Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
STRICTLY CONFIDENTIAL
Co-Manager
16 April 2012
TABLE OF CONTENTS
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of the Programme. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Incorporated by Reference . . . . . . . . . . . . . . . . . . . .
Terms and Conditions of the Notes . . . . . . . . . . . . . . . . . . . . . .
Pro Forma Pricing Supplement. . . . . . . . . . . . . . . . . . . . . . . . . .
Form of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Rates and Exchange Controls . . . . . . . . . . . . . . . . . . .
Capitalisation and Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mongolian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mongolian Banking Industry . . . . . . . . . . . . . . . . . . . . . . . .
Regulation and Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subscription and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .
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1
5
10
34
35
65
76
79
80
81
82
84
121
125
127
132
136
142
143
149
F-1
The Bank accepts responsibility for the information contained in this Information Memorandum. To the
best of the knowledge and belief of the Bank (having taken all reasonable care to ensure that such is the
case), the information contained in this Information Memorandum is in accordance with the facts and does
not omit anything likely to affect the import of such information. This Information Memorandum should
be read in conjunction with all information deemed to be incorporated herein by reference. See
Information Incorporated by Reference.
The Bank is responsible for the information in the Information Memorandum and the Joint Programme
Arrangers are not responsible for the truth, accuracy or completeness of the information set forth herein.
Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility
or liability is accepted by the Dealers or the Trustee as to the accuracy or completeness of the information
contained or incorporated by reference in this Information Memorandum or any other information provided
by the Bank in connection with the Programme. Neither any Dealer nor the Trustee accepts any liability
in relation to the information contained or incorporated by reference in this Information Memorandum or
any other information provided by the Bank in connection with the Programme.
No person is or has been authorised by the Bank or the Trustee to give any information or to make any
representation not contained in or not consistent with this Information Memorandum or any other
information supplied in connection with the Programme or the Notes and, if given or made, such
information or representation must not be relied upon as having been authorised by the Bank, any of the
Dealers or the Trustee.
Neither this Information Memorandum nor any other information supplied in connection with the
Programme or any Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should
be considered as a recommendation by the Bank, any of the Dealers or the Trustee that any recipient of
this Information Memorandum or any other information supplied in connection with the Programme or any
Notes should purchase any Notes. Each investor contemplating purchasing any Notes should make its own
independent investigation of the financial condition and affairs, and its own appraisal of the
creditworthiness, of the Bank. Neither this Information Memorandum nor any other information supplied
in connection with the Programme or the issue of any Notes constitutes an offer or invitation by or on
behalf of the Bank, any of the Dealers or the Trustee to any person to subscribe for or to purchase any
Notes in any jurisdiction where such offer would be unlawful.
Neither the delivery of this Information Memorandum nor the offering, sale or delivery of any Notes shall
in any circumstances imply that the information contained herein concerning the Bank is correct at any
time subsequent to the date hereof or that any other information supplied in connection with the
Programme is correct as at any time subsequent to the date indicated in the document containing the same.
The Dealers and the Trustee expressly do not undertake to review the financial condition or affairs of the
Bank during the life of the Programme or to advise any investor in the Notes of any information coming
to their attention.
The SGX-ST takes no responsibility for the contents of this Information Memorandum, makes no
representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any
loss howsoever arising from or in reliance upon the whole or any part of the contents of this Information
Memorandum.
The Notes have not been, and will not be, registered under the Securities Act or any U.S. state securities
laws and, unless so registered, may not be offered, sold or delivered within the United States or to, or for
the account or benefit of, U.S. persons (as defined in Regulation S) except pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the Securities Act and applicable U.S.
state securities laws. Each purchaser of the Notes in making its purchase will be required to make or will
be deemed to have made certain acknowledgements, representations and agreements. For a description of
these and certain further restrictions on offers, sales and transfers of the Notes and the distribution of this
Information Memorandum, see Subscription and Sale.
This document is for distribution only to persons who (i) are outside the United Kingdom, (ii) have
professional experience in matters relating to investments, (iii) are persons falling within Article 49(2)(a)
to (d) (high net-worth companies, unincorporated associations etc) of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2005 (as amended), or (iv) are persons to whom an invitation or
inducement to engage in investment activity (within the meaning of section 21 of the Financial Services
and Markets Act 2000 (FSMA) in connection with the issue or sale of any Notes may otherwise lawfully
be communicated or caused to be communicated (all such persons together being referred to as relevant
persons). This document is directed only at relevant persons and must not be acted on or relied on by
persons who are not relevant persons. Any investment or investment activity to which this document relates
is available only to relevant persons and will be engaged in only with relevant persons.
This Information Memorandum does not constitute an offer to sell or the solicitation of an offer to
subscribe for or purchase any Notes in any jurisdiction in which it is unlawful to make an offer or
solicitation to subscribe for or purchase any Notes. The distribution of this Information Memorandum and
the offer or sale of Notes may be restricted by law in certain jurisdictions. None of the Bank, any Dealer
and/or the Trustee represent that this Information Memorandum may be lawfully distributed, or that any
Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any
such jurisdiction, or pursuant to an exemption available thereunder, or assumes any responsibility for
facilitating any such distribution or offering. In particular, no action has been taken by the Bank, any of
the Dealers or the Trustee which would permit a public offering of any Notes or distribution of this
Information Memorandum in any jurisdiction where action for that purpose is required. Accordingly, no
Notes may be offered or sold, directly or indirectly, and neither this Information Memorandum nor any
advertisement or other offering material may be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with any applicable laws and regulations. Persons into whose
possession this Information Memorandum or any Notes may come must inform themselves about, and
observe, any such restrictions on the distribution of this Information Memorandum and the offering and
sale of Notes.
In particular, there are restrictions on the distribution of this Information Memorandum and the offer or
sale of Notes in the United States, the European Economic Area, the United Kingdom, the Russian
Federation, the Hong Kong Special Administrative Region of the Peoples Republic of China (Hong
Kong), the Republic of Singapore (Singapore), Japan, the Republic of Korea (Korea), Mongolia, the
Peoples Republic of China (the PRC), the Republic of the Philippines (the Philippines) and the
Republic of China (Taiwan).
ii
iii
iv
The Notes and the Trust Deed are governed by English law (except that Clause 2.7 of the Trust Deed and
Condition 3.2 are governed by Mongolian law) and the Bank has agreed in the Trust Deed that disputes
arising thereunder or in respect of the Notes are subject to arbitration before the London Court of
International Arbitration or, at the election of the Trustee or, as the case may be, a Noteholder, to the
jurisdiction of the English courts. Mongolian courts will not enforce any judgement obtained in a court
established in a country other than Mongolia unless, among other things, there is in effect a treaty between
such country and Mongolia providing for the reciprocal enforcement of judgements and then only in
accordance with the terms of such treaty. There is no such treaty in effect between Mongolia and the United
Kingdom. However, both Mongolia and the United Kingdom are parties to the 1958 New York Convention
on Recognition and Enforcement of Arbitral Awards (the Convention) and, accordingly, an arbitration
award obtained in a state which is party to such Convention, such as the United Kingdom, should be
recognised and enforceable in Mongolia provided the conditions to enforcement set out in the Convention
are met.
Further, in the event of any proceedings being brought in a Mongolian court in respect of a monetary
obligation expressed to be payable in a currency other than the Mongolian Tugriks, enforcement of the
judgment in the courts of Mongolia against any party in Mongolia would be available only in Mongolian
Tugriks and for such purposes all claims or debts would be converted into Mongolian Tugriks.
SUMMARY
This summary may not contain all of the information that may be important to prospective purchasers of
the Notes. This summary is qualified by, and must be read in conjunction with, the more detailed
information and financial statements appearing elsewhere in this Information Memorandum. Investing in
the Notes involves certain risks. The information set forth under Risk Factors should be carefully
considered. Certain statements in this Information Memorandum are forward-looking statements that also
involve risks and uncertainties as described under Forward-Looking Statements.
Overview
Trade and Development Bank of Mongolia LLC is a leading banking and financial services provider in
Mongolia, offering a wide range of domestic corporate and retail banking services, including large
corporate, small and medium-sized enterprise (SME) and retail lending, deposit-taking, trade finance,
remittance, cash management, treasury, foreign exchange, gold bullion and other precious metals trading
and investment banking services. The Bank ranked as the third-largest bank in the country by equity base
with total shareholders equity of MNT 139,414.8 million (US$100.0 million) and by assets with total
assets of MNT 2,090,039.7 million (US$1,498.8 million) as at 31 December 2011, according to the Banks
internal data and the Bank of Mongolia. In addition, the Bank has extensive experience in international
banking transactions, including trade finance, foreign exchange, remittance and syndicated lending
activities in the international market. The Bank has a prominent position in the domestic money markets,
leading Mongolias foreign exchange and gold bullion markets with a market share exceeding 27.8% and
51.0%, respectively, by trading volume as at 31 December 2011, according to the Banks internal data and
the Bank of Mongolia.
As the longest-serving bank in Mongolia, having commenced banking operations in 1990, the Bank acts
as primary lender to many of the countrys leading domestic and foreign corporate credits as well as
foreign representative offices across all major industrial and commercial sectors. Leveraging this
pre-eminent position and its long-standing customer relationships, the Bank has consolidated its
market-leading position in the handling of international trade finance and remittance with access to credit
lines with major international lenders and correspondent banking relationships with over 150 international
financial institutions.
The Banks strong corporate platform and network in the Mongolian banking sector has enabled the Bank
to capitalise on the growth of the Mongolian economy, which has experienced average gross domestic
product (GDP) growth of 8.3% per annum for the period from 2003 through 2011 according to the
International Monetary Fund (the IMF), and the accompanying demand for more comprehensive banking
solutions, through targeted lending to the growing SME sector and increasing numbers of high-end retail
customers, including staff of its corporate customers as well as other high net-worth individuals. Such
efforts have improved the loan portfolio mix amongst the Banks corporate, commercial and retail
segments. In addition, the Banks position in the corporate banking market has facilitated expansion into
complementary business segments such as treasury, foreign exchange, gold bullion and other precious
metals trading and money markets, as well as the Banks investment banking services, as the Mongolian
credit market continues to grow and becomes more sophisticated. The Bank believes these dual factors of
a strengthening Mongolian economy and the Banks business growth initiatives have resulted in the Banks
earnings increasing at a compound annual growth rate of 41.8% for the period from 2003 through 2011.
The Bank believes its diverse product offerings, long-term relationships with its corporate customers and
well-defined expansion strategy have poised it to capitalise on the anticipated growth of the Mongolian
economy.
As a customer-focused financial institution dedicated principally to serving its corporate customer base,
the Bank recognises the need to provide customers with convenient banking locations and personalised
customer service. From its headquarters in the capital city of Ulaanbaatar, the Bank operated a network of
42 branches in Mongolia as at 31 December 2011 including 30 branches located in Ulaanbaatar, one in
Umnugobi province near the Oyu Tolgoi copper project and 11 in industrial cities, such as Erdenet and
Darkhan. The Bank also operates one of the largest automated teller machine (ATM) networks in
Mongolia with 99 ATMs, including 79 in Ulaanbaatar, seven each in Erdenet and Darkhan, and six in other
rural areas. The Bank has a network of approximately 957 merchants and approximately 1,344
point-of-sale terminals.
With a primary focus on corporate lending and deposit-taking, the Banks activities are concentrated in,
and its distribution strategy centres on, Ulaanbaatar, resulting in an emphasis on the quality of its branch
coverage for corporate customers in Mongolia as opposed to the quantity of branches. The Bank believes
its distribution strategy enables the Bank to service its core corporate customer base without losing
efficiencies through unnecessary expansion into rural regions, which are typically less profitable due to
lower business concentration in such regions. To reflect its primary focus on corporate banking, the Bank
plans to extend its branch network in Mongolia by identifying strategic locations with substantial new
business activity from key sectors of the Mongolian economy, particularly the mining sector. The Bank
intends to open 11 additional branches in 2012 with eight branches to be located in Ulaanbaatar and three
branches to be located outside Ulaanbaatar.
Competitive Strengths
The Bank has strong liquidity and as at 31 December 2011, the Banks return on average assets was 2.6%
compared to 3.0%, 1.6% and 2.4% in respect of Khan Bank, Golomt Bank and XacBank, respectively,
according to public filings made by each bank. The Banks return on average equity was 39.8% as at 31
December 2011 compared to 28.8%, 27.0% and 19.3% in respect of Khan Bank, Golomt Bank and
XacBank, respectively, according to public filings made by each bank. The Bank believes it possesses the
following competitive strengths:
Leading corporate lender in Mongolia. The Bank has built a reputation as a leading corporate
banking service provider in Mongolia through its long-established presence and extensive experience
as well as its wide coverage of corporate and international trade-related services. The Bank is the
market leader in corporate lending with a 24.8% market share in 2011 according to the Bank of
Mongolia. The Bank believes corporate customers view the Bank as a reliable counterparty due to
its prudent capital management strategy and position as a leading corporate bank in Mongolia.
Well-positioned to take advantage of anticipated economic growth in Mongolia. The Bank will
continue its focus on corporate lending as well as developing SME and retail lending to take
advantage of growth in Mongolias mining sector and related development. The Bank believes its
diverse product offering, long-term relationships with corporate customers and well-defined
expansion strategy make the Bank well-positioned to capture future growth in the banking sector as
a result of the anticipated growth of the Mongolian economy in coming years.
Reputation as the international face of Mongolia. With over 150 correspondent relationships with
international financial institutions and 38 nostro accounts with major clearing banks around the
world, the Bank offers a wide range of trade finance instruments and services designed to appeal to
both domestic and international clients. The Bank believes it is the most experienced and advanced
participant among Mongolian banks in the international markets, including areas such as
international investment banking, syndicated and non-syndicated lending, trade finance and
remittance. In addition, the Bank diversified its funding sources by accessing the international capital
markets, as the first Mongolian issuer of debt securities in the international capital markets.
Diversified funding sources. The Bank has access to diversified funding sources from both domestic
depositors and foreign financial institutions, providing the Bank with greater financial flexibility as
compared to its domestic competitors, and believes corporate customers regard it as a preferred
deposit-taking institution. In addition, the Bank believes it has a lower cost of funding compared to
most other banks in Mongolia due to its large corporate deposit base, a significant portion of which
comprises current accounts, which typically carry a lower rate of interest as compared to individual
savings accounts.
Well-balanced asset portfolio. The Bank strives to maintain a balanced corporate loan portfolio and
has diversified overall credit exposure amongst the corporate, commercial and retail business
segments, thereby reducing the Banks reliance and concentration in any particular sector. The Bank
actively seeks to gain exposure to sectors that it believes it will contribute significantly to the growth
of Mongolias economy in the future, in particular the mining sector and related development.
Prudent risk management and strong corporate governance. The Bank has centralised organisational
and information systems that provide prompt reporting of operating risks, thereby enhancing the
Banks enterprise risk management and internal controls systems. Similarly, the Bank places great
importance on its implementation of sound corporate governance practices and maintains a system
of internal checks and balances and committees, consistent with international best practices, to
support its corporate governance structure. In response to the global financial crisis and other
macroeconomic factors affecting Mongolia, the Banks management increased its efforts in 2009 and
2010 to improve asset quality through enhancing its procedures for approving new loans and
monitoring and collecting existing loans, particularly for corporate customers in the construction
sector. In 2011, the Bank became the first commercial bank in Mongolia to establish an internal and
independent risk management committee to monitor credit, market and operation risks. The Banks
risk management committee is headed by the Chairman of the Banks Board. The Bank also
appointed an independent director to its Board in 2011. The Banks branch managers periodically
review loan usage, business operations of the Banks borrowers and collateral quality.
Experienced management team. The Bank has an experienced management team, including members
of its Representative Governing Board (the Board), that possesses extensive industry experience in
Mongolia and overseas. The Bank appointed one independent director to its Representative
Governing Board in 2011. The management teams ability to provide strategic direction, execute
business initiatives and compete in a highly competitive market is evidenced by the Banks growth
and position in the Mongolian banking sector as well as its prudent response to the global financial
crisis of 2008 and 2009. The average experience of members of its management team and the Board
in the financial services and banking sectors exceeds 20 years, with certain members of the
management and the Board having held senior positions in other leading local and international
financial institutions.
Strategy
The Banks core strategy is to be the nations most profitable financial institution, while maintaining its
leading position as the largest lender to the Mongolian corporate sector and capitalising on its foundation
and reputation in the domestic market to diversify its products and services. The key components of the
Banks strategy to achieve these objectives include:
Consolidating its status as a preferred financial institution for Mongolian corporate customers. The
Bank aims to maintain its leading position in the Mongolian corporate banking sector by continuing
to improve its customer service and the range and quality of its product and service offerings. The
Bank wishes to further broaden its partnerships with international banks and to expand the banking
services it offers outside its core lending activities, including the development of cash management
and depository services and investment banking services, and use its position to cross-sell other
corporate finance products.
Expanding its services to SMEs in a focused manner. Although the Banks historical focus has been
on large corporate customers, it has increased its efforts to solidify its position as the preferred bank
of Mongolian SMEs by offering a range of loans and deposit products designed to meet the growing
demand for more sophisticated financial products in the Mongolian financial services market. With
its strong reputation and expertise in the Mongolian corporate banking sector, the Bank believes it
will be able to replicate and extend the core competencies of its corporate banking operations to the
SME sector.
Maintaining and strengthening its loan portfolio quality. The Bank intends to maintain and
strengthen its financial condition through rigorous monitoring of and, where possible, by improving
the quality of its loan portfolio. The Bank has implemented numerous initiatives in pursuit of this
strategy, including improvements made in the credit due diligence and loan approval process, the
deployment of a systemised credit monitoring and collection process and advanced training for its
account managers, risk analysts and credit officers. The Bank is committed to a strategy of growing
market share in the credit market without compromising its asset quality and, to that end, closely
monitors its non-performing loan to total loan ratio.
Targeting niche segments of the retail market. Drawing on synergies with its corporate and SME
strategies, the Bank targets the growing financial needs of the employees of its corporate and SME
customers by offering personal banking services such as payroll, remittance and savings products. In
addition, the Bank has also focused its marketing and product development efforts on retail services
for high net-worth individuals, who typically generate higher-margin business and represent better
asset quality as compared to the mass-market retail segment. As the Banks retail platform expands,
it expects such increased scale to enhance its ability to target high net-worth retail clients.
Expanding its deposit base. The Bank strives to manage its competitive cost of funding, increase its
operating margins and maintain its ability to leverage its asset base. To this end, the Bank expects
to continue to enlarge its deposit base by competing with other Mongolian banks to obtain
attractively priced deposits denominated in Tugriks and U.S. dollars in the domestic market. As the
Mongolian economy relies heavily on U.S. dollar pricing for certain goods, many local and foreign
corporate and SME customers operating in Mongolia maintain both Tugrik-denominated and U.S.
dollar-denominated deposits as a hedging strategy against inflationary pressures. Moreover, the Bank
believes that its extensive experience in foreign exchange and remittance, together with its
correspondent bank network and reputation for strong financial management, places it in an
advantageous position to attract foreign customers seeking a deposit-taking financial institution in
Mongolia.
