Friday, May 2, 2014

Weakening Mongolian mining highlights risks for banks, says 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.

The following is Fitch’s assessment of Mongolian banks.

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 MNT, which depreciated by 20 percent in 2013 and by another six percent so far this year. With foreign-currency loans at around 30 percent, banks are exposed to credit risk from a weaker local currency, even though foreign-currency lending is largely to corporations with natural or financial hedges.

Credit risks have built up for the banks due to an exceptionally loose macro policy that has fueled 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 program pressures margins, liquidity and capital. Growth of non-performing loans is rapidly outstripping that of total loans, rising by 93 percent year on year in March 2014 against 54 percent.

The headline figure for NPLs remained at 5.2 percent of total loans (4.2 percent 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 percent 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 40 million USD short-term unsecured loan to MMC. The loan is about 1.3 percent of the bank’s total assets or 18 percent of equity, and so manageable. Golomt’s loans to the mining industry represented 11 percent of its end-2013 lending, while Khan and Xac (both “B/Negative”) had small lending exposures at four percent and three percent, 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 Fitch’s “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.

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