Rapid concentration: Business is consolidating in the hands of a few players

With 14 commercial banks in a market of MNT10.11trn ($7.1bn) in assets by June 2012, Mongolia is one of the more fragmented banking markets in terms of number of lenders. Yet the years since the financial crisis of 2008 have witnessed a rapid concentration of business in the hands of five top banks: Khan Bank, Golomt Bank and Trade and Development Bank (TDB) – the “big three” – as well as mid-sized lenders XacBank and Savings Bank. “Following the failure of two banks in 2009, the sector has experienced a flight to quality and concentrated significantly,” O. Orkhon, first deputy CEO of TDB, told OBG. Their collective share of deposits rose from 82.8% of total deposits in 2009 to 93.2% by the end of 2011, according to Bank of Mongolia (BoM) data. Their share of the industry’s capital base grew from 71.4% to 83.4% in the same period, while their share of aggregate outstanding loans increased from 70.4% to 83.5%.

RAISING STANDARDS: This rapid concentration of activity was not merely due to the takeover of Mongol Post Bank by Savings Bank in 2010, but is also evidence of brand loyalty by depositors and borrowers, despite the intended reassurance provided by the blanket deposit guarantee provided by the BoM since 2008. The traditional corporate players have expanded aggressively in retail, while all but Savings Bank have established investment banks following new banking rules in 2010. TDB led the trend with the opening of TDB Capital.

This has created what the central bank calls five “systemically important banks”, which as of the end of 2012 are required to hold 14% of tier-1 capital, as opposed to the minimum 12% set for the rest of the sector.

COME TOGETHER: Yet while the top players have been building up counter-cyclical buffers to deal with future crises, smaller lenders are coming under increasing pressure to consolidate. The end of the blanket deposit guarantee, which parliament replaced with a partial guarantee in autumn 2012, is likely to compound the market shift to the top players. Meanwhile, higher capital requirements of MNT16bn ($11.2m) from May 2013 will force banks to raise more capital or merge. Given the lack of voluntary mergers in Mongolia’s two decades of commercial banking experience, competition is set to remain high in the coming year.

KHAN BANK: Khan Bank holds a lead in all sector indicators. Its branch network is the most extensive, growing from 488 in 2009 to 512 by late 2012, while it held 28% of the sector’s deposits (MNT1.8trn, $1.3bn), 27.1% of capital (MNT247bn, $172.9m) and 24.7% of outstanding loans (MNT1.39trn, $975.8m) by year-end 2011. The former state-owned Agricultural Bank of Mongolia, split from the BoM in 1991 and placed under the management of USAID contractor Development Alternatives from 1999, was privatised in 2003.

Sawada Holdings now has 53% of the equity. Leading Mongolian conglomerate Tavan Bogd holds 35.2%, with Development Alternatives and the International Finance Corporation (IFC) holding 1.8% and 9.1%, respectively. Rated B1 by Moody’s and B by Fitch, Khan Bank has historically been the main intermediary for government payments, while also building a lead in retail, micro-finance and corporate banking.

While the bank’s lead in retail banking has eroded due to growing competition from other leading banks, with its share of households banked dropping considerably, according to the bank, Khan Bank remains the largest legacy bank with a presence in virtually every soum (district). As with others, the bank has faced a liquidity squeeze in 2012, with its capital adequacy ratio (CAR) dropping from 15.4% in 2011 to 14.7% by June 2012 and its liquidity ratio increasing from 35.3% to 38.3%. In the same period Khan Bank’s assets grew from MNT2.24trn ($1.6bn) to MNT2.41trn ($1.7bn), its liabilities from MNT1.99trn ($1.4bn) to MNT2.13trn ($1.5bn) and its profit-before-tax to MNT78.24m ($54,770) in end-2012 from MNT39.48m ($27,663) in mid-2012. Its return-on-equity (ROE) was second of the three top banks, at 39.2% in 2011. With a reduction of deposit inflows in 2012, Khan Bank expects its total lending growth to slow from 70% in 2011 to 30% in 2012, in line with the sector average. In June 2012 the bank secured $94m in syndicated loans from the Dutch development finance institution, the European Bank for Reconstruction and Development (EBRD) and several other institutions. Shoring up its tier-2 capital, the lender hopes to cement a lead in small and medium-sized enterprises (SMEs) and retail lending. Fitch rated it as the most likely to receive direct state support in a crisis given its size, in a note published in February 2012. Khan Bank had prepared to launch a $300m global depository receipt (GDR) through London in 2008, but was forced to abandon the attempt due to the 2009-08 global economic crisis. It is expected to tap markets for a similar amount in coming years, while management has indicated that an initial public offering, most likely a dual-listing, is on the cards.

