Opportunities and Challenges in Mongolian Banking
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The document summarizes opportunities and challenges in Mongolia's banking sector. It notes that Mongolia has a young population and vast mineral resources fueling rapid economic growth. The banking sector is also growing quickly but faces challenges like small bank capital sizes, underdeveloped markets, and inconsistent government policies. However, opportunities exist through partnerships, new products, and Mongolia's continued economic expansion.
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Opportunities and Challenges in Mongolian Banking
- 1. Opportunities and Challenges in Mongolian Banking Sector Mongolia Investment Summit Hong Kong November 19, 2013 Norihiko Kato CEO, Khan Bank
- 2. 2
- 3. 3 • Second largest landlocked country • 2.9M population, 1.3M in Ulaanbaatar, young population • Market economy since 1990 • About 40 million livestock, about 350,000 herders • 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 Mongolia Source: W orld Bank, NSO
- 4. 4 GDP Growth 10.6 7.3 8.6 10.2 8.9 -1.3 6.4 17.5 12.3 -5 0 5 10 15 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mongolia East Asia & Pacific (developing only) World Source: W orld Bank 2013 3Q GDP growth 11.5%
- 5. 5 GDP & GDP Per Capita Outlook GDP (USD in billions) GDP Per Capita (USD) 4.6 6.2 8.7 10 12.9 16 18.9 23.7 0 5 10 15 20 25 2009 2010 2011 2012 2013E 2014E 2015E 2016E 1,688$ 2,266$ 3,125$ 3,508$ 4,477$ 5,515$ 6,384$ 7,904$ 0$ 1,000$ 2,000$ 3,000$ 4,000$ 5,000$ 6,000$ 7,000$ 8,000$ 9,000$ 2009 2010 2011 2012 2013E 2014E 2015E 2016E Source: IMF
- 6. Source: Bank of Mongolia, NSO, World Bank DataBank Industry growth rates were 42.5% in wholesale and retail, 16% in manufacturing, 14% in construction, and 8.7% in mining; Supply Chain Effect 2012 GDP Composition by Sector 20% 13% 10% 7%7% 7% 3% 33% Mining & quarrying Agriculture Wholesale and retail trade Transportation and storage Manufacturing Real estate Government Others GDP Composition 6
- 7. 7 -148.4 -116.2 -166.7 -186 -151.4 -119.5 57.2 -228 -710 -252 -292 -1746 -2354 -1728 -4,000 -2,000 0 2,000 4,000 6,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3Q Export Import Trade Balance Trade Balance (USD millions) Export and Import
- 8. Source: Mongol Bank, NSO, World Bank DataBank Exports to (2013 2Q) Imports from (2013 2Q) Trade Composition 90% 3% 8% China Russia Others 30% 30% 40% China Russia Others 8 Export Composition (2013 2Q) Coal 27% Copper 20%Iron Ore 17% Gold 7% Zinc 3% Cashmere 1% Other 25% Import Composition (2013 2Q) Fuel 29% Heavy equipment & machinery 28% Food 11% Other 32%
- 9. 9 Foreign Direct Investment FDI (USD millions) Source: Bank of Mongolia , NSO 844 623 1,691 4,714 4,452 1,952 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2008 2009 2010 2011 2012 2013 3Q FDI dropped by 49% YOY.
