Findings of the Asset Quality Review performed on Systemically important banks of Mongolia

The Bank of Mongolia, under its medium-term Banking Sector Reform Strategy, has taken numerous measures since early 2020 aimed at ensuring financial stability including reducing banks’ shareholding concentration and diversifying their ownership structure, fostering external control, enhancing transparency. To this end, the mandatory requirement for domestic systematically important banks (D-SIBs) to reincorporate themselves into Open (listed) Joint-Stock companies was stipulated by the amendment in the banking legislation.

In order to facilitate the overall process for D-SIB's reincorporation via initial public offering (IPO), the Bank of Mongolia, in its supervisory capacity, launched an independent Asset quality review (AQR) exercise for 5 D-SIBs from 2 June until 2 August 2022 through an external consultant, PricewaterhouseCoopers Tax & Advisory LLP, Kazakhstan.

The exercise of similar nature was last conducted in 2017 i.e., 5 years ago, hence setting the potential precedent for the Bank of Mongolia to conduct AQR every 5 years going forward.

The time needed for the latest AQR was relatively short, drawing upon the Bank of Mongolia’s prior experiences and lessons-learned from the previous exercise in which both the regulatory bodies and banks have been well-prepared for the exercise beforehand.

The AQR was performed in line with internationally recognized methodologies and principles of the financial supervisory framework while taking into consideration the legal environment of Mongolia’s banking sector.

The AQR covered 70 percent of the total loan portfolio of D-SIBs with the banks’ valuations of over 300 corresponding collaterals were reviewed and validated by the Consultant. The scope of the exercise is relatively high and is consistent with the general practice of on-site inspections of banks by the Bank of Mongolia.

The exercise consists of the following components: (i) Data integrity validation, (ii) Sampling, (iii) Credit file review, (iv) Valuation of collateral, (v) Valuation of repossessed assets, (vi) Collective provisioning analysis, (vii) Determination of AQR-adjusted prudential ratios, and (viii) Quality control.

As the AQR is a point-in-time assessment of the asset quality of banks as of 31 March 2022, the results reflect the banks’ conditions of that period.

The result of the AQR finds a collective additional capital requirement of MNT 22.2 billion i.e., 0.05 percent of GDP. The amount of the required capital is less significant since the amount can be replenished in a shorter period, especially compared to the amount determined by the previous exercise i.e., MNT 512.0 billion or 1.9 percent of GDP.

The factors that contributed to the favorable results compared to the previous exercise are as follows:

1. All D-SIBs under the AQR have (i) fulfilled the requirement of minimum paid-in capital of at least MNT 100 billion; (ii) retained the significant amount of collective provisioning from the previous exercise to offset the calculation of additional capital requirement; and (iii) accumulated additional capital buffer per the Prudential requirement by the Bank of Mongolia;
2. The State-sanctioned "Economic Stimulus Program", coupled with phased-in fiscal, monetary, and regulatory forbearance measures mitigated the impact of the Covid-19 pandemic for the overall banking system.

According to prudential regulation ("Regulation on setting and monitoring prudential ratios to banking operation"), banks are obliged to comply with the minimum capital requirement for Total Capital adequacy ratio of 12 percent. The AQR-adjusted Capital adequacy ratio (CAR ratio) of D-SIBs combined stands at 14.49 percent as of 31 March 2022, which is well above the minimum requirement. Meanwhile, the AQR-adjusted liquidity ratio stands at 34.8 percent, which also meets the regulatory minimum of 25 percent.

The Bank of Mongolia also presented to the members of the Financial Stability Council the AQR results along with the set of potential remedial actions following the AQR findings which comprise time-bound assignments to the D-SIBs. These assignments are designed to ensure successful implementation of IPOs including, but not limited to reclassifying exposures, setting aside additional provisions per AQR results and reflect the adjustments to the financial statements, and if necessary, requiring banks to raise their regulatory capital in the manner prescribed by the legislation within a specified period. Banks are obliged to fulfill these requirements before offering their shares to the public.

Given that the AQR provides a snapshot assessment (i.e., 31 March 31, 2022) of D-SIB balance sheets, it is particularly important to note further changes and developments in the macroeconomic and external conditions both domestically and internationally may lead to changes in the solvency and asset quality of banks.

With D-SIBs' transitioning into open (listed) joint-stock companies, aside from the Bank of Mongolia’s intensified supervision, other domestic regulatory bodies e.g., the Financial Regulatory Commission and the Deposit Insurance Corporation of Mongolia will implement their supervisory and control functions as specified in the legislation.

Moreover, as the publicly listed banks will be obliged to disclose and present more detailed information to the public in addition to their annual audited financial statements, it ensures increased transparency and necessitates other stakeholders including retail investors to closely monitor the banks’ decisions and operations.

Going forward, the Bank of Mongolia will, in cooperation with the Financial Regulatory Commission and other relevant authorities, take required measures to ensure the stability of the banking sector focusing on the successful continuation of its medium-term reform.