Corporate History
The Bank was wholly owned by the Government at the time of its establishment in 1990. In 2002, the Bank
underwent a privatisation process, which resulted in Globull Investment & Development S.C.A.
(Globull), a consortium owned by Banca Commerciale Lugano and Gerald Metals Inc., owning the
majority of the Banks share capital. In January 2005, the Asian Development Bank (ADB) and IFC
subscribed for newly issued shares of the Bank and became the Banks second-largest shareholders
representing 14.5% of the Banks then total issued and outstanding shares. In addition, the ADB and IFC
contributed MNT 9.6 billion to the Banks capital in the form of subordinated debt in 2004. The Banks
minority shareholders, mainly comprised of the Banks employees, were diluted from a 24.0% to a 19.0%
ownership position following a subsequent rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). ADB and IFC exercised their tag-along rights and sold their shares to US Global, making it the
sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by Central
Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest. In February 2012, The Goldman Sachs
Group, Inc. acquired a 4.78% stake in the Bank. As at 31 December 2011, US Global Investment LLC held,
directly and indirectly through Globull, 73.14% of the Banks shares with the remaining shares held by
minority shareholders. See Principal Shareholders. The Bank was named the Development Supporting
Bank of the Year by the Government in 2011.
Description . . . . . . . . . . . . . . . . .
Arrangers . . . . . . . . . . . . . . . . . .
Dealers . . . . . . . . . . . . . . . . . . . .
Co-Manager . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . .
There are certain factors that may affect the Issuers ability to
fulfil its obligations in relation to Notes issued under the
Programme. In addition, there are certain factors which may be
material for prospective purchasers for the purpose of assessing
certain market risks associated with Notes issued under the
Programme. These factors are set out under Risk Factors.
Certain Restrictions . . . . . . . . . . .
Trustee . . . . . . . . . . . . . . . . . . . .
Registrar . . . . . . . . . . . . . . . . . . .
Programme Size . . . . . . . . . . . . . .
Distribution . . . . . . . . . . . . . . . . .
Currencies . . . . . . . . . . . . . . . . . .
Redenomination . . . . . . . . . . . . . .
Maturities . . . . . . . . . . . . . . . . . .
Issue Price . . . . . . . . . . . . . . . . . .
Notes may be issued on a fully paid or (in the case of Notes other
than Subordinated Notes) a partly paid basis and at an issue price
which is at par or at a discount to, or premium over, par, as
specified in the relevant Pricing Supplement.
Form of Notes . . . . . . . . . . . . . . .
The margin (if any) relating to such floating rate will be agreed
between the Issuer and the relevant Dealer for each such Series
of Floating Rate Notes and as specified in the applicable Pricing
Supplement.
Index Linked Notes . . . . . . . . . . .
Floating Rate Notes and Index Linked Interest Notes may also
have a maximum interest rate, a minimum interest rate or both.
Interest on Floating Rate Notes and Index Linked Interest Notes
in respect of each Interest Period, as agreed prior to issue by the
Issuer and the relevant Dealer, will be payable on such Interest
Payment Dates, and will be calculated on the basis of such Day
Count Fraction, as may be agreed between the Issuer and the
relevant Dealer and as specified in the applicable Pricing
Supplement.
Redemption . . . . . . . . . . . . . . . . .
Denomination of Notes . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . .
Negative Pledge . . . . . . . . . . . . . .
Cross Default . . . . . . . . . . . . . . .
Rating . . . . . . . . . . . . . . . . . . . . .
Listing . . . . . . . . . . . . . . . . . . . .
Governing Law . . . . . . . . . . . . . .
Selling Restrictions . . . . . . . . . . .
There are restrictions on the offer, sale and transfer of the Notes
in the United States, the European Economic Area, the United
Kingdom, the Russian Federation, Hong Kong, Singapore,
Japan, Korea, Mongolia, the PRC, the Philippines and Taiwan
and such other restrictions as may be required in connection with
the offering and sale of a particular Tranche of Notes. See
Subscription and Sale.
RISK FACTORS
An investment in the Notes involves certain risks. Prospective purchasers of the Notes should carefully
consider all of the information in this Information Memorandum and, in particular, the risks described
below, prior to making an investment decision with respect to the Notes. The risks described below are not
the only risks that may affect the Bank or the Notes. Prospective purchasers should also note that certain
of the statements set forth below constitute forward-looking statements. In general, investing in the
securities of issuers in emerging market countries, such as Mongolia, involves risks not typically
associated with investing in the securities of issuers in countries with more developed economies and
regulatory regimes.
To the extent the description below relates to the Government or Mongolian macroeconomic data, such
information has been extracted from official Government publications or other third-party sources and has
not been independently verified by the Bank. Prospective purchasers of the Notes should consult their own
financial and legal advisers about risks associated with an investment in such Notes and the suitability of
investing in such Notes in light of their particular circumstances. In particular, Notes where the amount
payable in respect thereof is determined by reference to one or more indices or bases of reference may not
be appropriate investment for investors who are unsophisticated with respect to such transactions.
Risks Relating to the Banks Business
The Banks non-performing assets may increase and the Banks ability to recover all or a substantial
portion of non-performing assets may deteriorate
Any lending activity is exposed to credit risk arising from the risk of default by borrowers. The Banks
total non-performing assets as at 31 December 2011 totalled MNT 28,181.7 million (US$20.2 million), or
2.5% of the Banks total loan portfolio. A number of factors affect the Banks ability to monitor, control
and reduce non-performing loans. Some of these factors, including macroeconomic developments in the
Mongolian economy, movements in global commodity markets, global competition, interest rates and
exchange rates, are not within the Banks control.
Growth of the Mongolian economy in 2011 improved the general creditworthiness of the Banks
borrowers, which improvement the Bank believes contributed to a reduction in the number and size of
defaults. The Banks policy requires security in the form of collateral for all loans, except international
syndicated loans. Historically, the Bank has experienced a recovery rate of approximately 90.7% of
non-performing assets, which recovery rate has typically been achieved by working with borrowers to
obtain repayment through asset sales, liquidation of collateral and legal actions. The Bank cannot assure
prospective purchasers that there will not be a need in future periods to increase provisions for loan losses
as a percentage of non-performing assets or that the percentage of non-performing assets that the Bank will
be able to recover will be similar to the Banks past experience of recoveries of non-performing assets.
The Bank has increased its efforts to tighten its credit appraisal systems and credit risk monitoring and
management systems, and has improved collections on existing non-performing assets. However, the Bank
cannot assure prospective purchasers that such improvements will continue or will continue to result in a
reduction in defaults or that the Bank will continue to be successful in its efforts to reduce its level of
non-performing assets or that the overall quality of its loan portfolio will not deteriorate in the future. If
the Bank is not able to control the absolute levels, as well as the percentage relative to the Banks total
loan portfolio, of non-performing assets, or if there is a significant increase in its restructured loans, its
business, financial condition and results of operations could be materially and adversely affected.
The Bank has significant credit exposure to certain borrowers and industries
As at 31 December 2011, the Bank had significant credit exposure to various industry sectors. As at 31
December 2009, 2010 and 2011, respectively, the Banks largest industry exposures were to mining and
quarrying at MNT 64,554.9 million, MNT 74,974.3 million and MNT 252,935.0 million (US$181.4
million); corporate trading at MNT 54,449.5 million, MNT 72,763.7 million and MNT 190,332.6 million
(US$136.5 million); mortgage loans at MNT 30,728.6 million, MNT 37,433.6 million and MNT 146,144.0
million (US$104.8 million); and manufacturing at MNT 103,251.5 million, MNT 77,532.6 million and
MNT 136,709.9 million (US$98.0 million), which together comprised an aggregate of MNT 726,121.4
million (US$520.7 million), or 63.6% of the Banks total loan portfolio.
10
In 2011, mining and quarrying, corporate trading, mortgage loans, manufacturing and construction each
represented more than 10% of the Banks total loan portfolio. As at 31 December 2011, exposure to the
mining and quarrying sector comprised approximately 22.2% of the Banks total loan portfolio.
The Banks direct credit exposure to the Mongolian mining and quarrying sector was MNT 252,935.0
million (US$181.4 million) as at 31 December 2011, or approximately 22.2% of the Banks total loan
portfolio; however, the Banks corporate customers in other industry sectors may also significantly depend
on the Mongolian mining sector, thereby increasing the Banks overall mining sector exposure. The global
and domestic trends in these industries may have a bearing on the Banks financial position. Any
significant deterioration in the performance of a particular sector, driven by events outside the Banks
control, such as regulatory action or policy announcements by the Government, would adversely impact
the ability of borrowers in that sector to service their debt obligations to the Bank. See Risks relating to
Mongolia Key decisions concerning foreign participation in the countrys mining sector may have an
adverse impact on the Mongolian economy. In addition, if a significant portion of the loans to these
borrowers or sectors were to become non-performing, this could materially and adversely affect the Banks
business, financial condition and results of operations.
The Bank operates in Mongolia, where credit risks and counterparty exposure experienced by banks
may be greater than in more developed countries
The Banks principal business includes commercial lending and, to a lesser extent, consumer lending, to
its Mongolia-based clients and customers. The Bank is subject to the credit risk of its borrowers, who may
not pay interest or repay principal on their loans in a timely fashion or at all. The credit risk of its
borrowers may be higher than in more developed countries primarily due to (i) the perceived greater
uncertainty in the Mongolian regulatory, political, economic and industrial environment, (ii) the foreign
debt of the Government and Mongolian corporates relative to Mongolias GDP, (iii) the volatility of
interest rates and Tugriks to U.S. dollar exchange rates and (iv) difficulties that many of the Banks
borrowers face in adapting to instability in world markets and global technological advances. Higher credit
risk has a material adverse effect on the quality of loan portfolios and exposes Mongolian banks, including
the Bank, to potential losses and risks that may be higher than for banks operating in more developed
countries. Such losses, if material, would have a material adverse effect on the Banks business, financial
condition and results of operations.
Moreover, the Bank has also been expanding its personal loan operations in recent years as part of its new
business strategy. Economic difficulties in Mongolia that have a material adverse effect on Mongolian
consumers could result in reduced growth and deterioration in the credit quality of the Banks personal
loan portfolio. For example, a rise in unemployment or an increase in interest rates in Mongolia could have
a material adverse impact on the ability of borrowers to make timely payments of interest or repayment
of principal on their loans and could increase the likelihood of defaults, while reducing overall demand for
personal loans. In addition, the number of loan accounts may be negatively affected by declines in
household income, public concerns about unemployment or other adverse macroeconomic factors.
Increased competition arising from economic liberalisation in Mongolia, variable industrial growth,
volatile prices of Mongolias exports, the high level of debt in the financing of projects and capital
structures of companies in Mongolia and high interest rates in Mongolia may reduce the profitability of
certain of the Banks customers, thereby increasing the credit risk associated with loans extended by the
Bank to such customers.
The Bank may be unable to obtain sufficient external financing to support its operations or to grow its
business
The Bank requires a substantial amount of cash for its operations, including for the extension of credit to
its customers through its principal corporate lending activities and for the expansion of certain business
segments such as its investment banking activities. To satisfy its liquidity and other funding requirements,
the Bank may need to issue additional equity or debt securities in the Mongolian or international capital
markets or otherwise incur additional borrowings. In addition, as part of its efforts to reduce funding costs
and establish a more stable capital structure, the Bank intends to continue to maintain diverse sources of
funding, which includes the reduction of its reliance on short-term borrowings. The ability of the Bank to
rely on alternative sources of funding will depend on its financial position and the liquidity of the
Mongolian and international capital markets as well as the Governments policies regarding domestic and
11
foreign currency borrowings. The Banks failure to obtain sufficient financing on commercially reasonable
terms or at all could delay or limit its ability to pursue its business expansion and diversification strategies,
which could materially and adversely affect the Banks business, financial condition and results of
operations.
The Banks funding is primarily short-term and depositors may not roll-over deposited funds upon
maturity
A significant portion of the Banks funding needs are satisfied from short-term sources, primarily in the
form of customer deposits. As at 31 December 2011, 63.0% of the Banks deposits were demand and term
deposits with maturities of three months or less and 37.0% of the Banks deposits were term deposits with
maturities of greater than three months. Accordingly, the maturity profile of the Banks assets and
liabilities shows a funding mismatch in the short-term. The negative gap has arisen mainly because the
Banks deposits, which are met through short-term funding sources (primarily in the form of deposits) and
other liabilities are of shorter average maturity than its loans and investments, which have medium or
long-term maturities.
Such deposits may not continue to be a stable source of funding for the Bank. In the event the Bank is
unable to attract or retain sufficient deposits or if a substantial number of the Banks depositors do not
roll-over deposited funds upon maturity, its liquidity position could be adversely affected and the Bank
may be unable to fund its loan growth and may be required to seek alternative sources of short-term or
long-term funding. The Bank cannot assure prospective purchasers as to the availability of such funding
or the terms of such funding. To the extent the Bank is unable to obtain sufficient funding on acceptable
terms or at all, the Banks business, financial condition and results of operations may be materially
adversely affected. In addition, if the amount of the Banks loans were to increase in excess of the increase
in its deposits, the loans to deposits ratio could rise and this could have a material adverse effect on the
Banks liquidity position and hence its ability to make payments under the Notes.
The Banks risk management policies and procedures have been revised and implemented in recent
years and are not fully developed
The Bank is exposed to a variety of risks, including credit risk, market risk, portfolio risk, exchange rate
risk, interest rate risk and operational risk. Although the Bank has established risk management policies
and procedures, many of which have been revised and implemented in recent years (including establishing
a risk management group, developing scoring and grading systems and bifurcating relationship and credit
functions), the effectiveness of the Banks risk management is limited by the quality, amount and
timeliness of available data in Mongolia in relation to factors such as the credit history of proposed
borrowers and the loan exposure borrowers have with other financial institutions. While a new law on
credit information was recently enacted by Parliament setting out rights, limitations and permissible
practices, unlike developed countries, Mongolia does not have a fully operational nationwide credit
information bureau, which may adversely affect the quality and limit the amount of information available
to the Bank regarding the credit profile of its borrowers, especially individuals and small businesses. As
such, the Bank cannot assure prospective purchasers that any of its risk management policies or procedures
will be fully effective. Some methods of managing risk are based upon observed historical market
behaviour. As a result, the Bank may not be able to accurately or in a timely fashion predict future risk
exposures, which could be greater than the historical measures indicated. In addition, the information
generated by different groups within the Bank may be incomplete or obsolete. Management of operational,
legal or regulatory risk requires policies and procedures to properly record and verify a large number of
transactions and events. Other risk management methods depend upon an evaluation of information
regarding markets, customers and other factors. This information may not in all cases be accurate,
complete, up-to-date or properly evaluated. Parts of the Banks risk management framework are new and
many of the risk management policies and procedures, such as portfolio management tools, have not been
tested or are still being developed or enhanced. The Bank cannot assure prospective purchasers that these
policies and procedures will operate in the way that the Bank anticipates and that such policies and
procedures will be adequate to identify and manage risks as intended.
The Bank has developed credit screening standards in response to such inadequacies in the quality of credit
information that are different from, or inferior to, the standards used by its international competitors. As
a result, the Banks ability to assess, monitor and manage risks inherent in its business may not meet the
standards of its counterparts in more developed countries. If the Bank is unable to acquire or develop in
12
the future the technology, expertise and systems available to meet international standards, or if the Banks
standards are not as rigorous as international standards, the Banks ability to manage these risks and on
the Banks business, financial condition and results of operations could be materially and adversely
affected.
The Bank may not be able to successfully implement its product expansion and business diversification
strategies
The Banks business strategy includes expanding the range of its products and services to diversify its
revenue streams as well as increasing its branch network. For example, the Bank has expanded its SME
and retail banking operations, has generated cross-selling opportunities by introducing products combining
elements of corporate financing and consumer financing, and is developing its investment banking
portfolio. Expansion of the Banks business activities to offer new financial products and services as well
as increasing its branch network exposes it to a number of risks and challenges, including, among others,
the following:
new business activities may require greater marketing and compliance costs than the Banks
traditional services;
new business activities may have lower growth or profit potential than the Bank anticipates, and the
Bank cannot assure prospective purchasers that new business activities will become profitable at the
level the Bank forecasts or at all;
the Bank may fail to identify and offer attractive new services in a timely fashion;
the Banks competitors may have substantially greater experience and resources for the new business
activities the Bank wishes to commence, particularly in the SME and retail banking sectors, and the
Bank may not be able to attract customers from its competitors;
the Bank may need to hire or retrain personnel to conduct and supervise new business activities;
the Bank may need to enhance its information technology capabilities to support a broader range of
activities; and
general economic conditions in Mongolia and worldwide, such as rising interest rates or housing
prices, could hinder the Banks expansion into the personal loan and mortgage industries.
New business endeavours may require knowledge and expertise which differ from those used in the current
business operations of the Bank, including different management skills, risk management procedures,
guidelines and systems, credit appraisal, monitoring and recovery systems. The Bank may not be
successful in developing such knowledge and expertise. In addition, managing such growth and expansion
requires significant managerial and operational resources and the number of qualified managerial
personnel in Mongolia may be limited. The Banks inability to implement its product expansion and
business diversification strategies could have a material adverse effect on the Banks business, financial
condition and results of operations.
The shareholders and related parties of the Bank may exercise influence over certain of the Banks
affairs and may have interests which differ from those of the Bank
As at 31 December 2011, US Global Investment LLC (a joint venture owned equally by Central Asia
Mining LLC and Mr. Erdenebileg Doljin) was the Banks largest shareholder, with a 73.14% direct and
indirect shareholding interest. In particular, Mr. Erdenebileg serves as the current Chairman of the Board
and as a member of the Representative Governing Board of Ulaanbaatar City Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest. Accordingly, these shareholders of the
Bank will be able to exert significant influence on the Banks strategic direction, business and operations.
The interests of these shareholders may differ significantly from the interests of the Bank and the Banks
other shareholders and creditors, including the holders of the Notes, and the Bank cannot assure
prospective purchasers that such shareholders will exercise influence over the Bank in a manner that is in
the best interests of the Bank and the Banks other shareholders and creditors or in a manner that will not
conflict with the interests of the Bank and the Banks other shareholders and creditors.
