S&P Assigns Golomt Bank of Mongolia 'BB-/B' Ratings; Outlook Stable

-- The credit profile of Golomt Bank of Mongolia reflects the bank's marginal capitalization due to its strong business growth strategy and narrow business scope.

-- We believe there is a degree of implicit support for Golomt Bank from the Mongolian government in times of financial distress, due to the bank's systemic importance.

-- We are assigning our 'BB-' long-term and 'B' short-term counterparty credit ratings to Golomt Bank.

-- The outlook on the long-term rating is stable to reflect our view that the bank will maintain its current financial risk profile while pursuing its high-growth strategy.

TAIPEI (Standard & Poor's) Nov. 9, 2011--Standard & Poor's Ratings Services said today it had assigned its 'BB-' long-term and 'B' short-term counterparty credit ratings to Golomt Bank of Mongolia. The outlook on the long-term rating is stable.

The ratings on Golomt Bank reflect the bank's marginal capitalization due to its strong business growth rate, somewhat narrow business scope, and moderate asset quality. These strengths are partly offset by the bank's satisfactory business position in its home market despite its small scale. The ratings also reflect the implicit support of the Mongolian government (Mongolia; BB-/Stable/B) due to the bank's importance to the country's banking system.

"We view Golomt Bank's capitalization to be marginal due to the bank's strong rate of growth," said Standard & Poor's credit analyst Ryan Tsang. "Nonetheless, the bank has a very prudent dividend policy to retain all earnings and proactive capital management to secure new capital funding its business growth."

Golomt Bank's risk-adjusted capital ratio was 5.6% in the six months ended June 30, 2011, based on Standard & Poor's Risk-Adjusted Capital Framework. The ratio is marginal by global standards, reflecting the likelihood that the bank's loan growth will be strong over the next one to two years. Over the same period, the bank's regulatory tier 1 ratio was 11.9% and total regulatory capital adequacy ratio was 16.1%.

Golomt Bank's operations focus on various Mongolian business sectors. The bank has a certain degree of concentration on some riskier industries, such as mining and real estate. The bank has a more diversified business mix than its local peers because of its higher individual share of the credit card and foreign exchange and trade business. However, Golomt Bank is more focused on traditional banking business than its international peers.

Golomt Bank's asset quality is moderate, in our view, but among the best in Mongolia's banking industry. We believe the bank's rapid loan growth since 2010 could weaken its asset quality, but this risk is partly offset by Mongolia's strong economic prospects and the bank's more prudent underwriting standard than its local peers'. Golomt Bank's nonperforming loan (NPL) ratio was 2% in 2010, but the bank's potential impaired assets would be twice this level if its restructured loans were included. The majority of these restructured loans are the extension of normal working capital lines. However, the NPL ratio can be a poor indicator of asset quality during periods of rapid growth, such as the current period for Golomt Bank.

"In our opinion, the greatest risk to Golomt Bank's profitability is its provisioning costs, which will likely increase in 2011 as the current credit cycle unfolds," said Mr. Tsang. "The bank's net interest margin has narrowed over the past few years due to fierce industry competition, particularly from foreign competitors with larger business scale. This could slightly improve following Golomt Bank's adjustments to its loan mix by increasing more small and mid-size loans and mortgages, in our view."

The bank's ratio of core earnings to adjusted assets was 1.27% in 2010, which is modest for a nascent banking system such as Mongolia's, and could be further moderated by the potential credit costs associated with strong loan growth.

In our view, Golomt Bank has a good market position in Mongolia's banking industry, where it commands about a quarter of the sector's total assets. The bank also has good positions in card services, international trade finance, and treasury services. Golomt Bank's satisfactory franchise enables the bank to secure stable funding sources and more diversified revenue mix compared to local peers'. However, the bank's scale disadvantage still constrains its overall market position compared to its international peers'.

Golomt Bank's funding and liquidity profile is adequate, in our opinion. The bank's loan-to-deposit ratio was about 60% at the end of 2010, and we expect the bank to maintain the ratio below 75% over the next one to two years.

The stable outlook on Golomt Bank reflects our expectation that the bank is likely to maintain its financial risk profile at a similar level while pursuing its high-growth strategy. Golomt Bank's capitalization may come under pressure if the bank cannot secure new capital to fund its strong business growth on a timely basis. We may raise the rating if Golomt Bank is able to substantially improve its capitalization under the expectation of strong asset growth. Conversely, we may lower the rating if the bank adopts a more aggressive expansion that weakens its already marginal capitalization or asset quality.