreign currency long-term senior unsecured MTN/subordinate MTN of (P)B1/(P)B2. All other ratings were unaffected: foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposits rating of NP; local currency/ foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.
XacBank -- Incorporating the downgrade of the bank's standalone rating discussed above, the new ratings of XacBank are: Bank Financial Strength of E+; local currency bank deposits rating of B1; issuer rating of B1; foreign currency long-term senior unsecured debt of B1; and foreign currency long-term senior unsecured MTN of (P)B1. All other ratings were unaffected: foreign currency bank deposits rating of B2; local currency/ foreign currency short-term deposit rating of NP; local currency/ foreign currency short-term issuer rating of NP; and Euro MTN program of (P)NP.
The methodologies used in these ratings 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
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