Interview with Benjamin Turnbull, CEO of newly formed State Bank of Mongolia by Business Council of Mongolia

BCM or Business Council of Mongolia is pro-business group representing interests of mainly foreign invested businesses in Mongolia. Recently BCM NewsWire interviewed Ben Turnbull, who is the recently appointed CEO of Mongolia’s newly-formed State Bank. Mr. Turnbull previously worked in Mongolia’s banking sector, first starting in 2003 with Khan Bank as Deputy
CEO for 4 years and more recently as a banking consultant through EBRD and Acting CEO of Zoos Bank from July 9th to November 20th. BCM spoke with Mr. Turnbull about the formation of the State Bank and the failure of the former Zoos Bank.

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BCM: Can you elaborate on what happened with Zoos Bank?
BT: There has been substantial stress in the Mongolian banking system overall and has been for the last nine months since the world financial crisis caught up with Mongolia. Specifically in the case of Zoos Bank, that strain began to show itself in the 1st and 2nd quarters. As a major investor with 25% 0f ohe equity, EBRD wanted to take an active role in addressing those problems and put a management team in, in conjunction with its existing ownership. We had been here already and working in the bank for some while. I have been here since March of 2008 as a consultant for SME activity and the others came in as part of what EBRD calls Institutional Building Plan consultancy which it started in December of 2008. This is normal procedure whenever EBRD invests in a financial institution in a developing market. They want to oversee re-structure and they normally put technical assistance money in to assist that process to help it move forward. The project was being carried out by Financial Access Consulting Services (FACS) from the Netherlands.
So we had a very good running start to takeover the bank because we were very familiar with it due to our experience within the bank. Our charge was to determine the nature and magnitude of the problems and come up with a solution. As we began to work within the bank, we found the problems were far greater than anyone had yet identified. This includes audits from Ernst and Young, and including inspections from the Bank of Mongolia. The difficulty that the bank was facing as we uncovered more and more of these specific problems, led us to believe that the bank couldn’t solve its problems on its own. Over a period of time, the Bank of Mongolia also came to believe that.
During the two weeks before the intervention, a significant run was generated because we published, as we are required to do, our September 30th figures, which showed a loss of MNT 38 billion and a negative net worth in the bank. This period of loss was from January 1, 2009 to September 30, 2009. These losses were recognized in the 3rd quarter after we came in. We lost something equivalent to half of our deposits in less than two weeks. The issue relative to the takeover by the receiver at that point became very obvious. We were in a classical situation where claims in the bank were far beyond the bank’s capacity to meet. There had been a discussion about mergers, but in our case, it was likely not the appropriate thing to do due to the magnitude of the problems.

BCM: Yes, there had been a press announcement that you were going to be a third party to a potential merger between the Post and Savings banks.
BT: That’s correct. That was an unfortunate announcement because it was done without due diligence on the part of the acquiring parties. Without that due diligence, they could not have possibly known what financial resources would be required to put Zoos Bank back in sound condition.

BCM: So it wasn’t that EBRD said the merger shouldn’t take place?
BT: That’s a big misunderstanding through the Press and bears clarification. EBRD has been blamed for problems that they did not create. EBRD’s effort was to fix things. Unfortunately, it has not been covered in that way. The Press has already announced by the governor that the total loss in the bank is MNT 84 billion. That for a bank that at its maximum size attained MNT 250 billion, and whose capitalization was never more than MNT 32 billion. So you are talking about losing almost three times your capital. The total loss as it stands right now is MNT 84 billion. The Receiver’s takeover was on November 20, 2009, so the loss is from the period of January 1, 2009 to November 20, 2009. This has been announced by the governor.