13
The Bank has grown rapidly in a relatively short period and its strategy depends on the continued
growth of the Mongolian economy and its ability to manage its growth
The Bank has grown rapidly in a relatively short period of time primarily due to the growth of the
Mongolian economy and the expansion of its product and service offerings as a result of the increasing
sophistication of the Mongolian banking industry. Its strategy depends on the continued growth of the
Mongolian economy, in particular the mining sector, and its ability to compete effectively in its existing
markets as customer demand for modern banking products and services increases. The Mongolian economy
may not continue to grow at the rate that it has in the recent past and external factors beyond the Banks
control, such as adverse Government regulation or a failure by the Government to develop sufficient
infrastructure necessary to develop the mining sector or otherwise, may inhibit growth in the future.
Moreover, past and future growth place strains on the Banks management and operations. The Banks
ability to manage its growth will be particularly dependent upon the Banks ability to:
maintain and enhance risk management and its system of internal controls to ensure timely and
accurate reporting; and
Slowing growth, the absence of growth or the inability of the Bank to effectively manage its growth could
negatively affect the Banks ability to implement its strategy, which could materially and adversely affect
the Banks business, financial condition and results of operations.
The value of the Banks collateral may be overstated and may decline in the future
A substantial portion of the Banks loans to corporate customers are secured by tangible assets, including
property, plant and equipment. Mortgages secured by land, real estate and mining licences need to be
registered with the state agencies and are the Banks preferred collateral. The real estate collateral value
of land as calculated by the Bank represents the price at which such land can be sold in the shortest term
in an auction and the Bank believes such valuation to be discounted than the market price of such
collateral. The Banks loans to corporate customers also include working capital credit facilities that are
typically secured by a first lien on inventory, receivables and other current assets. In some cases, the Bank
may have taken further security of a first or second lien on fixed assets, a pledge of financial assets such
as marketable securities, corporate guarantees and personal guarantees. A substantial portion of the Banks
loans to retail customers is also secured by the assets financed, predominantly real property and vehicles.
Although in general the Banks loans (excluding its syndicated loans) are over-collateralised, the Bank
cannot assure prospective purchasers that the realised value of the collateral would be adequate to cover
the Banks loans. An economic downturn or an increase in inflation could result in a fall in relevant
collateral values for the Bank. In particular, a downturn in the real estate market may result in the principal
amount of certain loans exceeding the value of the underlying real estate collateral. The Banks collateral
may be over-valued and not accurately reflect its liquidation value, which is the maximum amount the
Bank is likely to recover from a sale of collateral, less expenses of such sale. In addition, some of the
valuations in respect of the collateral may be outdated or may not accurately reflect the value of the
collateral. In certain instances, where there are no purchasers for a particular type of collateral, such
collateral may be worthless. While the Bank assesses the value of its real estate collateral on a yearly basis,
any decline in the value of the collateral securing the Banks loans, including with respect to any future
collateral taken by the Bank, would mean that its loan loss provisions may be inadequate and require an
increase in such provisions. The Bank cannot assure prospective purchasers that the collateral securing any
particular loan will protect the Bank from suffering a partial or complete loss if the loan becomes
non-performing. Any increase in the Banks provisions would adversely affect its capital adequacy ratio
and otherwise adversely affect its business, financial condition and results of operations.
The Bank may experience delays in enforcing its collateral when borrowers default on their obligations
to the Bank
Mongolian banks may not be able to fully recover amounts owed to them through enforcement of collateral
or guarantees, as a result of, among other factors, the legal uncertainties in enforcing such rights, delays
in bankruptcy and foreclosure proceedings, inability to perfect security interests for certain types of
14
collateral, defects in the perfection of certain types of collateral and fraudulent transfers by borrowers.
Bankruptcy laws and enforcement procedures in Mongolia are less developed than those in certain other
countries, and the enforcement process in Mongolia may be comparatively lengthy. As a result, it may take
several years for a bank to enforce and realise the value of collateral underlying non-performing loans, and
a particular loan may be classified as non-performing for several years before collateral can be seized and
liquidated. During such period, the physical condition and market value of the collateral can deteriorate,
particularly where the collateral is in the form of inventory or receivables. In addition, such collateral may
not be adequately insured or insured at all.
In the past, these factors have exposed, and continue to expose, lenders in Mongolia to legal liability while
in possession of collateral. The current difficulty of bringing enforcement actions under the Mongolian
legal system significantly reduces the ability of lenders to realise the value of collateral located in
Mongolia and therefore the effectiveness of taking a secured position on loans to Mongolian borrowers.
The Bank cannot assure prospective purchasers that it will be able to realise the full value, or any value,
of any collateral located in Mongolia in a bankruptcy or foreclosure proceeding or otherwise. In addition,
the Bank may incur significant administrative costs in maintaining and disposing of seized properties. A
failure to recover the expected value of collateral security could expose the Bank to a potential loss. Any
unexpected losses could adversely affect the Banks business, financial condition and results of operations.
The Banks allowances for doubtful accounts may prove inadequate
Non-performing loans of the Bank represented 5.3%, 4.1% and 2.5% of its total loans as at 31 December
2009, 2010 and 2011, respectively. Although the Bank has complied with the minimum allowance
requirements promulgated by the Government and, as a matter of internal policy, has maintained strict
reserve requirements, the Bank cannot assure prospective purchasers that the Bank will not be required to
make significant additional allowances for doubtful accounts in future periods if it experiences higher than
anticipated loan defaults and delinquencies due to increased credit losses resulting from, among other
things, ineffective collection management, discrete events adversely affecting specific customers or
businesses or adverse changes in the economy, which could in turn materially and adversely affect the
Banks business, financial condition and results of operations.
The Bank has contingent liabilities and commitments not stated on its balance sheet
As at 31 December 2011, the Bank had contingent liabilities and commitments of approximately MNT
229,494.9 million (US$164.6 million), on account of the Banks outstanding commitments to extend credit,
including in the form of undrawn portions of approved loans, credit card limits, overdraft facilities,
financial guarantees and letters of credit. These commitments and contingent liabilities have off
balance-sheet credit risk for which provisions are not currently made according to local banking practices
in Mongolia. A singificant portion of the contingent liabilities and commitments will expire without being
advanced in whole or in part. Accordingly, the amounts do not represent expected future cash flows.
Crystallisation of the Banks contingent liabilities would have a material adverse effect on the Banks
business, financial condition and results of operations.
The Bank is exposed to exchange rate risk and interest rate risk
As a financial institution, the Bank is exposed to exchange rate risk. Movements in foreign exchange rates
may materially and adversely impact the Banks borrowers, which may in turn adversely impact the nature
of its exposure to these borrowers. Volatility in foreign exchange rates could materially and adversely
affect the Banks business, financial condition and results of operations. As at 31 December 2011, the Bank
had U.S. dollar and other foreign currency-denominated gross loans of MNT 628,503.1 million (US$450.7
million) and U.S. dollar and other foreign currency-denominated customer deposits of MNT 522,025.0
million (US$374.3 million). In addition, as at 31 December 2011, the Bank had outstanding U.S.
dollar-denominated indebtedness of the equivalent of MNT 391.8 billion (US$281.0 million). Although, as
at 31 December 2011, the Bank had MNT 4,625.6 million (US$3.3 million) of short position in U.S. dollars
to hedge against local currency depreciation, if the Tugrik depreciates significantly at any time when the
Bank has a significant net open borrowing position denominated in foreign currencies, such depreciation
could cause the Bank to suffer losses, reduce its capital adequacy ratio and require the Bank to seek
additional capital or breach capital adequacy regulations set by the Bank of Mongolia. The Bank cannot
assure prospective purchasers that any additional required capital would be available on acceptable terms
or at all.
15
The Bank realises income from the margin, or spread, between interest-bearing assets, such as
investments and loans, and interest paid on interest-bearing liabilities, such as deposits and borrowings.
The performance of Mongolian banks, including the Bank, is subject to fluctuations in market interest rates
as a result of mismatches in the re-pricing of assets and liabilities. These interest rate fluctuations are
neither predictable nor controllable and may have a material adverse impact on the operations and financial
condition of Mongolian banks such as the Bank. In a rising interest rate environment, if the Bank is not
able to pass along its higher interest expenses to customers with loans with the Bank in the form of higher
interest rates for such loans, the Banks profitability would be materially and adversely affected. If such
increased costs are passed along to customers, such increased rates may make loans less attractive to
potential customers and result in a reduction in customer volume and hence the Banks operating revenues
would be materially and adversely affected. In a decreasing interest rate environment, potential
competitors may find it easier to enter the markets in which the Bank operates and to benefit from wider
spreads. As a result, fluctuations in interest rates could have an adverse effect on the Banks margins and
volumes and in turn result in an adverse effect on the Banks business, financial condition and results of
operations.
The Bank relies on certain key personnel
The Banks continued success depends upon the retention of key management executives, who have been
instrumental in its success, and upon its ability to attract and retain other highly capable individuals. The
loss of some of the Banks senior executives, or an inability to attract or retain other key individuals, could
materially and adversely affect the Banks business. In particular, the Banks business could be adversely
affected if the employment of certain key employees who constitute the Banks management team is not
renewed or is discontinued and suitable replacements are not found.
The Banks rate of growth may be limited as competitors compete for such talented and skilled personnel
who are becoming an increasingly scarce resource in Mongolia. The current demand for these talented and
skilled personnel is expected to continue for the foreseeable future as the Mongolian banks develop in line
with the economic development of Mongolia. Further, if the Bank is unable to attract, assimilate and retain
these talented and skilled personnel, it may be on terms that are economically disadvantageous.
The Bank does not carry insurance in respect of the loss of the services of any of the members of its
management. In addition, competition in Mongolia for personnel with relevant expertise is intense due to
the paucity of qualified individuals. Inability to retain its existing senior management and/or attract
additional qualified senior management personnel could have a material adverse effect on the Banks
business, financial condition and results of operations.
The Bank may not detect and prevent fraud or other misconduct committed by the Banks employees or
outsiders on a timely basis or at all
Similar to other financial institutions, the Bank is exposed to the risk of fraud and other misconduct
committed by employees or outsiders. Such fraud and other misconduct may adversely affect banks and
financial institutions more significantly than companies in other industries due to the large amounts of cash
transacted. In April 2006, a former branch manager of the Bank and certain other persons misappropriated
a total of MNT 3,456.8 million (US$2.5 million). A criminal investigation was initiated against the
offenders and MNT 1,378.6 million (US$1.0 million) of the misappropriated funds have been recovered
by the Bank. On 14 December 2007, the court ordered the former branch manager to transfer MNT 2,078.2
million (US$1.5 million) to the Bank by transferring title to certain properties located in central
Ulaanbaatar with the balance of the outstanding amount to be paid in cash. In 2009, the Bank experienced
another occurrence involving the misappropriation of funds by a branch employee and, although such case
involved a small sum, the Bank failed to prevent such fraud. While the Bank has managed to recover most
of the funds misappropriated by its branch manager, a number of weaknesses in the Banks internal
controls may have enabled such fraudulent activity to occur. As at the date of this Information
Memorandum, the Bank is not aware of any further misappropriation of funds by any officer of the Bank,
which might have a material effect on the Banks business operations.
While the Bank has taken various steps to improve internal procedures and prevent fraudulent actions, such
steps may be insufficient to prevent similar occurrences from transpiring in the future. In addition, failure
on the part of any member of the Bank to prevent future fraudulent actions may result in administrative
16
or other regulatory sanctions by the Financial Regulatory Committee of Mongolia (the FRC), formerly
known as the Securities Commission of Mongolia, or Government agencies and may also result in the
suspension or other limits on the Banks banking and other business licences. The Bank cannot assure
prospective purchasers that the Bank will be able to avoid future material incidents of fraud.
The Bank may not be able to respond to rapid technological changes
The Banks future success will depend, in part, on its ability to respond to technological advances and
emerging banking industry standards and practices on a cost-effective and timely basis. The development
and implementation of such technology entails significant technical and business risks. The Bank cannot
assure prospective purchasers that the Bank will successfully implement new technologies effectively or
adapt its transaction-processing systems to customer requirements or emerging industry standards. If the
Bank is unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing
market conditions, customer requirements or technological changes, its business, financial condition and
results of operations may be materially and adversely affected.
The Bank may fail to manage risks associated with its information and technology systems
The Bank is subject to risks relating to its information and technology systems and processes. These risks,
which may arise internally and externally, include malfunctions and failures, human error or misconduct
and other external factors. The Bank relies on internal and external information and technology systems
to generate new business, provide services to customers, administer customer data and manage the Banks
operations. The Bank uses increasingly advanced software, systems and networks to manage and back-up
its customer and accounting data and other aspects of its business. This hardware and software is
vulnerable to damage or interruption by human error, misconduct, malfunction, natural disasters, power
loss, sabotage, computer viruses and similar events or the interruption or loss of support services from
third parties such as Internet service providers, ATM operators and telephone companies. Any disruption,
outage, delay or other difficulty experienced by any of these information and technology systems could
result in delays in the provision or repayment of borrowings or decreased consumer confidence in the
Banks business, or otherwise adversely affect the Banks business, financial condition and results of
operations.
The Bank also seeks to protect its computer systems and network infrastructure from physical break-ins
as well as security breaches and other disruptive problems caused by the Banks increased use of the
Internet. Computer break-ins and power disruptions could affect the security of information stored in and
transmitted through these computer systems and network infrastructure. Because the Banks computer
systems and network infrastructure have only been recently deployed, there are areas in the system that
have not been properly protected from security breaches. Although the Bank employs security systems,
including firewalls and password encryption, designed to minimise the risk of security breaches and
maintains operational procedures to prevent break-ins, damage and failures, the potential for fraud and
securities problems is likely to persist, and the Bank cannot assure prospective purchasers that these
security measures will be adequate or successful. Failure in security measures could have a material
adverse effect on the Bank business, financial condition and results of operations.
The Banks trading and investment banking activities may result in losses
The Bank engages in trading and investment banking activities as well as engaging in commodities and
currency trading activities and other investment banking activities. For 2011, income generated from such
trading and investment banking activities accounted for 25.6% of the Banks total operating income. The
Bank may from time to time maintain long and short positions in different asset categories, from which
it expects to earn revenues based on changes in the relative values of the assets. The Banks trading
positions are inherently volatile as the prices of trading assets are subject to general economic, political
and market conditions that may fluctuate from time to time. To the extent that the relative values of its
trading assets change in a direction, manner or scope that the Bank did not anticipate or against which it
did not hedge, the Bank may realise a loss in those paired positions. For example, in November 2007, the
Bank acquired equity securities in certain foreign financial institutions. The subsequent continued
downturn in the global financial services sector resulted in the Bank recognising a net investment loss of
approximately MNT 3,000.0 million in January 2008 and closing its equities investment activities. The
Bank cannot assure prospective purchasers that it will not experience a similar investment loss in the
future. Risks arising both from the Banks trading and investment strategy and general market volatility,
which is beyond the Banks control, could expose the Bank to potential losses and may materially and
adversely affect the Banks business, financial condition and results of operations.
17
The Banks insurance may not be adequate to cover losses or liabilities that may arise
Consistent with industry practice in Mongolia, the Bank maintains insurance against some, but not all,
operational and natural disasters. In particular, consistent with industry practice, the Bank does not
maintain coverage for business interruption. The Bank cannot assure prospective purchasers that its
insurance will be adequate to cover losses or liabilities that may arise. Also, the Bank cannot predict the
continued availability of insurance at acceptable premium levels. A significant uninsured or underinsured
claim against the Bank or the failure of its insurers to pay claims could materially and adversely affect the
Banks business, financial condition and results of operations.
The Bank may be unable to procure or maintain the necessary licences
All banking operations and various related operations in Mongolia require a general banking licence from
the Bank of Mongolia. The Bank holds such a licence, but it cannot assure prospective purchasers that it
will be able to maintain such licence or obtain a new general banking licence if necessary in the future.
The Banks failure to comply with applicable rules and regulations could result in penalties, loss of
regulatory permits and damage to its business reputation, which could materially and adversely affect its
business, financial condition and results of operations. If the Bank loses its general banking licence, it
would be unable to perform any banking operations.
Risks Relating to the Banking Industry in Mongolia
Mongolia lacks a centralised system for the reporting of credit information
The Mongolian banking system is supported by an elementary centralised credit information system run
by the Bank of Mongolia that provides basic details of a customers credit history, including the loan
amount, disbursement date and whether outstanding loans are current. The system is highly dependent
upon participating banks supplying accurate and timely credit information, which is difficult in the many
areas where bank branches operate with information systems that are run manually or have limited
computer capability. Furthermore, there are no independent credit agencies in Mongolia. This means
verification of borrowings and, more importantly, credit history of credit applicants, in particular
individuals and small businesses, are difficult to obtain. Due to lack of an existing fully developed and
centralised credit bureau and credit agencies, the Bank may be unable to verify information provided by
credit applicants or determine whether other banks have previously extended, or are extending, credit to
such applicants.
As a result, borrowers may be overexposed by virtue of other credit obligations of which the Bank has no
knowledge. The Bank may therefore be exposed to credit risk which it may not be able to accurately assess
and provide for, which could have a material adverse effect on its financial condition and results of
operations. Mongolian banks, with the assistance of IFC, established a private credit bureau in 2009, and
the Law of Mongolia on Credit Information was adopted on 20 November 2011 by the Mongolian
Parliament (the Parliament) and came into force on 1 January 2012. Pursuant to this law, the activity
related to the credit information is subject to licence by Bank of Mongolia. However, the credit bureau that
was established by the commercial banks does not have the relevant licence yet. Enactment of this
legislation is a significant development for the stability of the Mongolian financial sector. Effective
information sharing is essential in the credit market, particularly for the microfinance development of the
country. A number of conditions such as lack of industry practice and IT infrastructure may initially
constrain the formation and sustainability of private credit information agencies in Mongolia.
Subsequently, there can be no assurance that a private credit bureau will be effective once it becomes
operational or that it will become operational in a reasonable time or at all.
The Mongolian banking system is underdeveloped, and the regulations governing banks, including the
Bank, are evolving
Mongolias banking and other financial systems remain in the early stages of development and the standard
and degree of legislation, supervision and transparency of the Mongolian banking sector in some respects,
in particular, with respect to lending criteria, credit quality, loan loss reserves, diversification of exposure
or other requirements, differs or lags behind internationally accepted norms. Deficiencies in the Mongolian
banking sector may result in the banking sector being more susceptible to market downturns or economic
slowdowns. If a banking crisis were to occur, Mongolian banks, including the Bank, could be subject to
severe liquidity constraints due to the limited supply of deposits and the potential withdrawal of foreign
18
funding sources. Certain Mongolian legislation relating to banks and bank accounts can also be subject to
varying interpretations and inconsistent application. The imposition of more stringent regulations or
interpretations as the Mongolian banking sector develops could lead to weakened capital adequacy and the
insolvency of some banks.
