Fitch: Weakening Mongolian Mining Highlights Risks for Banks
(The following statement was released by the rating agency) HONG KONG/LONDON, April 30 (Fitch) The extension of a debt repayment by Mongolian Mining Corporation (MMC) highlights the pressures for the industry and the risks for local banks, Fitch Ratings says. Mongolian banks do not have excessively high direct exposure to mining, but the deteriorating operating environment for the country's key export sector heightens wider macro risks to the banking system. There are no immediate rating implications for the banks, as our ratings and their Outlooks for Khan and Xac (both 'B/Negative') already reflect the harsher operating environment. Mongolian banks are susceptible to the liquidity and profitability pressure in the mining sector as this flows through to the broader economy.
Mining's weakness stems largely from depressed demand, as indicated by falling prices. This also has a negative impact on the Mongolian turgrik, which depreciated by 20% in 2013 and by another 6% so far this year. With foreign-currency loans at around 30%, banks are exposed to credit risk from a weaker local currency, even though foreign-currency lending is largely to corporates with natural or financial hedges.
Credit risks have built up for the banks due to an exceptionally loose macro policy that has fuelled credit growth above nominal GDP. Buffers against the risk are not robust, as the brisk pace of credit expansion at capped rates under the government's loan programme pressures margins, liquidity and capital. Growth of non-performing loans is rapidly outstripping that of total loans, rising by 93% yoy in March 2014 against 54%. The headline figure for NPLs remained at 5.2% of total loans (4.2% a year before). But Fitch believes this underestimates asset-quality stress as it only captures 90-days-or-longer-overdue loans. Mongolian banks' direct lending to the mining sector was a modest 12% of total lending at end-2013 because they lack the capacity to fund large projects. Financing has been provided by global financial institutions, which have had to extend their funding commitments due to delays. Among the local banks, Trade and Development Bank of Mongolia has a USD40m short-term unsecured loan to MMC. The loan is about 1.3% of the bank's total assets or 18% of equity, and so manageable. Golomt's loans to the mining industry represented 11% of its end-2013 lending, while Khan and Xac (both 'B/Negative') had small lending exposures at 4% and 3%, respectively. The Development Bank of Mongolia does occasionally guarantee mining loans in part, which mitigates some of the credit risk. The mounting pressure on Mongolia's economic and financial stability underpins the Negative Outlook on our 'B+' sovereign rating. Mongolia has a macro-prudential risk indicator of 'MPI3', reflecting a high risk of systemic stress from rapid credit growth, strong asset-price growth, and appreciation of the real effective exchange rate. Contact: Chikako Horiuchi Director Financial Institutions +852 2263 9924 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Mongolia here Mongolian Banks: Growing Ties with the State here 2014 Outlook: Asia-Pacific Banks here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Mining's weakness stems largely from depressed demand, as indicated by falling prices. This also has a negative impact on the Mongolian turgrik, which depreciated by 20% in 2013 and by another 6% so far this year. With foreign-currency loans at around 30%, banks are exposed to credit risk from a weaker local currency, even though foreign-currency lending is largely to corporates with natural or financial hedges.
Credit risks have built up for the banks due to an exceptionally loose macro policy that has fuelled credit growth above nominal GDP. Buffers against the risk are not robust, as the brisk pace of credit expansion at capped rates under the government's loan programme pressures margins, liquidity and capital. Growth of non-performing loans is rapidly outstripping that of total loans, rising by 93% yoy in March 2014 against 54%. The headline figure for NPLs remained at 5.2% of total loans (4.2% a year before). But Fitch believes this underestimates asset-quality stress as it only captures 90-days-or-longer-overdue loans. Mongolian banks' direct lending to the mining sector was a modest 12% of total lending at end-2013 because they lack the capacity to fund large projects. Financing has been provided by global financial institutions, which have had to extend their funding commitments due to delays. Among the local banks, Trade and Development Bank of Mongolia has a USD40m short-term unsecured loan to MMC. The loan is about 1.3% of the bank's total assets or 18% of equity, and so manageable. Golomt's loans to the mining industry represented 11% of its end-2013 lending, while Khan and Xac (both 'B/Negative') had small lending exposures at 4% and 3%, respectively. The Development Bank of Mongolia does occasionally guarantee mining loans in part, which mitigates some of the credit risk. The mounting pressure on Mongolia's economic and financial stability underpins the Negative Outlook on our 'B+' sovereign rating. Mongolia has a macro-prudential risk indicator of 'MPI3', reflecting a high risk of systemic stress from rapid credit growth, strong asset-price growth, and appreciation of the real effective exchange rate. Contact: Chikako Horiuchi Director Financial Institutions +852 2263 9924 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Mongolia here Mongolian Banks: Growing Ties with the State here 2014 Outlook: Asia-Pacific Banks here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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