Fitch: Mongolian Banks Still Under Pressure Despite IMF Deal
Mongolian banks will remain under pressure from asset-quality weakness and stricter enforcement of regulations, Fitch Ratings says, even though the sovereign’s recent IMF staff-level agreement is likely to reduce financing risks and help stabilise the economy. The proposed IMF programme has helped provide Fitch with sufficient confidence that Mongolia (B-/Stable, affirmed on 20 February) can meet its immediate external debt obligations, and is also likely to reduce some of the short-term macroeconomic risks faced by Mongolian banks, such as a further collapse in the Mongolian tugrik. The three Fitch-rated banks (all ‘B-’/Stable) have ratings that are driven by their standalone intrinsic strength, and have become less reliant on funding from the government in recent years. However, they have large exposure to government-related entities, equivalent to as much as 2.4x of equity in the case of State Bank. External financing support to the sovereign should help banks to maintain access to funding from international financial institutions. This is particularly important for Khan Bank and XacBank, which have a large proportion of wholesale funding. We expect banks to continue to use foreign-currency swap facilities provided by the Bank of Mongolia (BOM), due to limited swap counterparts, but they are likely to pivot toward market-based arrangements. We maintain a negative sector outlook for Mongolian banks, as the weak operating environment continues to put pressure on their financial profiles. Asset quality is likely to deteriorate further at banks with higher exposure to the most vulnerable borrowers – those in the mining, wholesale/retail and manufacturing sectors, for which banks’ impaired loan ratios were 17.9% at end-2016, compared with 8.5% for total loans. We do not expect BOM’s asset-quality review – which is linked to the IMF programme and is likely to conclude in 2017 – to reveal significant capital shortfalls at Fitch-rated banks. However, it is likely to emphasise forward-looking provisioning, early loss recognition and accurate collateral valuation, which could create additional credit costs and weigh on banks’ profits. Profit will also be constrained by weak loan growth, which we only expect to recover in the medium term, if the economy stabilises. The phasing-out of low-margin government-subsidised lending is unlikely to fully offset these drags on profit. Tighter enforcing of laws and regulations, in particular around connected exposures, could also create some strains in the banking sector. Two local banks, controlled by the same shareholder, that are not rated by Fitch – Trade and Development Bank of Mongolia and Ulaanbaatar City Bank – have allegedly exceeded a limit of 20% of total capital that can be loaned to a single borrower. We believe potential spill-over risks to be manageable for Fitch-rated banks, as they are not significantly exposed to those banks or to the identified large borrower. For more details, see our report “Mongolia Banks Report Card”, available at www.fitchratings.com or by clicking the link above.