Fitch affirms Mongolia's XacBank at 'B', outlook stable
Feb 22 - Fitch Ratings has affirmed Mongolia-based XacBank LLC's (XacBank) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with Stable Outlooks. A full rating breakdown is provided below.
XacBank's ratings reflect its adequate capitalisation and overall ability to absorb unexpected losses following new capital-raising during 2011, as well as sound asset quality. However, Mongolia's volatile operating environment, strong growth (which requires regular external capital raising), as well as heavy dependence on non-deposit funding remain constraints for its ratings.
Fitch sees the bank's capitalisation as not sustainable at the high levels recorded at end 2011, given expectations of continuing high loan growth and weaker outlook for profitability and internal capital generation. Without additional new equity the bank's capitalisation could fall to nearly 12% (minimum regulatory requirement in Mongolia), should 2011 loan growth be repeated in 2012 and net interest margin fall by a further 100bp-150bp. The bank raised MNT24.9bn of common equity and USD15m subordinated debt in November 2011, which elevated its Tier 1 and total regulatory capital ratios to 14.1% and 20.2%, respectively, at end 2011 (from 10.1% and 13.86% in 2010).
Dependence on non-deposit funding exposes the bank to potential refinancing risk, although the institutions providing XacBank funding are mainly development funds not seeking for high returns and their funds may be more stable than regular market funding. The current rapid loan growth could also pressure the bank's funding ability, although Fitch would expect growth to be managed taking into consideration any funding limitations. About half of XacBank's funding comprises borrowings from foreign micro finance funds and international development banks as well as local banks and the Mongolian government's development funds.
Excessive loan growth without improving capitalisation and having suitable funding in place may lead to negative rating action. In light of local market volatility, any upgrades in the near term are unlikely unless the bank achieves higher levels of capital in a consistent manner amid the high loan growth and/or materially reduces its dependency on non-deposit funding.
Fitch believes that the Mongolian government would consider XacBank as important since it is the fourth-largest bank in the system with 9% market shares both in deposit and lending. This might indicate a high propensity for sovereign support in case of need. However, the government's limited ability to provide full and timely support to all banks in case of systemic stress remains, leading Fitch to affirm XacBank's Support Rating and Support Rating Floor at '5' and 'B-' respectively. The Mongolian sovereign's Long-term IDRs were affirmed at 'B+' on 22 November 2011.
XacBank's loan balance grew 66% yoy in 2011, against a backdrop of domestic economic boom. Loan growth and low loan loss charges (56bp of total loans) helped keep the bank's profitability flat (return on assets: 1.9%), despite a fall in net interest margin (7.8% down from 8.6% in 2010). Shrinking margin was due to intensifying competition over new lending and an increase in funding costs.
XacBank's ratings:
Long-Term Foreign and Local Currency IDR affirmed at 'B'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
Source: Reuters
