1 US TO PURSUE HUAWEI EXECUTIVE EXTRADICTION WWW.NHK.OR.JP PUBLISHED:2019/01/23      2 BURNS NIGHT TO BE CELEBRATED FOR THE EIGHTH YEAR IN ULAANBAATAR WWW.MONTSAME.MN PUBLISHED:2019/01/23      3 MAJOR STOCK HOLDER OF GOLOMT BANK DETAINED WWW.NEWS.MN PUBLISHED:2019/01/23      4 GOVT TO REDUCE DEBT-TO-GDP RATIO BY 8.1 PERCENT IN 2019 WWW.ZGM.MN PUBLISHED:2019/01/23      5 INNER MONGOLIA'S TRADE WITH BRI PARTICIPATING COUNTRIES REACH 69.93 BILLION YUAN IN 2018 WWW.ENG.YIDAIYILU.GOV.CN PUBLISHED:2019/01/23      6 MONGOLIA FOG ENVELOPS INVESTOR VIEW WWW.ATIMES.COM PUBLISHED:2019/01/23      7 CHINA-EUROPE RAIL FREIGHT VIA MONGOLIA GROWS WWW.CONTAINER-NEWS.COM PUBLISHED:2019/01/22      8 MONGOLIA'S FOREIGN EXCHANGE RESERVES REACH 3.5 BLN USD BY END OF 2018 WWW.XINHUANET.COM PUBLISHED:2019/01/22      9 MONGOLIAN VAT LOTTERY WINNER TO TAKE MNT 225 MILLION WWW.NEWS.MN PUBLISHED:2019/01/22      10 EXPERTS SUGGEST FORWARDING TREASURY FUND BILL WWW.ZGM.MN PUBLISHED:2019/01/22      АЛБАН ТУШААЛТНУУДЫН 37 ХУВЬ НЬ Л ХОМ-ЭЭ ӨГӨӨД БАЙНА WWW.ZGM.MN НИЙТЭЛСЭН:2019/01/23     ӨРСӨЛДӨХ ЧАДВАРААР ОРХОН АЙМАГ ТЭРГҮҮЛЖ, АРХАНГАЙ АЙМАГ СҮҮЛ МУШГИЖЭЭ WWW.IKON.MN НИЙТЭЛСЭН:2019/01/23     “CHINA SHENHUA ENERGY”-ИЙН ЭРЧИМ ХҮЧНИЙ НҮҮРСНИЙ БОРЛУУЛАЛТ ӨСӨЖ, 461 САЯ ТОНН ХҮРЭВ WWW.BLOOMBERGTV.MN НИЙТЭЛСЭН:2019/01/23     МОНГОЛ УЛСЫН ЭДИЙН ЗАСГИЙН ӨСӨЛТ 2020 ОНООС СААРАХ ТӨЛӨВТЭЙ WWW.BLOOMBERGTV.MN НИЙТЭЛСЭН:2019/01/23     НӨАТ-ЫН БУЦААН ОЛГОЛТЫГ ИРЭХ ДОЛОО ХОНОГТ ШИЛЖҮҮЛНЭ WWW.EAGLE.MN НИЙТЭЛСЭН:2019/01/23     200 МОНГОЛ ИРГЭН ЭРХҮҮД 15 ЦАГИЙН ТУРШ СААТАЖ БАЙНА WWW.UNUUDUR.MN НИЙТЭЛСЭН:2019/01/23     УЛААНБААТАР-СӨҮЛИЙН ЧИГЛЭЛД ХОЁРДОГЧ АГААРЫН ТЭЭВЭРЛЭГЧ ОРУУЛАХАА БНСУ-ЫН ТАЛ МЭДЭГДЖЭЭ WWW.MONTSAME.MN НИЙТЭЛСЭН:2019/01/22     МЯЛЗАН ӨВЧНӨӨС УРЬДЧИЛАН СЭРГИЙЛЖ НИЙСЛЭЛИЙН ХЭМЖЭЭНД 3.3 ТОНН ГАХАЙН МАХ УСТГАЖЭЭ WWW.BLOOMBERTV.MN НИЙТЭЛСЭН:2019/01/22     ХУУЛЬЧИД ЖДҮХС-ААС ЗЭЭЛ ОЛГОСОН АЛБАН ТУШААЛТНЫ ШИЙДВЭРИЙГ ХҮЧИНГҮЙ БОЛГУУЛАХААР ШҮҮХЭД ХАНДЖЭЭ WWW.IKON.MN НИЙТЭЛСЭН:2019/01/22     “ОЮУ ТОЛГОЙ”-Н АЛТНЫ ҮЙЛДВЭРЛЭЛ 150 ХУВИАР ӨСЖЭЭ WWW.IKON.MN НИЙТЭЛСЭН:2019/01/22    