- 10. 10 Consumer Price Index 17.8% 22.1% 4.2% 13.0% 8.9% 14.0% 9.9% 0% 5% 10% 15% 20% 25% 2007 2008 2009 2010 2011 2012 Sep-13 Core Inflation National CPI Inflation
- 11. 11 Foreign Exchange Rate USD/MNT exchange rate Source: Bank of Mongolia , NSO 1170.84 1267.51 1524.07 1442.84 1325.59 1195.27 1258.64 1396.67 1318.80 1410.32 1446.17 1499.60 1616.98 1655.44 1716.28 1000 1100 1200 1300 1400 1500 1600 1700 1800 Starting mid July MNT depreciated significantly
- 12. 12 Financial Sector Mongolian Financial Sector: 13 commercial banks (private:12, state owned:1) 1 development bank (state owned) 212 non banking financial institutions 145 savings & credit cooperatives 70 brokerage houses 16 insurance companies 4 foreign banks have representative offices: ING Standard Chartered Bank Bank of China SMBC (BTMU, soon) 90-95% percent of financial sector assets are held by commercial banks. Source: Bank of Mongolia , FRC
- 13. 13 Banks’ growth Banking Sector Assets and Loans Growth (MNT trillions) Banks’ assets and loans are growing fast. Source: Bank of Mongolia 3 3 4 6 10 12 18 2 3 3 3 5 7 10 - 2 4 6 8 10 12 14 16 18 20 2007 2008 2009 2010 2011 2012 2013 3Q Total assets Domestic loans
- 14. 14 Banks market share 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. Total Deposit Market Share 2013 3Q Loan Market Share 2013 3Q Khan 25% TDB 22% Golomt 20% State 9% Xac 10% Others 14% Source: Bank of Mongolia & banks’ websites Khan 27% TDB 22%Golomt 23% State 8% Xac 10% Others 10%
- 15. STRICTLY CONFIDENTIAL 15 Cash 4% Deposit at BOM 12% Securities 7% Interbank 10% Other 7% Loan 60% KB Asset Composition (2013 3Q) KB LoanComposition (2013 3Q) Business Entities 45% Retail 55% Assets and Loans Composition in case of Khan Bank
- 16. STRICTLY CONFIDENTIAL 16 Salary 41% Mortgage 29% Pension 8% Herders 8% Other 14% Wholesale and Retail trade 31% Construction 22% Mining 8% Processing Production 7% Transportation 6% Service 5% Other 21% KB Retail Loans(2013 3Q) KB Corporate & Business Loans (2013 3Q) Assets and Loans Composition in case of Khan Bank
- 17. 17 Banks’ Capital 426 370 291 172 159 - 100 200 300 400 500 Khan TDB Golomt Xac State Although banking sector is growing rapidly, capital size is still small. Top banks can lend to one group customer up to from around USD 20 million to USD 50million under regulatory single party lending limit. Capital requirement; Tier 1 >9%, CAR>14% for “systematically important banks.” Banks’ Capital 2013 3Q (MNT billions) Source: Banks websites
- 18. 18 Non-performing Loans (USD millions) Banks’ Loan Quality Source: Bank of Mongolia 3.3% 7.1% 17.4% 11.5% 6.1% 4.2% 5.3% 1.5% 2.8% 8.0% 4.5% 2.3% 1.2% 1.6% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2007 2008 2009 2010 2011 2012 2013 3Q Banking Sector Gross Loans Banking Sector NPL Banking Sector NPL Ratios Khan Bank NPL Ratios
- 19. 19 Regulatory Prudential Ratios 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
- 20. 20 New Laws and Regulations Source: FinancialRegulatory Commission, MSE Recent Changes in Laws and Regulations “Deposit Insurance Law“ in January2013 “Securities Law” in May 2013 “new InvestmentLaw” in October 2013 “InvestmentFund Law” in October 2013
- 21. 21 PSP and Gov Mortgage Loan Program Price Stabilization and Mortgage Programs Government and Bank of Mongolia implemented “Price Stabilization Program” (PSP) to reduce inflation in exchange of soft loans through banks from Dec 2012. In June 2013, the Government Mortgage Program was introduced at 8% fixed rate funded by the Bank of Mongolia. In total, about MNT 3 trillion have been put into the market. Targeted sectors for PSP (biggest factors for high inflation): Meat, Flour, Petroleum Warehouse, Construction materials, Constructions Effects of PSP and Mortgage programs on banking sector: Increased MNT liquidity in the system Major factor for rapid loan growth in 2013 How do we exit? Source: Bank of Mongolia
- 22. 22 Challenges Underdeveloped capital markets, custody service, inter-bank market Underdeveloped non-banking sector Small capital of the commercial banks Underdeveloped derivative market and FX hedging instruments Legal and regulatory framework Consistency of fiscal and monetary policies with banks’ interests Risk Management and System Investment Compliance, Governance and Transparency
- 23. 23 Opportunities High growth potential Strategic and financial cooperation with international partners Sophistication from vanilla banking products New Securities Law New Investment Fund Law New business:custodian, securities, leasing
- 24. 24 Thank you for your attention.
- 25. 25 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.