The Bank is regulated principally by, and has reporting obligations to, the Bank of Mongolia. The Bank
is also subject to the banking, corporate and other laws in effect in Mongolia from time to time. The
regulatory and legal framework governing the Bank differs in certain material respects from that in effect
in other jurisdictions and may continue to change as the Mongolian economy and commercial and financial
markets evolve. Following the global financial crisis and the collapse of two local commercial banks, Anod
Bank and Zoos Bank, in Mongolia, the Mongolian Banking Law (the Banking Law) and other supporting
regulations were revised in early 2010, tightening policies and regulations governing the banking sector.
More stringent provisions, such as those aimed at reducing risks of abuses on related-party transactions and
conflicts of interest that arise from banks exposure to related parties, as well as greater transparency and
information disclosure, were adopted. Pursuant to this new law, the FRC has the authority to approve
services including finance and investment advisory, trustee, insurance brokerage, underwriting, custodian,
factoring, and other services that banks perform on behalf of their clients.
Additionally, in order to comply with the Banking Law, the Bank of Mongolia and the FRC may have to
revise a number of rules and regulations as well as introduce new rules and regulations. The Law on Bank
of Mongolia is also under review and subject to possible amendments addressing, among other things, the
autonomy and accountability of the Bank of Mongolia. If the Law on Bank of Mongolia is amended or any
additional rules and regulations are introduced the FRC and the Bank of Mongolia, as regulators, may be
unable to implement the changes in a consistent manner and there may be uncertainties in the application
or official interpretation of such laws and regulations. Further, if these and other additional rules or
regulations are introduced, the Bank may incur substantial compliance and monitoring costs. For example,
the current minimum core capital ratio is 6.0%, and the minimum risk weighted capital adequacy ratio is
12.0%. However, the minimum core capital ratio will increase to 7.0% from 30 June 2012 as provided in
the Order No. 726 of the Governor of the Bank of Mongolia dated 14 December 2011, and will further
increase to 8.0% from 31 December 2012 and to 9.0% from 30 June 2013. The minimum risk weighted
capital adequacy ratio will increase to 12.5%, 13.0% and 14.0% from 30 June 2012, 31 December 2012
and 30 June 2013, respectively, in accordance with the foregoing order. In addition, if over the previous
six months a banks assets represent more than 5% of the total assets of the Mongolian banking system then
an additional capital requirement of 0.5% will be imposed as of 30 June 2012; an additional capital
requirement of 1% will be imposed as of 31 December 2012; and an addition capital requirement of 2%
will be imposed as of 30 June 2013. Mongolian banks currently apply Basel I standards, however, the Bank
plans to fully implement Basel II standards within the next two years and expects that certain Basel II
compliant risk models of probability of default and loss given default will be implemented in 2012 in its
internal risk management frame work. Failure to comply with applicable rules and regulations could result
in penalties, loss of regulatory permits and damage to business reputation, which could have a material
adverse effect on the Banks business, financial condition and results of operations.
Guidelines for non-performing loan classifications and provisioning in Mongolia require subjective
determination and may be less stringent than those in other jurisdictions
The Bank of Mongolias regulations with respect to loan classifications and provisioning, in certain
circumstances, may be less stringent than similar regulations applicable to banks operating in other
jurisdictions. These differences may result in the Bank classifying particular loans as non-performing at
a later time, or in a category reflecting a lower degree of risk, than might be expected in other jurisdictions.
As a result, the level of the Banks non-performing loans, and its associated reserves, may be lower than
would be required if the Bank were regulated in another jurisdiction. Further, if the Bank changes its
provisioning policies to coincide with international standards or otherwise, the Banks business and results
of operations may be adversely affected.
In addition, the level of provisions recognised by the Bank for its loan portfolio depends largely on the
Banks evaluation of the credit position of its borrowers. If the Banks evaluation of the quality of its loan
portfolio is inaccurate, the level of the Banks provisions may not be adequate to cover actual losses
resulting from its existing non-performing loan portfolio. The Bank may also have to increase its level of
provisions if there is any deterioration in the overall credit quality of the Banks existing loan portfolio,
including the value of the underlying collateral.
19
Competition in the Mongolian banking industry is intense, and the Banks growth strategy depends in
part on the Banks ability to compete effectively
The Bank is subject to significant levels of competition in all areas of its business from a number of other
Mongolian banks, branches of foreign banks and non-bank finance institutions, including competitors
which, in some geographical areas and areas of business, have a greater market share and greater name
recognition than the Bank. As at 31 December 2011, the Mongolian financial sector comprised of 14
commercial banks, 13 of which were privately owned and one state-owned, 195 licensed non-banking
financial institutions and 162 saving and credit cooperatives.
In the future, the Bank may face increased competition from other financial institutions offering a wider
range of commercial banking services and products than the Bank and that have larger lending limits,
greater financial resources and stronger balance sheets than the Bank. Increased competition may arise
from:
other large Mongolian banking and financial institutions with significant presence in Ulaanbaatar and
large country-wide branch networks;
the inability to open more branches and to provide banking and financial services (as stated in the
Banking Law) if the Bank of Mongolia and FRC do not provide the required approval on the
establishment thereof;
foreign banks, due to, among other things, relaxed standards permitting large foreign banks to open
branch offices or to purchase into smaller banks that have extensive branch networks;
domestic banks entering into strategic alliances with foreign banks with significant financial and
management resources; and
consolidation in the banking sector involving domestic and foreign banks, driven in part by the
gradual removal of foreign ownership restrictions.
The Bank cannot assure prospective purchasers that it will be able to compete effectively in the face of
such increased competition.
The Bank is exposed to the risks of the Mongolian financial system which may in turn be affected by
financial and other difficulties faced by Mongolian financial institutions
As an emerging market economy, the Mongolian financial system faces risks of a nature and magnitude
not typically faced in more developed countries, including the risk of significant withdrawals of deposits
by depositors (deposit runs). The Mongolian financial system has experienced difficulties in its banking
sector in 1994, 1996, 1998 and 2000. In 2000, non-performing loans in the Mongolian banking industry
reached approximately 40.0% of total bank loans. As a result, certain Mongolian financial institutions
experienced difficulties, and some Mongolian banks faced serious financial and liquidity crises. Two major
domestic commercial banks, Anod Bank and Zoos Bank, faced serious difficulties starting in December
2008 and July 2009, respectively. Anod Bank went into receivership in December 2008 and was liquidated
in July 2010. Zoos Bank went into receivership with the Bank of Mongolia in November 2009, the receiver
was appointed in November 2010 for a second term and debt recovery activities are still taking place. Zoos
Bank was spun off by the Government into State Bank and partially recapitalised. Although the Bank did
not suffer from illiquidity and insolvency difficulties during these banking crises, the Bank cannot assure
prospective purchasers that it will not be affected by such difficulties in the future as a result of deposit
runs, non-performing loans or other factors. The problems faced by individual Mongolian financial
institutions and any instability in or difficulties faced by the Mongolian financial system generally could
create a material adverse market perception toward Mongolian financial institutions and banks, which
could in turn materially and adversely affect the Banks business, financial condition and results of
operations.
The term of the current Bank Deposit Guarantee Law expires in 2012
The Bank Deposit Guarantee Law is effective until November 2012. Under such law, the Government fully
guarantees against losses incurred on savings accounts, current accounts, time deposits and interbank
deposit money at commercial banks during the guarantee period, excluding certain types of deposits that
are statutorily excluded for policy reasons. Whilst such law may be replaced by another similar law upon
its expiry and the Government may take ad hoc measures to protect depositors, no assurances can be given
20
that after the expiry of such law that there will not be substantial capital movement out of Mongolia or that
commercial banks, including the Bank, will not be subject to serious liquidity constraints due to the limited
supply of deposits. The European Reconstruction and Development Bank has emphasised that the banking
system of Mongolia needs a proper deposit insurance mechanism replacing the blanket guarantee
introduced by this legislation. While the Bank of Mongolia has submitted to Parliament a draft deposit
insurance law, the Bank cannot assure you that such law will be passed in the form submitted or at all.
Risks Relating to Mongolia
Substantially all of the Banks operations and assets are based in Mongolia
Substantially all of the Banks business operations and assets are based in Mongolia. As a result, the Banks
income, results of operations and the quality and growth of its assets depend, to a large extent, on the
performance of the Mongolian economy. In the past, Mongolia has experienced periods of slow or negative
growth, high inflation and a devaluation of the Mongolian currency.
Prior to the July 2000 parliamentary elections, the Government adopted expansionary fiscal and monetary
policies, which led to the persistence of a substantial fiscal imbalance and a steep rise in the money supply.
The fiscal deficit, at 10.8% of GDP, breached the 8.5% target for 2000 agreed under the Poverty Reduction
and Growth Facility of the IMF. Money supply was growing at an annualised rate of approximately 32.0%
by December 1999, and averaged approximately 35.0% in the first 10 months of 2000, but decreased to
17.6% by December 2000.
The expansionary policy stance adopted by the Government resulted in an increased current account deficit
and build-up of external debt. Large current account deficits persisted from 1977 to 2000, which led to a
rapid accumulation of external debt, which almost doubled from approximately US$532 million in 1996
to approximately US$935 million in 2000, or from 46.0% of GDP to close to 100.0% of GDP. The
declining trend of inflation reversed, rising to 11.6% in 2000 (having fallen from approximately 37.0% in
1997 to approximately 7.6% in 1999).
After the general elections of July 2000, the new Government embarked on a plan of macroeconomic
stabilisation with a budget for the year 2001 aimed at reducing the fiscal deficit from approximately 11.0%
of GDP to 7.4% in 2001. From 2001 to 2005, the fiscal deficit of Mongolia decreased to 2.9% from 10.6%
for the years from 1997 to 2000. In 2005, 2006 and 2007, according to the World Bank, Mongolias state
budget recorded a surplus of 3.2%, 5.3% and 2.2%, respectively, as compared to a deficit of 2.0% in 2004,
partly due to strong commodity prices of gold and copper and rising imports. In the last several years, the
Mongolian economy has shown signs of growth. According to the National Statistical Office of Mongolia,
real GDP was MNT 3,913.7 billion, MNT 4,162.7 billion and MNT 4,881.4 billion in 2009, 2010 and 2011,
respectively, and real industrial production output grew at -3.3%, 10.0% and 9.7% in 2009, 2010 and 2011,
respectively. Real GDP growth was estimated at 16.0% for 2011 according to the World Banks quarterly
economic update published in February 2012.
When the global economic crisis started to unfold in late 2008, the external shock, due primarily to the
collapse of the copper prices, hit Mongolia harder than other copper producing countries because of
Mongolias particular combination of expansive fiscal and monetary policies, a fixed exchange rate and an
overheated financial sector at the time of the copper price collapse. Mongolia experienced a broad based
recovery in late 2009 and the beginning of 2010. Nominal GDP registered a 27.7% increase in 2010 and
a 28.7% increase in 2011. Total foreign exchange reserves reached US$2.5 billion as at 31 December 2011.
Public finances have reached a sound footing and the banking system has stabilised. Mongolias
turnaround stems primarily from the Mongolian authorities policy response to the global economic crisis,
supported by significant resources from the international community, including a loan from the IMF. In
addition, overall global economic recovery, strong demand from the PRC and an increase in copper prices
contributed to Mongolias restored growth. However, the Bank cannot assure you that this turnaround will
continue or be sustained.
Any slowdown in the Mongolian economy, including a significant deterioration of the fiscal budget or the
Tugrik, or an increase in interest rates, or future volatility of global commodity prices could adversely the
Banks borrowers and its contractual counterparties. This, in turn, could adversely affect the Banks
business, the quality of its assets, its financial performance and trading in the Notes.
21
The Banks ability to conduct its business activity in Mongolia is subject to political risk
The Banks ability to efficiently conduct its business activities is subject to changes in government policy
or shifts in political attitudes within Mongolia that are beyond its control. Government policy may change
to discourage foreign investment, nationalisation of mining industries may occur or other government
limitations, restrictions or requirements not currently foreseen may be implemented. There can be no
assurances that the Banks assets will not be subject to nationalisation, requisition or confiscation, whether
legitimate or not, by any authority or body. The provisions under Mongolian law for compensation and
reimbursement of losses to investors under such circumstances may not be effective to restore the value
of the Banks original investment. In addition, Mongolia may experience political instability. Such
instability could have a material adverse effect on economic or social conditions in Mongolia and may
result in outbreaks of civil unrest, terrorist attacks or threats or acts of war in the affected areas, any of
which could materially and adversely affect the Banks business, prospects, financial condition and results
of operations.
Mongolia may experience political and social instability
Prior to 1990, Mongolia was a socialist country and the only functioning political party was the Mongolian
Peoples Revolutionary Party (the MPRP). Since the collapse of communism in 1990, Mongolia has
experienced a process of democratic change, resulting in political and social events that have highlighted
the unpredictable nature of Mongolias evolving political landscape. Such events have resulted in political
instability as well as general social and civil unrest on certain occasions in the past few years. In March
1990, due to extended street protests carried out in public and popular demands for faster reform, the
political bureau of the MPRP resigned. In May 1990, the constitution was amended, which removed the
MPRPs role as the guiding force in the country, legalised opposition parties, created a standing legislative
body and established the office of president.
The MPRP was the ruling party for the first half of the 1990s and was succeeded by the Democratic Party
until it regained control of the Parliament in 2000. Following a political realignment in 2006, when a new
coalition government was formed, the MPRP won the majority of seats in Parliament again in 2008.
However, there were allegations of fraudulent practices in the elections made by the chairman of the
Democratic Party. The Mongolian General Committee of Elections dismissed these allegations and
confirmed that the MPRP had won the majority of seats in Parliament. The election results also triggered
strong protests and riots and the Government declared a state of emergency, which was lifted after four
days. A coalition government was formed by the MPRP and the Democratic Party and in August 2008,
members of the Democratic Party were sworn in as members of Parliament and Mr. Bayar Sanj was sworn
in as the Prime Minister. Mr. Elbegdorj Tsankhia was sworn as the President in June 2009. The MPRP
changed its name to the Mongolian Peoples Party (MPP) in 2010 and thereafter former president of
Mongolia, Mr. Enkhbayar Nambaryn, received judicial permission to re-register the name Mongolian
Peoples Revolutionary Party as a different party than the MPP.
In January 2012, the Democratic party announced its decision to withdraw from the coalition government
formed in 2008 with the MPRP (now known as the MPP). Former president and current leader of the new
MPRP, Mr. Enkhbayar Nambaryn, is currently under the investigation of the Mongolian Independent
Authority Against Corruption (the Anti-Corruption Agency). On 13 April 2012, he was arrested for
allegedly failing to appear before the Anti-Corruption Agency in relation to the investigation into his
activities. Mr. Enkhbayar has denied the allegations and has stated his view that the charges are politically
motivated.
Although Mongolias transition to democracy has been relatively peaceful and there was representation of
various political parties in the Government, tension continues to exist between the political parties.
Consequently, the Bank cannot assure prospective purchasers that events similar to those described above
will not occur in the future and on a wider scale, or that such disturbances will not, directly or indirectly,
have a material adverse effect on the Banks business. Elections have been scheduled in June 2012 to elect
a new Parliament and in May 2013 to elect a new president. Future changes in the Government, the ruling
party, major policy shifts or lack of consensus between the various political groups could lead to political
instability and could also have a material adverse effect on the Banks business. In addition, the possibility
of political instability and uncertainty could adversely affect trading in the Notes and have a significant
adverse impact on the economy of Mongolia, and investors may adopt a more cautious approach towards
Mongolias securities markets or investments in Mongolia in general, and such factors could also adversely
affect trading in the Notes.
22
inconsistencies among, or uncertainties in the application or official interpretation of, laws, decrees,
orders and regulations, and regional and local rules and regulations, as a result of limited judicial
guidance, lack of stare decisis or established precedents and other factors;
gaps in the regulatory structure due to delay in, or absence of, implementing regulations;
the lack of experience of judges and courts in interpreting new principles of Mongolian legislation,
particularly those relating to securities laws;
bankruptcy procedures that are not well developed and are subject to abuse.
In general, the Mongolian judicial system is relatively inexperienced in enforcing the laws and regulations
that currently exist, leading to a degree of uncertainty as to the outcome of any litigation. The Mongolian
judicial system may also favour Mongolian parties over foreign companies and individuals. Further, it may
be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgement by a court
of another jurisdiction. The introduction of new Mongolian laws and regulations and the application or
23
interpretation of existing ones may be subject to policy changes reflecting domestic political or social
changes. As the Mongolian legal system continues to develop, the Bank cannot assure prospective
purchasers that changes in such legislation or application or interpretation thereof will not have a material
adverse effect on the Banks business, financial condition, results of operations and future prospects.
In addition, while legislation has been enacted to protect private property against expropriation and
nationalisation, due to the lack of experience in enforcing these provisions and political factors, these
protections may not be enforced in the event of an attempted expropriation or nationalisation.
Expropriation or nationalisation of any of the Banks businesses, its assets or portions thereof, potentially
without adequate compensation, could have a material adverse effect on the Banks business and prospects
and on the trading price of the Notes.
The Mongolian economy depends heavily on agriculture and commodities for growth, which are cyclical
in nature, and is particularly vulnerable to fluctuations in commodity prices
The Mongolian economy depends heavily on certain market sectors, particularly gold, copper and coal
mining and agriculture, including herding livestock. According to the National Statistical Office of
Mongolia, agriculture and mining accounted for 20.2% of Mongolias GDP for 2011. Prices for agricultural
products and commodities such as gold and copper are based upon or affected by global prices for such
products, which tend to be cyclical in nature. The markets for such products are sensitive to changes in
industry capacity and output levels and changes in the world and Asian economies (including the
imposition of tariffs and/or anti-dumping measures by the United States, the European Union, countries in
Southeast Asia or by other principal export markets), all of which can have a significant impact on selling
prices. As such, the Mongolian economy is affected by both worldwide and regional levels of demand for
these products, along with price competition. Moreover, weak economic conditions or changes in
consumer preferences, whether in the world, Asia generally or Mongolia specifically, may reduce demand
and put pressure on margins. To the extent that the Mongolian economy is affected by such price
fluctuations, the Banks business, financial condition, results of operations, cash flows and prospects may
be adversely affected.
Key decisions concerning foreign participation in the countrys mining sector may have an adverse
impact on the Mongolian economy
The Banks corporate lending business, and the Mongolian economy generally, depend heavily on
commercial activity associated with the Mongolian mining industry. The development of mining laws and
regulations in Mongolia is at a nascent stage and is influenced by the interests of political parties, mining
interests, domestic financial interests as well as the need to maintain the Mongolian mining industry as a
commercially attractive destination for foreign investment.
