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Transforming the Mongolian Banking Sector Mongolia Investment Summit in Hong Kong October 30, 2012 Norihiko Kato CEO, Khan Bank 1

30.10.2012 Transforming Mongolia's banking sector to match international standards, Norihiko Kato

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Transforming the Mongolian Banking Sector

Mongolia Investment Summit in Hong KongOctober 30, 2012

Norihiko Kato

CEO, Khan Bank

1

�Mongolia economy

�Banking sector

�Regulation and modernization of financial sector

�Challenges for banking sector

Transforming Mongolia Banking Sector

2

GDP Growth (USD billions)

Source: Bank of Mongolia, NSO, World Bank DataBank

� Since negative growth in 2009, Mongolia has made strong economic growth.

� In 2011, real GDP grew by 17.5%. One of the fastest in the world.

Mongolia Economy

1.4911.980

1.600

2.300

3.288

4.321

5.226

6.1566.516

7.684

0.000

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

2.6 2.8 2.8 3.03.5 3.7

4.45.1

5.6

6.4

0

2

4

6

8

10

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

3

GDP per Capita (USD)

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

GDP Composition by Sector (2011)

20%

13%

10%

7%7%

7%

3%

33%

Mining & quarrying

Agriculture

Wholesale and retail trade

Transportation and

storage

Manufacturing

Real estate

Government

Others

Mongolia Economy

4

FDI Each Month (USD millions)

Mongolia Economy

0

50

100

150

200

250

300

350

400

450

500

201

1m

01

201

1m

02

201

1m

03

201

1m

04

201

1m

05

201

1m

06

201

1m

07

201

1m

08

201

1m

09

201

1m

10

201

1m

11

201

1m

12

201

2m

01

201

2m

02

201

2m

03

201

2m

04

201

2m

05

201

2m

06

201

2m

07

201

2m

08

5

Source: Bank of Mongolia, NSO

185 191360

839

570

1630

3808

0

1000

2000

3000

4000

2005 2006 2007 2008 2009 2010 2011

FDI Each Year (USD millions)

Trade Balance (USD millions)

Source: Mongol Bank, NSO, World Bank DataBank

Exports to (2012 1Q)

Imports from (2012 1Q)

Mongolia Economy

90%

3%8%

China

Russia

Others

30%

30%

40% China

Russia

Others

1,889

2,534

1,885

2,908

4,780

2,262

3,232

2,117

3,244

2,137

3,200

6,526

3,313

5,246

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

2007 2008 2009 2010 2011 2012 2Q 2013 3Q

Export Import Trade Balance

6

Mongolia Economy

Export Composition (USD millions)

-

100

200

300

400

500

600 Other Coal Gold Copper

Source: NSO

7

Mongolia Economy

Import Composition (USD millions)

0

100

200

300

400

500

600

700 Other Machinery & Equipments Food Oil

Source: NSO

8

Mongolia Macroeconomic Overview

Inflation (CPI) MNT against USD

9

1000

1100

1200

1300

1400

1500

1600

2008

Mar

Jun

Sep

Dec

2009

Mar

Jun

Sep

Dec

2010

Mar

Jun

Sep

Dec

2011

Jan

Mar

Jun

Sep

Dec

2012

Jan

Mar

Jun

Sep

t

Source: Bank of Mongolia, NSO, World Bank DataBank

0

5

10

15

20

25

30

35

40

200

8m

01

200

8m

04

200

8m

07

200

8m

10

200

9m

01

200

9m

04

200

9m

07

200

9m

10

201

0m

01

201

0m

04

201

0m

07

201

0m

10

201

1m

01

201

1m

04

201

1m

07

201

1m

10

201

2m

01

201

2m

04

201

2m

07

Core Inflation Inflation

*Meat, milk and vegetables are excluded from consumer

basket to calculate core inflation.

*

� 14 commercial banks, 1 development bank, 195 small NBFIs,162 savings & credit cooperatives, and 17 insurance companies.

� 2 foreign bank representative offices.

� 90-95% percent of financial sector assets are dominated by commercial banks.

� Top 3 banks (Khan, TDB, Golomt) make up 70% of total assets.

� Top 5 banks (Top 3, Xac, and Savings) make up 87% of total assets.

Banking Sector

Source: Banks’ websites

10

Top 3

Banks

70%

Other

Banks

30%

Top 5

Banks

87%

Other

Banks

13%

Top 3 Banks’ Assets (2012 2Q) Top 5 Banks’ Assets (2012 2Q)

Banking Sector Assets vs. GDP (USD millions)

11

Banking Sector

69%

56%

68%

75%

87%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2007 2008 2009 2010 2011

GDP Banking Sector Assets Banking Sector Assets to GDP

Source: Bank of Mongolia, NSO

GDP and Loan Growth (USD millions) GDP and Deposit Growth (USD millions)

Banking Sector

�In 2011, sector loans grew 79% and deposits grew 42% while GDP grew 17.5%.�2012 3Q, loans grew 23% and deposits grew by 19%.

