Terrence Edwards in Ulaanbaatar -
A gold mine in Mongolia that locals are calling jinxed has laid claim to another banking victim, and highlighted a potential problem in the banking sector of mineral rights being used as collateral for loans.
Most baffling about the collapse of Khadgalamj Bank - or Savings Bank as it is called in English - and it's subsequent takeover on July 19 by the government-owned State Bank (Toriin Bank) is this was the third time that the same gold mine, Olon Ovoot, was at the centre of a Mongolian bank's downfall. When Anod Bank filed for bankruptcy in 2008 and then Zoos Bank folded in 2009, both times it was because the Mongolian firm Mongol Gazar had defaulted on a loan that used Olon Ovoot as collateral.
In this latest instance, the majority shareholder of Savings Bank's parent company Just Group, Sh. Batkhuu, took out a $109m loan using Olon Ovoot. Just Group had purchased the mining rights to what Batkhuu thought was 13.5 tonnes of gold at Olon Ovoot in 2009. But the mine didn't have as much reserves as registered, says Batkhuu, and he found himself in position where he could no longer service his debts.
Batkhuu claims the loan was to be used for the expansion of Saving Bank's business, though even before the loan was made the country's fifth largest bank was in problems, say industry players. "It was clear from the outset after its merger with Mongol Post Bank in 2009 that Savings Bank had high levels of non-performing loans," says Randolph Koppa, president of competing bank Trade and Development Bank of Mongolia (TDB). "Earning levels had been low and as the central bank stepped up capital requirements, the bank didn't seem to either generate enough earnings or to attract additional capital investment."
A government source familiar with the matter tells bne that Mongolia's central bank was aware that Savings Bank's financial situation had been deteriorating since 2011, and had discovered that the bank had been lending to its subsidiaries in excess of the 5% limit legally allowed for loans outstanding. Savings Bank was declared insolvent on July 22 after affiliated companies defaulted on loans, leaving an approximately $122m hole in its balance sheet.
The takeover by State Bank means the state's once small banking operation in the capital now stretches to all corners of the country, lifting it into fourth spot in one fell swoop. There is talk of an IPO of State Bank, which would mean Savings Bank's problems proved a happy coincidence for the state.
But some consolidation in Mongolia's banking sector is probably overdue. Before Savings Bank collapsed, there were 14 banks serving a relatively poor population of just 2.9m, which some analysts see as overkill. "In a country with 13 banks but only 3m people, some moves towards banking sector consolidation aren't such a bad thing," says Nick Plummer, an analyst at the Economic Policy and Competitive Research Center.
Mongolia's banking sector has been an area of concern for investors throughout the mining boom, as bank loans have been the most readily available source for capital in the country. Moody's Investors Service gave Mongolia's banking sector a negative outlook amid the rapid growth in lending, describing the situation on the ground as "an economy that is increasingly exposed to commodity-driven boom-bust cycles."
That portrayal seems to be no exaggeration, as backing loans with mineral deposits is not uncommon among Mongolia's commercial banks. According to 2013 data from the Mineral Resource Authority of Mongolia, the largest lender TDB has 40 loans backed by mineral deposits, while number-two bank Golomt has 26, followed by the third largest Khan with 27. Savings Bank had just seven loans with mines used as collateral, but it only took one mine that Batkhuu says has less reserves than was registered with the Mineral Resources Authority to send the whole institution crumbling.
TDB's Koppa defends the practice, though: "When lending to operating mining companies, it is common practice to take the mining licenses as part of the collateral package. The security interest in such licenses can be perfected by registration of the lien, and the value of the mine can be determined based on the volume of reserves recognised by the mining authority."
On a brighter note, the same Moody's report noted that the negative outlook for the sector as whole contrasts with the stable outlook on Mongolia's top-four banks. Koppa, too, says the failure at Savings Bank should not be taken as representative of the sector as a whole, given that TDB's business model differs greatly, and that although Savings Bank represented 8% of the market, it was not a significant lender. "In terms of TDB, Savings Bank really didn't compete against us in corporate banking," says Koppa, "Our credit quality ratios are continuing to improve, and at present we have a fair amount of liquidity."
Plummer echoes that sentiment, noting that the central bank has provided support to banks and the economy through looser monetary policy, as well as through its price stabilisation programme and mortgage loan subsidies. "At the same time, the Bank of Mongolia has been enhancing banking sector supervision. These measures should improve the performance and stability of the financial system," he says.
As for Batkhuu and Just Group, the Savings Bank debacle seems to have taken the rest of his assets with it, including a profitable food processing firm and oil firm. And he's promised to pay back the government the $122m debt it has shouldered from Just Group. And for all that's happened, Batkhuu has not yet been charged with a crime. Rather than a remorseful appearance at his press conference, Batkhuu has been eager to pat himself on the back for transferring all his assets (including his debts) to the state, thereby maintaining depositors' savings.
When asked what he planned to do next, he replies: "I got up at 9:00am, I used to work for long hours every day. I will relax. Then I will pay back the loan. It is unsuitable to be in business as the director of a bank. Business is too risky."
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