GOLOMT BANK: While historically focused on the corporate segment, Golomt Bank has closely trailed Khan Bank in terms of the value of outstanding loans, surpassing the leader in 2009 and 2010 before dropping back in 2011, and leads in deposits. Its branch network of 89 has concentrated its business in Ulaanbaatar (where it has 39 branches) and, increasingly, provincial towns. Golomt Bank held 28% of all deposits (MNT1.8trn, $1.3bn) by the end of 2011, 20.6% of total capital (MNT188bn, $131.6m) and 22.1% of outstanding loans (MNT1.25trn, $873.6m). Historically wholly owned by Bodi International, a leading Mongolian conglomerate, 10.7% of the bank was sold to Swiss investor Urs Schwarzenbach’s SWISS-MO Investment for MNT25bn ($17.5m) in June 2011 and 5.02% was sold to the world’s third-largest commodities trader, Trafigura, for MNT21.2bn ($14.8m) in March 2012. Rated B+ by Standard and Poor’s (S&P) and B1 by Moody’s, Golomt Bank raised convertible debt from Credit Suisse ($20m in 2007) and the Abu Dhabi Investment Council ($25m in 2010), although neither has yet exercised its right to convert this into an equity stake. Its CAR fell to 14.5% by June 2012, while its liquidity ratio reached 38.7%.

While it competes directly with TDB, both banks have expanded their traditional competition on the corporate market to the retail and SME space, taking on the other three established retail banks. Trafigura’s stake will likely generate more business in the mining industry, where the trader has already invested in three projects, for both trade and corporate finance. Golomt Bank’s assets grew 35.4% year-on-year (y-o-y) in 2011 to MNT2.13trn ($1.5bn), reaching MNT2.31trn ($1.6bn) by June 2012. Its loans outstanding in 2011 grew 58.8% y-o-y to MNT1.25trn ($871.5m), stabilising at MNT1.25trn ($873.6m) in the first half of 2012. Its ROE was the lowest of the big three in 2011, at 27.7%, according to the bank. While Golomt Bank delayed plans for a Eurobond issue in May 2012 it is still expected to test the markets in 2013 and has announced plans to go public on an as-yet-unnamed exchange in 2014. The bank concluded the sale of some $53m in convertible bonds to the Kuwait Investment Authority in October 2012, easing its liquidity gap.

TRADE & DEVELOPMENT BANK: TDB has long held an edge in trade and corporate finance as the oldest bank established in 1990 as the BoM’s trade settlement arm. With a significant lead in trade finance, with 57% market share of trade finance and 60% of inward remittances in the third quarter of 2011, according to the bank, TDB has begun expanding into domestic retail and SME banking, building its network of branches from 28 in 2009 to 47 by June 2012. It trails the two first banks in terms of deposits, with 22.4% of the market (MNT1.44trn, $1bn); in capital, with 19.5% market share (MNT178bn, $124.6m); and by loans outstanding with 20.2% of loans (MNT1.14trn, $796.6m) in 2011. Despite this, its strong welcome by investors on international markets in 2012 make it a solid contender.

OWNERSHIP & INVESTORS: Privatised in 2002, the government’s 74% stake in TDB was sold to Globull Investment and Development, a consortium of US-based Gerald Metals and Switzerland’s Banca Commerciale Lugano. These two were acquired in turn in 2006 by a consortium of Mongolian investors including Central Asian Mining and Mongolian businessman D. Erdenebileg, with links to Ulaanbaatar City Bank, (UB City). The Asian Development Bank and the IFC invested $11m in the bank in 2004 and has had a long-standing advisory relation with Dutch bank ING.

In February 2012 US bank Goldman Sachs acquired a 4.8% stake (near the 4.99% ceiling for foreign purchases under the new US Dodd-Frank Act) believed to be $20m. Goldman’s acquisition is seen particularly as a means to raise capital on global markets rather than as a way for the US giant to pump capital through the Mongolian lender. Rated B1 by Moody’s and B+ by S&P, TDB remained in late 2012 the only bank to have floated three Eurobonds through Singapore – $75m in 2006, $150m with a secondary issue of $25m in 2009, and $300m in 2012, all over-subscribed.

Goldman’s stake in the lender, followed by the bond issue, was timely given its very rapid 142% y-o-y in its loan book in 2011. Its CAR deteriorated from 16.3% in 2010 to 12.7% by year-end 2011, rebounding to 14.5% by June 2012, according to Moody’s. The bank is also seeking to further develop its traditional edge with an agreement with state-owned China Development Bank in May 2012 to expand bilateral project and trade financing. TDB had the highest ROE of top banks in 2011, at 43.6%, given its highest gearing (or leverage) ratio of 10.7. Despite slowing from the heights of 2011, lending growth has continued in 2012 with the bank close on Golomt Bank’s heels, with 22% of all deposits and 23% of all loans by end of the first half of 2012, according to Moody’s. The rating agency expects further foreign equity participation in the bank in coming years.

