November 20, 2017 / 8:09 AM / a month ago

Fitch Affirms Three Mongolian Banks at 'B-'; Outlook Revised to Positive

(The following statement was released by the rating agency) HONG KONG, November 20 (Fitch) Fitch Ratings has revised the Outlooks on the Long-Term Issuer Default Ratings (IDRs) of Mongolia-based Khan Bank LLC, XacBank LLC and State Bank LLC to Positive from Stable. The banks' Long-Term IDRs have been affirmed at 'B-' and their Viability Ratings at 'b-'. A full list of rating action is at the end of this rating action commentary. The rating action follows Fitch's periodic review of the Mongolian banks and the Mongolian sovereign. See <a href="https://www.fitchratings.com/site/pr/1032478">Fitch Revises Outlook on Mongolia to Positive; Affirms at 'B-', published on 17 November 2017. Our 2018 outlook on the banking system is revised to Stable from Negative. There are signs of cyclical economic improvement, although challenges remain and the asset-quality review (AQR) has yet to be concluded. Fitch has raised its 2018 GDP forecast to 4.5%, from 3.5%, against its expected GDP of 4.2% for 2017. KEY RATING DRIVERS IDRS AND VIABILITY RATINGS The IDRs of Khan Bank and XacBank are driven by their respective Viability Ratings, while State Bank's IDR is driven by our expectation of sovereign support. Therefore, the Positive Outlook on Khan Bank and XacBank mirrors the prospect for stronger intrinsic credit profiles as operating conditions improve. For State Bank, the Positive Outlook reflects our view of improving sovereign ability to provide extraordinary support, if needed. The affirmation of the banks' Viability Ratings reflects our view that their intrinsic credit profiles remain commensurate with the 'b-' category. Fitch expects the operating environment to continue improving, with positive changes over the near- to medium-term being of a cyclical and structural nature. The sovereign's stabilised fiscal position has significantly reduced external liquidity risk and positively affected the economic environment. Fitch also expects that, with support from the IMF, the Bank of Mongolia's authority will strengthen as it leads a comprehensive AQR of the banking system and aligns its supervisory framework more closely with international standards. We see easing pressure on all three banks' funding and liquidity profiles. The Mongolian government's refinancing risks have receded, banks' deposit funding remains stable and international financial institutions should continue to provide term funding, especially for Khan Bank and XacBank. We do not expect the banks' asset quality to continue worsening due to the improving operating environment. However, loan re-classifications are likely to lead to some non-performing loan ratio adjustments, subject to the result of the AQR, particularly for rescheduled loans and loans that are past due but still reported as performing. Notwithstanding, we expect the banks' non-performing loan ratios to stabilise or even fall in 2018. The improving economic environment and the return of investor confidence have strengthened banks' loan-growth aspirations for the coming one to two years. We see rapid loan growth as an indicator of higher risk appetite, but risk controls and capital management should remain adequate to help banks maintain sufficient risk buffers. We expect State Bank's profitability to improve as the proportion of its subsidised lending at below market rates phases out. This should allow the bank to focus on more profitable segments. The bank's weaker-than-peers' capital generation is of higher influence for its Viability Rating. SUPPORT RATINGS AND SUPPORT RATING FLOORS The affirmation of Khan Bank's and State Bank's Support Ratings and Support Rating Floors reflects Fitch's view that the sovereign's propensity to provide extraordinary support remains unchanged given the banks' domestic systemic importance and high proportion of retail deposit funding. State Bank's Support Rating Floor is aligned to the sovereign's rating due to its higher-than-peers' share of government funding (19% of total funding at end-2016). We believe this, together with its 100% government ownership, provides a strong incentive for the authorities to extend extraordinary support, if required. XacBank's Support Rating and Support Rating Floor have been affirmed at '5' and 'No Floor', respectively, reflecting Fitch's view that sovereign support, while possible, cannot be relied upon. XacBank's higher proportion of wholesale funding could be used to share losses if that was considered necessary to support system stability. RATING SENSITIVITIES IDRS AND VIABILITY RATINGS A sovereign rating upgrade could lead to an upgrade in Khan Bank's and XacBank's IDRs and Viability Ratings and State Bank's IDRs. State Bank's IDRs are also sensitive to changes in Fitch's expectation of the sovereign's willingness to provide support to the bank. An upgrade in State Bank's Viability Rating could come from a significant profitability improvement, disciplined growth, stronger capitalisation or a more diversified funding structure. Negative rating action on the banks' Viability Ratings could stem from a higher risk appetite, leading to disproportionate asset concentration in riskier sectors. In addition to significant loan quality deterioration, an erosion of capital or funding position could also result in a downgrade. A downgrade in Khan Bank's and State Bank's Viability Ratings would likely result in a downgrade in their IDRs if our expectation for sovereign support were to change. In contrast, a downgrade in XacBank's Viability Rating is likely to lead to a downgrade in its IDR. A sovereign rating downgrade would lead to a downgrade of all three banks' IDRs and Viability Ratings. SUPPORT RATINGS AND SUPPORT RATING FLOORS A perceived change in assumptions around the sovereign's willingness, or a weakening of its ability, to provide timely support could result in a change of the Support Rating Floors of Khan Bank and State Bank. XacBank's Support Rating Floor could be upgraded if we were to take positive rating action on the sovereign. The rating actions are as follows: Khan Bank LLC Long-Term Foreign-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'B' Long-Term Local-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' XacBank LLC Long-Term Foreign-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'B' Long-Term Local-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' State Bank LLC Long-Term Foreign-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'B' Long-Term Local-Currency IDR affirmed at 'B-'; Outlook revised to Positive from Stable Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' Contact: Primary Analyst Sabine Bauer Senior Director +852 2263 9966 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Dex Voeux Road Central Hong Kong Secondary Analyst Veronica Lau Director +852 2263 9924 Committee Chairperson Wee Siang Ng, CFA Senior Director +65 6796 7230 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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