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Fitch Rates Mongolia's State Bank 'B'; Outlook Negative
February 5, 2015 / 3:17 AM / 3 years ago

Fitch Rates Mongolia's State Bank 'B'; Outlook Negative

(The following statement was released by the rating agency) HONG KONG, February 04 (Fitch) Fitch Ratings has assigned Mongolia-based State Bank LLC a Long-Term Issuer Default Rating (IDR) of 'B' with a Negative Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SUPPORT RATING (SR) and SUPPORT RATING FLOOR (SRF) The IDRs, SR and SRF of State Bank reflect Fitch's view that it would be the domestic bank most likely to receive state support in case of need. This assessment reflects State Bank's strong relationship with the government as evidenced by its 100% state-ownership and the Ministry of Finance has seconded personnel to take up key positions at the bank. Furthermore, State Bank is Mongolia's fourth-largest bank with a 13% share of total system deposits. It maintains a comparatively strong nationwide retail banking presence and the authorities have designated it one of the country's six systemically important banks. State Bank emerged from the government's efforts to maintain banking sector stability by bailing out two failed banks: Zoos Bank, which failed in 2009, and Savings Bank in 2013. KEY RATING SENSITIVITIES - IDRS, SUPPORT RATING and SUPPORT RATING FLOOR The IDR is driven by the SRF and as such State Bank's ratings are sensitive to Fitch's assessment around the likelihood for government support. Fitch applies a one-notch differential between the Long-Term IDR of the sovereign (B+/Negative) and State Bank's SRF. A potential change in the government's ownership, which is not yet reflected in these ratings, could lead to a wider notching if Fitch believed this would impact the state's willingness to provide support. The Negative Outlook indicates that a downgrade of Mongolia's sovereign rating would result in a downgrade of State Bank's IDR, SRF and SR. Positive action on the IDR could derive from the sovereign's stronger ability and propensity to provide support or from a substantial improvement in State Bank's intrinsic financial strength, as expressed in the Viability Rating (VR). In accordance with Fitch's bank rating methodology, the IDR is the higher of the SRF or the VR. KEY RATING DRIVERS - VIABILITY RATING State Bank's VR reflects the bank's leading franchise and adequate asset quality, characterised by limited foreign currency lending (2.3% of total loans at end-November 2014). The rating also captures the bank's limited loss absorption capacity, moderate profitability and Fitch's assessment of corporate governance, which is considered weaker than privately-owned peers' due to the lack of external or international shareholder representation. The bank's Fitch core capital ratio of 13.8% at end-1H14 compares favourably with peers'. This calculation applies a 100% risk weighting to zero-risk weighted loans under the government subsidy scheme for which the credit risks reside with the banks. State Bank's capital, however, also benefits from substantial property revaluation reserves (1.2% of regulatory risk-weighted assets at end-2014), which render the tight regulatory total capital ratio particularly susceptible to fluctuations in property prices. The regulatory total capital ratio was 15.1% at end-2014 compared to the minimum requirement of 14%. Liquidity is adequate with the bank maintaining a low 83.8% loan-to-deposit ratio at end-1H14 compared with peers'. Profitability is weakened by low revenue contribution from non-loan businesses and high operating costs from managing its large branch network. In addition the bank incurred non-recurring expenses related to performing structural adjustments and improving bank practices following the takeover of Savings Bank's non-problematic assets. Furthermore, the regulator's 60% net loan to asset cap constrains State Bank's growth and profitability. RATING SENSITIVITIES - VIABILITY RATING An upgrade of the VR would result from a substantial improvement in capital and an extended track record in performance and loan quality. The ratings could be downgraded if there is material erosion of capital, including from fluctuations in property prices. Intensifying pressure on the corporate loan portfolio from a further deterioration of the operating environment, resulting in a significant weakening of loan quality, could also result in a downgrade. The rating actions are as follows: Long-Term Foreign Currency IDR assigned at 'B'; Outlook Negative Long-Term Local Currency IDR assigned at 'B'; Outlook Negative Short-Term Foreign Currency IDR assigned at 'B' Support Rating assigned at '4' Support Rating Floor assigned at 'B' Viability Rating assigned at 'b-' Contact: Primary Analyst Ivan Lin Associate Director +852 2263 9984 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Sabine Bauer Senior Director +852 2263 9966 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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