Laws governing Mongolias mining industry, including provisions pertaining to Government participation
in or control of certain projects as well as the royalties and other taxes payable by the mining industry, have
historically been subject to periodic substantive revision by the Mongolian Parliament. For example, the
Government imposed a windfall profits tax on mining reserves prior to repeal and debate regarding
changes to basic royalty rate to replace lost tax revenue. In the event any future revisions to this legal
regime adversely impact foreign direct investment in Mongolia, and its mining industry in particular, the
Mongolian economy and, in turn, the Banks business, financial condition and results of operations could
be materially adversely affected.
The Mongolian economy is heavily dependent on its export trade and, in particular, relies on the PRC
as its main export market. Any decrease in the level of demand in the PRC for exports from Mongolia
will affect the Mongolian economy
The Mongolian economy relies heavily on its export trade and produces and exports large amounts of metal
products, coal and agriculture. Since its transition to a market economy in the 1990s, the PRC has emerged
as an important trading partner of Mongolia, mainly due to its geographic proximity. According to the
National Statistical Office of Mongolia, the PRC accounted for over 92.1% of Mongolias total exports in
2011. Mining products such as copper, coal and other metals represent the majority share of Mongolian
exports to the PRC. As the Mongolian economy is heavily dependent on its export trade, trade relationships
with other countries can influence Mongolian economic conditions and, in particular, any decrease in the
level of demand for its exports for any reason whatsoever would likely affect Mongolias GDP and
economy, which could in turn affect the Banks business and results of operations. Mongolia experienced
a trade deficit of US$612.6 million in 2008 due to collapsing commodity prices, notably copper and a steep
24
drop in external demand. Likewise, when the PRC economy stabilised, Mongolias export activities
tracked movements in the PRC economy and rapidly recovered. Total exports in 2011 were US$4,780.4
million an increase of 153.5% since 2009. If Mongolias trade deficits increase or become unmanageable,
the Mongolian economy, and therefore, the Banks business, future financial performance and trading in
the Notes may be adversely affected.
Currently, exports to China are transported by road and railway. The Government plans to connect the
mineral deposits along the southern perimeter of Mongolia to PRC markets by railway, construction for
which is expected to commence in 2012. Any delays in the construction of the railway link to China could
adversely affect Mongolias export volumes.
A decline in Mongolias foreign exchange reserves affect liquidity and interest rates in the Mongolian
economy
As the global economic crisis deepened in 2008 and 2009, the Mongolian currency weakened significantly
due to currency flight, which was accelerated initially by the Bank of Mongolias attempts to defend the
currency and maintain its de facto currency peg to the U.S. dollar. In the course of implementing such
policies, the Bank of Mongolia used approximately US$500 million of its foreign currency reserves
between July 2008 and February 2009 while the Mongolian currency depreciated by approximately 38%
between the end of October 2008 and mid-March 2009. The Bank of Mongolia took subsequent measures,
including the implementation of a flexible exchange rate regime that limited intervention and opportunistic
building of reserves. Intervention was transparently conducted through a bi-weekly foreign exchange
auctioning mechanism supported by a 4% increase in the policy interest rate, which measures were
effective in calming markets and attracting capital back to Mongolia. The foreign exchange market has
since stabilised and total foreign exchange reserves reached an all-time high of US$2.5 billion as at 31
December 2011. A sharp decline in these reserves could result in reduced liquidity and higher interest rates
in the Mongolian economy. Reduced liquidity or an increase in interest rates in the economy following a
decline in foreign exchange reserves could adversely affect the Banks business, its future financial
performance and trading in the Notes.
Emerging markets such as Mongolia are subject to greater risks than more developed markets, and are
particularly vulnerable to fluctuations in the global economy
The Mongolian market and the Mongolian economy are influenced by economic and market conditions in
other countries. Moreover, financial turmoil in any emerging market country tends to adversely affect
prices in capital markets of all emerging market countries, including Mongolia, as investors move their
money to more stable, developed markets. As has happened in the past, financial problems or an increase
in the perceived risks associated with investing in emerging economies could dampen foreign investment
in Mongolia and adversely affect the Mongolian economy. A loss of investor confidence in the financial
systems of other emerging markets may cause volatility in Mongolian financial markets and indirectly, in
the Mongolian economy in general. Any worldwide financial instability could also have a negative impact
on the Mongolian economy. This in turn could negatively impact the Mongolian economy, including the
movement of exchange rates and interest rates in Mongolia. In addition, during such times, companies that
operate in emerging markets can face severe liquidity constraints as foreign funding sources are
withdrawn. Thus, even if the Mongolian economy remains relatively stable, financial turmoil in any
emerging market country could seriously disrupt the Banks business, as well as adversely affect trading
in the Notes. Mongolias inflation rate is also higher than some of the more developed economies. A further
increase in Mongolias inflation rate could materially and adversely impact the Banks business, financial
condition and results of operations.
Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate
the significance of the risks involved in, and are familiar with, investing in emerging markets. Investors
should also note that emerging markets such as Mongolia are subject to rapid change and that the
information set out in this Information Memorandum may become outdated relatively quickly.
Unlawful, selective or arbitrary Government action could occur in Mongolia
Governmental authorities have a relatively high degree of discretion in Mongolia and at times appear to
act selectively or arbitrarily, without due process, and in a manner that is contrary to law or influenced by
political or commercial considerations. The Banks assets and customers are predominantly located in
Mongolia. The Government has traditionally exercised and continues to exercise a dominant influence over
many aspects of the Mongolian economy. Its economic policies have had and could continue to have a
25
significant effect on Mongolian companies and financial institutions, including the Bank, and on market
conditions and prices of Mongolian securities, including the Notes. The Government may also, in certain
circumstances, interfere with the performance of contracts. Unlawful, selective or arbitrary governmental
actions have reportedly included suspension or withdrawal of licences, sudden and unexpected tax audits,
criminal prosecutions and civil actions. Government entities also appear to have used common defects in
matters surrounding securities issuances and registration as pretexts for court claims and other demands
to invalidate the issuances or registrations or to void transactions, seemingly for economic and political
purposes. In such an environment, competitors of the Bank may receive preferential treatment from the
Government and governmental authorities, potentially giving them a competitive advantage. Unlawful,
selective or arbitrary Government action, if directed at the Banks operations, could have a material
adverse effect on the Banks business, results of operations and prospects and on the trading price of the
Notes.
Corporate governance and disclosure standards in Mongolia may differ from those in more developed
countries and there may be less company information available in the Mongolian securities markets
than securities markets in more developed countries
While a principal objective of Mongolian securities laws is to promote full and fair disclosure of material
corporate information, there may be less publicly available information about Mongolian companies, such
as the Bank, than is regularly made available by companies in certain other countries. Furthermore,
although the Bank complies with the requirements of the Bank of Mongolia with respect to corporate
governance standards, these standards may differ from those applicable in other jurisdictions.
There may also be differences between the level of regulation and monitoring of the Mongolian securities
markets and the activities of investors, brokers and other participants and that of the markets in more
developed countries. The FRC is responsible for monitoring and regulating the Mongolian securities
markets, and creating a proper regulatory and supervisory environment for capital market transactions. The
FRC has issued regulations and guidelines on disclosure requirements and other matters regarding
securities traded in Mongolia. However, the FRC regulations only cover securities traded in Mongolia, and
as securities laws, including those relating to corporate governance, disclosure and reporting requirements,
anti-fraud safeguards, insider trading restrictions and fiduciary duties have only been adopted recently and
have limited histories of interpretation and enforcement, it is often unclear whether or how regulations,
decisions and letters issued by various regulatory authorities apply to the Bank. As a result, the Bank may
be subject to fines or other enforcement measures despite its best efforts at compliance. Any or all of these
factors may adversely affect the Banks ability to conduct securities-related transactions, including the
issue and sale of the Notes.
The recent turmoil and upheaval in the global financial markets and the resulting overall slowdown in
the global economy and in particular in Mongolia could materially and adversely affect the Banks
financial condition and results of operations
Since July 2007, significant adverse developments in the U.S. sub-prime mortgage sector have created
significant disruption and volatility in global financial markets. The ensuing contraction of liquidity,
diminished credit availability, deterioration in asset values, increase in bankruptcies, rising unemployment
rates and declining confidence of consumption and business caused an overall slowdown in the global
economy. Beginning in the second half of 2008 up to mid-2009, the worlds largest economies, including
the United States, Europe and Japan, were widely considered to be in the midst of significant economic
recessions, and major emerging economies such as the PRC and India also faced substantial slowdown in
their economic growth.
Mongolia was severely affected by the global economic slowdown although it experienced a turnaround
in late 2009 and a broad-based recovery in 2010 that continued in 2011. However, future uncertainties in
the global economies may lead to an economic slowdown in Mongolia and may adversely affect the Banks
financial condition and results of operation in many ways, including, the increased regulation and
supervision of the financial services industry in response to the financial crisis, which may restrict its
business flexibility and increase its compliance costs. In addition, the uncertainty surrounding the recent
European sovereign debt crisis may negatively affect the Mongolian economy. The Bank cannot assure you
that if an economic downturn occurs, that there would not result in a decline in customer demand for its
products and services as well as a corresponding increase in personal, SME and micro business
bankruptcies, which could have a material and adverse affect on its businesses, results of operations and
financial condition.
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A severe or prolonged downturn in the global economy could materially and adversely affect the business,
results of operations and financial condition of the Bank. Recent global market and economic conditions
have been challenging with tight credit conditions and recession in most major economies. Continued
concerns about the systemic impact of potential long-term and widespread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have
contributed to increased market volatility and diminished expectations for economic growth around the
world. The economic outlook has negatively affected business and consumer confidence and contributed
to significant levels of volatility. Continued turbulence in the international markets and prolonged declines
in consumer spending, as well as any slowdown of economic growth globally may continue to have an
adverse impact on the Mongolian economy and its industry sectors, which may in turn adversely affect the
business, results of operations and financial condition of the Bank.
Destabilising events in other parts of the world could interrupt the Banks business
Events related to the terrorist attacks in the United States that took place on 11 September 2001, recent
developments in the Middle East, including the war in Iraq, higher oil and food prices, natural disasters,
the general weakness of the global economy and the outbreak of epidemic diseases in Asia and other parts
of the world have increased the uncertainty of global economic prospects in general. The Bank cannot
assure prospective purchasers that further terrorist acts or other destabilising events will not occur in the
future. In addition, although such acts and events have not targeted or directly affected Mongolia, the
Banks assets or those of the Banks customers, the Bank cannot assure prospective purchasers that they
will not do so in the future. The Banks current insurance policies do not cover terrorist attacks or other
such destabilising events. Any terrorist attack, natural disaster or other such event including damage to the
Banks infrastructure or that of the Banks customers, could cause interruption to parts of the Banks
business and materially and adversely affect the Banks business, financial condition, results of operations,
cash flows and prospects.
The Bank faces risks related to health epidemics and other outbreaks of contagious diseases
The Banks business could be adversely affected by the outbreaks of severe acute respiratory syndrome
(SARS) or other contagious diseases. There have been reports of outbreaks of a highly pathogenic avian
flu, caused by the H5N1 virus, in certain regions of Asia and Europe since 2003. While there have been
no reported cases of avian flu in Mongolia, there have been reports on the occurrences of avian flu or other
deadly infectious diseases in various parts of the PRC, including a few confirmed cases of human infection.
An outbreak of avian flu in the human population of the PRC could result in a widespread health crisis that
has the potential to spread to Mongolia and could adversely affect the economies and financial markets of
many countries, particularly in Asia. Additionally, any recurrence of SARS, a highly contagious form of
atypical pneumonia, similar to the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan,
Singapore, Vietnam and certain other countries, would also have similar adverse effects. As a significant
portion of Mongolias economy relies on trade with the PRC and as many of the Banks customers have
business interests in the PRC, these outbreaks of contagious diseases, and other adverse public health
developments in the PRC, could have a material adverse effect on the Banks business, financial condition
and results of operations. The Bank has not adopted any written preventive measures or contingency plans
to combat any future outbreak any epidemic or outbreak of disease.
Risks Relating to the Notes
Non-enforcement of foreign judgements may limit the ability of Noteholders to recover damages from
the Bank through court proceedings
The Bank is a limited liability company organised in Mongolia and substantially all of its assets are located
in Mongolia. In addition, all of its directors and officers are resident in Mongolia. As a result, it may be
difficult for investors (a) to effect service of process, including judgements, on the Bank or the directors
and officers of the Bank outside Mongolia, (b) to enforce against any of them, in courts of jurisdictions
other than Mongolia, judgements obtained in such courts that are predicated upon the laws of such other
jurisdictions, (c) to enforce a foreign arbitral award against the Bank or (d) to enforce against any of them,
in Mongolian courts, judgements obtained in jurisdictions other than Mongolia, including judgements
obtained in connection with the Notes and the Trust Deed in the courts of England and Wales.
The Notes and the Trust Deed are governed by English law (except that Clause 2.7 of the Trust Deed and
Condition 3.2 are governed by Mongolian law) and the Bank has agreed in the Trust Deed that disputes
arising thereunder or in respect of the Notes are subject to arbitration before the London Court of
27
International Arbitration or, at the election of the Trustee or, in certain circumstances, a Noteholder, to the
juridiction of the English courts. The Bank has been advised by its Mongolian legal advisers that
Mongolian courts will not enforce judgements of non-Mongolian courts unless, among other things, there
is in effect a treaty between such country and Mongolia providing for the reciprocal enforcement of
judgements and then only in accordance with the terms of such treaty. There is no such treaty in effect
between Mongolia and the United Kingdom. As a result, holders of the Notes may be required to pursue
claims against the Bank or its directors and officers in Mongolian courts. Although Mongolian courts may
enter judgements based on choice of law of jurisdictions other than Mongolia, in view of the lack of
experience of the Mongolian courts with foreign law, the results of such judgements may be unsatisfactory
to support the legitimate claims of litigants. The Bank cannot assure prospective purchasers that the claims
or remedies available under Mongolian law will be the same, or as extensive, as those available in other
jurisdictions.
However, both Mongolia and the United Kingdom are parties to the Convention and, accordingly, an
arbitration award obtained in a state which is party to the Convention, such as the United Kingdom, should
be recognised and enforceable in Mongolia, provided that the conditions to enforcement set out in the
Convention are met.
The Notes may have limited liquidity
The Notes when issued will constitute a new issue of securities for which there will be no existing trading
market. Although the Dealers may make a market in the Notes, they are not obligated to do so, and any
market-making activity with respect to the Notes, if commenced, may be discontinued at any time without
notice. The Bank cannot assure holders of the Notes that a trading market for the Notes will develop or
be maintained. If such a market were to develop, it is not possible to predict the price at which Notes will
trade in such market or whether such market will be liquid or illiquid. The Bank may, but is not obliged
to, list or admit to trading Notes on a stock exchange or market. If the Notes are not listed or admitted to
trading on any stock exchange or market, pricing information for the Notes may be more difficult to obtain
and the liquidity of the Notes may be adversely affected. If the Bank does list or admit to trading an issue
of Notes, it cannot assure holders of the Notes that at a later date, the Notes will not be delisted or that
trading on such stock exchange or market will not be suspended. The Bank cannot assure prospective
purchasers that a market for the Notes will develop in the future. If such a market were to develop, the
Notes could trade at prices that may be higher or lower than the offering price depending on many factors,
including, among others:
the complexity and volatility of the bases of reference applicable to the Notes;
the method of calculating amounts payable, or other consideration, if any, in respect of the Notes;
the amount of other securities linked to the bases of reference applicable to the Notes;
the rate of exchange between Tugriks and the Specified Currency in which the relevant Notes are
issued;
Holders of the Notes may not be able to sell such Notes readily or at prices that will enable them to realise
their anticipated yield. No investor should purchase Notes unless such investor understands and is able to
bear the risk that such Notes may not be readily saleable, that the value of such Notes will fluctuate over
time, that such fluctuations may be significant and that such investor may lose all or a substantial portion
of the purchase price of the Notes.
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Certain provisions in the Trust Deed define the limits of a Noteholders rights under the Notes
The Trust Deed contains provisions for calling meetings of Noteholders to consider matters affecting their
interests generally. These provisions permit defined majorities to bind all Noteholders of a relevant Series
including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in
a manner contrary to the majority.
The conditions of the Notes also provide that the Trustee may in certain circumstances, without the consent
of Noteholders (i) agree to modifications, or to the waiver or authorisation of any breach or proposed
breach, of the provisions of Notes or (ii) determine without the consent of the Noteholders that an Event
of Default or a potential Event of Default shall not be treated as such or (iii) agree to the substitution of
another company as principal debtor under any Notes in place of the Issuer, in each case in the
circumstances described in Condition 16 of the Notes.
If, in connection with the exercise of its powers, trusts, authorities or discretions, the Trustee is of the
opinion that the interests of the Noteholders would be materially prejudiced thereby, the Trustee shall not
exercise such power, trust, authority or discretion without the approval of such Noteholders in accordance
with the Trust Deed. The Trust Deed provides the Trustee to take action on behalf of the Noteholders in
certain circumstances, but only if the Trustee is indemnified and/or secured to its satisfaction.
Investors in the Notes may be exposed and subject to exchange rate risks and exchange controls
The Issuer or, as the case may be, the Bank will pay principal and interest on the Notes in the Specified
Currency (as defined in the Conditions). This presents certain risks relating to currency conversions if an
investors financial activities are denominated principally in a currency or currency unit (the Investors
Currency) other than the Specified Currency. These include the risk that exchange rates may significantly
change (including changes due to devaluation of the Specified Currency or revaluation of the Investors
Currency) and the risk that authorities with jurisdiction over the Investors Currency may impose or
modify exchange controls. An appreciation in the value of the Investors Currency relative to the Specified
Currency would decrease (i) the Investors Currency-equivalent yield on the Notes, (ii) the Investors
Currency-equivalent value of the principal payable on the Notes and (iii) the Investors Currencyequivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that
could adversely affect an applicable exchange rate. As a result, investors may receive less interest or
principal than expected, or no interest or principal.
Credit ratings may not reflect all risks relating to an investment in the Notes
One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may
not reflect the potential impact of all risks related to structure, market, additional factors discussed above,
and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy,
sell or hold securities and may be revised or withdrawn by the rating agency at any time.
Subordinated Notes are subordinated and have only limited rights of acceleration
Subordinated Notes will be subordinated obligations of the Bank. Payments on Subordinated Notes will
be subordinated in right of payment upon the winding-up or liquidation of the Bank to the claims of all
other creditors of the Bank, except claims of holders of subordinated indebtedness which rank equally with
or junior to the Subordinated Notes. As a consequence of these subordination provisions, in the event of
a winding-up or liquidation of the Banks operations, the holders of Subordinated Notes may recover
proportionately less than the holders of the Banks deposit liabilities or the holders of its other
unsubordinated liabilities, including Senior Notes. As at 31 December 2011, a majority of the Banks
outstanding liabilities (including deposits, borrowings, call money, guarantees and acceptances,
outstanding debt securities issued and other liabilities, but excluding provisions) would rank senior to
Subordinated Notes.
