Apr 16, 2013
Hong Kong, April 11th 2013 - Moody's Investors Service has assigned a negative outlook for the Mongolian banking system to reflect the challenges the banks face 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.
Further underpinning the negative outlook is the presence of various structural features, such as high loan concentrations, weak risk-monitoring systems, and the developing character of the regulatory framework.
Moody's detailed the change in outlook in its just-released and first Banking System Outlook: Mongolia, authored by Hyun Hee Park, a Moody's analyst. The outlook expresses Moody's expectations for the fundamental credit conditions in the system over the next 12-18 months.
"Mining and government spending have become the two dominant sources of economic growth behind the current double-digit growth rates of gross domestic product (GDP) and loans, and these concentrated growth drivers raise overheating concerns and undermine the banks' ability to diversify their loan portfolios," says Park. "Although inflation has declined from its high 2012 levels, it poses a risk that could hurt confidence in the banking system."
"Furthermore, our analysis also considers the banks' limited capital resources which provide only a weak buffer to absorb losses in a downside scenario. Under our central scenario, limited capital will put a strain on banks' ability to maintain current high loan growth," says Park.
The new Moody's report specifically examines the Mongolian banking system's operating environment, asset quality and capital, funding and liquidity, profitability and efficiency, and systemic support.
With the operating environment, Moody's baseline scenario assumes GDP growth of around 12% in 2013, up from 10% in the first nine months of 2012, as the country's two main mines enter production. Loan growth will likely rebound to 30%-40% in 2013, up from around 24% in 2012, testing the banks' ability to control risks, build capital and maintain liquidity.
With asset quality and capital, the current low reported non-performing loan (NPL) ratio largely reflects recent double-digit loan growth, which in turn inflates the ratio's denominator. Moody's expect the ratio to rise as these new loans season, especially in the fast growing mortgage and mining-related segments.
In the area of funding and liquidity, Moody's expects that conditions for the banks will remain tight despite some benefit from further monetary easing. At the same time, the key driver of underlying liquidity pressures will be the very high pace of loan growth.
With profitability and efficiency, Moody's expects both to stabilize in 2013 after a modest decline in 2012, based on the assumption that the period will continue to see double-digit loan growth and a slight widening in margins. However, top-line gains will be offset by rising operating costs in a high-inflation environment, and by rising credit costs as bank loan books season.
The report further says that Moody's does not incorporate any systemic support in its ratings for Mongolian banks because it does not consider Mongolia a high-support country. This view is consistent with the resolution of Zoos Bank and Anod Bank in 2009; in both cases, the government protected depositors with blanket deposit guarantees, but also opted to liquidate the banks.
Moody's rates the four largest banks in Mongolia, and which together hold a combined 77.7% of total system loans and 77.6% of total system deposits as of September 2012. The four all have a standalone baseline credit assessment (BCA) of b1, and local currency deposit ratings of B1 and stable rating outlooks. Moody's also rates the Development Bank of Mongolia (B1 stable), a government-related issuer.
The negative banking system outlook contrasts with the stable rating outlooks for the rated banks .These stable rating outlooks reflect the view that the current rating levels of B1 for all four already incorporate substantial downside risks.
Nonetheless, Moody's believes that, on balance, negative rating actions are more likely than positive actions over the next 12-18 months. The stable outlook on Mongolia's B1 government bond rating reflects the risks highlighted in the report, as balanced by improved government finances and foreign exchange reserves.
Re-disseminated by The Asian Banker