Banks race to keep pace with Mongolias growth

Mongolia’s mining industry is driving the economy’s rapid expansion and bringing challenges for local banks, which are scrambling to keep up with such dramatic rates of growth.

Mongolia is in the midst of a copper, coal and gold rush. And now the mining boom is filtering down from international mining companies to the Mongolian supply chain, increasing the demand for financial services from Mongolia’s domestic banks.With gross domestic product growth at 17.2% in 2011, Mongolia’s small banking sector faces a number of challenges in keeping up with the rate of change.

“Liquidity is very tight,” says Norihiko Kato, acting CEO at Mongolia's Khan Bank, of one of the issues facing the industry at the moment. “There is a liquidity issue,” echoes Bat-Ochir Dugersuren, CEO at Ulaanbaatar-based XacBank. On the question of whether Mongolian banks are facing a liquidity crisis, Mr Bat-Ochir says: “It is an issue of liquidity to expand, not an issue of liquidity to service existing liabilities. It is not a liquidity crisis.” 

Global presence

The Mongolian banks are small and are having to seek foreign capital to keep up with the pace of growth. The Trade and Development Bank of Mongolia (TDB) found such investment from Goldman Sachs, which bought a 4.8% stake in the bank in February 2012.

While foreign interest in the Mongolian market is increasing, one international bank that has established a presence ahead of the competition is ING Bank of the Netherlands. From 2003 to 2006, ING advised TDB in a technical assistance programme. Howard Lambert, ING’s head of corporate and investment banking in Mongolia, says that the bank has a two-pronged strategy in the market: first, to have a representative office on the ground to support domestic Mongolian businesses and act as the bridge for Mongolian companies and the international market, and second, to assist foreign companies entering Mongolia. ING set up its representative office in Ulaanbaatar in 2008, the first international bank to do so. It has since been followed by Standard Chartered.

The domestic banks are small and are all growing at an exponential rate

John Finigan

Standard Chartered’s presence in Ulaanbaatar is known, although its strategy for Mongolia is a topic of speculation. A Standard Chartered spokesperson says: “Standard Chartered has a representative office in Ulaanbataar, which was opened in late 2011. We are interested to grow our presence in Mongolia but we do not have specific plans to share right now.”

Impact on local banks

When asked if foreign banks could encroach on the business of Mongolia's domestic banks, Mr Kato at Khan Bank argues that the international banks will take the business of the large international companies, whereas the local banks will continue to focus on the suppliers. “I do not think the foreign banks would want to come into the domestic market – we have viable local players here – and I don’t see the foreign banks in the domestic market.” 

And since Mongolia’s population is only 2.7 million, the domestic market is small. “The domestic banks are small and are all growing at an exponential rate,” says John Finigan, CEO of Golomt Bank. As part of its growth strategy, Golomt has built relationships with a number of international investors. “We are very pleased to be welcoming a new investor and Tier 1 equity investor in Trafigura Beheer BV – the renowned global trading company – as our latest investor with an equity injection of about $16m,” says Mr Finigan, who adds that negotiations are at an advanced stage with sovereign wealth funds and financial institutions for further capital enhancement.

Golomt, which has traditionally been more of a corporate bank, is also turning its attention to the retail market. Ganbold Galsan, executive vice-president of Golomt’s retail banking group, points to the ‘50/50’ motto on his office wall, which signifies how the bank is aiming to change the weighting of its business so that it is evenly shared between retail and corporate banking. Mr Ganbold explains that the current split of the bank’s business is approximately 35% retail to 65% of corporate and business banking. 

Mr Ganbold says that while Khan Bank and Savings Bank have traditionally been focused on government-related transactions, such as distributing pension payments, Golomt is “always focused upon the commercial sector”. “To differentiate we are pursuing our corporate clients,” he says.

As the mining boom takes shape in the rural areas, Golomt aims to become the leading retail bank in the capitals of each of the provinces – or ‘aimags’ – across Mongolia. Khan Bank is perceived to be the leading retail bank in the market, and is also focusing on its reach. “Providing banking services throughout the country is Khan Bank’s mission,” says Mr Kato.

Diversifying banking

Mongolia’s growth means that the local banks are reconfiguring their business mix, so that all of them are becoming more universal. Mr Kato is open-minded about Khan Bank’s strategy in terms of keeping up with Mongolia’s growth. He does not rule out the bank diversifying into leasing, insurance or investment banking in the future. 

Savings Bank is another emerging as a competitor in the retail market and is showing signs of catching up with Khan Bank. Sandagdorj Sukhbaatar, deputy CEO of Savings Bank, explains that the bank’s origins were in savings, collecting utility bills and distributing pension payments. In 2009 a merger was agreed with Mongol Post Bank, and by April 2010 the operational restructuring from the merger was complete.

Mr Sandagdorj explains that 2010 was a year for merging, rebranding and restructuring, while 2011 was a year for developing infrastructure and expanding the bank’s network into the countryside. “Now we have created the infrastructure and have positioned ourselves in the retail market quite well. The economy is doing well, NPLs [non-performing loans] are going down, the loan concentration is much less – now we are on track,” says Mr Sandagdorj. 

SME growth plans

A bank with a slightly different mission is XacBank, whose origins were in microlending in rural areas. It is now expanding into the small and medium-sized enterprise (SME) market, to the extent where 14.1% of its lending is now in microbusiness loans and 43.5% is in the SME sector.