Only events relating to the Banks winding-up, liquidation or reorganisation, or revocation of the Banks
banking licence issued by the Bank of Mongolia will permit a holder (or the Trustee on its behalf) of a
Subordinated Note to accelerate payment of such Subordinated Notes. See Condition 11.2. In such event,
the only actions the holder (or the Trustee on its behalf) may take in Mongolia against the Bank are certain
actions to cause, or make a claim in, the Banks liquidation or reorganisation. Furthermore, if the Banks
indebtedness were to be accelerated, its assets may be insufficient to repay in full borrowings under all
such indebtedness, including the Notes.
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30
If a payment were to be made or collected through a Member State which has opted for a withholding
system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer
nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any
Notes as a result of the imposition of such withholding tax. The Bank is required to maintain a Paying
Agent in a Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
Change of law
The Conditions of the Notes are based on English law (except for Condition 3.2, which is governed by
Mongolian law) in effect as at the date of this Information Memorandum. No assurance can be given as
to the impact of any possible judicial decision or change to English law or administrative practice after the
date of this Information Memorandum.
Notes where denominations involve integral multiples: definitive Notes
In relation to any issue of Notes which have denominations consisting of a minimum specified
denomination plus one or more higher integral multiples of another smaller amount, it is possible that such
Notes may be traded in amounts that are not integral multiples of such minimum specified denomination.
In such a case a holder who, as a result of trading such amounts, holds an amount which is less than the
minimum specified denomination in his account with the relevant clearing system at the relevant time may
not receive a definitive Note in bearer form in respect of such holding (should such Notes be printed) and
would need to purchase a principal amount of Notes such that its holding amounts to a specified
denomination.
If definitive Notes are issued, holders should be aware that definitive Notes which have a denomination
that is not an integral multiple of the minimum specified denomination may be illiquid and difficult to
trade.
Reliance on Euroclear and Clearstream, Luxembourg procedures
Notes issued under the Programme will be represented on issue by one or more Global Notes that may be
deposited with a common depositary for Euroclear and Clearstream, Luxembourg or (each as defined under
Form of the Notes). Except in the circumstances described in each Global Note, investors will not be
entitled to receive Notes in definitive form. Each of Euroclear and Clearstream, Luxembourg and their
respective direct and indirect participants will maintain records of the beneficial interests in each Global
Note held through it. While the Notes are represented by a Global Note, investors will be able to trade their
beneficial interests only through the relevant clearing systems and their respective participants.
While the Notes are represented by Global Notes, the Bank will discharge its payment obligation under the
Notes by making payments through the relevant clearing systems. A holder of a beneficial interest in a
Global Note must rely on the procedures of the relevant clearing system and its participants to receive
payments under the Notes. The Bank has no responsibility or liability for the records relating to, or
payments made in respect of, beneficial interests in any Global Note.
Holders of beneficial interests in a Global Note will not have a direct right to vote in respect of the Notes
so represented. Instead, such holders will be permitted to act only to the extent that they are enabled by
the relevant clearing system and its participants to appoint appropriate proxies.
The secondary market generally
Notes may have no established trading market when issued, and one may never develop. If a market does
develop, it may not be very liquid. Therefore, investors may not be able to sell their Notes easily or at
prices that will provide them with a yield comparable to similar investments that have a developed
secondary market. This is particularly the case for Notes that are especially sensitive to interest rate,
currency or market risks, are designed for specific investment objectives or strategies or have been
structured to meet the investment requirements of limited categories of investors. These types of Notes
generally would have a more limited secondary market and more price volatility than conventional debt
securities. Illiquidity may have a severely adverse effect on the market value of Notes.
31
payment of principal or interest may occur at a different time or in a different currency than expected;
a Relevant Factor may be subject to significant fluctuations that may not correlate with changes in
interest rates, currencies or other indices;
if a Relevant Factor is applied to Notes in conjunction with a multiplier greater than one or contains
some other leverage factor, the effect of changes in the Relevant Factor on principal or interest
payable is likely to be magnified; and
the timing of changes in a Relevant Factor may affect the actual yield to investors, even if the average
level is consistent with their expectations.
In general, the earlier the change in the Relevant Factor, the greater the effect on yield. The Bank has no
control over a number of matters, including economic, financial and political events, that are important in
determining the existence, magnitude and longevity of such risks and their results.
Partly-paid Notes
The Bank may issue Notes where the issue price is payable in more than one instalment. Failure to pay
any subsequent instalment could result in an investor losing all of its investment.
Fixed/floating rate Notes
Fixed/floating rate notes may bear interest at a rate that the Bank may elect to convert from a fixed rate
to a floating rate, or from a floating rate to a fixed rate. The Banks ability to convert the interest rate will
affect the secondary market and the market value of the Notes since it may be expected to convert the rate
when it is likely to produce a lower overall cost of borrowing. If the Bank converts the Notes from a fixed
rate to a floating rate, the spread on the fixed/floating rate Notes may be less favourable than then
prevailing spreads on comparable floating rate notes tied to the same reference rate. In addition, the new
floating rate at any time may be lower than the rates on other Notes. If the Bank converts from a floating
rate to a fixed rate, the fixed rate may be lower than then prevailing rates on the Notes.
32
33
the publicly available audited consolidated annual financial statements and the interim financial
statements (if any) of the Bank for the most recent financial period (see General Information for
a description of such financial statements published by the Bank); and
(2)
all amendments and supplements to this Information Memorandum prepared and circulated by the
Bank from time to time,
save that any statement contained herein or in a document which is deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for the purpose of this Information Memorandum to
the extent that a statement contained in any such subsequent document which is deemed to be incorporated
by reference herein modifies or supersedes such earlier statement (whether expressly, by implication or
otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Information Memorandum.
The Bank will provide, without charge, to each person to whom a copy of this Information Memorandum
has been delivered, upon the request of such person, a copy of any or all of the documents deemed to be
incorporated herein by reference unless such documents have been modified or superseded as specified
above. Requests for such documents should be directed to the Bank at the address set out at the end of this
Information Memorandum. In addition, such documents will be available to holders of Notes from the
principal office of The Hongkong and Shanghai Banking Corporation Limited as principal paying agent
(the Principal Paying Agent) at Level 30, HSBC Main Building, 1 Queens Road Central, Hong Kong.
In connection with the listing of the Notes on the SGX-ST, and for so long as any Note remains outstanding
and listed on such exchange, in the event of any material change in the condition of the Bank which is not
reflected in this Information Memorandum, the Bank will prepare a supplement to this Information
Memorandum or publish a new Information Memorandum for use in connection with any subsequent issue
of the Notes to be listed on the SGX-ST.
In addition, if the terms of the Programme are modified or amended in a manner which would make this
Information Memorandum, as so modified or amended, inaccurate or misleading, the Bank will prepare a
new Information Memorandum.
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in relation to any Notes represented by a global Note (a Global Note), units of each Specified
Denomination in the Specified Currency;
(b)
(c)
(d)
any definitive Notes in bearer form (Definitive Bearer Notes, and together with Bearer Global
Notes, the Bearer Notes) issued in exchange for a Bearer Global Note; and
(e)
any definitive Notes in registered form (Definitive Registered Notes, and together with Registered
Global Notes, the Registered Notes) (whether or not issued in exchange for a Registered Global
Note).
The Notes, the Receipts (as defined below) and the Coupons (as defined below) have the benefit of an
agency agreement dated 5 January 2007 as supplemented by a first supplemental agency agreement dated
9 October 2010 (such agency agreement as further amended and/or supplemented and/or restated from time
to time, the Agency Agreement) and made between the Issuer, the Trustee, The Hongkong and Shanghai
Banking Corporation Limited as principal paying agent (the Principal Paying Agent, which expression
shall include any successor principal paying agent (as defined below) and any additional paying agents
appointed in accordance with the Agency Agreement (the Paying Agents, which expression shall include
any successor paying agents) and The Hongkong and Shanghai Banking Corporation Limited as registrar
(the Registrar, which expression shall include any successor registrar, and together with the Principal
Paying Agent, the Transfer Agents, which expression shall include any successor transfer agent).
Interest bearing Definitive Bearer Notes have interest coupons (Coupons) and, if indicated in the
applicable Pricing Supplement, talons for further Coupons (Talons) attached on issue. Any reference
herein to Coupons or coupons shall, unless the context otherwise requires, be deemed to include a
reference to Talons or talons. Definitive Bearer Notes repayable in instalments have receipts (Receipts)
for the payment of the instalments of principal (other than the final instalment) attached on issue.
Definitive Registered Notes and Global Notes do not have Receipts, Coupons or Talons attached on issue.
The Pricing Supplement for this Note (or the relevant provisions thereof) is attached to or endorsed on this
Note and supplements these Terms and Conditions (the Conditions) and may specify other terms and
conditions which shall, to the extent so specified or to the extent inconsistent with the Conditions, replace
or modify the Conditions for the purposes of this Note. References to the applicable Pricing Supplement
are to the Pricing Supplement (or the relevant provisions thereof) attached to or endorsed on this Note.
35
The Trustee acts for the benefit of (in the case of Bearer Notes) the holders for the time being of the Notes
and (in the case of Registered Notes) the persons in whose name the Notes are registered for the time being
(the Noteholders, which expression shall, in relation to any Notes represented by a Global Note, be
construed as provided in Condition 1 below), the holders of the Receipts (the Receiptholders) and the
holders of the Coupons (the Couponholders, which expression shall, unless the context otherwise
requires, include the holders of the Talons), in each case in accordance with the provisions of the Trust
Deed.
As used herein, Tranche means Notes which are identical in all respects (including as to listing and
admission to trading) and Series means a Tranche of Notes together with any further Tranche or Tranches
of Notes which are (a) expressed to be consolidated and form a single series with such Tranche of Notes
and (b) identical in all respects (including as to listing and admission to trading) except for their respective
Issue Dates, Interest Commencement Dates and/or Issue Prices.
Copies of the Trust Deed and the Agency Agreement are available for inspection during normal business
hours at the principal office for the time being of the Trustee, which as at 16 April 2012 is located at Level
30, HSBC Main Building, 1 Queens Road Central, Hong Kong and at the specified office of each of the
Paying Agents, the Registrar and the Transfer Agents (such Agents and the Registrar being together
referred to as the Agents). Copies of the applicable Pricing Supplement in respect of any unlisted Notes
will only be obtainable by a Noteholder holding one or more such Notes and such Noteholder must produce
evidence satisfactory to the Issuer and the Trustee or, as the case may be, and the relevant Paying Agent
as to its holding of such Notes and identity. The Noteholders, the Receiptholders and the Couponholders
are deemed to have notice of, and are entitled to the benefit of, and are bound by all the provisions of the
Trust Deed, the Agency Agreement and the applicable Pricing Supplement which are applicable to them.
The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the
Trust Deed and the Agency Agreement.
Words and expressions defined in the Trust Deed, the Agency Agreement or used in the applicable Pricing
Supplement shall have the same meanings where used in these Conditions unless the context otherwise
requires or unless otherwise stated and provided that, in the event of inconsistency between the Trust Deed
and the Agency Agreement, the Trust Deed will prevail and, in the event of inconsistency between the Trust
Deed or the Agency Agreement and the applicable Pricing Supplement, the applicable Pricing Supplement
will prevail.
1.
36
This Note may be an Index Linked Redemption Note, an Instalment Note, a Dual Currency
Redemption Note, a Partly Paid Note or a combination of any of the foregoing, depending upon the
Redemption/ Payment Basis shown in the applicable Pricing Supplement.
Definitive Bearer Notes are issued with Coupons and (if applicable) Receipts and Talons attached,
unless they are Zero Coupon Notes in which case references to Coupons and Couponholders in these
Conditions are not applicable.
Subject as set out below, title to the Bearer Notes, Receipts and Coupons will pass by delivery and
title to the Registered Notes will pass upon registration in the register in accordance with the
provisions of the Agency Agreement. The Issuer, the Paying Agents and the Trustee may (except as
otherwise required by law) deem and treat the bearer of any Bearer Note, Receipt or Coupon (whether
or not overdue and notwithstanding any notice of ownership or writing thereon or notice of any
previous loss or theft thereof) and the person in whose name any Registered Note is registered as the
absolute owner thereof for all purposes but, in the case of any Global Note, without prejudice to the
provisions set out in the next succeeding paragraph.
For so long as any of the Notes is represented by a Global Note, each person who is for the time being
shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular
nominal amount of such Notes (in which regard any certificate or other document issued by Euroclear
or Clearstream, Luxembourg as to the nominal amount of such Notes standing to the account of any
person shall be conclusive and binding for all purposes save in the case of manifest error) shall be
treated by the Issuer, the Paying Agents and the Trustee as the holder of such nominal amount of such
Notes for all purposes other than with respect to the payment of principal or interest on such nominal
amount of such Notes, for which purpose the bearer of the relevant Bearer Global Note or the
registered holder of the relevant Registered Global Note shall be treated by the Issuer, any Paying
Agent and the Trustee as the holder of such nominal amount of such Notes in accordance with and
subject to the terms of the relevant Global Note and the expressions Noteholder and holder of
Notes and related expressions shall be construed accordingly. In determining whether a particular
person is entitled to a particular nominal amount of notes as aforesaid, the Trustee may rely on such
evidence and/or information and/or certification as it shall, in its absolute discretion, think fit and,
if it does so rely, such evidence and/or information and/or certification shall, in the absence of
manifest error, be conclusive and binding on all concerned.
Notes which are represented by a Global Note will be transferable only in accordance with the rules
and procedures for the time being of Euroclear and Clearstream, Luxembourg, as the case may be.
References to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be
deemed to include a reference to any additional or alternative clearing system specified in the
applicable Pricing Supplement or as may otherwise be approved by the Issuer, the Principal Paying
Agent and the Trustee.
2.
2.1
2.2
37
with the form of transfer thereon duly executed by the holder or holders thereof or his or their
attorney or attorneys duly authorised in writing and (B) complete and deposit such other
certifications as may be required by the Registrar or, as the case may be, the relevant Transfer Agent
and (ii) the Registrar or, as the case may be, the relevant Transfer Agent must, after due and careful
enquiry, be satisfied with the documents of title and the identity of the person making the request.
Any such transfer will be subject to such reasonable regulations as the Issuer and the Registrar may
from time to time prescribe (the initial such regulations being set out in Schedule 3 to the Agency
Agreement). Subject as provided above, the Registrar or, as the case may be, the relevant Transfer
Agent will, within three business days (being for this purpose a day on which banks are open for
business in the city where the specified office of the Registrar or, as the case may be, the relevant
Transfer Agent is located) of the request (or such longer period as may be required to comply with
any applicable fiscal or other laws or regulations), authenticate and deliver, or procure the
authentication and delivery of, at its specified office to the transferee or (at the risk of the transferee)
send by uninsured mail, to such address as the transferee may request, a new Definitive Registered
Note of a like aggregate nominal amount to the Definitive Registered Note (or the relevant part of
the Definitive Registered Note) transferred. In the case of the transfer of part only of a Definitive
Registered Note, a new Definitive Registered Note in respect of the balance of the Definitive
Registered Note not transferred will be so authenticated and delivered or (at the risk of the transferor)
sent to the transferor.
2.3
2.4
Costs of registration
Noteholders will not be required to bear the costs and expenses of effecting any registration of
transfer as provided above, except for any costs or expenses of delivery other than by regular
uninsured mail and except that the Issuer may require the payment of a sum sufficient to cover any
stamp duty, tax or other governmental charge that may be imposed in relation to the registration.
2.5
3.
STATUS
3.1
3.2
38
(a)
Subordination
Subordinated Notes and any relative Receipts and Coupons constitute unsecured and
subordinated obligations of the Issuer ranking pari passu without any preference among
themselves and, in the event of the winding up or liquidation of the Issuer, the claims of the
holders of Subordinated Notes and any relative Receipts and Coupons pursuant thereto will be
subordinated in right of payment to the claims of all other creditors (other than claims of
holders of subordinated indebtedness ranking equal to or lower than the claims of the holders
of Subordinated Notes and any relative Receipts and Coupons, if any) of the Issuer in the
manner and to the extent provided in the Trust Deed. The claims of holders of Subordinated
Notes and any relative Receipts and Coupons shall in the event of the winding up or liquidation
of the Issuer rank senior to the claims of holders of any subordinated liabilities which by their
terms rank, in right of payment, junior to the Notes and all classes of equity securities of the
Issuer, including holders of preference shares, if any.
(b)
Set-off
Claims in respect of Subordinated Notes and any relative Receipts and Coupons may not be
set-off, or be the subject of a counterclaim, by the holder against or in respect of any obligations
of the holder to the Issuer or to any other persons and the holder of any Subordinated Note or
relative Receipt or Coupon shall, by virtue of being the holder of such Subordinated Note or
relative Receipt or Coupon, be deemed to have waived all such rights of set-off.
4.
NEGATIVE PLEDGE
If this Note is specified in the applicable Pricing Supplement as being a Senior Note, so long as any
of such Senior Notes remains outstanding (as defined in the Trust Deed), the Issuer will not, and will
procure that none of its Subsidiaries will, create or have outstanding any mortgage, charge, lien,
pledge or other security interest (each a Security Interest) upon, or with respect to, any part of the
present or future business, undertaking, assets or revenues (including any uncalled capital) of the
Issuer or any Subsidiary to secure any Relevant Indebtedness (as defined below), unless the Issuer,
in the case of the creation of a Security Interest, before or at the same time and, in any other case,
promptly, takes any and all action necessary to ensure that:
(a)
all amounts payable by it under such Senior Notes and the Trust Deed (in respect of such Senior
Notes) are secured by such Security Interest equally and rateably with the Relevant
Indebtedness; or
(b)
such other Security Interest or other arrangement (whether or not it includes the granting of a
Security Interest) is provided either (i) as the Trustee in its absolute discretion deems to be not
materially less beneficial to the interests of the holders of such Senior Notes or (ii) as is
approved by an Extraordinary Resolution (as defined in the Trust Deed) of the holders of such
Senior Notes.
39
5.
REDENOMINATION
5.1
Redenomination
Where redenomination is specified in the applicable Pricing Supplement as being applicable, the
Issuer may, without the consent of the Noteholders, the Receiptholders and the Couponholders, but
after prior consultation with the Trustee, on giving prior notice to the Principal Paying Agent,
Euroclear and Clearstream, Luxembourg and at least 30 days prior notice to the Noteholders in
accordance with Condition 15, elect that, with effect from the Redenomination Date specified in the
notice, the Notes shall be redenominated in euro.