Fitch Ratings: Mongolia Banks Recovering Post-AQR but Loan Growth a Risk www.fitchratings.com

Fitch Ratings-Hong Kong/Singapore-12 September 2018: Most large Mongolian banks have undertaken additional provisioning in response to an asset-quality review (AQR) concluded earlier this year, which is likely to pave the way for a pick-up in profitability and faster growth, says Fitch Ratings. However, the AQR highlighted weak capital, with some banks close to the regulatory minimum, while weaknesses in the regulatory environment and lending standards will continue to pose medium-term risks as banks refocus on expansion.

The AQR and subsequent stress test has not resulted in a full and transparent clean-up of balance sheets, but the process is likely to have led to improved acknowledgement of underlying asset-quality problems and a reassessment of collateral valuation. The doubling of State Bank's official NPL ratio in 1Q18, for example, is likely to have reduced under-reporting. State Bank's NPL ratio was previously well below the wider measure used by Fitch, which combines impaired loans and loans more than 90 days overdue. NPL ratios of other domestic systemically important banks (DSIBs) were more stable following the AQR, and those of Khan Bank (B/Stable/b) and XacBank (B/Stable/b) even declined, due to loan growth and, possibly, write-downs.

DSIBs' loss-absorption buffers - reserves and excess capital - averaged 6.8% of gross loans at end-1H18, which fell short of their average official NPL ratio of 7.4%. TDB was the only bank with loan-loss allowances that exceeded regulatory NPLs. Khan, State and Xac have full coverage if excess capital buffers are included, while Golomt is the only DSIB with an overall shortfall. This analysis excludes collateral and future earnings, which may address uncovered potential losses.

Provisioning costs are likely to ease in 2H18, and they will also benefit from a stronger operating environment. Banks could even receive a boost from recoveries on non-performing assets as the economy gains momentum. We forecast real GDP growth of 5.2% in 2018 and 6.3% in 2019.

This improvement in conditions will support earnings and reduce near-term risks. However, the pick-up has already triggered an acceleration in lending growth that will add to pressure on capitalisation and could signal a return to high risk-taking. System-wide lending growth increased to 17.8% ytd in 1H18, compared with 9.0% in the whole of 2017, and is now considerably faster than nominal GDP growth. Golomt was the fastest-growing DSIB, with lending growth of 23.3% ytd in 1H18, even though its total capital ratio was barely above the 14.0% regulatory minimum. Xac and TDB also have relatively thin buffers.

The return to strong growth could test the effectiveness of efforts to address structural weaknesses in the supervisory framework, and the authorities' willingness to prioritise financial stability. The AQR process has strengthened the role of the supervisor, and there is a focus on containing more aggressive lending toward the lower-risk consumer sector, encouraging scrutiny of borrowers' consolidated debt burdens, and deterring banks from lending in foreign currency. However, continued rapid growth of weaker banks without regulatory intervention could signal continued shortcomings in enforcement, and might encourage moral hazard.

The banking sector recapitalisation law, approved by parliament in June, could add to moral hazard risks. The law sets guidelines under which DSIBs can receive public capital injections. Regulators' application of the law has not been tested, and banks with weak capital could view potential state injections as a reason not to ease back on growth.

The second "Fitch on Mongolia Forum" was held on 30 August 2018 in Ulaanbaatar. Presentation slides are available on www.fitchratings.com or by clicking the link.

Contact:

Sabine Bauer 
Senior Director 
Financial Institutions 
+852 2263 9966
Fitch (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road, Central
Hong Kong

Savio Fan
Associate Director
Financial Institutions
+852 2263 9955

Dan Martin
Senior Analyst
Fitch Wire
+65 6796 7232

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: leslie.tan@fitchratings.com
Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935 , Email: wailun.wan@fitchratings.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed atwww.fitchratings.com. All opinions expressed are those of Fitch Ratings.



Published Date:2018-09-14