Opportunities and Challenges in Mongolian Banking Sector

Mongolia Investment Summit Hong Kong

November 19, 2013

Norihiko Kato

CEO, Khan Bank

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• Second largest landlocked country

• 2.9M population, 1.3M in Ulaanbaatar, young population

• Market economy since 1990

• About 40 million livestock, about 350,000 herders

• Rich mineral resources

- coal, copper, iron-ore, gold, uranium, molybdenum, zinc,

rare metals, etc.

Oyu Tolgoi (OT): copper 36M ton, gold 1300 ton

Tavan Tolgoi (TT): coal 6.4B ton (coking coal 1.8B ton)

• Rapid economic growth

• Underdeveloped infrastructure

• Young democracy

Mongolia

Source: W orld Bank, NSO

4

GDP Growth

10.6

7.3

8.6

10.2

8.9

-1.3

6.4

17.5

12.3

-5

0

5

10

15

20

2004 2005 2006 2007 2008 2009 2010 2011 2012

Mongolia East Asia & Pacific (developing only) WorldSource: W orld Bank

2013 3Q GDP growth 11.5%

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GDP & GDP Per Capita Outlook

GDP (USD in billions) GDP Per Capita (USD)

4.6

6.2

8.7

10

12.9

16

18.9

23.7

0

5

10

15

20

25

2009 2010 2011 2012 2013E 2014E 2015E 2016E

1,688$

2,266$

3,125$3,508$

4,477$

5,515$

6,384$

7,904$

0$

1,000$

2,000$

3,000$

4,000$

5,000$

6,000$

7,000$

8,000$

9,000$

2009 2010 2011 2012 2013E 2014E 2015E 2016E

Source: IMF

Source: Bank of Mongolia, NSO, World Bank DataBank

� Industry growth rates were 42.5% in wholesale and retail, 16% in manufacturing, 14% in construction, and 8.7% in mining; Supply Chain Effect

2012 GDP Composition by Sector

20%

13%

10%

7%7%

7%

3%

33%

Mining & quarrying

Agriculture

Wholesale and retail

tradeTransportation and

storage

Manufacturing

Real estate

Government

Others

GDP Composition

6

7

-148.4 -116.2 -166.7 -186 -151.4 -119.5

57.2

-228-710

-252 -292

-1746-2354

-1728

-4,000

-2,000

0

2,000

4,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3Q

Export Import Trade Balance

Trade Balance (USD millions)

Export and Import

Source: Mongol Bank, NSO, World Bank DataBank

Exports to (2013 2Q)

Imports from (2013 2Q)

Trade Composition

90%

3%8%

China

Russia

Others

30%

30%

40% China

Russia

Others

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Export Composition (2013 2Q)

Coal

27%

Copper

20%Iron Ore

17%

Gold

7%

Zinc

3%

Cashmere

1%

Other

25%

Import Composition (2013 2Q)

Fuel

29%

Heavy

equipment

&

machinery

28%

Food

11%

Other

32%

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Foreign Direct Investment

FDI (USD millions)

Source: Bank of Mongolia , NSO

844 623

1,691

4,714 4,452

1,952

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2008 2009 2010 2011 2012 2013 3Q

FDI dropped by 49% YOY.

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Consumer Price Index

17.8%

22.1%

4.2%

13.0%

8.9%

14.0%

9.9%

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011 2012 Sep-13

Core Inflation National CPI

Inflation

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Foreign Exchange Rate

USD/MNT exchange rate

Source: Bank of Mongolia , NSO

1170.84

1267.51

1524.07

1442.84

1325.59

1195.27

1258.64

1396.67

1318.80

1410.32

1446.17

1499.60

1616.98

1655.44

1716.28

1000

1100

1200

1300

1400

1500

1600

1700

1800

Starting mid July MNT depreciated significantly

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Financial Sector

� Mongolian Financial Sector:

� 13 commercial banks (private:12, state owned:1)

� 1 development bank (state owned)

� 212 non banking financial institutions

� 145 savings & credit cooperatives

� 70 brokerage houses

� 16 insurance companies

� 4 foreign banks have representative offices:

� ING

� Standard Chartered Bank

� Bank of China

� SMBC

� (BTMU, soon)

� 90-95% percent of financial sector assets are held by commercial banks.

Source: Bank of Mongolia , FRC

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Banks’ growth

Banking Sector Assets and Loans Growth (MNT trillions)

Banks’ assets and loans are growing fast.

Source: Bank of Mongolia

3 3

4

6

10

12

18

2 3 3 3

5

7

10

-

2

4

6

8

10

12

14

16

18

20

2007 2008 2009 2010 2011 2012 2013 3Q

Total assets Domestic loans

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Banks market share

� Largest three banks (Khan, TDB, Golomt) make up around 70% of the total assets and loans in the system.

� Largest five banks make up around 85-90% of the total assets and loans.

