Fitch Ratings says in a new report that the Mongolian government”s credit stimulus adds pressure on banks” margins, capital, and asset quality. However, state involvement remains important to maintain confidence in the banking sector, including banks depending on the government for liquidity and currency risk mitigation.

Fitch believes that the government”s MNT2trn (about USD1.2bn) loan programme and resultant margin pressure could remain in place until the government attains sustainably low inflation through higher interest rates or tighter fiscal policies. Steady access to equity is an important rating driver for the rated banks, as lending directed to strategic sectors under the loan programme could be more susceptible to deterioration and the programme”s preferential lending rates insufficient to cover resulting loan losses. While there are plans to securitise banks” mortgages in Q413 to create capacity for continuous growth, it remains unclear to what extent this benefits liquidity and capital.

Foreign-currency (FC) risk remains the main pressure point for banks” asset quality and liquidity. The Mongolian tughrik”s high volatility can quickly lead to large currency mismatches, which banks manage through a swap facility with the central bank. FC deposits increased rapidly following the tughrik”s 24% depreciation from end-2012 to September 2013. Liquidity remains tight despite improving FC loan/deposit ratios given low levels of FC liquid assets and cashflow sensitivity to FC borrower defaults.

Source: fitchratings.com