Announcement: Moody's: Mongolian banks' 3Q results show credit growth, but economic headwinds persist

Moody's Investors Service says that the operating environment for Mongolian banks remains challenging, despite some signs of stabilizing credit growth in their 3Q 2016 results.

"The pace of asset quality deterioration has slowed, but we expect delinquencies will rise further, reflecting the country's economic challenges," says Hyun Hee Park, a Moody's Assistant Vice President and Analyst.

Moody's conclusions are contained in its just-released report "Banks -- Mongolia: 3Q 2016 Results Show Recovering Credit Growth, But Economic Headwinds Persist".

Moody's downgraded Mongolia's sovereign rating to Caa1 from B3 on 18 November 2016, reflecting uncertainty over the government's ability to meet its debt service obligations, and an expectation that the budget deficit will remain wide.

Moody's revised GDP growth assumptions of 0.0% in 2016 and 1.0% in 2017 are lower than its previous estimates of 1.5% and 3.5% and point to a slower improvement in the operating environment in 2017 than previously anticipated.

Meanwhile, credit growth turned positive in 3Q 2016, with loans extended by Mongolian banks up 4.5% year-on-year, the first positive reading since 4Q 2014. Liquidity also improved, as deposit growth of 22.4% in the same period outpaced loan growth and led to a drop in the system's loan-to-deposit ratio to 89.9% at end-September 2016 from 106% at end-2015.

Nevertheless, Moody's says downside risks remain, absent an improvement in the economy.

In particular, room to loosen policy support has narrowed, as the government's fiscal strength and the economy's external position have deteriorated. The Bank of Mongolia raised its policy rate by 450 basis points to 15% on 18 August 2016 to protect the domestic currency from further depreciation.

The banks' profitability has deteriorated, due to pressure on net interest margins from rising funding costs and low demand for loans due to high real borrowing costs.

Credit costs will also rise further in the current economic environment, says Moody's. And as a result, the limited growth in internally generated capital and a quicker pace of loan growth will pressure capitalization.

Nonetheless, mining-related foreign direct investment should recover from 2017, given investments linked to the Oyu Tolgoi Phase 2 project, with the growth impact set to accelerate into 2018. This situation will lead to a moderate improvement in the funding and liquidity conditions for the banks.