Moody’s Warns on Mongolia’s Banks

Moody's Investors ServiceMCO +0.08% has placed negative outlooks on three Mongolian banks, citing risks from rising bad loans, slower economic growth and a deteriorating operating environment.

Moody’s changed its outlook to negative from stable on Khan Bank LLC, Trade, Development Bank of Mongolia LLC and XacBank LLC while reaffirming the three lenders’ B1 ratings.

The warning on Mongolia’s banking sector follows similar views from other ratings firms, who have noted that lenders in the resource-rich country are vulnerable to an economic slowdown after a period of rapid loan growth.

Because around 90% of Mongolia’s revenues come from mining-product exports, falling commodity prices have hurt growth and the nation’s balance of payments.

“Given the resource-based nature of the economy and a large lending concentration in mining, there is the risk of boom-bust cycles, resulting in a volatile operating environment,” Moody’s said in its assessment.

The credit firm noted that loan growth from January to November 2013 was 55%, much higher than the 23% growth of a year earlier. The nonperforming-loan ratio rose to 5.3% from 4.2%, still not as high as it might be given the pace of lending. But Moody’s noted that the bulk of loan growth was concentrated in the construction sector.

If those loans sour, capital raisings by the banks may be needed.

“The effects of the strong loan growth for 2013 are likely to offset the strong internal capital generated by reported earnings,” Moody’s said. “Therefore, despite an annualized average 26% return on equity before tax over the first nine months of 2013, the banks will need additional capital from external sources to support growth and maintain capital ratios.”

The downbeat assessment comes despite Mongolia’s authorities having projected a bumper year for the economy, led by foreign investment and an expected agreement with the country’s international partner to launch phase II development at the Oyu Tolgoi copper and gold mine, a $6.5 billion project that is projected to eventually account for a large chunk of the country’s gross domestic product. Central bank head Naidansuren Zoljargal said in November that GDP could expand as much as 17% next year from around 11% this year.

Meantime, Mongolia is drawing criticism for its treatment of foreign business executives in the country. In December, authorities moved to block a consultant to Standard Bank Group Ltd. from leaving in a dispute over loan repayment. They eventually allowed him to depart shortly before Christmas.

Around 20 foreign executives are estimated to have been barred from leaving Mongolia over the past two years.

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