This document summarizes the challenges and opportunities facing Mongolian banks and financial institutions given the country's rapidly growing economy. It notes that while Mongolia has experienced double-digit GDP growth, fueled by expansionary monetary and fiscal policies, the economy faces macroeconomic imbalances and volatility from its dependence on mining. Banks dominate the financial sector but have small capital bases. The government has implemented price stabilization and mortgage programs to boost the economy, impacting bank liquidity and loan growth. Rating agencies view Mongolia's banking system outlook negatively due to ties to the government's creditworthiness and narrow economic focus. Challenges include an underdeveloped non-banking sector and legal framework, while opportunities include cooperation with international partners and

1. Examining How Mongolian Banks and Financial
Institutions Are Dealing with the Challenges and
Opportunities of a Fast Growing Economy
Mongolia Investment Summit
London
April 29 – May 2, 2014
Norihiko Kato
CEO, Khan Bank

2. 2
• Second largest landlocked country
• 2.9M population, 1.3M in Ulaanbaatar, young population
• About 40 million livestock
• Market economy since 1990
• Rich Mineral Resources
- coal, copper, iron-ore, gold, uranium, molybdenum, zinc,
rare metals, etc.
Oyu Tolgoi (OT): copper 36M ton, gold 1300 ton
Tavan Tolgoi (TT): coal 6.4B ton (coking coal 1.8B ton)
• Rapid economic growth
• Underdeveloped infrastructure
• Young democracy, Resource nationalism
Mongolia in Brief

3. 3

4. 4
Despite significant external imbalances, falling FDI and overall macroeconomic situation is
weakening, the Mongolian economy is still growing at double digits.
However Growth was boosted by highly expansionary fiscal and monetary policies to
compensate for the marked slowdown
 On behalf of the Government, the Bank of Mongolia implemented “Price Stabilization Program”
(PSP) to combat inflation through soft loans via local banks to meat/flour/oil/other consumption
goods importing companies since Dec 2012. National inflation is 12.5% down from 14.0% a year ago
as of December 31.
 MNT has depreciated by19% year to date due to (1) monetary easing policy, (2) BOM’s supply side
policy, (3) deterioration in balance of payments and (4) decrease in FDI (43% year over year Sep
2013).
 Banking sector performance still acceptable, but macro risks remains. According to the rating
agencies Mongolian Banks’ financial strengths are offset by volatile operating environment and
mining focused economic activities.
 Latest news on Oyu Tolgoi mine draws major concerns towards the timing of Phase II investment
of the project and agreement between Government of Mongolia and Rio Tinto.
Overview
Macroeconomic Indicators

5. 5
GDP Growth
8.6%
10.2%
8.9%
-1.3%
6.4%
17.5%
12.3%
11.7%
-5%
0%
5%
10%
15%
20%
2006 2007 2008 2009 2010 2011 2012 2013
Source: Bank of Mongolia, NSO

6. 6
GDP Composition
17%
15% 15%
13%
9%
6%
5%
4%
4%
13%
21%
2%
13%
17%
-2%
28%
7%
5%
8%
16%
-10%
0%
10%
20%
30%
0%
4%
8%
12%
16%
20%
% of GDP in 2013 (LHS) 2012-2013 Growth (RHS)
Source: Bank of Mongolia, NSO

7. 7
Macroeconomic Indicators
Foreign Exchange Rate
1170.84
1267.51
1524.07
1442.84
1325.59
1195.27
1396.67 1446.17
1655.44
1000
1200
1400
1600
1800
2008Mar
Jun
Sep
Dec
2009Mar
Jun
Sep
Dec
2010Mar
Jun
Sep
Dec
2011Mar
Jun
Sep
Dec
2012Mar
Jun
Sep
Dec
2013Mar
Jun
Sept
Dec
Starting July 2013, MNT
depreciated significantly
Source: Bank of Mongolia, NSO
International Reserve (USD millions)
4,080 4,011
3,796
3,512 3,387
3,107 3,012
2,725 2,679
2,389 2,309 2,248
2,446
-
1,000
2,000
3,000
4,000
5,000
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

8. 8
Macroeconomic Indicators
Export by CountriesExport by Products
China
87%
UK
5%
Canada
3%
Russia
1%
Italy
1%
Others
3%
Coal
26%
Copper
concentrate
22%
Iron ore
15%
Crude oil
12%
Gold
7%
Cashmere
5%
Zinc
concentrate
3%
Other
10%
Trade Balance (USD millions)
-148.4 -116.2 -166.7 -186 -151.4 -119.5
57.2
-228 -710 -252 -292
-1746
-2354 -2082
-4,000
-2,000
0
2,000
4,000
6,000
8,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Export Import Trade Balance
Source: Bank of Mongolia, NSO

9. 9
Macroeconomic Indicators
FDI (USD millions)
Consumer Price Index
Source: Bank of Mongolia , NSO
844
623
1,691
4,714
4,452
2,343
-
1,000
2,000
3,000
4,000
5,000
2008 2009 2010 2011 2012 2013
17.8%
22.1%
4.2%
13.0%
14.0%
12.5%
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012 2013
Core Inflation National CPI

