August 31, 2017 / 1:09 AM / a year ago

Fitch: Asset-Quality Review to Aid Mongolian Banks' Transparency

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Presentation: Update on Mongolia - Sovereign and Banks here HONG KONG/LONDON, August 30 (Fitch) The adequacy of capital positions of Mongolian banks should become clearer as a result of the Bank of Mongolia's review of asset quality, Fitch Ratings says. We expect the review will lead to improved transparency and comparability of banks' exposure to deteriorating asset quality. This could lead to some smaller or weaker banks being acquired by stronger ones, which would help banking system stability. It could also result in public ownership if sovereign support is needed to maintain system stability, with the IMF having earmarked up to 3.5% of GDP as a contingency. The review, which began recently as part of Mongolia's IMF programme, is being conducted by an independent consultancy firm and is scheduled to be completed by the end of November. The Bank of Mongolia will then engage with banks on their capital and business plans. Identified capital shortfalls will have to be rectified by end-1H18. We believe there will be a particular focus on loans that are past due and still reported as performing and not impaired, given the large volumes of these since 2015. We also expect high scrutiny over rescheduled loans, which are usually reported in the highest-performing category, and collateral valuations. The sector's non-performing loan (NPL) ratio - loans classified as substandard, doubtful and loss loans - has been steadily rising in recent years, reaching 8.8% at end-1H17 (end-2012: 4.2%). Past-due loans increased more sharply, reaching 7.3% of gross loans at end-2015 (end-2012: 1.6%) before starting to decline to 6.2% at end-1H17 as some started to become non-performing. There are signs that movement from past-due to non-performing is accelerating and we expect NPL ratios to worsen, particularly among smaller banks where governance and underwriting standards tend to be weaker. Capital positions are susceptible to higher impairments, and the sector's reserve coverage (end-2016: 80%) could fall quickly with rising NPLs, leading to pressure on profitability. Our analysis shows significant disparity between Mongolia's major banks in terms of their capital headroom to absorb a rise in NPLs. <iframe allowfullscreen src="// mbed" title="Mongolian Banks - Capital Headroom" width="700" height="557" scrolling="no" frameborder="0"> Khan Bank (B-/Stable) and XacBank (B-/Stable) have relatively large buffers, with sufficient Tier 1 capital to absorb an 11-percentage-point rise in impaired loans, based on our calculations on end-2016 data with reserve coverage on existing and new NPLs adjusted to 100%. XacBank's impaired loan ratio had increased to 8.9% by end-1H17 from 4.5% at end-2016 while Khan Bank's came down slightly to 8.2% from 8.3%. Trade and Development Bank of Mongolia (TDB; not rated) could absorb a 6pp rise and Golomt (not rated) and State Bank (B-/Stable) could only absorb a 3pp rise, which appears low, particularly for Golomt, a corporate lender with sizeable risk. State Bank is a retail lender with a lower-risk lending profile. Its impaired loan ratio had declined to 4.5% by end-1H17 from 6.7% at end-2016. We do not expect the asset-quality review to reveal significant capital shortfalls at the Fitch-rated banks. However, it is likely to emphasise provisioning, earlier loss-recognition and accurate collateral valuation, which could create additional costs and weigh on banks' profits. We also believe the review will strengthen the Bank of Mongolia's prudential role and supervision of banks' corporate governance and risk management. But initiatives to make it easier for banks to sell NPLs may be slow-moving as they will require changes to the legal framework. Our ratings of Mongolia's banks reflect their asset quality, their significant direct exposure to the sovereign (B-/Stable), the volatile operating environment, and a local currency prone to volatility. The slides "Presentation: Update on Mongolia - Sovereign and Banks" are an excerpt from Fitch's seminar in Ulaanbaatar on 23 August, and are available at or by clicking the link above. Contact: Sabine Bauer Senior Director, Financial Institutions +852 2263 9966 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road, Central Hong Kong David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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