The following is a press release from Fitch Ratings:
Fitch Ratings-Hong Kong/Singapore-13 November 2008: Fitch Ratings has today assigned XacBank of Mongolia (XacBank) the following ratings: ‘B+’ Long-term Foreign Currency Issuer Default Rating (IDR), ‘B+’ Local Currency IDR, ‘B’ Short-term IDR, ‘D’ Individual Rating, ‘4’ Support Rating and ‘B’ Support Rating Floor.
XacBank’s ratings reflect its small but solid balance sheet, good profitability, very good corporate governance, as well as the potential for significantly higher credit costs, given the more challenging economic outlook. XacBank’s loans growth has been exceptionally strong in recent years at about 70% p.a., albeit similar to system-wide growth, reflecting the under-banked and fast growing Mongolian economy. Historically focused on micro and rural lending, it has more recently concentrated on SMEs and urban areas, including mortgages and other consumer loans. At H108, micro loans accounted for 20% of XacBanks’s total loans, versus SMEs at 25%, mortgages at 21% and other consumer loans at 19%.
XacBank’s loans quality has been good in recent years, with core credit costs at about 0.5% of loans p.a. At H108, 90-day past due loans were just 0.6% of loans and 173% covered by loan loss reserves. Credit costs however, could rise significantly as interest rates in Mongolia have recently risen sharply to combat a bout of high inflation. Additionally the bank’s USD loans are high at 30% of total loans, although this is likewise for the system. Presently pegged to the USD, should the Mongolian Togrog (MNT) depreciate substantially – a notable risk with high inflation – it would cause financial strain for many USD borrowers, as they often do not have solid levels of USD income.
The bank’s profitability has been very good in recent years (RoAA: around 2.4% p.a.) largely due to very good net interest margins in Mongolia’s under-banked and fast growing economy, and XacBank’s focus on higher yielding micro, SME and consumer loans, as well as its good access to relatively low-cost debt funding.
XacBank’s ownership comprises the International Finance Corporation (11.81%) and the European Bank for Reconstruction and Development (11.15%) along with various ethical/social investors including Mercy Corps (15.78%). Recently, the company’s shareholders have provided it with an increasing amount of debt-funding, as have other specialist microfinance investors, often with an ethical mandate. At 30 June 2008, borrowings stood at 50% of XacBank’s total funding (FY05: 29%) against deposits on 39% (FY05: 52%). These borrowings should be reasonably stable amidst the current tightened global credit conditions, although the bank may well have to now refocus more on deposit funding.
At 30 September 2008 XacBank’s capital was satisfactory after issuing MNT5.5bn in capital and subordinated debt and had Tier I/Total CARs of 12.9% and 14.8%, respectively. With expectations of ongoing strong asset growth in the next few years (including outside of Mongolia), further capital raisings are planned to maintain its Tier I / Total CARs above 10% and 14%, respectively.
Established in 2001, XacBank is Mongolia’s seventh largest bank with about 5% of system-wide assets. It has a network of 74 offices and 1031 staff.