10. 10
Financial Sector
 Mongolian Financial Sector:
 13 commercial banks
 1 development bank
 191 non banking financial institutions
 145 savings & credit cooperatives
 70 brokerage houses
 16 insurance companies
 6 foreign banks have representative offices:
 ING
 Standard Chartered Bank
 Bank of China
 SMBC
 BTMU
 Gazprom Bank
 90-95% percent of financial sector assets are held by commercial banks.
Source: Bank of Mongolia , FRC

11. 11
Banking Sector
 Banking sector assets and loan grew at unprecedented level for the past few
years.
Banking Sector Assets and Loans Growth (MNT trillions)
3 3
4
6
9
12
21
2
3 3 3
5
7
11
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012 2013
Total Assets Domestic Loan
Source: Bank of Mongolia

12. 12
Banking Sector
 Largest three banks (KHAN, TDB, Golomt) make up around 70% of the total
assets and loans in the system.
 Largest five banks make up around 85-90% of the total assets and loans.
Loan Market Share 2013 YE Core Deposits Market Share 2013 YE
Source: Bank of Mongolia & banks’ websites
Khan
23%
TDB
23%Golomt
20%
Xac
10%
State
9%
Others
15% Khan
26%
TDB
20%
Golomt
21%
Xac
7%
State
10%
Others
16%

13. 13
Banking Sector
 Although banking sector is growing rapidly, capital size is still small.
 A bank with largest capital base can lend around MNT 85 billion (USD50 mln)
to a single borrower.
 Small capital size limits banks’ ability to finance large projects.
Banks’ Capital Position 2013 YE (MNT billions)
Source: Banks websites
471
435
330
180
132
0
100
200
300
400
500
Khan TDB Golomt Xac State

14. 14
Banking Sector
Key prudential ratios set by Bank of Mongolia
Prudential Ratios Requirement
Liquidity Ratio > 25%
Capital Adequacy Ratio >14%
Tier 1 Ratio > 9%
Reserve Requirement >12%
Credit Concentration
Total Related Parties Lending < 20%
Single Related Party Lending < 5%
Single Borrower Lending < 20%
Foreign Exchange Risk
Open Position on Single Currency < 15%
Total Open Position < 40%
Source: Bank of Mongolia

15. 15
 Long term USD/MNT swap procedure prepared by BOM
 Policy rate remain unchanged at 10.5%
 Double tax treaties with Luxemburg, Netherlands, Kuwait, and United
Arab Emirates are set to abolished.
Source: Financial Regulatory Commission, MSE
Recent Regulatory Changes
Regulatory Development in Financial Sector

16. 16
Regulatory Development in Financial Sector
Price Stabilization and Mortgage Programs
 The Government and the Bank of Mongolia implemented “Price Stabilization Program” (PSP) to combat
inflation through soft loans via local banks since Dec 2012.
 In June 2013, the Mortgage Program was introduced with 8% (+ - 1%) fixed rate and funded by the Bank
of Mongolia.
 Targeted sectors for PSP (biggest factors for high inflation):
 Meat
 Flour
 Petroleum importers
 Other consumer good importers
 Effects of PSP and Mortgage programs on banking sector:
 Increased MNT liquidity in the system
 Major factor for rapid loan growth in 2013
 Careful exit strategy is needed
 Size of PSP and Mortgage programs as of December 2013. Source: The Government of Mongolia. In Billion MNT
 Price stabilization program: MNT 1.060 billions
 Mortgage program: MNT 1.213 billions
 BOM deposit placement: MNT 900 billions
Source: Bank of Mongolia
Program Spending PSP
167
303
248
370
800
Fuel retail price stability
Reducing the cost of imported
consumption goods;
Price stability of staple food
Construction
Mortgage

17. 17
Rating Agency Opinions
 Mongolia’s Banking system outlook remain negative.
The rating reflects Moody's and Fitch’s assessment that a bank's rating
ultimately cannot be completely insulated from the credit quality of the
government's creditworthiness.
The financial strengths of the Bank are offset by Mongolia's volatile operating
environment and the narrow focus of its economy.

18. 18
Challenges
Underdeveloped capital markets, custody service, inter-bank market
Underdeveloped non-banking sector; 95% of financial assets held by commercial
banks
Small capital of the commercial banks
Underdeveloped derivative market and FX hedging instruments
Legal and regulatory framework
e.g. movable assets pledge, non-banking finance business
Consistency of Fiscal and Monetary policies with banks’ interests
Risk Management and System Investment
Compliance, Governance and Transparency

19. 19
Opportunities
 High growth potential
 Strategic and financial cooperation with international partners
 Expand from plain vanilla banking products
 New Securities Law
 New Investment Fund Law

20. 20
Thank you for your attention.

21. 21
Disclaimer
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