XacBank is a growing franchise, says Moody’s

Moody's has assigned XacBank  a D- Bank Financial Strength Rating. The Mongolia-based bank also received a Ba3/NP for long- and short-term local currency deposit ratings; a B2 /NP for long- and short-term foreign currency deposit ratings; and a Ba3/NP for long-term local and foreign currency issuer ratings

"XacBank's D- BFSR reflects its growing franchise, adequate capital, and stabilizing asset quality. These strengths, however, are offset by the bank's narrowing profit margin, small scale, and the volatile operating environment in Mongolia," says Yvonne Zhang, a Moody's Vice President and Senior Analyst.

"The local currency deposit rating of Ba3 is supported by the bank's stand alone financial strength, as the local currency government bond is rated lower at B1 and the systemic support to the bank from the Mongolian government is moderate," adds Zhang.

XacBank relies heavily on interest income. As a leading bank in the microfinance sector, it has maintained a wide net interest margin. However, with the micro finance market saturating in recent years, XacBank has gradually shifted its business focus to SME lending for growth.

The profit margin is declining as a result, and will be under pressure in coming years due to increased competition in the sector. The net interest margin declined to 7.2 per cent in 2009 from 9.2 per cent a year ago. The bank's bottom line was also hit by higher credit costs and operating expenses in 2009.

The deterioration in the bank's loan quality has stabilized, and loan quality has improved so far in 2010. The bank's asset quality has been much better than the system average, even during the global financial crisis.