Moody’s changes ratings outlooks of Mongolian banks to negative
Moody’s Investors Service reported on Wednesday that it has changed the ratings outlooks for three Mongolian banks to negative from stable, reflecting intensifying adverse developments in their operating environments.
The banks are Khan Bank LLC, Trade and Development Bank of Mongolia LLC (TDBM), and XacBank LLC. Moody’s published a complete list of their ratings.
At the same time, Moody’s has lowered TDBM’s baseline credit assessment (BCA) to b2 from b1 because of the high credit risks evident in its portfolio. On this last point, Moody’s notes a high level of borrower concentration and relatively higher exposure to risky sectors, such as construction and mining.
Despite the lowering of the BCA, Moody’s has affirmed TDBM’s B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM – as the second largest lender in terms of loans – in the Mongolia banking system.
RATINGS RATIONALE
Moody’s said its change in the ratings outlooks to negative reflects the fact that the banks remain vulnerable to deterioration in asset quality and high borrower concentration against the backdrop of intensifying adverse developments in the operating environment.
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.
An expansionary fiscal policy and a loose monetary policy have somewhat mitigated the negative impact of the slowdown in global commodities markets on the operating environment.
However, given the prolonged slowdown, risk in the banking sector is increasing, as the continued efficacy of such policies is uncertain.
In this context, Moody’s notes that the banking system’s loan growth for January-November 2013 was 55 percent, much faster than 23 percent for the same period in the previous year. The system’s non-performing loans (NPL) ratio only rose to 5.3 percent at end-November 2013 from 4.2 percent at end-2012. However, the increase was tempered by the denominator effect, which raises our concerns about the sustainability of the country’s rapid credit growth.
Moody’s further notes that much of the loan growth of 2013 was concentrated in the construction sector, following the disbursement of policy loans from the Bank of Mongolia through its price stabilization and mortgage financing programs starting from early 2013.
As a result, loans to the construction sector started to jump 67.7 percent in the second quarter of 2013 from the first quarter of 2013, much higher than the overall system loan growth of 16.6 percent.
Moreover, it is difficult for the banks to fully price in the credit risks of borrowers in their policy loans due to rate caps on such loans. As a result, the buffer to absorb credit costs is lower than in the case of a normal commercial loan.
The effects of the strong loan growth for 2013 are likely to offset the strong internal capital generated by reported earnings. Therefore, despite an annualized average 26 percent 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.
Moody’s has lowered TDBM’s BCA to b2 — as indicated — from b1 to reflect pressure on its credit profile, due to its relatively higher concentration risk and exposure to borrowers in risky sectors.
Despite the lowering of the BCA, Moody’s has affirmed TDBM’s B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM – as the second largest lender in terms of loans – in the Mongolia banking system.
Elements that could change ratings
Moody’s said that given that the B1 ratings assigned to the three banks are the same as the sovereign rating, an upgrade of their ratings is unlikely.
However, upward pressure on the BCA at TDBM could occur if it substantially reduces its borrower concentration and exposure to risky sectors.
The following factors could exert negative pressure on the three banks’ ratings: corporate governance-related problems that cause a loss of depositor confidence, therefore increasing the threat of deposit flight; a significant deterioration in asset quality; for example new NPLs to gross loans exceed four percent; a rise in concentration, or a rise in exposures to risky sectors, in particular construction; Tier 1 falls below nine percent; or a significant deterioration in profitability, such that their net income is less than 1.4 percent of their average risk weighted assets.
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The banks are Khan Bank LLC, Trade and Development Bank of Mongolia LLC (TDBM), and XacBank LLC. Moody’s published a complete list of their ratings.
At the same time, Moody’s has lowered TDBM’s baseline credit assessment (BCA) to b2 from b1 because of the high credit risks evident in its portfolio. On this last point, Moody’s notes a high level of borrower concentration and relatively higher exposure to risky sectors, such as construction and mining.
Despite the lowering of the BCA, Moody’s has affirmed TDBM’s B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM – as the second largest lender in terms of loans – in the Mongolia banking system.
RATINGS RATIONALE
Moody’s said its change in the ratings outlooks to negative reflects the fact that the banks remain vulnerable to deterioration in asset quality and high borrower concentration against the backdrop of intensifying adverse developments in the operating environment.
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.
An expansionary fiscal policy and a loose monetary policy have somewhat mitigated the negative impact of the slowdown in global commodities markets on the operating environment.
However, given the prolonged slowdown, risk in the banking sector is increasing, as the continued efficacy of such policies is uncertain.
In this context, Moody’s notes that the banking system’s loan growth for January-November 2013 was 55 percent, much faster than 23 percent for the same period in the previous year. The system’s non-performing loans (NPL) ratio only rose to 5.3 percent at end-November 2013 from 4.2 percent at end-2012. However, the increase was tempered by the denominator effect, which raises our concerns about the sustainability of the country’s rapid credit growth.
Moody’s further notes that much of the loan growth of 2013 was concentrated in the construction sector, following the disbursement of policy loans from the Bank of Mongolia through its price stabilization and mortgage financing programs starting from early 2013.
As a result, loans to the construction sector started to jump 67.7 percent in the second quarter of 2013 from the first quarter of 2013, much higher than the overall system loan growth of 16.6 percent.
Moreover, it is difficult for the banks to fully price in the credit risks of borrowers in their policy loans due to rate caps on such loans. As a result, the buffer to absorb credit costs is lower than in the case of a normal commercial loan.
The effects of the strong loan growth for 2013 are likely to offset the strong internal capital generated by reported earnings. Therefore, despite an annualized average 26 percent 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.
Moody’s has lowered TDBM’s BCA to b2 — as indicated — from b1 to reflect pressure on its credit profile, due to its relatively higher concentration risk and exposure to borrowers in risky sectors.
Despite the lowering of the BCA, Moody’s has affirmed TDBM’s B1 senior unsecured bond and local currency deposit ratings, incorporating one notch of systemic support, given our assessment of the systemic importance of TDBM – as the second largest lender in terms of loans – in the Mongolia banking system.
Elements that could change ratings
Moody’s said that given that the B1 ratings assigned to the three banks are the same as the sovereign rating, an upgrade of their ratings is unlikely.
However, upward pressure on the BCA at TDBM could occur if it substantially reduces its borrower concentration and exposure to risky sectors.
The following factors could exert negative pressure on the three banks’ ratings: corporate governance-related problems that cause a loss of depositor confidence, therefore increasing the threat of deposit flight; a significant deterioration in asset quality; for example new NPLs to gross loans exceed four percent; a rise in concentration, or a rise in exposures to risky sectors, in particular construction; Tier 1 falls below nine percent; or a significant deterioration in profitability, such that their net income is less than 1.4 percent of their average risk weighted assets.
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