The election will have effect as follows:
(a)
the Notes and the Receipts shall be deemed to be redenominated in euro in the denomination
of euro 0.01 with a nominal amount for each Note and Receipt equal to the nominal amount of
that Note or Receipt in the Specified Currency, converted into euro at the Established Rate,
provided that, if the Issuer determines, with the agreement of the Principal Paying Agent and
the Trustee, that the then market practice in respect of the redenomination in euro of
internationally offered securities is different from the provisions specified above, such
provisions shall be deemed to be amended so as to comply with such market practice and the
Issuer shall promptly notify the Noteholders, the stock exchange (if any) on which the Notes
may be listed and the Paying Agents of such deemed amendments;
(b)
save to the extent that an Exchange Notice has been given in accordance with paragraph (d)
below, the amount of interest due in respect of the Notes will be calculated by reference to the
aggregate nominal amount of Notes presented (or, as the case may be, in respect of which
Coupons are presented) for payment by the relevant holder and the amount of such payment
shall be rounded down to the nearest euro 0.01;
(c)
if definitive Notes are required to be issued after the Redenomination Date, they shall be issued
at the expense of the Issuer in the denominations of euro 1,000, euro 10,000, euro 100,000 and
(but only to the extent of any remaining amounts less than euro 1,000 or such smaller
denominations as the Principal Paying Agent and the Trustee may approve) euro 0.01 and such
other denominations as the Principal Paying Agent shall determine and notify to the
Noteholders;
(d)
if issued prior to the Redenomination Date, all unmatured Coupons denominated in the
Specified Currency (whether or not attached to the Notes) will become void with effect from
the date on which the Issuer gives notice (the Exchange Notice) that replacement
euro-denominated Notes, Receipts and Coupons are available for exchange (provided that such
securities are so available) and no payments will be made in respect of them. The payment
obligations contained in any Notes and Receipts so issued will also become void on that date
although those Notes and Receipts will continue to constitute valid exchange obligations of the
Issuer. New euro-denominated Notes, Receipts and Coupons will be issued in exchange for
Notes, Receipts and Coupons denominated in the Specified Currency in such manner as the
Principal Paying Agent may specify and as shall be notified to the Noteholders in the Exchange
Notice. No Exchange Notice may be given less than 15 days prior to any date for payment of
principal or interest on the Notes;
(e)
after the Redenomination Date, all payments in respect of the Notes, the Receipts and the
Coupons, other than payments of interest in respect of periods commencing before the
Redenomination Date, will be made solely in euro as though references in the Notes to the
Specified Currency were to euro. Payments will be made in euro by credit or transfer to a euro
account (or any other account to which euro may be credited or transferred) specified by the
payee;
(f)
if the Notes are Fixed Rate Notes and interest for any period ending on or after the
Redenomination Date is required to be calculated for a period ending other than on an Interest
Payment Date, it will be calculated:
(i)
in the case of the Notes represented by a Global Note, by applying the Rate of Interest to
the aggregate outstanding nominal amount of the Notes represented by such Global Note;
and
40
(ii)
in the case of Definitive Bearer Notes or Definitive Registered Notes, by applying the
Rate of Interest to the Calculation Amount;
and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding
the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such
sub-unit being rounded upwards or otherwise in accordance with applicable market convention.
Where the Specified Denomination of a Fixed Rate Note is a multiple of the Calculation
Amount, the amount of interest payable in respect of such Fixed Rate Note shall be the product
of the Calculation Amount (determined in the manner provided above) and the amount by which
the Calculation Amount is multiplied to reach the Specified Denomination, without any further
rounding; and
(g)
5.2
if the Notes are Floating Rate Notes, the applicable Pricing Supplement will specify any
relevant changes to the provisions relating to interest.
Definitions
In these Conditions, the following expressions have the following meanings:
Established Rate means the rate for the conversion of the Specified Currency (including
compliance with rules relating to roundings in accordance with applicable European Community
regulations) into euro established by the Council of the European Union pursuant to Article 123 of
the Treaty;
euro means the currency introduced at the start of the third stage of European economic and
monetary union pursuant to the Treaty;
Redenomination Date means (in the case of interest bearing Notes) any date for payment of interest
under the Notes or (in the case of Zero Coupon Notes) any date, in each case specified by the Issuer
in the notice given to the Noteholders pursuant to Condition 5.1 above and which falls on or after
the date on which the country of the Specified Currency first participates in the third stage of
European economic and monetary union; and
Treaty means the Treaty establishing the European Community, as amended.
6.
INTEREST
6.1
41
Except in the case of Notes where an applicable Fixed Coupon Amount or Broken Amount is
specified in the applicable Pricing Supplement, interest shall be calculated by applying the Rate of
Interest to:
(i)
in the case of Fixed Rate Notes which are represented by a Global Note, the aggregate nominal
amount of the Fixed Rate Notes represented by such Global Note (or, if they are Partly Paid
Notes, the aggregate amount paid up); or
(ii)
in the case of Fixed Rate Notes in definitive form, the Calculation Amount;
and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the
resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit
being rounded upwards or otherwise in accordance with applicable market convention. Where the
Specified Denomination of a Fixed Rate Note is a multiple of the Calculation Amount, the amount
of interest payable in respect of such Fixed Rate Note shall be the product of the Calculation Amount
(determined in the manner provided above) and the amount by which the Calculation Amount is
multiplied to reach the Specified Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in accordance with
this Condition 6.1:
(a)
in the case of Notes where the number of days in the relevant period from (and including)
the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to
(but excluding) the relevant payment date (the Accrual Period) is equal to or shorter
than the Determination Period during which the Accrual Period ends, the number of days
in such Accrual Period divided by the product of (I) the number of days in such
Determination Period and (II) the number of Determination Dates (as specified in the
applicable Pricing Supplement) that would occur in one calendar year; or
(ii)
in the case of Notes where the Accrual Period is longer than the Determination Period
during which the Accrual Period ends, the sum of:
(A) the number of days in such Accrual Period falling in the Determination Period in
which the Accrual Period begins divided by the product of (x) the number of days
in such Determination Period and (y) the number of Determination Dates that would
occur in one calendar year; and
(B)
(b)
the number of days in such Accrual Period falling in the next Determination Period
divided by the product of (x) the number of days in such Determination Period and
(y) the number of Determination Dates that would occur in one calendar year; and
if 30/360 is specified in the applicable Pricing Supplement, the number of days in the period
from (and including) the most recent Interest Payment Date (or, if none, the Interest
Commencement Date) to (but excluding) the relevant payment date (such number of days being
calculated on the basis of a year of 360 days with 12 30-day months) divided by 360.
In these Conditions:
Determination Period means each period from (and including) a Determination Date to (but
excluding) the next Determination Date (including, where either the Interest Commencement Date or
the final Interest Payment Date is not a Determination Date, the period commencing on the first
Determination Date prior to, and ending on the first Determination Date falling after, such date); and
42
sub-unit means, with respect to any currency other than euro, the lowest amount of such currency
that is available as legal tender in the country of such currency and, with respect to euro, one cent.
6.2
the Specified Interest Payment Date(s) in each year specified in the applicable Pricing
Supplement; or
(ii)
Such interest will be payable in respect of each Interest Period. In these Conditions, Interest
Period means the period from (and including) an Interest Payment Date (or the Interest
Commencement Date) to (but excluding) the next (or first) Interest Payment Date).
If a Business Day Convention is specified in the applicable Pricing Supplement and (x) if there
is no numerically corresponding day in the calendar month in which an Interest Payment Date
should occur or (y) if any Interest Payment Date would otherwise fall on a day which is not a
Business Day, then, if the Business Day Convention specified is:
(A) in any case where Specified Periods are specified in accordance with Condition 6.2(a)(ii)
above, the Floating Rate Convention, such Interest Payment Date (a) in the case of (x)
above, shall be the last day that is a Business Day in the relevant month and the provisions
of (ii) below shall apply mutatis mutandis or (b) in the case of (y) above, shall be
postponed to the next day which is a Business Day unless it would thereby fall into the
next calendar month, in which event (i) such Interest Payment Date shall be brought
forward to the immediately preceding Business Day and (ii) each subsequent Interest
Payment Date shall be the last Business Day in the month which falls the Specified Period
after the preceding applicable Interest Payment Date occurred; or
(B)
the Following Business Day Convention, such Interest Payment Date shall be postponed
to the next day which is a Business Day; or
(C)
the Modified Following Business Day Convention, such Interest Payment Date shall be
postponed to the next day which is a Business Day unless it would thereby fall into the
next calendar month, in which event such Interest Payment Date shall be brought forward
to the immediately preceding Business Day; or
(D) the Preceding Business Day Convention, such Interest Payment Date shall be brought
forward to the immediately preceding Business Day.
In these Conditions, Business Day means a day which is both:
(a)
a day (other than a Saturday or a Sunday) on which commercial banks and foreign
exchange markets settle payments and are open for general business (including dealing in
foreign exchange and foreign currency deposits) in Hong Kong and any Additional
Business Centre specified in the applicable Pricing Supplement; and
43
(b)
either (i) in relation to any sum payable in a Specified Currency other than euro, a day
on which commercial banks and foreign exchange markets settle payments and are open
for general business (including dealing in foreign exchange and foreign currency
deposits) in the principal financial centre of the country of the relevant Specified
Currency (if other than any Additional Business Centre and which if the Specified
Currency is Australian dollars or New Zealand dollars shall be Sydney or Auckland,
respectively) or (ii) in relation to any sum payable in euro, a TARGET Day;
TARGET Day means (i) until such time as TARGET is permanently closed down and ceases
operations, any day on which both TARGET and TARGET2 are open for the settlement of
payments in euro and (ii) following such time as TARGET is permanently closed down and
ceases operations, any day on which TARGET2 is open for the settlement of payments in euro;
TARGET means the Trans-European Automated Real-time Gross Settlement Express
Transfer payment system which utilises interlinked national real time gross settlement systems
and the European Central Banks payment mechanism and which began operations on 4 January
1999; and
TARGET2 means the Trans-European Automated Real-time Gross Settlement Express
Transfer payment system which utilises a single shared platform and which was launched on 19
November 2007 or any successor thereto.
(c)
Rate of Interest
The Rate of Interest payable from time to time in respect of Floating Rate Notes and Index
Linked Interest Notes will be determined in the manner specified in the applicable Pricing
Supplement.
(i)
(C)
the relevant Reset Date is either (a) if the applicable Floating Rate Option is based
on the London interbank offered rate (LIBOR) or on the Euro-zone interbank
offered rate (EURIBOR), the first day of that Interest Period or (b) in any other
case, as specified in the applicable Pricing Supplement.
For the purposes of this subparagraph (i), Floating Rate, Calculation Agent, Floating
Rate Option, Designated Maturity and Reset Date have the meanings given to those
terms in the ISDA Definitions.
Unless otherwise stated in the applicable Pricing Supplement, the Minimum Rate of
Interest shall be deemed to be zero.
44
(ii)
the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005
being rounded upwards) of the offered quotations,
(expressed as a percentage rate per annum) for the Reference Rate which appears or
appear, as the case may be, on the Relevant Screen Page as at 11.00 a.m. (London time,
in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the Interest
Determination Date in question plus or minus (as indicated in the applicable Pricing
Supplement) the Margin (if any), all as determined by the Principal Paying Agent. If five
or more of such offered quotations are available on the Relevant Screen Page, the highest
(or, if there is more than one such highest quotation, one only of such quotations) and the
lowest (or, if there is more than one such lowest quotation, one only of such quotations)
shall be disregarded by the Principal Paying Agent for the purpose of determining the
arithmetic mean (rounded as provided above) of such offered quotations.
The Agency Agreement contains provisions for determining the Rate of Interest in the
event that the Relevant Screen Page is not available or if, in the case of (A) above, no such
offered quotation appears or, in the case of (B) above, fewer than three such offered
quotations appear, in each case as at the time specified in the preceding paragraph.
If the Reference Rate from time to time in respect of Floating Rate Notes is specified in
the applicable Pricing Supplement as being other than LIBOR or EURIBOR, the Rate of
Interest in respect of such Notes will be determined as provided in the applicable Pricing
Supplement.
(d)
(e)
45
(B)
in the case of Floating Rate Notes or Index Linked Interest Notes in definitive form, the
Calculation Amount;
and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding
the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such
sub-unit being rounded upwards or otherwise in accordance with applicable market convention.
Where the Specified Denomination of a Floating Rate Note or an Index Linked Interest Note
is a multiple of the Calculation Amount, the Interest Amount payable in respect of such Note
shall be the product of the Calculation Amount (determined in the manner provided above) and
the amount by which the Calculation Amount is multiplied to reach the Specified
Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in
accordance with this Condition 6.2:
(i)
(ii)
(iii) if Actual/365 (Sterling) is specified in the applicable Pricing Supplement, the actual
number of days in the Interest Period divided by 365 or, in the case of an Interest Payment
Date falling in a leap year, 366;
(iv) if Actual/360 is specified in the applicable Pricing Supplement, the actual number of
days in the Interest Period divided by 360;
(v)
where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless such
number is 31, in which case D1 will be 30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless such number would be 31 and D1 is greater than 29,
in which case D2 will be 30;
46
(vi) if 30E/360 or Eurobond Basis is specified in the applicable Pricing Supplement, the
number of days in the Interest Period divided by 360, calculated on a formula basis as
follows:
Day Count Fraction
where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless such
number would be 31, in which case D1 will be 30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless such number would be 31, in which case D2 will
be 30;
(vii) if 30E/360 (ISDA) is specified in the applicable Final Terms, the number of days in the
Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction
where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless (i) that
day is the last day of February or (ii) such number would be 31, in which case D1 will be
30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless (i) that day is the last day of February but not the
Maturity Date or (ii) such number would be 31, in which case D2 will be 30.
(f)
47
Interest Amount and Interest Payment Date so notified may subsequently be amended (or
appropriate alternative arrangements made by way of adjustment) without prior notice in the
event of an extension or shortening of the Interest Period. Any such amendment will be
promptly notified to each stock exchange on which the relevant Floating Rate Notes or Index
Linked Interest Notes are for the time being listed and to the Noteholders in accordance with
Condition 15. For the purposes of this paragraph, the expression London Business Day means
a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are
open for general business in London.
(g)
(h)
Certificates to be final
All certificates, communications, opinions, determinations, calculations, quotations and
decisions given, expressed, made or obtained for the purposes of the provisions of this
Condition 6.2, whether by the Principal Paying Agent or, if applicable, the Calculation Agent
or, if applicable, the Trustee, shall (in the absence of wilful default or manifest error) be binding
on the Issuer, the Trustee, the Principal Paying Agent, the Calculation Agent (if applicable), the
other Paying Agents and all Noteholders, Receiptholders and Couponholders and (in the
absence of wilful default and bad faith) no liability to the Issuer, the Noteholders, the
Receiptholders or the Couponholders shall attach to the Principal Paying Agent, if applicable,
the Calculation Agent or the Trustee in connection with the exercise or non-exercise by it of its
powers, duties and discretions pursuant to such provisions.
6.3
6.4
6.5
Accrual of interest
Each Note (or in the case of the redemption of part only of a Note, that part only of such Note) will
cease to bear interest (if any) from the date for its redemption unless, upon due presentation thereof,
payment of principal is improperly withheld or refused. In such event, interest will continue to accrue
as provided in the Trust Deed.
48
7.
PAYMENTS
7.1
Method of payment
Subject as provided below:
(a)
payments in a Specified Currency other than euro will be made by credit or transfer to an
account in the relevant Specified Currency (which, in the case of a payment in Japanese yen to
a non-resident of Japan, shall be a non-resident account) maintained by the payee with a bank
in the principal financial centre of the country of such Specified Currency (which, if the
Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney or Auckland,
respectively); and
(b)
payments in euro will be made by credit or transfer to a euro account (or any other account to
which euro may be credited or transferred) specified by the payee.
Payments will be subject in all cases to any fiscal or other laws and regulations applicable thereto
in the place of payment, but without prejudice to the provisions of Condition 9.
7.2
49
Upon the date on which any Floating Rate Note, Dual Currency Note, Index Linked Note or Long
Maturity Note which is a Definitive Bearer Note becomes due and repayable, unmatured Coupons
and Talons (if any) relating thereto (whether or not attached) shall become void and no payment or,
as the case may be, exchange for further Coupons shall be made in respect thereof. A Long Maturity
Note is a Fixed Rate Note (other than a Fixed Rate Note which on issue had a Talon attached) whose
nominal amount on issue is less than the aggregate interest payable thereon provided that such Note
shall cease to be a Long Maturity Note on the Interest Payment Date on which the aggregate amount
of interest remaining to be paid after that date is less than the nominal amount of such Note.
If the due date for redemption of any Definitive Bearer Note is not an Interest Payment Date, interest
(if any) accrued in respect of such Note from (and including) the preceding Interest Payment Date
or, as the case may be, the Interest Commencement Date shall be payable only against surrender of
the relevant Definitive Bearer Note.
7.3
7.4
50
None of the Issuer, the Trustee or the Agents will have any responsibility or liability for any aspect
of the records relating to, or payments made on account of, beneficial ownership interests in the
Registered Global Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
7.5
7.6
(a)
the Issuer has appointed Paying Agents with specified offices outside the United States with the
reasonable expectation that such Paying Agents would be able to make payment in U.S. dollars
at such specified offices outside the United States of the full amount of principal and interest
on the Bearer Notes in the manner provided above when due;
(b)
payment of the full amount of such principal and interest at all such specified offices outside
the United States is illegal or effectively precluded by exchange controls or other similar
restrictions on the full payment or receipt of principal and interest in U.S. dollars; and
(c)
such payment is then permitted under United States law without involving, in the opinion of the
Issuer, adverse tax consequences to the Issuer.
Payment Day
If the date for payment of any amount in respect of any Note, Receipt or Coupon is not a Payment
Day, the holder thereof shall not be entitled to payment until the next following Payment Day in the
relevant place and shall not be entitled to further interest or other payment in respect of such delay.
For these purposes, Payment Day means any day which (subject to Condition 10) is:
(a)
(b)
7.7
a day on which commercial banks and foreign exchange markets settle payments and are open
for general business (including dealing in foreign exchange and foreign currency deposits) in:
(i)
in the case of Notes in definitive form only, the relevant place of presentation;
(ii)
each Additional Financial Centre specified in the applicable Pricing Supplement; and
either (A) in relation to any sum payable in a Specified Currency other than euro, a day on
which commercial banks and foreign exchange markets settle payments and are open for
general business (including dealing in foreign exchange and foreign currency deposits) in the
principal financial centre of the country of the relevant Specified Currency (if other than the
place of presentation and any Additional Financial Centre and which if the Specified Currency
is Australian dollars or New Zealand dollars shall be Sydney or Auckland, respectively) or (B)
in relation to any sum payable in euro, a TARGET Day.
any additional amounts which may be payable with respect to principal under Condition 9 or
under any undertaking or covenant given in addition thereto, or in substitution therefor,
pursuant to the Trust Deed;
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(b)
(c)
(d)
(e)
(f)
in relation to Zero Coupon Notes, the Amortised Face Amount (as defined in Condition 8.6);
and
(g)
any premium and any other amounts (other than interest) which may be payable by the Issuer
under or in respect of the Notes.
