Fitch: Mongolian Bank Failure Highlights Fragile System

Last week’s failure of Mongolia’s fifth-largest lender, Savings Bank, highlights Mongolia’s deteriorating business environment and weaknesses in corporate governance and regulation of the banking sector, says Fitch Ratings.

The credit ratings agency (CRA), in a report entitled
‘Mongolian Banks: A Fragile System’
, adds that key pressure points are brisk loan growth on the back of the government’s subsidised loan scheme; currency depreciation; and weaknesses in the construction and mining sectors. Domestic depositor confidence in the banking system remains intact, and has so far prevented a systemic crisis.

Savings Bank’s failure highlights the mining and construction sectors as the central pressure points for the banking system – given the slow mining production and rapid decline in copper and property prices. Further depreciation of the local currency is also likely to weaken banks’ loan quality, as 30% of total loans were in foreign currency at the end of the first half of 2013. The failure of Savings Bank is also a reminder that collateral held against loans may be insufficient or unenforceable.

Fitch calls for much greater rigour in implementing existing related-party/concentration limits to maintain financial stability, as Mongolia’s volatile economy could suffer from rapid credit deterioration. Savings Bank’s failure was caused mainly by its association with the insolvent Just Group, its ultimate parent. The bank’s non-performing loans exceeded its capital by more than two times, which would be a striking breach of the 20% limit if all were to related parties.

System-wide liquidity is under pressure from strong loan growth and falling confidence on the part of international investors. Fitch expects Savings Bank’s creditors to suffer no losses, and domestic deposits to remain stable following the takeover of Savings Bank’s healthy assets and liabilities by state-owned State Bank.

Mongolia has a macro-prudential risk indicator of ‘MPI3’, reflecting a high risk of systemic stress from rapid credit growth, strong asset-price growth, and appreciation of the real effective exchange rate.

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