Getting back to EBRD, they had looked at the bank all along and said we are trying to help. That’s why they invested in it in the first place. That’s their mission is to improve banking systems in the countries that have memberships in EBRD. They had also paid for a substantial amount of technical assistance to improve the management functions here. When you have taken losses of that magnitude, you begin to understand that to pay in new funds of MNT 84 billion for a bank that had at its maximum obtained a size of MNT 250 billion is not a viable idea. It’s going to take several eons to recover all of that even with the strongest earnings.
EBRD had said all along this was not only a specific mismanagement problem at Zoos Bank, but also general stresses in the banking system. They couldn’t be expected to fix both of these all by themselves. The situation required, as in other countries where the banking system has gone into severe distress, government intervention. That had been EBRD’s position over the past several months.
When the intention of the Savings Bank to merge was first announced to Zoos Bank’s Board of Supervisors, EBRD put in a proviso that Zoos’ Management and Board should follow the banking law as it applies to merger or take over operations. In this case it was not a merger but a purchase or takeover. The Savings Bank would have bought 100% shares of Zoos Bank. There is a process that you have to go through. First, there is an offer on a conditional basis or an indicative offer. This is under Mongolian law. You place an indicative offer to the takeover target. That offer is evaluated by the Board of Supervisors of the target organization and they have to pass it on to the shareholders either with or without an endorsement, within a specific period of time. Once that is done and the shareholders say yes we can entertain that as an indicative offer, then you open your books for full due diligence. We didn’t get to that stage.
EBRD was not saying that they were blocking the merger or refusing to sell their shares. They were saying we as EBRD and as party to this transaction have to follow the law. This was not the horrendous issue it was made out to be in the press. It’s a bit of a moot point as to whether EBRD would or would not have caused blocking action because the run was at such a high velocity at the time the merger talks had started, the Central Bank was left with no choice but to intervene. There is a time process for a merger. For example, the Central Bank is given 30 days to study and approve any merger. And that only takes place after all agreements have been reached by the parties. For a merger to go forward it takes roughly 30-60 days. Our deposit run was too strong to allow that to go forward.

BCM: At our recent BCM meeting, Mr. Enkhhuyag, First Deputy Governor of the Bank of Mongolia talked about the fact that Mongol Gazar, through a myriad of companies, caused Zoos and Anod to lose MNT 100 billion.
BT: Yes, that’s roughly right.

BCM: How is the State Bank set up?
BT: Everyone was anxious to see something good come out of something bad. They also wanted to see action by the Bank of Mongolia and the Ministry of Finance, now supported by Parliament, to create a mechanism to provide stability to the banking system in a time of crisis. As soon as the intervention by the Receiver took place with Zoos, with the encouragement by IMF and others, a solution was sought. By the determination of the government, creation of a state owned bank was accomplished. It is held 100% by the Ministry of Finance as the legal entity. It is currently capitalized and duty registered. There was substantial Government of Mongolia money already in the bank through various financing efforts to add stability and liquidity to both the bank and economic situation. 18 million dollars was borrowed by Zoos Bank from the Ministry of Finance. On our balance sheet we had that funding and some liquidity funding. That is all held by the Ministry of Finance and most of that will be converted to capital. We’ll end up as a well capitalized bank relative to our size. Also there is a bond issue going through Parliament to take care of the Zoos Bank Receivership and State Bank in terms of taking assets and liabilities from the Receiver.

BCM: How does that work?
BT: It’s pretty straight forward in the State Bank case. The liabilities or deposits are way in excess of the loans transferred from the old Zoos Bank. In order to balance the balance sheet you have to have assets in the form of bonds put on your balance sheet. It’s similar to the 1990’s crisis; the Savings Bank was created to be a repository for deposits from failed banks. And their asset side was almost entirely built on bonds. Eventually they paid those bonds back. At the time Saving Bank was privatized, they just about paid off those bonds by putting loans in their place. Those bonds can be roughly split between Receiver and State Bank.

