01.05.2014 Examining how Mongolian banks and financial institutions are dealing with the challenges and opportunities of a fast growing economy, Norihiko Kato
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01.05.2014 Examining how Mongolian banks and financial institutions are dealing with the challenges and opportunities of a fast growing economy, Norihiko Kato
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
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
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
21. 21
Disclaimer
This presentation has been prepared solely for informational purposes and its not to be construed as a
solicitation or any offer to buy or sell securities, commodities, or related financial instruments.
The Bank has prepared this presentation based on information available to it, including information
derived from public sources that have not been independently verified. No investment, divestment or
other financial decisions or actions should be based solely on the information in this presentation. Khan
Bank accepts no responsibility in relation to this presentation, and shall not be liable for any loss or
damage whatsoever suffered by any party arising from, relating to, resulting from or based upon the use
of this presentation and any errors or omissions there from.
This presentation has been prepared on a confidential basis solely for the use of the intended recipient.
This material must not be copied, reproduced, distributed or passed to others at any time, in whole or in
part, without the prior written consent of Khan Bank.