RPT-Fitch Affirms Mongolia's Khan Bank and XacBank at 'B'; Outlook Stable
Nov 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has today affirmed the ratings of two Mongolian banks - Khan Bank LLC (Khan Bank) and XacBank LLC (XacBank). The Long-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) are 'B' and 'b' for both banks. The Outlook on each bank's IDR is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT
The IDRs of both banks, which are driven by the banks' respective VRs, capture the volatile operating environment in Mongolia and the banks' limited loss absorption capabilities in the event of a sharp deterioration in the operating environment.
Pre-impairment profits - the banks' first line of defence - and capital are under pressure in part due to rapid loan expansion at rates that are capped under the government's loan programme. Heightened currency risk and tighter liquidity from strong loan growth are counterbalanced by various actions by the government, including providing a swap facility and cheaper funding.
RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT
Khan Bank's and XacBank's ratings are vulnerable to negative rating actions if the operating environment deteriorates. In particular, a material revision to Fitch's expectations for the economy's performance and the outlook for external liquidity could lead to a revision to the Outlooks.
The ratings are also sensitive to changes around the government's credit stimulus and its approach to foreign exchange intervention. This is based on the agency's view that the withdrawal of the stimulus could result in asset quality deterioration as economic growth slows and/or inflation accelerates. The banks may also be exposed to potential foreign-currency deposit withdrawals if the government itself has limited access to foreign currency and imposes restrictions on currency conversion. The ability of both banks to manage their foreign exchange risk, stemming particularly from a sharp rise in foreign currency deposits, is contingent on the use of the central bank's currency swap facility.
Both banks' ratings will also come under pressure if there are any changes in their steady access to capital from private-sector owners. Khan Bank's existing shareholder subscribed to USD40m of the bank's subordinated debt in October 2013 (2.2% of risk-weighted assets at end 1H13). Fitch also expects XacBank to issue new equity to accommodate further growth.
Fitch does not expect any upgrades at present as credit growth is likely to continue and limit improvements to the both banks' loss-absorption capabilities.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
Khan Bank's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that, as the largest bank in Mongolia with a 23% share of system-wide assets as at 1H13 based on Fitch's calculation, it would be the domestic bank most likely to receive state support in case of need. However, the Mongolian sovereign's ability to provide timely support to the banking system remains limited as underlined by its IDR of 'B+'.
The SR and SRF of XacBank reflect the agency's view that support from the sovereign, in case of need, cannot be relied upon. XacBank is the fourth-largest bank in Mongolia with a 7% share in each of assets and deposits, and 10% share of loans at end-1H13 based on the agency's calculation.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions around the propensity or ability of the Mongolian government to provide timely support to these banks. This would most likely be manifested in a change to Mongolia's sovereign rating.
The rating actions are as follows:
Khan Bank
Long-Term Foreign Currency IDR affirmed at 'B'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'B'
Long-Term Local Currency IDR affirmed at 'B'; Outlook Stable
Viability Rating affirmed at 'b'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B'
XacBank
Long-Term Foreign Currency IDR affirmed at 'B'; Stable Outlook
Short-Term Foreign Currency IDR affirmed at 'B'
Long-Term Local Currency IDR affirmed at 'B'; Stable Outlook
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
Fitch Ratings has today affirmed the ratings of two Mongolian banks - Khan Bank LLC (Khan Bank) and XacBank LLC (XacBank). The Long-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) are 'B' and 'b' for both banks. The Outlook on each bank's IDR is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT
The IDRs of both banks, which are driven by the banks' respective VRs, capture the volatile operating environment in Mongolia and the banks' limited loss absorption capabilities in the event of a sharp deterioration in the operating environment.
Pre-impairment profits - the banks' first line of defence - and capital are under pressure in part due to rapid loan expansion at rates that are capped under the government's loan programme. Heightened currency risk and tighter liquidity from strong loan growth are counterbalanced by various actions by the government, including providing a swap facility and cheaper funding.
RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT
Khan Bank's and XacBank's ratings are vulnerable to negative rating actions if the operating environment deteriorates. In particular, a material revision to Fitch's expectations for the economy's performance and the outlook for external liquidity could lead to a revision to the Outlooks.
The ratings are also sensitive to changes around the government's credit stimulus and its approach to foreign exchange intervention. This is based on the agency's view that the withdrawal of the stimulus could result in asset quality deterioration as economic growth slows and/or inflation accelerates. The banks may also be exposed to potential foreign-currency deposit withdrawals if the government itself has limited access to foreign currency and imposes restrictions on currency conversion. The ability of both banks to manage their foreign exchange risk, stemming particularly from a sharp rise in foreign currency deposits, is contingent on the use of the central bank's currency swap facility.
Both banks' ratings will also come under pressure if there are any changes in their steady access to capital from private-sector owners. Khan Bank's existing shareholder subscribed to USD40m of the bank's subordinated debt in October 2013 (2.2% of risk-weighted assets at end 1H13). Fitch also expects XacBank to issue new equity to accommodate further growth.
Fitch does not expect any upgrades at present as credit growth is likely to continue and limit improvements to the both banks' loss-absorption capabilities.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
Khan Bank's Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's view that, as the largest bank in Mongolia with a 23% share of system-wide assets as at 1H13 based on Fitch's calculation, it would be the domestic bank most likely to receive state support in case of need. However, the Mongolian sovereign's ability to provide timely support to the banking system remains limited as underlined by its IDR of 'B+'.
The SR and SRF of XacBank reflect the agency's view that support from the sovereign, in case of need, cannot be relied upon. XacBank is the fourth-largest bank in Mongolia with a 7% share in each of assets and deposits, and 10% share of loans at end-1H13 based on the agency's calculation.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF are potentially sensitive to any change in assumptions around the propensity or ability of the Mongolian government to provide timely support to these banks. This would most likely be manifested in a change to Mongolia's sovereign rating.
The rating actions are as follows:
Khan Bank
Long-Term Foreign Currency IDR affirmed at 'B'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'B'
Long-Term Local Currency IDR affirmed at 'B'; Outlook Stable
Viability Rating affirmed at 'b'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B'
XacBank
Long-Term Foreign Currency IDR affirmed at 'B'; Stable Outlook
Short-Term Foreign Currency IDR affirmed at 'B'
Long-Term Local Currency IDR affirmed at 'B'; Stable Outlook
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
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