XACBANK: From origins as a micro-finance bank, XacBank has emerged to become an aggressive yet stable contender in the micro, retail and SME segments. Serving some 77,345 borrowers, roughly 70% of which live outside the capital, XacBank is often compared to Indonesia’s Bank Danamon for its focus on low-income banking and stability through decentralisation. Expanding its branch network from 78 in 2009 to 91 by June 2012, the lender held a higher share of the sector’s capital than Savings Bank, at 9.1% in 2011 (MNT83bn, $58.1m), and of outstanding loans at 9.6% of the total (MNT540.6bn, $378.4m). Its share of total deposits still trailed fifth at 6.4% (MNT410bn, $287m). Initially established as the first (donor-funded) non-bank financial institution (NBFI) in 1998, it restructured under a banking licence in 1999 and merged with six other NBFIs in 2001. The bank is controlled by Tenger Financial Group, whose shareholders include a majority of foreign interests including donors – the IFC (15.2%), Mercy Corps (8.4%) and the EBRD (11.1%) – a European mutual bank (Triodos Bank, 14.2%), private US equity fund BlueOrchard (18.7%) and several local nongovernmental organisations (NGOs) and staff. The average size of its corporate loans is below $100,000. Competing with Savings and Khan Bank on the retail segment, it has proved nimbler at seizing opportunities of new distribution channels than the former while trailing the latter in sheer size. Launching its Amar (meaning “easy”, in Mongolian) mobile banking platform in 2008, Tenger has also sought to grow horizontally into non-banking services, while investing in the first Chinese-Mongolian microfinance firm in China’s Xinjiang province alongside the IFC in June 2012. The balance sheet is heavily skewed towards SMEs, which accounted for 43.4% of its total lending in 2011, although mortgage, micro-business and consumer loans accounted for 19.7%, 14% and 12.7%, respectively. While its lending has risen rapidly, 66% y-o-y in 2011, Fitch forecast a slowdown in lending in 2012 in a February 2012 note, given the absence of new sources of capital. Xac’s total assets grew from MNT468.4bn ($326.9m) in 2010 to MNT817.6bn ($572.3m) in 2011, levelling out at MNT850.5bn ($595.4m) by May 2012, while total loans grew from MNT325.9bn ($228.1m) to MNT542.5bn ($379.8m) and MNT593.1bn ($415.2m) in the same periods. Profitability has increased in line with the thriving economy, from MNT6.5bn ($4.6m) in 2010 to MNT12.1bn ($8.5m) in 2011. Return on assets reached 1.71% and ROE 18.53% in 2011, according to Microfinance Information Exchange, a global NGO.

While the non-performing loan ratio decreased from 1.6% in 2010 to 1.2% in 2011, it has started rebounded gradually to 1.3% by May 2012, although bank management claim a doubling of the ratio would be easily handled. Two capital injections in 2011 totalling MNT37bn ($25.9m) boosted the lender’s CAR o to 18.7% by May 2012, while the IFC’s Capitalisation Fund invested an additional $40m in July 2012, bringing the bank’s CAR to 20% in the third quarter of the year. While XacBank was forced to reschedule plans to float a $200m Eurobond in May 2012 and a week after TDB’s float in September 2012, future attempts are likely as is a dual listing on the stock exchange. “XacBank has frontloaded its capital somewhat and we now have the highest CAR of all big four banks,” H. Amar, the managing director of Tenger Financial Group, told OBG. “We aim to increase our leverage over the medium term to improve ROE.”

SAVINGS BANK: Following its takeover of the failing Mongol Post Bank, the bank remains a latent competitor a lender with a strong rural presence with over half of its book in microfinance, by April 2010. The merger produced a sprawling network of 488 branches, up from 325 pre-merger, with 8.8% of deposits (MNT568bn, $397.6m), 7.1% of capital (MNT65bn, $45.5m) and 6.9% of loans (MNT391bn, $273.7m) in 2011. Established by the state in 1996, Savings Bank was by 2006 the last of the then-state-owned banks to be privatised, sold to a consortium of Russia’s Bratsk National Bank, Chinggis Khaan Bank and Mongolia’s largest insurer, Mongol Daatgal, for $20.1m. The special vehicle formed to hold the bank, MD Securities, was sold to the Russian land developer Coalco Group in 2007, before being sold in 2010 to a Mongolian conglomerate, the Just Group (with operations in downstream oil, meat processing and mining). The acquisition caused the lender’s nonperforming loans ratio to rise to 16% by mid-2011, although it expects to reduce this burden to 5% by 2013, and has significantly slowed its lending.

