30.10.2012 transforming mongolia's banking sector to match international standards, norihiko...
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Transforming the Mongolian Banking Sector
Mongolia Investment Summit in Hong KongOctober 30, 2012
Norihiko Kato
CEO, Khan Bank
1
�Mongolia economy
�Banking sector
�Regulation and modernization of financial sector
�Challenges for banking sector
Transforming Mongolia Banking Sector
2
GDP Growth (USD billions)
Source: Bank of Mongolia, NSO, World Bank DataBank
� Since negative growth in 2009, Mongolia has made strong economic growth.
� In 2011, real GDP grew by 17.5%. One of the fastest in the world.
Mongolia Economy
1.4911.980
1.600
2.300
3.288
4.321
5.226
6.1566.516
7.684
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
2007
2008
2009
2010
2011
2012
E
2013
E
2014
E
2015
E
2016
E
2.6 2.8 2.8 3.03.5 3.7
4.45.1
5.6
6.4
0
2
4
6
8
10
2007
2008
2009
2010
2011
2012
E
2013
E
2014
E
2015
E
2016
E
3
GDP per Capita (USD)
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
GDP Composition by Sector (2011)
20%
13%
10%
7%7%
7%
3%
33%
Mining & quarrying
Agriculture
Wholesale and retail trade
Transportation and
storage
Manufacturing
Real estate
Government
Others
Mongolia Economy
4
FDI Each Month (USD millions)
Mongolia Economy
0
50
100
150
200
250
300
350
400
450
500
201
1m
01
201
1m
02
201
1m
03
201
1m
04
201
1m
05
201
1m
06
201
1m
07
201
1m
08
201
1m
09
201
1m
10
201
1m
11
201
1m
12
201
2m
01
201
2m
02
201
2m
03
201
2m
04
201
2m
05
201
2m
06
201
2m
07
201
2m
08
5
Source: Bank of Mongolia, NSO
185 191360
839
570
1630
3808
0
1000
2000
3000
4000
2005 2006 2007 2008 2009 2010 2011
FDI Each Year (USD millions)
Trade Balance (USD millions)
Source: Mongol Bank, NSO, World Bank DataBank
Exports to (2012 1Q)
Imports from (2012 1Q)
Mongolia Economy
90%
3%8%
China
Russia
Others
30%
30%
40% China
Russia
Others
1,889
2,534
1,885
2,908
4,780
2,262
3,232
2,117
3,244
2,137
3,200
6,526
3,313
5,246
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
2007 2008 2009 2010 2011 2012 2Q 2013 3Q
Export Import Trade Balance
6
Mongolia Economy
Export Composition (USD millions)
-
100
200
300
400
500
600 Other Coal Gold Copper
Source: NSO
7
Mongolia Economy
Import Composition (USD millions)
0
100
200
300
400
500
600
700 Other Machinery & Equipments Food Oil
Source: NSO
8
Mongolia Macroeconomic Overview
Inflation (CPI) MNT against USD
9
1000
1100
1200
1300
1400
1500
1600
2008
Mar
Jun
Sep
Dec
2009
Mar
Jun
Sep
Dec
2010
Mar
Jun
Sep
Dec
2011
Jan
Mar
Jun
Sep
Dec
2012
Jan
Mar
Jun
Sep
t
Source: Bank of Mongolia, NSO, World Bank DataBank
0
5
10
15
20
25
30
35
40
200
8m
01
200
8m
04
200
8m
07
200
8m
10
200
9m
01
200
9m
04
200
9m
07
200
9m
10
201
0m
01
201
0m
04
201
0m
07
201
0m
10
201
1m
01
201
1m
04
201
1m
07
201
1m
10
201
2m
01
201
2m
04
201
2m
07
Core Inflation Inflation
*Meat, milk and vegetables are excluded from consumer
basket to calculate core inflation.
*
� 14 commercial banks, 1 development bank, 195 small NBFIs,162 savings & credit cooperatives, and 17 insurance companies.
� 2 foreign bank representative offices.
� 90-95% percent of financial sector assets are dominated by commercial banks.
� Top 3 banks (Khan, TDB, Golomt) make up 70% of total assets.
� Top 5 banks (Top 3, Xac, and Savings) make up 87% of total assets.
Banking Sector
Source: Banks’ websites
10
Top 3
Banks
70%
Other
Banks
30%
Top 5
Banks
87%
Other
Banks
13%
Top 3 Banks’ Assets (2012 2Q) Top 5 Banks’ Assets (2012 2Q)
Banking Sector Assets vs. GDP (USD millions)
11
Banking Sector
69%
56%
68%
75%
87%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2007 2008 2009 2010 2011
GDP Banking Sector Assets Banking Sector Assets to GDP
Source: Bank of Mongolia, NSO
GDP and Loan Growth (USD millions) GDP and Deposit Growth (USD millions)
Banking Sector
�In 2011, sector loans grew 79% and deposits grew 42% while GDP grew 17.5%.�2012 3Q, loans grew 23% and deposits grew by 19%.
