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Opportunities and Challenges in Mongolian Banking Sector
Mongolia Investment Summit Hong Kong
November 19, 2013
Norihiko Kato
CEO, Khan Bank
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• 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
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) WorldSource: W orld Bank
2013 3Q GDP growth 11.5%
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
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
tradeTransportation and
storage
Manufacturing
Real estate
Government
Others
GDP Composition
6
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
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
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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%
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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.
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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
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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
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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
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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
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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%
STRICTLY CONFIDENTIAL 15
Cash
4%Deposit at
BOM
12%
Securities
7%
Interbank
10%
Other
7%
Loan
60%
KB Asset Composition (2013 3Q) KB Loan Composition (2013 3Q)
Business
Entities
45%
Retail
55%
Assets and Loans Composition in case of Khan Bank
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
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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
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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
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Regulatory Prudential RatiosKey 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
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New Laws and Regulations
Source: Financial Regulatory Commission, MSE
Recent Changes in Laws and Regulations
� “Deposit Insurance Law“ in January 2013
� “Securities Law” in May 2013
� “new Investment Law” in October 2013
� “Investment Fund Law” in October 2013
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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
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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
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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
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Thank you for your attention.
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Disclaimer
This presentation has been prepared solely for informational purposes and its not to be construed as asolicitation 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 informationderived from public sources that have not been independently verified. No investment, divestment orother financial decisions or actions should be based solely on the information in this presentation. KhanBank accepts no responsibility in relation to this presentation, and shall not be liable for any loss ordamage whatsoever suffered by any party arising from, relating to, resulting from or based upon the useof 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 inpart, without the prior written consent of Khan Bank.