Overview of pandemic impact on banking sector

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2020 was a year with endless struggles as the whole world fought to take down one of the worst plagues in history – COVID-19. The pandemic lead to tough restrictions, border closures and even nationwide lockdowns in Mongolia, causing the national economic growth to shrink -5.3 percent, according to the National Statistics Office.

Last year, Mongolia allowed loan holders to get a deferral for their consumer loans and mortgage loans and made several changes to banking policy and strategy documents, including the Banking Law and Strategy to Reduce Interest Rates. Local banks have been working under high pressure accommodating customers on their pursuit for deferrals while ensuring employee safety from the virus and having to temporarily close due to lockdowns, and switch services and operations into online mode.

“Banks were able to overcome the various challenges caused by the COVID-19 pandemic as they had been consistently investing in their digital transformation efforts. They had been pouring a third of their investments, around 100 million MNT, each year on digitalization efforts. As a result, banks have been and are still able to deliver services to customers without interruptions,” remarked L.Amar, executive director of the Mongolian Bankers Association (MBA)

In this article, let’s look into how the COVID-19 pandemic affected the Mongolian banking sector in 2020, based on MBA’s new report.

Loan portfolio trends downward

Continuous lockdowns have slashed the demand for loans despite the Mongol Bank’s intervention, which pulled the policy rate down by 5 percentage points last year. By end-2020, the policy rate stood at a record low of 6 percent.

The number of outstanding loans reduced by an average of 5 percent year-on-year in 2020.

The report highlighted a 6 percent drop in newly issued loans. Only lending to non-mining and non-agricultural sectors increased. Newly issued agricultural loans amounted to 85 billion MNT, up by 15 billion MNT from the previous year, and mining loans amounted to 862 billion MNT, up by jaw-breaking 305 billion MNT. 

The issuance of retail loans declined by 24 to 34 percent in 2020. Among these loans, the amount issued in car loans was the lowest at merely 6 billion MNT, according to MBA’s report. This is 25 percent lower than in 2019 and 95 percent lower than in 2018.

Loan performance worsens

As of 2020, 60 MNT for every 100 MNT of bank loan performed normally but the remaining 40 MNT didn’t, resulting in overdue or non-performing loan due impacts of the pandemic, said the MBA.

In the banking loan, total outstanding loans stood at 17.2 trillion MNT at end-2020. Non-performing and overdue loans amounted to 2 trillion MNT and 1.3 trillion MNT, respectively. The association assessed that 21 percent of all loans (worth 3.7 trillion MNT) were affected by the pandemic with adverse impact recorded in their repayment.

In short, loans of around 7 trillion MNT are “facing issues” out of the total loans amounting to 17 trillion MNT.

Banks automatically label loans as “non-performing” if no repayment has been made for 90 or more days after the agreed date. In 2020, 11.8 percent of total loans in the banking system or 1 in 10 loans became non-performing. A breakdown of non-performing loans by sector shows that one in three industrial loans, one in four agricultural loans, and one in five construction loans became non-performing.

The Mongolian and Chinese governments agreed to adopt the Green Gate regime for Mongolia’s coal export to China in an attempt to boost bilateral trade and facilitate customs proceedings last year. It was then followed with the creation of Green Zones at the border. These countermeasures made positive impact on loan performance of particularly the mining and transportation sector.

While certain percentage of loans issued to other sectors performed poorly, the number of non-performing loans in the mining sector reduced by 1 percentage point to 24 percent and the number of non-performing loans in the transportation sector reduced by 7 percentage points to 9 percent.

Overdue loans now make up 7.4 percent of total loans in the banking system. They value at 1.3 trillion MNT.

Almost 80 percent of the overdue loan portfolio, worth 1 trillion MNT, is overdue business loans, highlighted the report. The number of overdue loans had been decreasing since the economy stimulated in July but the November full lockdown led to a sharp surge. Overdue business loans rose by 60 percent and overdue individual loans rose by 36 percent.

Dollarization of banking source goes down

After the interest rate for current accounts was annulled, more people switched their current account into savings accounts. Deposit held in foreign currency had been growing by 70 percent but the government’s endorsement of national currency combined with lowered interest rate resulted in reduction of deposits held in foreign currency and increase in those held in turgrug. Deposits held in tugrug rose by 2.2 trillion MNT.

At the end of 2020, current accounts and deposits held in foreign currency amounted to 2 trillion MNT and 4.6 trillion MNT respectively, while current accounts and deposits held in tugrug amounted to 3.5 trillion MNT and 13.3 trillion MNT respectively.

The report underlined that dollarization of banking sources fell to 28 percent, returning to the 2019 level.

The MBA’s Executive Director L.Amar said, “The US dollar has been appreciating against the tugrug in the past two years and in connection to this, banks have been less motivated to issue loans in foreign currency. This has led to steady declines in the share of loans held in foreign currency in total loans.”

Weighted average interest rate lands on all-time low

Last year, the weighted average interest rate of deposits and loans dropped by 2 percentage points. As the policy rate fell by 3 percentage points in the second half of 2020, the weighted average interest rate is expected to fall by another 1.5 percentage points in 2021. In addition, the impact of interest rates on project loans is expected to show in 2021.

The weighted average interest rate stood at 14.8 percent for loans and 8.4 percent for deposits.

The policy rate was cut down by 5 percentage points to 6 percent, the lowest it reached in Mongolia. The low policy rate is expected to further reduce loan interest rates in 2021.

How are top 5 banks performing?

Assets of systematically influential banks grew moderately in 2020, except assets of XasBank, which shrank by 300 billion MNT.

Khan Bank’s assets grew the most by 2 trillion MNT reaching 12.2 trillion MNT in total. Trade and Development Bank (TDB)’s assets reached 8.2 trillion MNT (up by 0.4 trillion MNT), Golomt’s amounted to 7.2 trillion MNT (up by 0.6 trillion MNT), and State Bank’s stood at 3.5 trillion MNT (up by 0.2 trillion MNT) at the end of 2020.

Two banks saw increase in their balance of outstanding loans. In particular, Khan Bank and TDB’s outstanding loans amounted to 5 trillion MNT and 4 trillion MNT respectively.

Apart from XasBank, systematically influential banks had higher deposit source than in 2019. As for current accounts, the number of current accounts at Khan Bank and XasBank rose year-on-year while it decreased for Golomt, TDB and State Bank.

Golomt Bank’s return on equity was -3.9 percent in 2020, while other banks’ return on equity was positive. In particular, the return on equity of Xac and State Bank accelerated.

Return on yield stands at 12.9 percent for Khan Bank, 12.1 percent for State Bank, 9.2 percent for XasBank, 5.5 percent for TDB, and -3.9 percent for Golomt.

The five largest banks in Mongolia are meeting the capital adequacy ratio. XasBank and Golomt’s slightly increased year-on-year in 2020, while Khan Bank’s dropped by 2.8 percentage points. Still, Khan Bank has the best capital adequacy ratio.

Dulguun Bayarsaikhan

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