Moody's reviews seven Mongolian banks for downgrade following sovereign review

Global Credit Research - 16 Feb 2017

Hong Kong, February 16, 2017 -- Moody's Investors Service has placed on review for downgrade the long-term ratings of seven Mongolian banks following Moody's review for downgrade of Mongolia's sovereign ratings on 15 February 2017.

The seven banks are: Bogd Bank LLC; Capital Bank LLC; Golomt Bank LLC; Khan Bank LLC; State Bank LLC; Trade and Development Bank of Mongolia LLC; and XacBank LLC.

Please see the related press release for more information on the sovereign review at this link:

https://www.moodys.com/research/--PR_362057

Moody's expects to complete the review within three months.

A full list of the affected ratings can be found at the bottom of this press release.

RATINGS RATIONALE

The action on the seven banks' ratings reflects the high correlation between the creditworthiness of the Mongolian banking system and that of the sovereign, given (1) the strong extent to which the banks' businesses depend on macroeconomic and financial conditions in Mongolia, and in view of the low level of cross-border diversification in their operations; and (2) their significant direct and indirect exposures to domestic sovereign debt relative to their capital bases.

The sovereign review is initiated because of uncertainty around the financing options for Development Bank of Mongolia's (DBM) $580 million repayment which is maturing on 21 March 2017. DBM lacks the foreign currency funds to finance the repayment itself, and the presence of an irrevocable and unconditional government guarantee on the DBM issuance means that Moody's would consider a default on the notes to constitute a default by the sovereign. The DBM notes also contain cross-acceleration clauses on other government obligations, implying wider implications of a default for investors.

The purpose of the sovereign review is to assess the implications of the 21 March 2017 maturity of the government-guaranteed notes issued by the DBM for the government's fiscal position and foreign exchange buffers. In Moody's view, the as yet unresolved issue of how that maturity will be financed poses a near-term threat to Mongolia's credit profile, notwithstanding ongoing discussions with the IMF.

Should an agreement with the IMF be reached during the review, the review will also assess the extent to which the terms of the resultant program mitigate those near-term risks, as well as offer the prospect of improvements in Mongolia's credit profile over the medium term.

In particular, the review for Trade and Development Bank of Mongolia LLC (TDBM) will focus on the implications -- if any -- for holders of the TDBM government-guaranteed bond of $500 million due on 19 May 2020, in the event that the upcoming repayment in March for a similarly guaranteed government bond issued by DBM results in economic losses for bond holders, and the government guarantee is not honored.

What Could Stabilize the Rating at the Current Level: Bogd Bank LLC; Capital Bank LLC; Golomt Bank LLC; Khan Bank LLC; State Bank LLC; and XacBank LLC.

Because these banks' caa1 BCAs are at the same level as Mongolia's sovereign rating, an upgrade is unlikely in the near term.

At the end of the review period, Moody's will confirm their Caa1 ratings with stable outlooks if the sovereign rating of Caa1 is confirmed with a stable outlook; and if the banks' asset quality and profitability profiles, which are under pressure from the challenging operating environment, show signs of clear stabilization.

What Could Change the Rating - Down: Bogd Bank LLC; Capital Bank LLC; Golomt Bank LLC; Khan Bank LLC; State Bank LLC; and XacBank LLC

Factors that could result in a downgrade include:

1) A downgrade of Mongolia's sovereign rating; or

2) A downgrade of the banks' BCAs

The banks' BCAs could be downgraded if: (1) asset quality deteriorates significantly, for example, with problem loans/gross loans exceeding 9.0% for a sustained period; (2) tangible common equity falls below 8%; or (3) profitability deteriorates significantly, leading to annual net losses on a sustained basis.

What Could Stabilize the Rating at the Current Level: Trade and Development Bank of Mongolia LLC.

Because the bank's caa1 BCA is at the same level as Mongolia's sovereign rating, an upgrade is unlikely in the near term.

At the end of the review period, Moody's will maintain its Caa1 rating with a stable outlook if the upcoming repayment in March for a similarly guaranteed government bond issued by DBM does not increase the risk of economic loss for the government-guaranteed bond holders of TDBM, and if there is no reduction in the likelihood that the government guarantee will be exercised if necessary; and if the banks' asset quality and profitability profiles, which are under pressure from the challenging operating environment, show signs of clear stabilization.

What Could Change the Rating - Down: Trade and Development Bank of Mongolia LLC

1) A high likelihood of losses for holders of TDBM government guaranteed bonds if the upcoming repayment in March for a similarly guaranteed government bond issued by DBM increases the risk of economic losses for bond holders of TDBM and reduces the likelihood that the government guarantee will be exercised;

2) A downgrade of Mongolia's sovereign rating; or

3) A downgrade of the bank's BCA

The bank's BCA could be downgraded if: (1) asset quality deteriorates significantly, for example, with problem loans/gross loans exceeding 9.0% for a sustained period; (2) tangible common equity falls below 8%; or (3) profitability deteriorates significantly, leading to annual net losses on a sustained basis.

The resultant ratings and actions are listed below:

Issuer: Bogd Bank LLC

- Baseline Credit Assessment (BCA) of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- Local Currency (LC) Deposit Rating of Caa1 placed on review for downgrade

- Foreign Currency (FC) Deposit Rating of Caa2 placed on review for downgrade

- LC/FC Short-term Deposit Rating, affirmed at NP

Issuer: Capital Bank LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

- LC/FC Short-term Deposit Rating, affirmed at NP

Issuer: Golomt Bank LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

Issuer: Khan Bank LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

- LC/FC Issuer Rating of Caa1 placed on review for downgrade

- LC/FC Short-term Deposit Rating, affirmed at NP

Issuer: State Bank LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

Issuer: Trade and Development Bank of Mongolia LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

- LC/FC Short-term Deposit Rating, affirmed at NP

- LC/FC Issuer Rating of Caa1 placed on review for downgrade

- LC/FC Short-term Issuer Rating, affirmed at NP

- Backed FC Senior Unsecured of Caa1 placed on review for downgrade

- FC Senior Unsecured MTN of (P)Caa1 placed on review for downgrade

Issuer: XacBank LLC

- BCA of caa1 placed on review for downgrade

- Adjusted BCA of caa1 placed on review for downgrade

- Long-term Counterparty Risk Assessment of B3(cr) placed on review for downgrade

- Short-term Counterparty Risk Assessment affirmed at NP(cr)

- LC Deposit Rating of Caa1 placed on review for downgrade

- FC Deposit Rating of Caa2 placed on review for downgrade

- LC/FC Issuer Rating of Caa1 placed on review for downgrade

- FC senior unsecured MTN of (P)Caa1 placed on review for downgrade

- LC/FC Short-term Deposit Rating, affirmed at NP

- LC/FC Short-term Issuer Rating, affirmed at NP

- Other Short-term Program, affirmed at (P)NP

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Hyun Hee Park
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Source:Moody's Investor Service