Mongolian banking sector needs additional liquidity and capital to support strong loan growth says Fitch Ratings in a new report.
“The pace of credit growth in the Mongolian banking sector has been rapid even by comparison with other emerging markets. Annual loan growth clocked in at 55% in 2011, a rate last seen prior to the 2008 economic crisis,” says Chikako Horiuchi, Director in Fitch’s Financial Institutions Team.
“More stringent controls are needed. Yet the authorities’ efforts in controlling credit growth and maintaining adequate capital and liquidity are compromised by lax implementation.”
The system’s loan/deposit ratio, which is to exceed 100% despite steady deposit growth, implies tighter liquidity and an increasing reliance on market funding. This renders the sector more vulnerable to market conditions.
Higher capital is also necessary to absorb unexpected losses, particularly in light of the volatile domestic operating environment, low reserve coverage, and expectations of a weaker pre-provision operating profit (PPOP) buffer.
Fitch expects the PPOP for Mongolian banking sector to come down in 2012 and beyond with mounting pressure on net interest margin due to intensifying competition for both funding and new lending. Given Mongolia’s heavy dependence on mineral exports, its banking sector is exposed to external factors including commodity prices, foreign-exchange rates, slower economic growth in China, economic policy errors and political uncertainty, which could affect the flow of foreign direct investment.