12

Source: Bank of Mongolia, NSO

25.3%

-6.6%

26.0%

79.6%

8.9%

-1.3%6.4%

17.5%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2008 2009 2010 2011

Loans Loan Growth GDP Growth

23%25%

55%

42%

8.9%

-1.3%

6.4%

17.5%

-10%

0%

10%

20%

30%

40%

50%

60%

0

1000

2000

3000

4000

5000

6000

2008 2009 2010 2011

Deposits Deposit Growth GDP Growth

Banking Sector

CAR (2012 2Q)

Total Loan Market Share (2012 2Q)

Khan

24,14%

Golomt

22,01%TDB

22,05%

Xac

9,32%

Savings

7,29%

Others

15,19%

Total Deposit Market Share (2012 2Q)

Total Capital (2012 2Q )

Khan

24,85%

Golomt

23,73%

TDB

24,26%

Xac

6,85%

Savings

9,05%

Others

11,26%

(MNT billions)

14.7% 14.3% 14.5%

19.1%

12.7%

0%

5%

10%

15%

20%

25%

Khan TDB Golomt Xac Savings

Source: Bank of Mongolia, Banks’ websites

275 256

227

91 69

-

50

100

150

200

250

300

Khan TDB Golomt Xac Savings

13

58,379 42 101

30 244

12 146

Khan TDB Golomt XacBank

Net Income (YE2011) ROA 2011

3.08%2.83%

1.89%1.61%

Khan TDB XacBank Golomt

503 497

92 8842

0

100

200

300

400

500

600

Khan Savings XacBank Golomt TDB

Number of Branches (YE2011)

MNT billions

Income Composition (2012 2Q)

Banking Sector

MNT billions

Source: Banks’ websites, Bank of Mongolia

14

67

31 3227

17 13 155

84

45 48

33

0

20

40

60

80

100

Khan Golomt TDB Xac

Net-Interest Income Non-Interest Income Operating Income

Banking sector Non-performing Loans (MNT billions)

Banking Sector

3.0%

7.1%

17.4%

11.5%

5.8%4.8% 4.4%

1.5%2.8%

8.0%

4.5%

2.3% 2.0% 1.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1000

2000

3000

4000

5000

6000

7000

8000

2007 2008 2009 2010 2011 2012 2Q 2012 3Q

Banking Sector Gross Loan Banking Sector NPL

Banking Sector NPL Ratio Khan Bank NPL RatioSource: Bank of Mongolia,

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Regulatory Development in Financial Sector

Key Prudential Ratios set by Bank of Mongolia

Liquidity Ratio > 25% Liquid Assets / Total Deposits

Capital Adequacy Ratio >12.5% (Tier 1 + Tier 2 ) / Risk Weighted Assets

Tier 1 Capital Adequacy > 7% Tier 1 / Risk Weighted Assets

Reserve Requirement >12% of total deposits (MNT and FC)

Credit Concentration

Total Related Parties Lending < 20% of total capital

Single Related Party Lending < 5% of total capital

Single Borrower Lending < 20% of total capital

Foreign Exchange Risk

Open Position on Single Currency < 15% of total capital

Total Open Position < 40% of total capital

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Source: Bank of Mongolia,

Regulatory Development in Financial Sector

� Increase bank’s statutory fund from MNT 8 billion to MNT 16 billion effective May 2013.

� Blanket Deposit Guarantee Law, to expire in November 2012, will be extended one more year.

� Deposit insurance system is planned to be introduced.

� Additional capital requirement on systematically important banks whose assets are greater than 5% of the total assets in the system.

30 Jun 2012 31 Dec 2012 30 Jun 2013

Tier 1 Capital Adequacy 7.0% 8.0% 9.0%

Capital Adequacy Ratio 12.5% 13.0% 14.0%

Banking Sector Regulatory Changes

17

Source: Bank of Mongolia,

Regulatory Development in Financial Sector

Financial Sector Regulatory Changes

Parallel Development of Capital Markets

� A new securities law has been submitted to Parliament in order to develop and regulate securities and capital markets.

� Millennium IT trading system is introduced with T+3 for securities settlement.

� A new Investment Fund law is being developed by Financial Regulatory Commission.

� Regulation of Custodian Operation is under review.

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Source: Financial Regulatory Commission, MSE

Challenges

�Small size of capital of the banks

�Underdeveloped interbank market, capital markets, custody service

�Lack of long term MNT funding source, maturity gap mismatch

�Underdeveloped derivative market and hedging instruments

�Legal and regulatory framework e.g. movable assets pledge, non-banking finance business

financial holding company

�Risk management and system investment

�Compliance, AML, KYC

�Governance and transparency

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Month End Balance of Interbank Transactions (USD thousands)

20

0%

1%

2%

3%

4%

5%

6%

7%

0

20,000

40,000

60,000

80,000

100,000

120,00005

.01.

3105

.03.

3105

.05.

3105

.07.

3105

.09.

3005

.11.

3006

.01.

3106

.03.

3106

.05.

3106

.07.

3106

.09.

3006

.11.

3007

.01.

3107

.03.

3107

.05.

3107

.07.

3107

.09.

3007

.11.

3008

.01.

3108

.03.

3108

.05.

3108

.07.

3108

.09.

3008

.11.

3009

.01.

3109

.03.

3109

.05.

3109

.07.

3109

.09.

3011

/30/

2009

01/3

1/20

1003

/31/

2010

05/3

1/20

1007

/30/

2010

09/3

0/20

1011

/30/

2010

01/3

1/20

1103

/31/

2011

05/3

1/20

1107

/30/

2011

09/3

0/20

1111

/30/

2011

01/3

1/20

1203

/31/

2012

05/3

1/20

1207

/30/

2012

Interbank transaction volume / banking sector assets

Interbank transaction in MNT

Interbank transaction in FC

Interbank transactions had an upward trend till economic crisis

Daily interbank transaction size is no more than 6% of the total assets

Source: Bank of Mongolia,

Interbank transactions: repo, overnight, loans, deposits, and central bank bills

Thank you for your attention.

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