TEXT-Fitch affirmed Mongolia's XacBank at 'B';outlook stable
(The following statement was released by the rating agency)
Nov 20 - Fitch Ratings has affirmed Mongolia-based XacBank LLC's (XacBank) Long-Term Issuer Default Rating (IDR) at 'B' and its Short-Term IDR at 'B'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.
The ratings capture XacBank's ongoing business model changes and the likely pressure this will bring on its asset quality, liquidity and capital. XacBank, a traditionally microfinance institution, is increasing riskier SME lending which will likely lead to higher loan concentration and impairment rates (H112: 1.8% as per IFRS, 2011: 1.2%). In addition, it increases XacBank's vulnerability to changes in the operating environment and theeconomy due to the nature of SME lending and the bank's limited expertise in the area.
The bank continues to seek market funding which in Fitch's view will accelerate the shift in its business model to SME lending and its funding structure to market funding as well as increase its funding costs. The bank had planned to issue a maximum of USD200m senior unsecured notes in March and September 2012 to ease tight liquidity and support further credit growth but this was held back both times by difficult market conditions.
Negative rating action may result from a relaxation of underwriting standards to grow its SME book rapidly without bolstering capital and liquidity. Upgrade prospects are slim given limited scope for a material and sustainable improvement in the bank's loss-absorbing ability due to further credit growth and pressure on profitability from higher funding and operating costs. The bank aims to maintain only a small buffer above the regulatory minimum capital ratios (targets for 2013: Tier 1 ratio of 11.1%, total capital adequacy ratio (CAR) of 16.4%), which leaves room for further credit growth. XacBank's Tier 1 capital ratio at end-H112 was 14.2% and total CAR at 19.7%.
The Support Rating and Support Rating Floor were affirmed, reflecting the agency's unchanged view that support from the Mongolian sovereign to XacBank, in case of need, cannot be relied upon. XacBank is the fourth largest bank in Mongolia with a 9% share in each of lending and assets and 7% of deposits at end-H112. Significant changes to the government's financial profile or XacBank's importance in the banking system could lead to rating changes.
XacBank's lending balance is constantly increasing, albeit at a slower pace in H112 (H112: 9% in six months, 2011: 66%, 2010: 64%). The bank aims to grow SME lending to more than 50% of total loans by end-2013 (end-August 2012: 44%, 2009: 31%). XacBank remains the most highly capitalised bank in the system with a Fitch core capital ratio at end-H112 of 13.5%. Loan-to-deposit ratio remained high at 128% at end-H112, even after a 27% increase in customer deposits in six month to H112.
The rating actions are as follows:
- Long-Term Foreign Currency IDR affirmed at 'B'; Stable Outlook
- Short-Term Foreign Currency IDR affirmed at 'B'
- Long-Term Local Currency IDR affirmed at 'B'; Stable Outlook
- Viability Rating affirmed at 'b'
- Support Rating affirmed at '5'
- Support Rating Floor affirmed at 'B-'
Nov 20 - Fitch Ratings has affirmed Mongolia-based XacBank LLC's (XacBank) Long-Term Issuer Default Rating (IDR) at 'B' and its Short-Term IDR at 'B'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.
The ratings capture XacBank's ongoing business model changes and the likely pressure this will bring on its asset quality, liquidity and capital. XacBank, a traditionally microfinance institution, is increasing riskier SME lending which will likely lead to higher loan concentration and impairment rates (H112: 1.8% as per IFRS, 2011: 1.2%). In addition, it increases XacBank's vulnerability to changes in the operating environment and theeconomy due to the nature of SME lending and the bank's limited expertise in the area.
The bank continues to seek market funding which in Fitch's view will accelerate the shift in its business model to SME lending and its funding structure to market funding as well as increase its funding costs. The bank had planned to issue a maximum of USD200m senior unsecured notes in March and September 2012 to ease tight liquidity and support further credit growth but this was held back both times by difficult market conditions.
Negative rating action may result from a relaxation of underwriting standards to grow its SME book rapidly without bolstering capital and liquidity. Upgrade prospects are slim given limited scope for a material and sustainable improvement in the bank's loss-absorbing ability due to further credit growth and pressure on profitability from higher funding and operating costs. The bank aims to maintain only a small buffer above the regulatory minimum capital ratios (targets for 2013: Tier 1 ratio of 11.1%, total capital adequacy ratio (CAR) of 16.4%), which leaves room for further credit growth. XacBank's Tier 1 capital ratio at end-H112 was 14.2% and total CAR at 19.7%.
The Support Rating and Support Rating Floor were affirmed, reflecting the agency's unchanged view that support from the Mongolian sovereign to XacBank, in case of need, cannot be relied upon. XacBank is the fourth largest bank in Mongolia with a 9% share in each of lending and assets and 7% of deposits at end-H112. Significant changes to the government's financial profile or XacBank's importance in the banking system could lead to rating changes.
XacBank's lending balance is constantly increasing, albeit at a slower pace in H112 (H112: 9% in six months, 2011: 66%, 2010: 64%). The bank aims to grow SME lending to more than 50% of total loans by end-2013 (end-August 2012: 44%, 2009: 31%). XacBank remains the most highly capitalised bank in the system with a Fitch core capital ratio at end-H112 of 13.5%. Loan-to-deposit ratio remained high at 128% at end-H112, even after a 27% increase in customer deposits in six month to H112.
The rating actions are as follows:
- Long-Term Foreign Currency IDR affirmed at 'B'; Stable Outlook
- Short-Term Foreign Currency IDR affirmed at 'B'
- Long-Term Local Currency IDR affirmed at 'B'; Stable Outlook
- Viability Rating affirmed at 'b'
- Support Rating affirmed at '5'
- Support Rating Floor affirmed at 'B-'
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