Fitch Ratings Affirms Two Mongolian Banks Maintain Negative Outlook

Hong Kong-based Fitch Ratings, an international credit rating agency, has affirmed on November 19 that Mongolia’s Khan Bank, and XacBank foreign currency Long-term Issuer Default Ratings (IDR) at ‘B’, foreign currency Short-term IDRs at ‘B’, and local currency Long-term IDRs at ‘B’.
The Outlook on the Long-term IDRs remains Negative.

Hong Kong-based Fitch Ratings, an international credit rating agency, has affirmed on November 19 that Mongolia’s Khan Bank, and XacBank foreign currency Long-term Issuer Default Ratings (IDR) at ‘B’, foreign currency Short-term IDRs at ‘B’, and local currency Long-term IDRs at ‘B’.
The Outlook on the Long-term IDRs remains Negative.
At the same time, the agency has downgraded both banks’ Individual Rating to ‘D/E’ from ‘D’ and their Support Rating to ‘5’ from ‘4’, which is in line with Fitch’s methodology. Meanwhile, the Support Rating Floor of both banks was affirmed at ‘B-’.
“The downgrade of both banks’ Individual Rating reflects their limited financial flexibility due to weak loan quality, low reserve coverage levels and vulnerable capitalization, especially if the banks continue to grow their loans quickly without raising adequate additional capital,” says Sabine Bauer, Director in Fitch’s Financial Institutions Team.
Fitch said that there is a risk that it would downgrade Khan Bank’s and XacBank’s Long-term IDRs in six months if the banks fail to materially strengthen their capital to bolster reserves. However, if loan quality were to stabilize on the back of an overall improved economic environment, Fitch may consider revising the Outlook to Stable.
Khan Bank’s and XacBank’s IDRs and Individual Ratings also take into account the banks’ solid revenues, good liquidity and good corporate governance. In XacBank’s case, its ratings largely reflect its small size and dependence on non-deposit funding, even though borrowings from bilateral and multilateral institutions add some stability. However, Fitch notes that the bank recorded a solid increase in customer deposits in 9M09 (42 percent). Despite Khan Bank’s dominant franchise, its ratings reflect its somewhat weaker loan quality. Though, reported direct exposure to the problematic construction sector is relatively low at the two banks (5 percent at Khan Bank at end-H109 and 2 percent at XacBank at end-9M09), both rely heavily on property collateral.
The quality of loans deteriorated substantially in 9M09 and Fitch expects this trend to continue, even though the economy should benefit from additional foreign direct investment in the country’s large-scale mining projects. According to the regulatory loans classification scheme, at end-9M09, substandard, doubtful and loss loans stood at 6,6 percent of gross loans for Khan Bank, with an additional 9,5 percent being classified as special mention loans (2008: 2,8 percent and 7,3 percent, respectively). For XacBank the respective ratios were 2,6 percent and 2,2 percent (2008: 1,2 percent and 0,8 percent). Those ratios are not fully comparable, since banks do have some flexibility in how they classify their loans. At end-9M09, loan loss reserves covered 4 percent of gross loans at Khan Bank and 1,4 percent at XacBank.
After recent capital raisings (Khan Bank issued MNT4 billion new shares in August 2009 and plans to issue US$15 million subordinated debt by end-2009, while XacBank issued MNT5 billion common stock and US$3 million subordinated debt in November 2009). Khan Bank’s Tier 1 capital adequacy ratio (CAR) stood at 14 percent (Total CAR of 14,5 percent) at end-9M09 while XacBank’s was an estimated 14 percent (18%) as of mid-November 2009. While these ratios appear strong, there is the potential for capital erosion through elevated credit costs and strong loan growth.
Khan Bank is Mongolia’s largest bank with 23 percent of system-wide assets at end-9M09. XacBank is Mongolia’s fourth-largest bank with 7 percent of system-wide assets.

Source:Fitch Ratings HK