Total Deposit Market Share 2013 3Q Loan Market Share 2013 3Q

Khan

25%

TDB

22%

Golomt

20%

State

9%

Xac

10%

Others

14%

Source: Bank of Mongolia & banks’ websites

Khan

27%

TDB

22%Golomt

23%

State

8%

Xac

10%

Others

10%

STRICTLY CONFIDENTIAL 15

Cash

4%Deposit at

BOM

12%

Securities

7%

Interbank

10%

Other

7%

Loan

60%

KB Asset Composition (2013 3Q) KB Loan Composition (2013 3Q)

Business

Entities

45%

Retail

55%

Assets and Loans Composition in case of Khan Bank

STRICTLY CONFIDENTIAL 16

Salary

41%

Mortgage

29%

Pension

8%

Herders

8%

Other

14% Wholesale and

Retail trade

31%

Construction

22%Mining

8%

Processing

Production

7%

Transportation

6%

Service

5%

Other

21%

KB Retail Loans (2013 3Q) KB Corporate & Business Loans (2013 3Q)

Assets and Loans Composition in case of Khan Bank

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Banks’ Capital

426

370

291

172 159

-

100

200

300

400

500

Khan TDB Golomt Xac State

� Although banking sector is growing rapidly, capital size is still small.

� Top banks can lend to one group customer up to from around USD 20 million to USD 50million under regulatory single party lending limit.

� Capital requirement; Tier 1 >9%, CAR>14% for “systematically important banks.”

Banks’ Capital 2013 3Q (MNT billions)

Source: Banks websites

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Non-performing Loans (USD millions)

Banks’ Loan Quality

Source: Bank of Mongolia

3.3%

7.1%

17.4%

11.5%

6.1%4.2% 5.3%

1.5%

2.8%

8.0%

4.5%

2.3%1.2% 1.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 2008 2009 2010 2011 2012 2013 3Q

Banking Sector Gross Loans Banking Sector NPL Banking Sector NPL Ratios Khan Bank NPL Ratios

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Regulatory Prudential RatiosKey prudential ratios set by Bank of Mongolia

Prudential Ratios Requirement

Liquidity Ratio > 25%

Capital Adequacy Ratio >14%

Tier 1 Ratio > 9%

Reserve Requirement >12%

Credit Concentration

Total Related Parties Lending < 20%

Single Related Party Lending < 5%

Single Borrower Lending < 20%

Foreign Exchange Risk

Open Position on Single Currency < 15%

Total Open Position < 40%

Source: Bank of Mongolia

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New Laws and Regulations

Source: Financial Regulatory Commission, MSE

Recent Changes in Laws and Regulations

� “Deposit Insurance Law“ in January 2013

� “Securities Law” in May 2013

� “new Investment Law” in October 2013

� “Investment Fund Law” in October 2013

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PSP and Gov Mortgage Loan Program

Price Stabilization and Mortgage Programs

� Government and Bank of Mongolia implemented “Price Stabilization Program” (PSP) to reduce inflation in exchange of soft loans through banks from Dec 2012.

� In June 2013, the Government Mortgage Program was introduced at 8% fixed rate funded by the Bank of Mongolia.

� In total, about MNT 3 trillion have been put into the market.

� Targeted sectors for PSP (biggest factors for high inflation): � Meat, Flour, Petroleum � Warehouse, Construction materials, Constructions

� Effects of PSP and Mortgage programs on banking sector:

� Increased MNT liquidity in the system

� Major factor for rapid loan growth in 2013

� How do we exit?

Source: Bank of Mongolia

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Challenges

�Underdeveloped capital markets, custody service, inter-bank market

�Underdeveloped non-banking sector

�Small capital of the commercial banks

�Underdeveloped derivative market and FX hedging instruments

�Legal and regulatory framework

�Consistency of fiscal and monetary policies with banks’ interests

�Risk Management and System Investment

�Compliance, Governance and Transparency

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Opportunities

� High growth potential

� Strategic and financial cooperation with international partners

� Sophistication from vanilla banking products

� New Securities Law

� New Investment Fund Law

� New business: custodian, securities, leasing

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Thank you for your attention.

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Disclaimer

This presentation has been prepared solely for informational purposes and its not to be construed as asolicitation or any offer to buy or sell securities, commodities, or related financial instruments.

The Bank has prepared this presentation based on information available to it, including informationderived from public sources that have not been independently verified. No investment, divestment orother financial decisions or actions should be based solely on the information in this presentation. KhanBank accepts no responsibility in relation to this presentation, and shall not be liable for any loss ordamage whatsoever suffered by any party arising from, relating to, resulting from or based upon the useof this presentation and any errors or omissions there from.

This presentation has been prepared on a confidential basis solely for the use of the intended recipient.This material must not be copied, reproduced, distributed or passed to others at any time, in whole or inpart, without the prior written consent of Khan Bank.