12
Source: Bank of Mongolia, NSO
25.3%
-6.6%
26.0%
79.6%
8.9%
-1.3%6.4%
17.5%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2008 2009 2010 2011
Loans Loan Growth GDP Growth
23%25%
55%
42%
8.9%
-1.3%
6.4%
17.5%
-10%
0%
10%
20%
30%
40%
50%
60%
0
1000
2000
3000
4000
5000
6000
2008 2009 2010 2011
Deposits Deposit Growth GDP Growth
Banking Sector
CAR (2012 2Q)
Total Loan Market Share (2012 2Q)
Khan
24,14%
Golomt
22,01%TDB
22,05%
Xac
9,32%
Savings
7,29%
Others
15,19%
Total Deposit Market Share (2012 2Q)
Total Capital (2012 2Q )
Khan
24,85%
Golomt
23,73%
TDB
24,26%
Xac
6,85%
Savings
9,05%
Others
11,26%
(MNT billions)
14.7% 14.3% 14.5%
19.1%
12.7%
0%
5%
10%
15%
20%
25%
Khan TDB Golomt Xac Savings
Source: Bank of Mongolia, Banks’ websites
275 256
227
91 69
-
50
100
150
200
250
300
Khan TDB Golomt Xac Savings
13
58,379 42 101
30 244
12 146
Khan TDB Golomt XacBank
Net Income (YE2011) ROA 2011
3.08%2.83%
1.89%1.61%
Khan TDB XacBank Golomt
503 497
92 8842
0
100
200
300
400
500
600
Khan Savings XacBank Golomt TDB
Number of Branches (YE2011)
MNT billions
Income Composition (2012 2Q)
Banking Sector
MNT billions
Source: Banks’ websites, Bank of Mongolia
14
67
31 3227
17 13 155
84
45 48
33
0
20
40
60
80
100
Khan Golomt TDB Xac
Net-Interest Income Non-Interest Income Operating Income
Banking sector Non-performing Loans (MNT billions)
Banking Sector
3.0%
7.1%
17.4%
11.5%
5.8%4.8% 4.4%
1.5%2.8%
8.0%
4.5%
2.3% 2.0% 1.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
1000
2000
3000
4000
5000
6000
7000
8000
2007 2008 2009 2010 2011 2012 2Q 2012 3Q
Banking Sector Gross Loan Banking Sector NPL
Banking Sector NPL Ratio Khan Bank NPL RatioSource: Bank of Mongolia,
15
Regulatory Development in Financial Sector
Key Prudential Ratios set by Bank of Mongolia
Liquidity Ratio > 25% Liquid Assets / Total Deposits
Capital Adequacy Ratio >12.5% (Tier 1 + Tier 2 ) / Risk Weighted Assets
Tier 1 Capital Adequacy > 7% Tier 1 / Risk Weighted Assets
Reserve Requirement >12% of total deposits (MNT and FC)
Credit Concentration
Total Related Parties Lending < 20% of total capital
Single Related Party Lending < 5% of total capital
Single Borrower Lending < 20% of total capital
Foreign Exchange Risk
Open Position on Single Currency < 15% of total capital
Total Open Position < 40% of total capital
16
Source: Bank of Mongolia,
Regulatory Development in Financial Sector
� Increase bank’s statutory fund from MNT 8 billion to MNT 16 billion effective May 2013.
� Blanket Deposit Guarantee Law, to expire in November 2012, will be extended one more year.
� Deposit insurance system is planned to be introduced.
� Additional capital requirement on systematically important banks whose assets are greater than 5% of the total assets in the system.
30 Jun 2012 31 Dec 2012 30 Jun 2013
Tier 1 Capital Adequacy 7.0% 8.0% 9.0%
Capital Adequacy Ratio 12.5% 13.0% 14.0%
Banking Sector Regulatory Changes
17
Source: Bank of Mongolia,
Regulatory Development in Financial Sector
Financial Sector Regulatory Changes
Parallel Development of Capital Markets
� A new securities law has been submitted to Parliament in order to develop and regulate securities and capital markets.
� Millennium IT trading system is introduced with T+3 for securities settlement.
� A new Investment Fund law is being developed by Financial Regulatory Commission.
� Regulation of Custodian Operation is under review.
18
Source: Financial Regulatory Commission, MSE
Challenges
�Small size of capital of the banks
�Underdeveloped interbank market, capital markets, custody service
�Lack of long term MNT funding source, maturity gap mismatch
�Underdeveloped derivative market and hedging instruments
�Legal and regulatory framework e.g. movable assets pledge, non-banking finance business
financial holding company
�Risk management and system investment
�Compliance, AML, KYC
�Governance and transparency
19
Month End Balance of Interbank Transactions (USD thousands)
20
0%
1%
2%
3%
4%
5%
6%
7%
0
20,000
40,000
60,000
80,000
100,000
120,00005
.01.
3105
.03.
3105
.05.
3105
.07.
3105
.09.
3005
.11.
3006
.01.
3106
.03.
3106
.05.
3106
.07.
3106
.09.
3006
.11.
3007
.01.
3107
.03.
3107
.05.
3107
.07.
3107
.09.
3007
.11.
3008
.01.
3108
.03.
3108
.05.
3108
.07.
3108
.09.
3008
.11.
3009
.01.
3109
.03.
3109
.05.
3109
.07.
3109
.09.
3011
/30/
2009
01/3
1/20
1003
/31/
2010
05/3
1/20
1007
/30/
2010
09/3
0/20
1011
/30/
2010
01/3
1/20
1103
/31/
2011
05/3
1/20
1107
/30/
2011
09/3
0/20
1111
/30/
2011
01/3
1/20
1203
/31/
2012
05/3
1/20
1207
/30/
2012
Interbank transaction volume / banking sector assets
Interbank transaction in MNT
Interbank transaction in FC
Interbank transactions had an upward trend till economic crisis
Daily interbank transaction size is no more than 6% of the total assets
Source: Bank of Mongolia,
Interbank transactions: repo, overnight, loans, deposits, and central bank bills