Collapse of Savings Bank leads to calls for better regulation

It came like an unseasonal Siberian wind from the steppe. Anointed the "Best Managed Bank in Mongolia" by The Asian Banker magazine in April this year, the collapse of Savings Bank, the country's fifth-largest lender, only three months later, has led to calls for further regulation and oversight as the country upgrades its financial services.
Branded with a negative outlook by ratings agency Moody's, the banking sector faces challenges, "in managing what will likely be a period of rapid loan growth in an economy that is increasingly exposed to commodity-driven boom-bust cycles", said Graeme Knowd, Moody's associate managing director of financial instruments group at a recent investment forum in the Mongolian capital of Ulan Bator.
According to Moody's, overall loan to deposit ratios had climbed to 89.5 per cent in September last year from 65.7 per cent in late 2010.
Golomt Bank, one of the big four banks, which combined hold 77 per cent of the nation's deposits, is late in filing its 2012 end of year accounts. PwC has recently been appointed as a second auditor to help review the bank's off-balance-sheet risks.
At the head of a recent government-backed credit splurge on mortgages and corporate loans, banks have struggled with the fallout from the slowdown in neighbouring China, the destination for 80-90 per cent of Mongolian exports. Cheap credit has been made available to banks to lend at favourable rates to key industries including food processing and construction as a way to bring down double digit inflation. The move is credited by the government for bringing near term inflation below 10 per cent.
"Overall asset quality is under pressure due to the volatile environment," says Chikako Horiuchi, a Mongolian banking analyst at Fitch. She estimates 30 per cent of bank loans are in foreign currencies, placing additional pressure on borrowers given a 17 per cent drop in the tugrik against the US dollar during the past month.
Dollar loans have been popular in Mongolia because they are often cheaper than local currency borrowing. "Repayment is likely to become difficult if these borrowers only have local currency income," Horiuchi said.
In recent years, Mongolia's four larger banks have upgraded services and attracted outside investors. The country's largest bank, Khan Bank, is 41.3 per cent owned by Sawada Holdings in Japan. In 2012, the country's third-largest bank, the Trade and Development Bank, sold a 4.8 per cent stake to Goldman Sachs.
In 2013, the parent group of Mongolia's fourth-largest bank, Xac Bank, sold a 16 per cent share for US$24 million to Japanese financial services firm Orix.
Analysts seem comfortable that with upgrades in management and corporate governance the big four are on relatively stable ground.
There is more concern for the 10 or so smaller banks that make up 25 per cent of the market. "Outside the big four the resilience of the banking sector to the challenging operating environment is likely to be lower," said Knowd.


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