BCM: Who is the Receiver and how does Receivership work?
BT: The receiver is N.Ariunbat; he is a long time officer in the supervision area of the Bank of Mongolia. The process of receivership is quite labor intensive and extensive. For example, for us, it started Friday morning. The bank is closed, and officers of the Bank of Mongolia take possession of the bank and all its branches. A team of about 55 people showed up nationwide at every branch with an order from the Bank of Mongolia Governor, stating the authority of the Receiver can take over the bank. The authority of all the officers and other empowered people under the old bank is eliminated. Then the only authority of the bank is the Receiver. The Bank staff has to assemble all records. The Receiver has to inspect them all. They look at every loan file, deposit agreement, everything. The Receiver’s staff and our staff worked together. They have to inventory furniture, everything. In Zoos’ case, the Receiver and his staff were pleased with the quality of record keeping and transparency. They sign off and accept the bank’s assets and liabilities. To create the new State Bank, the receiver gives some things back. So we are in the process of doing all of that now. It’s an auditing process. In this case, the presence of the receiver was welcomed by management.

BCM: What have you received thus far?
BT: We took all the performing loans and some good quality past due loans. The receiver offers and we examine. We don’t have a right to pick and choose. The receiver has extensive powers and it’s difficult to question his powers. A bank liquidation is very different from a company liquidation since it is time sensitive and effects the stability of the banking system. The Receiver must act quickly for the benefit of the government and depositors and creditors. For example: There is 80 billion in loans and 240 in liabilities. In theory, we take deposits and good loans, so you are short on the asset side. To fill the gap, you are granted bonds. And there is a maturity on them, so they must be paid back. These have not been issued yet, but the government is standing behind everything and it is not an issue. The bond issue has already been approved in Parliament.
The Bank of Mongolia is charged with oversight of the collection of bad loans. We do expect that some of Anod’s good assets may be coming to State Bank. One of the purposes for creating the bank was to create an emergency vehicle for any good assets from any forthcoming bank liquidations. PricewaterhouseCoopers is looking at all banks and those banks not meeting capital requirements may result in liquidation. This gives the government flexibility that they didn’t have before in terms of action.

BCM: Can you tell us about State Bank’s management and future?
BT: The government did right in this case and with State Bank. They created an emergency vehicle for an emergency. The government doesn’t like the idea of a nationally owned bank. They are aware that worldwide, this kind of bank doesn’t work, often due to political pressure on lending. An example of this is Freddie Mac and Fannie Mae in the U.S. The Mongolians understand this is not a good thing. The stated policy is that we will be in existence as a state owned bank for 12 to 18 months and then privatized. It provides for a clean entry for a private investor into the banking system. Privatization is the main issue everyone insisted on including the government of Mongolia.
We intend to provide good quality service, good quality products and invest in the core banking system. We have coverage for most of the country. There may be some downsizing because there are too many banks in the countryside. We currently have approximately 40 branches in 11 aimags. We feel our future as a lender is on the SMEs market. Large corporates are not appropriate for our mission or for a bank of our size. We already have a good book of SMEs.
The new State Bank has Mongolian and ex-pat management. The Ministry of Finance and Bank of Mongolia wanted to see ex-pat management continued in the new bank. The management staff has been scaled down a bit because it is a much smaller bank than Zoos was. I am CEO, Soren Sorensen is Chief Financial Officer and Robert Loggia, a Canadian, is Chief Operations Officer. The Chief Commercial Officer is Otgonbileg who comes highly experienced.
Both Robert and Otgonbileg have very well qualified Mongolian Deputies. Oyunchimeg works with Robert and Narandelger with Otgonbileg.
We’ve downsized Risk Management since we are not lending aggressively at the moment, but we may restructure that in the future.
The State Bank is open and ready for business. We’ve been open for about two weeks and are functioning normally. There have been a few minor start-up problems, but nothing major. We have the 100% support from the government of Mongolia. We are keeping most of our old Zoos customers in the bank. We look forward to serving the future economic development of Mongolia.

Source:Newswire service of Business Council of Mongolia (www.bcm.org)
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