The demand for infrastructure projects is getting bigger and bigger due to the needs of effectively transporting mining sector products through newly built roads and railway tracks

Jang Jin Kim

With a small deposit base, XacBank relies on international funding. Its holding company is the Tenger Financial Group, which has a number of global investors such as International Finance Corporation and the European Bank for Reconstruction and Development (EBRD). Mr Bat-Ochir says that future plans for XacBank depend on the bank’s shareholders. “We have many interested parties who are willing to invest into XacBank – the only problem is that our shareholders are not ready to allow them to do so,” he says.

Mr Bat-Ochir explains that the rapid growth in Mongolia has presented a number of challenges to the domestic banks. “With 50% to 60% growth every year, it is difficult to maintain institutional capacity,” he says. 

Also, the needs for financial services are changing, according to Mr Bat-Ochir, which means that many banks may need skills that they do not have in house, such as for project financing or corporate lending. He explains that since Mongolia has only had a market economy for 20 years, the economy was long reliant on large state-owned enterprises and the private sector was very small. “It was difficult to develop these skills in this environment – the sector needs to bring in new knowledge,” says Mr Bat-Ochir. It was for this reason that XacBank sought technical assistance from the EBRD in areas such as risk management. 

Developing infrastructure

While the commercial banks are scrambling to keep pace with the growth of Mongolia’s economy, the challenges of financing also extend to the development of the country itself. To build the country’s much-needed infrastructure, the Development Bank of Mongolia (DBM) has been tasked with providing large-scale financing, which commercial banks are unable to offer. The Korea Development Bank (KDB) won a four-year management contract for DBM and aims to replicate the success that KDB had in building South Korea’s infrastructure in a relatively short space of time.

“The demand for infrastructure projects is getting bigger and bigger due to the needs of effectively transporting mining sector products through newly built roads and railway tracks,” explains Jang Jin Kim, CEO of DBM.

Other development targets include modernising urban planning, developing infrastructure utilities, enhancing the road systems and increasing housing. Mr Kim believes that the greatest challenge for DBM is fundraising. The bank has been given a government guarantee to issue bonds up to $600m. Mr Kim explains that in November 2011 the $600m euro medium-term note programme was established. The first tranche of $20m was sold last December and the remaining $580m was issued in March 2012 at 5.75%.

“Now we are engaged in analysing and reviewing many projects to be financed through our funds whether the requirements set by relevant authorities and the bank are met. We will be disbursing our first loans to these projects very soon," says Mr Kim.

Although progress at DBM has been criticised for being slow, Mr Kim says: “I have always emphasised that stability is more important. Even though progress is a little bit slow, we are stable. Not everything is ready yet – that is why we are checking everything step by step.” Such an attitude reflects the view of many in the financial services industry that Mongolia’s growth has to be managed prudently.

Mining manoeuvres

The catalyst for Mongolia’s current mining boom was the 2009 investment agreement between the Mongolian government and Ivanhoe Mines for the Oyu Tolgoi copper and gold mine. And mining company Rio Tinto’s investment in Ivanhoe lent further credibility to Mongolia as an investment destination. Mandar Jayawant, managing director of Mongolia Opportunity Partners, comments that the Oyu Tolgoi deal showed that the Mongolian government was serious about attracting substantial foreign investment. “It demonstrated that Mongolia was ready to engage with foreign investors.”

Of his own strategy for investing in Mongolia, Mr Jayawant says: “We see opportunities around the mining deals.” While foreign investors often target large investments in mining companies, Mongolia Opportunity Partners looks for the unfunded niche further down the supply chain. The private equity firm invests in Mongolian mining services and infrastructure companies, which typically require an investment of between $3m and $7.5m. The firm also sees opportunities in the financial services sector and high-value exports from agri-business such as cashmere. As well as providing the financing, which commercial banks may not be able to offer, the firm is able to provide financial management and strategic direction to the companies. Aided by the expertise of Mongolian businessman Batsaihan Jamichoi – formerly CEO of cashmere company Goyo and now a partner in the firm – these Mongolian companies are able to establish relationships with foreign companies and strategic investors. 

The impact of the Oyu Tolgoi mine will be more apparent on Mongolia’s economy once the mine begins production in 2013. Masa Igata, CEO of boutique investment bank Frontier Securities, says: “Last year, Mongolia was still experiencing a trade deficit. From next year we will see a trade surplus because of Oyu Tolgoi.” He estimates that the revenue could be approximately $5bn and profit $3bn, according to the current copper and gold prices.

Another milestone in Mongolia’s development is the planned initial public offering (IPO) of Erdenes Tavan Tolgoi, a state-run company that owns one of the world’s largest coal mines. When the IPO will go ahead, however, is a matter of some debate. There has been speculation that it will be ready for September this year, but Mr Igata believes that it will likely be delayed, given that many government decisions will be put on hold because of the parliamentary elections in June. 

Another decision that is working its way through parliament is the new securities law, which Mongolian Stock Exchange CEO Altai Khangai hopes will be passed soon. “The current existing law is outdated and it is absolutely necessary to come up with a new law,” says Mr Altai, adding that a new law is needed to facilitate dollar listings and depositary receipts, for example.

Managing the boom

Like the banks, Mongolia's bourse is struggling to keep pace with the demands of the boom. With the help of the London Stock Exchange Group, MSE is undergoing a transformation. Mr Altai says the main challenge of bringing the bourse up to speed is its legacy system, which was initially set up 21 years ago to privatise state assets.

Among the activity on the modernised MSE could be IPOs of the domestic banks. Khan Bank considered an IPO in 2008, but because of the events of the global financial crisis those plans were put on hold.

While the banks are not revealing their specific plans, many observers are indicating that IPOs of the local banks will be likely within the next two to three years, just one of the options open to them in meeting the demands of Mongolia’s rapid growth.


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