Fitch Ratings - Seoul/Hong Kong - 11 Mar 2025: Fitch Ratings has assigned Golomt Bank JSC a Long-Term Issuer Default Rating (IDR) of 'B+'. The Outlook on the IDR is Stable. At the same time, the agency has also assigned Golomt a Viability Rating (VR) of 'b' and Government Support Rating (GSR) of 'b+'.
Key Rating Drivers
Sovereign Support Drives IDR: Golomt's Long-Term IDR is driven by its GSR, which is in line with Mongolia's sovereign rating (B+/Stable). We believe the Mongolian authorities have a higher propensity to support a large domestic systemically important bank (D-SIB) such as Golomt, which has a 20% share of system deposits, than smaller D-SIBs, although this is counterbalanced by the country's ability to provide timely support. Mongolia's re-capitalisation law provides grounds for sovereign support as well as for a bail-in, should any D-SIB require it.
The VR is underpinned by Golomt's solid domestic banking franchise. It also reflects the bank's larger risk appetite relative to higher-rated domestic peers. Golomt's loan growth rate has exceeded the Mongolian banking system average, weighing on its capitalisation and deposit funding. However, its financial performance has improved significantly in recent years as it continues to resolve legacy asset-quality issues.
Favourable Operating Environment: Fitch anticipates favourable business prospects for the banking sector, driven by Mongolia's steady medium-term economic trajectory. We believe robust mining activities and the increasing stability of the government's policy execution are supportive of growth. We also expect the authorities to remain committed to upholding the sector's stability, including adoption of international prudential standards such as the Basel framework, to strengthen banks' capital management.
Significant Domestic Franchise: Golomt's business profile score of 'b' captures its significant franchise in Mongolia. The bank's operating income has increased significantly in recent years as it emerged from a successful turnaround effort following asset-quality troubles during 2018-2020 with high credit impairments. However, Golomt's absolute size remains small among international 'b' category peers.
Large Growth Appetite: Golomt has reduced its sectoral concentration substantially by diversifying into SME and retail loans, with the share of corporate loans to total loans declining by 17pp over the past six years. Nonetheless, we assess that Golomt has larger loan growth appetite and higher concentration risks than its close local peers. Its loan portfolio grew by 53% in 2024, compared with the system average of 35%.
Improved Loan Quality: The bank's asset quality has improved substantially over the past several years through repeated asset-quality reviews and increasing diversification. Fitch estimates that the stage 3 loan ratio improved to about 5% in 2024, from about 12% in 2021. However, we note that strong loan growth in recent years contributed to the improved ratio and the provision coverage for stage 3 loans remains low compared with those of local peers.
Improved Profitability: Golomt's earnings and profitability have continued to improve as credit costs declined considerably. Fitch's core metric, the four-year average of the operating profit/risk-weighted-asset ratio, improved to 4% in 2024 from below 1% in 2021. We forecast Golomt's risk-adjusted profitability to moderate in the near future, as we do not expect the contribution from foreign-currency swaps in 2024 to be sustained. The net interest margin is also likely to decline due to intense competition and lower policy rates.
Growth Pressures Capitalisation: Golomt's capital ratios have been declining since 2022 due to its renewed focus on balance-sheet growth. We estimate its Fitch Core Capital ratio will have declined to about 16% by end-2024, from 17.6% at end-2022, and we forecast a further drop in the near term due to its large growth appetite. This is in spite of the bank's improved internal capital generation capacity. Golomt's capital ratio is also noticeably lower than those of its local peers.
Franchise Supports Funding and Liquidity: The ratio of loans to customer deposits increased significantly in 2024 due to substantially faster loan growth. However, we assess that Golomt's significant deposit franchise is able to support and fund the expansion of its loan book, provided that growth moderates from the 2024 level. The bank's overall funding structure, including its higher concentration of large depositors, appears to be weaker than those of higher-rated local peers.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Any negative rating action on the sovereign rating would prompt similar action on Golomt's GSR and IDR.
Golomt's VR could also be downgraded if its business profile were to be compromised by a structural weakening of its franchise and larger risk appetite, and if a weaker economic environment leads to deterioration in a combination of the following metrics:
- impaired loans/gross loans increasing above 8% for a sustained period (end-1H24: 5.5%);
- operating profit/risk-weighted assets falling below 2% for a sustained period (1H24: annualised 9.3%); and
- the Fitch Core Capital ratio falling below 14% without a credible path to return the ratio above this level (end-1H24: 16.1%).
The GSR could be downgraded if we assess that the sovereign's ability to provide support has weakened, which could be indicated by a sovereign downgrade. A GSR downgrade could also be driven by our view that the state's propensity to provide support has diminished, which could result from a significant decline in the bank's systemic importance and deposit market share, although this is not our base case.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
A positive rating action on the sovereign rating would prompt similar action on Golomt's GSR and IDR.
Golomt's VR is sensitive to developments in Mongolia's operating environment. A sovereign rating upgrade, combined with steady progress towards a stronger legal and regulatory framework, could potentially lead to a higher operating environment score. This, in tandem with sustained improvements in Golomt's risk appetite and financial profile, could result in an upgrade of the VR.
The GSR is equalised with the sovereign rating. It can be upgraded only if the sovereign rating is upgraded and if we believe that the propensity of sovereign support has not diminished.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The Long-Term IDR (xgs) of 'B(xgs)' is driven by the VR. The Short-Term IDR (xgs) of 'B(xgs)' is mapped from the Long-Term IDR (xgs) in accordance with Fitch's Bank Rating Criteria.
Golomt's long-term senior debt instruments are rated in line with its Long-Term IDR and Long-Term IDR (xgs), as they represent its unsecured and unsubordinated obligations. The Recovery Rating of these notes is 'RR4', reflecting average recovery prospects in a default.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
A change in the VR would prompt a similar change to the Long-Term IDR (xgs). The Short-Term IDR (xgs) could be downgraded if the VR is downgraded to the 'ccc' category or below. The Short-Term IDR (xgs) could be upgraded if the VR is upgraded to 'bbb-' or above, which is a remote prospect.
A change in the Long-Term IDR or Long-Term IDR (xgs) would lead to similar action on the ratings of the bank's long-term senior debt instruments. The senior debt rating would also be sensitive to our assessment of recovery prospects.
Date of Relevant Committee
27-Feb-2025
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Golomt's Long-Term IDR is linked to Mongolia's sovereign rating, based on our assumption of state support.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products....

Published Date:2025-03-12