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  • Mongolia aims for a brighter banking future

    July 2014 www.euromoney.com

    Celebrating 90 years

    of banking in Mongolia

  • This special report is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.

    Euromoney does not endorse any advertising material or editorials for third-party products included in this publication. Care is taken to ensure that advertisers follow advertising codes of practice and are of good standing, but the publisher cannot be held responsible for any errors.

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  • Contents

    Banking system marks its 90th anniversary in good shapeMongolias banking sector has come a long way since its foundation, with Russian help, in 1924.

    The industry proved resilient during the financial crisis and competition has stimulated expansion and innovation, although there are worries about over-dependence on the resource sector 2

    A stable base for future growthAs Mongolia moves away from dependence on mineral resources, Bold Sandagdorj, chief economist and advisor to the Bank of Mongolia, explains the central banks role in creating more sustainable economic growth

    4

    Capital markets struggle to make headwayHampered by a lack of liquidity and trading activity, capital markets have been slow to evolve, despite government efforts to create a sympathetic regulatory environment8

    Building on an old traditionBold Magvan is president of the Mongolian Bankers Association and CEO of Tenger Financial Group.

    Tengers largest subsidiary XacBank is a systemic bank in Mongolia with 10% of market share; the group also has leasing, insurance and investment advisory arms, and a greenfield microfinance company in China 5

    Foreign investors ponder developing potentialMongolias rich mineral resources have attracted considerable foreign capital but the government also now

    hopes to attract investment in its efforts to diversify the economy. The long-running dispute over the Oyu Tolgoi mining project may be dampening interest, however 10

    Bringing banking to the steppesDespite its small and widely dispersed population, Mongolia rates highly in the financial inclusion stakes14

    Expansion and consolidationEven after a series of closures and mergers, Mongolia

    probably still has too many banks for its small population 16

  • SPECIAL REPORT : MONGOLIA July 2014 www.euromoney.com2

    Banking system

    MONGOLIAS BANKING SYSTEM has changed out of all

    recognition from its humble beginnings in the 1920s, helping to

    transform the country along the way into the pocket economic

    powerhouse it is today.

    When the countrys first bank, the Trade and Industry Bank of

    Mongolia, opened with a single branch in June 1924 it was with

    the help of its Soviet neighbour and staffed mostly by Russians.

    Mongolia also had no national currency, presenting the bank

    with the headache of trying to fulfil financial and monetary

    policy with the foreign currencies then in circulation.

    The togrog (MNT1,823 = $1) was introduced the following

    year and by 1954 Mongolia had gained sole ownership and

    control of the bank, which was renamed State Bank of Mongolia

    (now the Bank of Mongolia the central bank).

    Transition to market economyBut the most significant milestone in the sectors 90-year history

    came in 1990 with the start of the transition from Soviet-style

    communist rule, with its centrally-planned economy, to a multi-

    party democracy with a market economy.

    The countrys first commercial bank, Trade and Development

    Bank (TDB), was founded in October of that year, followed

    by Khan Bank three months later. The 1991 Banking Law

    established the central bank and a statutory minimum paid-in

    capital requirement for banks. All banks, however, remained

    under state ownership. That year also saw the establishment of

    the Mongolian Stock Exchange in Ulaanbaatar.

    However, early promise soon evaporated in the face of an

    economic crisis resulting from the collapse of the Soviet Union,

    on which Mongolia had relied for nearly all its trade as well as

    medicine, fuel, and machinery.

    When reform efforts and private enterprise eventually fed

    through in the mid-1990s, economic growth resumed but

    banks over-extended credit. This left them poorly positioned to

    weather the Asian financial crisis that followed in the second

    half of the decade and a number of banks closed.

    With Golomt Bank leading the way, by the early 2000s the

    sector had been transformed into a mostly privatized banking

    system, with 16 commercial banks regulated by the Bank of

    Mongolia. In 2006 the Financial Regulatory Commission was

    established to supervise the rest of the financial sector including

    insurers, securities houses, credit and savings unions, and non-

    banking financial institutions.

    In 2007, TDB became the first bank to tap the international

    debt market with a $75 million bond issue. It repeated the

    exercise in 2010 and 2012, doubling the value of its issuance

    on each occasion. In January, TDB priced Mongolias first

    renminbi-denominated bonds. The banks so-called dim sum

    bond offering, raising RMB700 million ($115 million), was twice

    over-subscribed.

    Resilient in crisisThe global financial crisis did cause problems with two bank

    failures, two mergers and the formation from the liquidated

    banks assets of a new state-owned bank, State Bank, in

    2009. Overall, the sector proved rather resilient, with growth

    dipping only briefly in the initial stages, helped in part by the

    introduction of an interim blanket bank deposit guarantee

    scheme in 2008.

    That year saw the first foreign banking presence when Dutch

    bank ING set up a representative office. The UKs Standard

    Chartered followed in 2011 and Bank of China in 2013. Japans

    number one and two banks Bank of Tokyo-Mitsubishi and

    Sumitomo Mitsui Banking Corporation opened representative

    offices in 2013. Goldman Sachs took a 4.8% stake in TDB in 2012.

    In 2010, the Banking Law was strengthened, boosting

    minimum paid-in capital to MNT8 billion ($4.39 million) and

    limiting a banks exposure to any single borrower. The law also

    prohibits a single investor from significant influence in more

    than one bank, requires banks to notify the regulator of major

    changes in the shareholder structure, and prioritizes prudential

    compliance over dividends. The minimum paid-in capital

    requirement was doubled again last year to MNT16 billion as part

    of counter-cyclical measures being pursued by the central bank.

    Mongolias banking sector has come a long way since its foundation, with Russian help, in 1924. The industry proved resilient during the financial crisis and competition has stimulated expansion and innovation, although there are worries about over-dependence on the resource sector

    Banking system marks its 90th anniversary in good shape

  • www.euromoney.com SPECIAL REPORT : MONGOLIA July 2014 3

    The Development Bank of Mongolia was established in 2011

    to extend medium- to long-term financing to strategically

    important sectors loans for infrastructure and industrial

    and energy developments to be funded through bond sales.

    The banks first issue of debt government backed in 2012

    raised $580 million and was 10 times oversubscribed, followed

    last December by a Samurai bond issue. The $290 million

    of yen-denominated debt was guaranteed by Japan Bank for

    International Cooperation.

    In January last year parliament passed the Deposit Insurance

    Law, replacing the earlier temporary measure that expired at the

    end of 2012. The industry-funded scheme guarantees deposits up

    to MNT20 million in the event of the failure of a member bank.

    In July 2013, Savings Bank, the fifth largest lender, failed

    pulled down by the non-performing loans of its affiliates and its

    insolvent parent company and was taken over by State Bank.

    Dynamic sectorThis evolution over many decades means that, today, Mongolia

    has a dynamic banking sector comprising 13 banks ranging from

    dominant players like TDB, Khan and Golomt to community

    development and microfinance providers such as XacBank.

    Seeing the development of the banking system over the last

    decade, although there have been problems all theyve done

    is helped highlight and weed out the weaker players, says

    TDB president Randolph Koppa. So were getting, I feel, an

    increasingly stronger system thats providing a broader array

    of financial services to Mongolians in general than it was nine

    years ago when I arrived here.

    Competition has spurred banks to expand, particularly their

    retail busines