In little more than two decades since the first commercial banks sprang up in the early 1990s, the banking sector in Mongolia has undergone repeated periods of rapid expansion followed by consolidation.
Five years ago there were 16 banks. Three failures, two of them in an eight-week period in 2009, one new bank and three mergers later the sector has shrunk by a fifth to its smallest size since the turn of the century.
Even with the 13 banks that remain today, the sector remains highly concentrated with the top five – TDB, Khan Bank, Golomt Bank, XacBank and State Bank – accounting for 90% of all assets within the system.
Analysts have long believed that the sector is overcrowded and that half a dozen banks would be better suited to serve a small market of 2.9 million people. Further possible consolidation could take the form of a merger of two of the systemically important banks or one or more of the eight smaller niche banks relinquishing their licences or being taken over by the dominant players.
“Consolidation would make sense and we’re seeing something similar in other countries. But our experience has been that consolidation only happens when people are really desperate,” says Clemente Cappello, founder and CEO of Sturgeon Capital. “It’s not necessarily a rational process but rather consolidation happens when banks are being bailed out, or a foreign bank comes in and effectively is buying the franchise and the licence rather than the actual financial value of the company.
“There’s a point at which if you put together two banks each with 25% or 30% market share you get a bank with 50% plus and that starts to look a bit too controlling of the market”
Randolph Koppa, TDB
TDB president Randolph Koppa, argues the threat from foreign banks is overstated, but for different reasons. “Foreign banks are seen as a chance to get cheaper money into the country and have lower priced loans but there isn’t a big local domestic pool of funds they can tap. Without a proper local money market or a big consumer base to get retail deposits any foreign bank that gets a licence for banking operations, either in subsidiaries or branches, would probably have to fund into Mongolia from abroad.
“That’s no different to the representative offices they currently have but as cross-border lenders they don’t have the considerable added costs of running a bank in the country and all that entails both from local requirements and from headquarters – compliance officers, IT support and controls on money transfers.”
Koppa believes that there is further potential consolidation among the big five to come because the central bank’s ultimate goal is to privatize State Bank; one of the other four, or a foreign bank, could be the acquirer. “Beyond that I’m not sure how much more of a gain could be made in terms of competitiveness because there’s a point at which if you put together two banks each with 25% or 30% market share you get a bank with 50% plus and that starts to look a bit too controlling of the market.”
In a wave of consolidation starting in October 2009, Savings Bank took over Mongol Post Bank, doubling its assets to become one of the country’s largest banks. A month later, Bank of Mongolia (BOM) placed into receivership a further two troubled banks, Anod – which it had taken over the previous December – and the MSE-listed Zoos. Anod, the fifth largest lender, was dissolved and all its accounts were transferred into Savings Bank. A wholly government-owned bank, State Bank, was then set up to hold the good assets and accounts of Zoos Bank.
Last July, weighed down by bad loans to affiliates and losses from the Mongol Post merger, Savings Bank was itself declared insolvent and taken over by BOM. Its assets of around $600 million, 1.7 million accounts, 500 branches and around 3,000 staff were transferred to State Bank, transforming it into one of the largest lenders.
“State Bank was merged with Savings Bank due to Savings Bank’s failure to meet the BOM’s prudential requirements and its passive operations exceeding its active operations,” says Gombosuren Khandtsooj, State Bank’s director of investment banking. “At that time State Bank was a small commercial, state-owned bank. After the merger it is much larger, ranking fifth in terms of activity, and the largest by number of branches.
“Personally, I assume that a lesser number of larger banks is more important for the future of the Mongolian banking sector. However, it also depends on the stage of Mongolian development. The ‘too big to fail’ phenomenon can happen anywhere.