TEXT-S&P summary: Golomt Bank of Mongolia
(The following statement was released by the rating agency)
Jan 09 -
Summary analysis -- Golomt Bank of Mongolia ----------------------- 09-Jan-2013
CREDIT RATING: B+/Stable/B Country: Mongolia
Credit Rating History:
Local currency Foreign currency
08-Dec-2011 B+/B B+/B
08-Nov-2011 BB-/B BB-/B
Ratings Score Snapshot
Issuer Credit Rating B+/Stable/B
Business Position Strong (+1)
Capital and Earnings Weak (0)
Risk Position Moderate (-1)
Funding and Liquidity Above Average
and Adequate (0)
GRE Support 0
Group Support 0
Sovereign Support 0
Additional Factors 0
The stable outlook on Golomt Bank reflects our expectation that the bank could maintain its financial risk profile at about the current level while pursuing its high-growth strategy. The outlook on the bank also reflects the stable outlook on the sovereign rating on Mongolia.
We may raise the rating if Golomt Bank continues to manage its credit growth, diversify its asset mix, and maintain its record of lower credit losses than peers'. This could lead to our positive reassessment of the bank's risk position. We could also upgrade the bank if its capitalization improves substantially, although we believe this is unlikely in view of the bank's strong asset growth. We may also raise the rating if the sovereign rating on Mongolia is raised and Golomt Bank maintains its "high systemic importance."
Conversely, we may lower the rating if the bank's capitalization weakens significantly, such that its RAC ratio before concentration adjustments falls below 3%. This could be either due to substantial credit losses or overly aggressive expansion.
Standard & Poor's Ratings Services bases its ratings on Golomt Bank of Mongolia on the bank's 'b+' anchor, "strong" business position, "weak" capital and earnings, "moderate" risk position, "above-average" funding, and "adequate" liquidity, as our criteria define those terms.
Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a bank operating only in Mongolia is 'b+'. Golomt Bank predominantly operates in Mongolia.
The BICRA score is based on our evaluation of economic risk; we view Mongolia as a narrowly based, small economy with high reliance on the mining sector and low income levels. Rapid growth in house prices and domestic credit, along with significant exposure to external imbalances, heighten the country's economic imbalance. The economic risk score also reflects relaxed lending and underwriting standards with high sector and single-name concentration, and weaknesses in the payment culture and rule of law. The industry risk score reflects our view of the banking sector's weak regulation, aggressive risk appetite reflected in a focus on growth, and moderate systemwide funding with a narrow and shallow domestic debt capital market. We noted that some weaker Mongolian banks experienced deposit runs from the fourth quarter of 2008 to the first quarter of 2009.
Golomt Bank's leading market position in Mongolia, where it commands about one fifth of the banking sector's total assets, supports its business position. The bank also has good positions in card services, international trade finance, and treasury services. Golomt Bank's strong franchise enables it to have stable funding sources and a more diversified revenue mix compared with local peers'.
Our assessment of Golomt Bank's capital and earnings primarily reflects the bank's weak risk-adjusted capital (RAC) ratio before diversification and concentration adjustments, and our view of the bank's strong credit growth. We estimate that the bank's RAC ratio will be 3%-4% over the next 18 months. This is despite significant growth in the bank's capital base due to solid earnings in the first three quarters of 2012 and a Mongolian tugrik (MNT) 21 billion share placement in March 2012. Golomt Bank has a prudent dividend policy to retain all earnings, and proactive capital management to secure new capital funding for its business growth. Nonetheless, the bank's internal accruals are not sufficient to support its strong growth in risk-weighted assets (RWA), according to our risk-adjusted capital framework (RACF).
Our risk position assessment for Golomt Bank is primarily based on the significant RWA adjustment for the bank's concentration risks under our RACF. The adjustment mainly reflects the bank's small size and its credit concentration in a narrow-based economy. Golomt Bank also has a concentration on some riskier industries, including mining, construction, and real estate development. However, Golomt Bank's credit concentration compares well to the industry average, thanks to the bank's higher individual share of credit card, foreign exchange, and trade businesses, as well as its more prudent underwriting standard than its local peers'.
On a positive note, Golomt Bank's credit loss experience has by far been significantly better than its domestic peers' or the projected losses according to our RACF. The bank's asset quality is moderate, in our view, but is among the best in Mongolia's banking industry. Although we believe Golomt Bank's rapid loan growth since 2010 could weaken its asset quality, Mongolia's strong economic prospects partly offset this risk. Moreover, we expect the bank's loan quality to continue to outperform its domestic peers', given the bank's below-par loan growth in the past two years.
Golomt Bank's satisfactory domestic franchise supports its above-average funding profile. The bank's loan-to-deposit ratio deteriorated to about 75% at the end of September 2012 from about 65% at the beginning of the year, due mainly to modest deposit growth throughout the year in a context of tightened monetary policy. That said, Golomt Bank's ratio remains far lower than the industry average of about 107% as of end-September 2012.
The bank's liquidity profile appears to be adequate, with liquidity ratios above the industry average. We expect Golomt Bank to maintain prudent management of its liquidity position. Nonetheless, slow customer deposit inflow could constrain the bank's loan growth in the next 12 months.
We view Golomt Bank as having "high systemic importance" in Mongolia (BB-/Stable/B), where we classify the government as being "highly supportive" to the banking system. As such, we believe there is a "high" likelihood for Golomt Bank to receive extraordinary support from Mongolian government if the bank comes under financial distress. Nonetheless our rating on the bank does not factor in any extraordinary government support because the bank's stand-alone credit profile is very close to the local currency rating on Mongolia.
Related Criteria And Research
-- Banking Industry Country Risk Assessment: Mongolia, Jan. 8, 2013
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010