Information on the Results of Asset Quality Review

Date: 2018/02/23

The PricewaterhouseCoopers Česká republika s.r.o. company has successfully completed the Asset Quality Review (AQR). More than 230 specialists and experts have been involved in the evaluation process for the past 6 months.

The AQR was based on the methodologies and principles adopted by international banking institutions, and in accordance with the laws and regulations of Mongolia, as well as rules and regulations approved by the Bank of Mongolia. The review evaluated the credit risk management system of commercial banks and established the methodology of appraisals on the mining licenses, which is particular importance compared to the similar reviews conducted in other countries.

AQR covered banks loans, receivables, guarantees, other credit-equivalent guarantees, letters of credit, other off-balance-sheet assets and third-level assets. The consulting company has conducted the following evaluation steps:  

1.     Processes, policies and accounting review

2.     Review of credit risk management framework

3.     Loan data integrity validation

4.     Sampling

5.     Credit review

6.     Collateral and real estate valuation

7.     Distribution of sampling results

8.     Collective provision analysis

9.     Level 3 fair value exposures review

10.   Configuration on required capital

During the review each step or workblock have started after the full completion of the previous workblock.

AQR covered up to 91 percent of the all corporate loan in the banking sector in the sample, which is relatively high number. The loan portfolio is rated according to the organization, small and medium enterprises, mortgages and retail categories.

As a result of the review, required capital of the banking system is needs to be increased by equivalent to 1.9 percent of 2017's GDP, in order to meet capital adequacy ratio requirement. It is consistent with the Bank of Mongolia’s estimates.

The Bank of Mongolia has given commercial banks a 9 months period to cover the capital shortfall and increase the required capital. That means the banks will be required to complete the requirement within December 2018.

After applying the adjustment on AQR results, the capital adequacy ratio as end of 2017 was 13.7 percent, and liquidity ratio was 45 percent.

Within the legal reforms of the banking sector to strengthening the financial sector stability, amendments on Law on central bank, Banking law, and Deposit insurance law have been passed by the State Great Khural (Parliament), and the amendments on Money Laundering and Terrorist Financing prevention law is expected shortly. By successfully implementing the legal reforms in banking sector, and with approval of the draft laws, banking supervision methods and requirements will meet international standards, and strengthen the deposit insurance system, as well as ensure the stability of the banking sector.