The failure of Mongolia’s Savings Bank last week is dividing opinion on the creditworthiness of the country’s banking industry.
Savings Bank was the fifth-biggest lender in Mongolia with a market share of about 8% before the Bank of Mongolia stepped in on July 22 and declared it insolvent, transferring all of its equity, liabilities and good assets to the much smaller State Bank of Mongolia, a government-owned lender. The central bank took over its bad loans.
This prompted Fitch to warn investors yesterday about “Mongolia's deteriorating business environment and weaknesses in corporate governance and regulation of the banking sector”.
The rating agency said that subsidised loans, a depreciating currency and weakening construction and mining industries are all “key pressure points” that could hurt depositors’ confidence in the banking system.
Trade and Development Bank of Mongolia (TDBM) is the country’s biggest bank and the most popular with foreign investors. Goldman Sachs owns a 4.8% stake, other minority investors hold 18.3% and multilateral agencies ADB and IFC once owned a combined 14.5% stake. The bank also has an outstanding $300 million dollar bond due in 2015.
But not everyone is concerned about the Savings Bank collapse. To some, the government’s quick response and its commitment to bailing out all the bank’s creditors was reassuring, as they figured it would be even more committed to rescuing the country’s biggest bank.
“[Mongolian] banking system assets currently account for around 77% of GDP,” said Nomura in a report last week. “So we believe that the sovereign should have an adequate ability to bail out even the largest bank in the system (with a market share of 25%) if it becomes insolvent due to similar idiosyncratic issues.”
This is a reference to the fact that Savings Bank fell into trouble because of corporate governance issues that arose from its sole ownership by a Mongolian businessman, Sharalamdan Batkhuu.
Even so, Savings Bank had assets of about $660 million, while Nomura estimates the potential recapitalisation costs will be roughly $68 million, which it says should be “very manageable” for Mongolia.
TDBM is more broadly owned and its majority shareholder, Erdenebileg Doljin, who holds 73.1%, is one of the richest people in the country, with an estimated net worth of $700 million.
“Although a large part of his wealth was derived from TDBM, it still shows that the financial support from its shareholder should be quite strong,” said Nomura. “Overall, we think that the chances of TDBM becoming insolvent for similar reasons should be quite remote.”
Indeed, Nomura has been recommending TDBM’s 2015 bonds as a buy since June, when they were trading at 778bp over US Treasuries. They are now trading at a spread of more than 1,000bp, and Nomura is still calling a buy.