Not covered by a credit rating agency, analysts have less visibility on the bank. With its geographic reach, Savings has been a key conduit for social programmes such as the government’s Human Development Fund and several projects each for Germany’s donor programme KfW, the Asian Development Bank, Mercy Corps, and the Ministry of Social Welfare and Labour.

COMPETING FOR THE REST: Several of the eight other banks (excluding State Bank) have carved out a solid niche for themselves, from UB City in the capital to Chinggis Khaan Bank in investment banking. Despite the BoM’s policy of sector consolidation through successive capital requirement hikes, several banks have succeeded in complying on their own. While all but three of the banks met the new MNT16bn ($11.2m) requirement in late 2012, from 2013 banks will need to make a convincing case for their medium-term growth.

UB City, serving six districts of the capital, was established in 1998 by the municipality, which still holds a 20% stake in late 2012. Now majority owned by TDB shareholder D. Erdenebileg, the bank ranked sixth in terms of assets and outstanding loans, 5.1% of the market (MNT285.9bn, $200.1m), in 2011. Doubling its assets from MNT250bn ($175m) in late 2010 to MNT480bn ($336m) by October 2012 made it the fastest-growing bank on the market, while it doubled its branch network from 12 in 2009 to 24 by June 2012. Looking to grow its corporate business by creating an investment bank in 2011, UB City is also engaging foreign partners to raise new funding over the medium term. In 2011 the bank partnered with China Construction Bank to support its expansion in trade finance, while it focuses on SMEs, particularly in property and construction.

Capital Bank, the only other commercial bank with over MNT100bn ($70m) in outstanding loans at the end of 2011, has been fully owned by Mongolian trading firm Bishrelt Holding since 2003. The legacy of the Industrial Shareholding Bank, formed in 1990 by 16 factories, the lender has grown from 36 branches in 2009 to 50 in June 2012, with MNT121.9bn ($85.3m) in loans by year-end 2011 (2.2% of the market).

CROWDED SECTOR: Domestic conglomerates own several smaller banks. Erel Group established the eponymous bank in 1991 and expanded into upmarket retail banking in the late 1990s, with seven branches by 2011. With the highest CAR in the market, at around 40% in 2011 according to the IMF, the lender has been supporting high rates of lending growth, peaking at 100% y-o-y in 2010, albeit from a small base of only MNT26.65bn ($18.7m) in loans by year-end 2011.

Capitron Bank, in which Mongolia’s Ajnai Corp ( owner of the small Tavan Tolgoi mine) holds a commanding stake, was originally established in 2001. The lender concluded the sector’s first acquisition when it bought Inter Bank in February 2006. With 17 branches in the capital and towns of Erdenet, Darkhan and Bayan-Ulgii, the bank focuses on SME lending in domestic industry, with support from Japan’s Bank for International Cooperation, Germany’s KfW, the World Bank, USAID and the Mongolian government.

CORPORATE BANKS: The four other commercial banks are exclusively corporate. The most active is Chinggis Khaan Bank, established in 2000 by Russian investors (Millennium Securities Management and Coral Sea Holding Group). It has extended around $200m in loans in the three years to September 2011, financing some 170 companies in the past decade, according to the group. The focus is on larger local corporates like MCS, Mongol Daatgal, Blue Sky Cashmere, APU, UB Management, Tavan Bogd, Khaan Palace and Shunklai Group.

Six-branch National Investment Bank is owned by US hedge fund Firebird, which also controls the brokerage BDS ec, and majority (56%) held by retired Sumo wrestler D. Dagvadorj. The bank has sought to broaden its market to agricultural SMEs. Transport Development Bank, established in 1997 with two branches, works closely with Russian banks, while Credit Bank, controlled by Russian conglomerate Basic Elements, is the smallest.

While business is consolidating in a handful of players competing increasingly in each other’s segments, the BoM is raising the stakes for smaller lenders. Staffing is also expected to become a growing challenge for smaller banks looking to grow. While financial services have traditionally been the top employer for white-collar staff, competition with the mining industry is causing strain in the banking labour market, and is likely to continue with investments in the mining industry in coming years. Despite rapid growth into 2012, the market will not sustain viable business cases for all the players on the market. Competing for both clients and investors will be crucial to the survival of banks capable of supporting Mongolia’s medium-term growth.

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The Report: Mongolia 2013

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