Any reference in the Conditions to interest in respect of the Notes shall be deemed to include, as
applicable, any additional amounts which may be payable with respect to interest under Condition
9 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant
to the Trust Deed.
8.
8.1
Redemption at maturity
Unless previously redeemed or purchased and cancelled as specified below, each Note (including
each Index Linked Redemption Note and Dual Currency Redemption Note) will be redeemed by the
Issuer at its Final Redemption Amount specified in, or determined in the manner specified in, the
applicable Pricing Supplement in the relevant Specified Currency on the Maturity Date.
8.2
on the occasion of the next payment due under the Notes, either the Issuer has or will become
obliged to pay additional amounts as provided or referred to in Condition 9 as a result of any
change in, or amendment to, the laws or treaties (including any regulations or rulings
promulgated thereunder) of a Tax Jurisdiction (as defined in Condition 9) or any change in the
application or official interpretation of such laws or treaties (including any regulations or
rulings promulgated thereunder), which change or amendment becomes effective on or after the
date on which agreement is reached to issue the first Tranche of the Notes; and
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(b)
such obligation cannot be avoided by the Issuer taking reasonable measures available to it,
provided that (1) in the case of Subordinated Notes, the prior approval of the Bank of Mongolia and,
if necessary, any other relevant authority shall have been obtained and (2) no such notice of
redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would
be obliged to pay such additional amounts were a payment in respect of the Notes then due; and
provided further that where any such additional amounts due in accordance with Condition 9 result
from a change in, or amendment to, the laws or treaties (including any regulations or rulings
promulgated thereunder) of a Tax Jurisdiction, this Condition 8.2 will only have effect to permit
Notes to be redeemed in the event that the rate of withholding or deduction required by such law or
treaty is in excess of 20% (or such other rate as may be specified in the applicable Pricing
Supplement as the withholding tax rate in effect on the date of the relevant Subscription Agreement
or, if there is no Subscription Agreement, the date of the applicable Pricing Supplement).
Prior to the publication of any notice of redemption pursuant to this Condition, the Issuer shall
deliver to the Trustee a certificate signed by two duly authorised officers of the Issuer stating that
the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the
conditions precedent to the right of the Issuer so to redeem have occurred, and an opinion of
independent legal advisers of recognised standing to the effect that the Issuer has or will become
obliged to pay such additional amounts as a result of such change or amendment and the Trustee shall
be entitled to accept such certificate and opinion as sufficient evidence of the satisfaction of the
conditions precedent set out above, in which event it shall be conclusive and binding on the
Noteholders, the Receiptholders and the Couponholders.
Notes redeemed pursuant to this Condition 8.2 will be redeemed at their Early Redemption Amount
referred to in Condition 8.6 below together (if appropriate) with interest accrued to (but excluding)
the date of redemption.
As of the date of this Information Memorandum, payments of premium and interest on the Notes are
subject to a 10.0% Mongolian withholding tax in respect of which the Issuer will pay additional
amounts so that after deduction or withholding of such tax, Noteholders will receive the amounts of
premium and interest which would otherwise have been receivable in the absence of such deduction
or withholding. The Issuer will account directly to the Mongolian authorities with respect to such
withholding tax. See Taxation Mongolian Taxation. Noteholders are advised to consult local tax
counsel with regard to the tax consequences of the payment of premium and interest subject to
withholding and the payment of additional amounts on the Notes.
8.3
not less than 15 nor more than 30 days notice to the Noteholders in accordance with Condition
15; and
(b)
not less than 15 days before the giving of the notice referred to in (a) above, notice to the
Trustee and to the Principal Paying Agent and, in the case of a redemption of Registered Notes,
the Registrar,
redeem all or some only of the Notes then outstanding on any Optional Redemption Date and at the
Optional Redemption Amount(s) specified in, or determined in the manner specified in, the
applicable Pricing Supplement together, if appropriate, with interest accrued to (but excluding) the
relevant Optional Redemption Date. Any such redemption must be of a nominal amount not less than
the Minimum Redemption Amount and not more than the Maximum Redemption Amount, in each
case as may be specified in the applicable Pricing Supplement. In the case of a partial redemption
of Notes, the Notes to be redeemed (Redeemed Notes) will be selected individually by lot, in the
case of Redeemed Notes represented by definitive Notes, and in accordance with the rules of
Euroclear and/or Clearstream, Luxembourg, in the case of Redeemed Notes represented by a Global
Note, not more than 30 days prior to the date fixed for redemption (such date of selection being
53
hereinafter called the Selection Date). In the case of Redeemed Notes represented by definitive
Notes, a list of the serial numbers of such Redeemed Notes will be published in accordance with
Condition 15 not less than 15 days prior to the date fixed for redemption. The aggregate nominal
amount of Redeemed Notes represented by definitive Notes shall bear the same proportion to the
aggregate nominal amount of all Redeemed Notes as the aggregate nominal amount of definitive
Notes outstanding bears to the aggregate nominal amount of the Notes outstanding, in each case on
the Selection Date, provided that such first mentioned nominal amount shall, if necessary, be rounded
downwards to the nearest integral multiple of the Specified Denomination, and the aggregate nominal
amount of Redeemed Notes represented by a Global Note shall be equal to the balance of the
Redeemed Notes. No exchange of the relevant Global Note will be permitted during the period from
(and including) the Selection Date to (and including) the date fixed for redemption pursuant to this
Condition 8.3 and notice to that effect shall be given by the Issuer to the Noteholders in accordance
with Condition 15 at least five days prior to the Selection Date.
8.4
8.5
Put Notices
To exercise the right to require redemption or purchase of any Note pursuant to Condition 8.4, the
holder of a Note must, if such Note is in definitive form and held outside Euroclear and Clearstream,
Luxembourg, deliver, to the specified office of any Paying Agent (in the case of Bearer Notes) or the
Registrar (in the case of Registered Notes) at any time during normal business hours of such Paying
Agent or, as the case may be, the Registrar falling within the notice period, a duly completed and
signed notice of exercise in the form (for the time being current) obtainable from any specified office
of any Paying Agent or, as the case may be, the Registrar (a Put Notice) and in which the holder
must specify a bank account to which payment is to be made under this Condition and, in the case
of Registered Notes, the nominal amount thereof to be redeemed or purchased and, if less than the
full nominal amount of the Registered Notes so surrendered is to be redeemed or purchased, an
address to which a new Registered Note in respect of the balance of such nominal amount is to be
sent subject to and in accordance with the provisions of Condition 2.2. If the Note is in definitive
form, the Put Notice must be accompanied by the relevant Note or evidence satisfactory to the Paying
Agent concerned that such Note will, following delivery of the Put Notice, be held to its order or
under its control. If the Note is represented by a Global Note and held through Euroclear or
Clearstream, Luxembourg, in order to exercise the right to require redemption or purchase of the
relevant Note, the holder of the relevant Note must, within the relevant notice period, give notice to
the Principal Paying Agent of such exercise in accordance with the standard procedures of Euroclear
and Clearstream, Luxembourg (which may include notice being given on such holder s instruction
by Euroclear or Clearstream, Luxembourg or any common depositary for Euroclear or Clearstream,
Luxembourg to the Principal Paying Agent by electronic means) in a form acceptable to Euroclear
and Clearstream, Luxembourg at such time and, at the same time the holder of such Global Note shall
present or procure the presentation of the relevant Global Note to the Principal Paying Agent for
notation accordingly.
Any Put Notice or other notice given in accordance with the standard procedures of Euroclear and
Clearstream, Luxembourg by a holder of any Note pursuant to Condition 8.5 shall be irrevocable
except where, prior to the due date for redemption or purchase, an Event of Default has occurred and
the Trustee has declared the Senior Notes or, as the case may be, the Subordinated Notes to be due
and repayable pursuant to Condition 11, in which event such holder, at its option, may elect by notice
to the Issuer to withdraw the notice given pursuant to Condition 8.5.
54
8.6
in the case of a Note with a Final Redemption Amount equal to the Issue Price, at the Final
Redemption Amount thereof;
(b)
in the case of a Note (other than a Zero Coupon Note but including an Instalment Note and a
Partly Paid Note) with a Final Redemption Amount which is or may be less or greater than the
Issue Price or which is payable in a Specified Currency other than that in which the Note is
denominated, at the amount specified in, or determined in the manner specified in, the
applicable Pricing Supplement or, if no such amount or manner is so specified in the applicable
Pricing Supplement, at its nominal amount; or
(c)
in the case of a Zero Coupon Note, at an amount (the Amortised Face Amount) calculated in
accordance with the following formula:
Early Redemption Amount = RP X (1 + AY)(y)
where:
RP means the Reference Price;
AY means the Accrual Yield expressed as a decimal; and
y is a fraction the numerator of which is equal to the number of days (calculated on the basis
of a 360-day year consisting of 12 months of 30 days each) from (and including) the Issue Date
of the first Tranche of the Notes to (but excluding) the date fixed for redemption or (as the case
may be) the date upon which such Note becomes due and repayable and the denominator of
which is 360,
or on such other calculation basis as may be specified in the applicable Pricing Supplement.
8.7
Instalments
Instalment Notes will be redeemed in the Instalment Amounts and on the Instalment Dates. In the
case of early redemption, the Early Redemption Amount will be determined pursuant to Condition
8.6.
8.8
8.9
Purchases
The Issuer or any Subsidiary of the Issuer may at any time purchase Senior Notes and, subject to
obtaining the prior approval of the Bank of Mongolia and, if necessary, any other relevant authority,
Subordinated Notes (provided that, in the case of definitive Notes, all unmatured Receipts, Coupons
and Talons appertaining thereto are purchased therewith) at any price in the open market or
otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any
Paying Agent and/or the Registrar for cancellation.
8.10 Cancellation
All Notes which are redeemed pursuant to Condition 8.4 will forthwith be cancelled (together with
all unmatured Receipts, Coupons and Talons attached thereto or surrendered therewith at the time of
redemption or purchase, as the case may be). All Notes so cancelled and any Notes purchased and
cancelled pursuant to Condition 8.9 above (together with all unmatured Receipts, Coupons and
Talons cancelled therewith) shall be forwarded to the Principal Paying Agent and cannot be reissued
or resold.
55
the date on which all amounts due in respect of such Zero Coupon Note have been paid; and
(b)
five days after the date on which the full amount of the moneys payable in respect of such Zero
Coupon Notes has been received by the Principal Paying Agent, the Registrar or the Trustee and
notice to that effect has been given to the Noteholders in accordance with Condition 15.
9.
TAXATION
9.1
All payments of principal and interest in respect of the Notes, Receipts and Coupons by the Issuer
will be made without withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf
of any Tax Jurisdiction unless such withholding or deduction is required by law. In such event, the
Issuer will pay such additional amounts as may be necessary in order that the net amounts received
by the holders of the Notes, Receipts or Coupons after such withholding or deduction shall equal the
respective amounts of principal and interest which would otherwise have been receivable in respect
of the Notes, Receipts or Coupons, as the case may be, in the absence of such withholding or
deduction; except that no such additional amounts shall be payable with respect to any Note, Receipt
or Coupon:
(a)
(b)
presented for payment by or on behalf of a holder who is liable for such taxes or duties in
respect of such Note, Receipt or Coupon by reason of his having some connection with a Tax
Jurisdiction other than the mere holding of such Note, Receipt or Coupon; or
(c)
presented for payment more than 30 days after the Relevant Date (as defined below) except to
the extent that the holder thereof would have been entitled to additional amounts on presenting
the same for payment on such thirtieth day assuming that day to have been a Payment Day (as
defined in Condition 7.5); or
(d)
(e)
presented for payment by or on behalf of a holder who would have been able to avoid such
withholding or deduction by presenting the relevant Note, Receipt or Coupon to another Paying
Agent in a Member State of the European Union.
As used herein:
(i)
Tax Jurisdiction means Mongolia or any political subdivision or any authority thereof or
therein having power to tax and any other jurisdiction or any political subdivision or any
authority thereof or therein having power to tax to which it (other than through the Paying
Agents) becomes subject in respect of payments made by it on the Notes, the Receipts or the
Coupons; and
(ii)
the Relevant Date means the date on which such payment first becomes due, except that, if
the full amount of the moneys payable has not been duly received by the Trustee, the Principal
Paying Agent or the Registrar, as the case may be, on or prior to such due date, it means the
date on which, the full amount of such moneys having been so received, notice to that effect
is duly given to the Noteholders in accordance with Condition 15.
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9.2
The Issuer will also (i) make such withholding or deduction and (ii) remit the full amount deducted
or withheld to the relevant authority in accordance with applicable law.
10.
PRESCRIPTION
The Notes (whether in bearer or registered form), Receipts and Coupons will become void unless
presented for payment within a period of 10 years (in the case of principal) and five years (in the case
of interest) after the Relevant Date (as defined in Condition 9) therefor.
There shall not be included in any Coupon sheet issued on exchange of a Talon any Coupon the claim
for payment in respect of which would be void pursuant to this Condition or Condition 7.2 or any
Talon which would be void pursuant to Condition 7.2.
11.
if the Issuer shall fail to pay or cause to be paid any principal of any such Senior Note when
due; or
(b)
if the Issuer shall fail to pay or cause to be paid any interest on any such Senior Note when due,
and such failure shall continue for 10 Business Days after written notice thereof by the Trustee
has been delivered to the Issuer; or
(c)
if the Issuer fails to perform or observe any of its obligations under these Conditions or the
Trust Deed (other than any such default referred to in (a) and (b) above) and (except in any case
where, in the opinion of the Trustee, the failure is incapable of remedy when no such
continuation or notice as is hereinafter mentioned will be required) the failure continues for the
period of 30 days (or such longer period as the Trustee may permit) next following the service
by the Trustee on the Issuer of notice requiring the same to be remedied; or
(d)
if (i) any present or future Indebtedness for Borrowed Money (as defined below) of the Issuer
or any of its Subsidiaries becomes capable of being declared due and repayable prematurely by
reason of an event of default (however described); or (ii) the Issuer or any of its Subsidiaries
fails to make any payment in respect of any Indebtedness for Borrowed Money on the due date
for payment or (iii) any security given by the Issuer or any of its Subsidiaries for any
Indebtedness for Borrowed Money becomes enforceable provided that no event described in
this subparagraph (d) shall constitute an Event of Default unless the Indebtedness for Borrowed
Money or other relative liability due and unpaid, either alone or when aggregated (without
duplication) with other amounts of Indebtedness for Borrowed Money and/or other liabilities
due and unpaid relative to all (if any) other events specified in (i) through (iii) above, amount
to at least US$5,000,000 or its equivalent in other currencies (on the basis of the middle spot
rate for the relevant currency against the U.S. dollar as quoted by an independent bank of
international repute in London on the day on which the calculation falls to be made); or
(e)
if any order is made by a court of competent jurisdiction or a resolution is passed for the
winding up or dissolution of the Issuer or any of its Subsidiaries, save for the purposes of
reorganisation on terms previously approved by an Extraordinary Resolution of the holders of
such Senior Notes; or
57
(f)
if the Issuer or any of its Subsidiaries ceases or threatens to cease to carry on the whole or a
substantial part of its business, save for the purposes of reorganisation on terms previously
approved by an Extraordinary Resolution of the holders of such Senior Notes, or the Issuer or
any of its Subsidiaries stops or threatens to stop or suspend payment of, or is unable to, or
admits inability to, pay, its debts (or any class of its debts) as they fall due, or is deemed unable
to pay its debts pursuant to or for the purposes of any applicable law, or is adjudicated or found
bankrupt or insolvent; or
(g)
if the Issuer or any of its Subsidiaries (or their respective directors or shareholders) initiates or
consents to judicial proceedings relating to itself under any applicable liquidation, insolvency,
composition, reorganisation or other similar laws or makes a conveyance or assignment for the
benefit of, or enters into any composition or other arrangement with, its creditors generally (or
any class of its creditors) or any meeting is convened to consider a proposal for an arrangement
or composition with its creditors generally (or any class of its creditors);
(h)
if a moratorium is agreed or declared by the Issuer or any of its Subsidiaries in respect of any
Indebtedness for Borrowed Money (including any obligation arising under any guarantee) of
the Issuer or any of its Subsidiaries; or
(i)
if it is or will become unlawful for the Issuer to perform or comply with any one or more of
its obligations under any of such Senior Notes or the Trust Deed; or
(j)
(k)
if the Issuer or any of its Subsidiaries is or becomes entitled or subject to, or is declared by law
or otherwise to be protected by immunity (sovereign or otherwise) and Condition 20.3 is held
to be invalid or unenforceable; or
(l)
if (i) proceedings are initiated against the Issuer or any of its Subsidiaries under any applicable
liquidation, insolvency, composition, reorganisation or other similar laws or an application is
made (or documents filed with a court) for the appointment of an administrative or other
receiver, manager, administrator or other similar official, or an administrative or other receiver,
manager, administrator or other similar official is appointed, in relation to the Issuer or any of
its Subsidiaries or, as the case may be, in relation to the whole or any part of the undertaking
or assets of any of them or an encumbrancer takes possession of the whole or any part of the
undertaking or assets of any of them, or a distress, execution, attachment, sequestration or other
process is levied, enforced upon, sued out or put in force against the whole or any part of the
undertaking or assets of any of them, and (ii) in any such case (other than the appointment of
an administrator or an administrative receiver appointed following presentation of a petition for
an administration order) unless initiated by the relevant company, is not discharged within 14
days; or
(m) if any event occurs, which, under the laws of Mongolia has or may have, in the Trustees
opinion, an analogous effect to any of the events referred to in subparagraphs (f) to (h) inclusive
or (j).
11.2 Events of Default relating to Subordinated Notes
(a)
If this Note is specified in the applicable Pricing Supplement as being a Subordinated Note,
subject to the provisions of Condition 3.2, if default is made in the payment of any principal
or interest due on such Subordinated Notes or any of them on the due date and, in the case of
interest, such default continues for a period of 10 days, the Trustee may, at its discretion and
without further notice, institute proceedings for the winding up or liquidation of the Issuer to
enforce the obligations of the Issuer under the Subordinated Notes or the Trust Deed but may
take no further action in respect of such default (but without prejudice to paragraph (b) below)
and provided that it shall not be bound to take any such proceedings or any other action in
relation to the Trust Deed, the Notes, the Receipts or the Coupons unless (i) it shall have been
58
If any decision, order or approval is made for the winding up or liquidation, or in the event of
the revocation of the Issuer s banking licence No. 08, issued by the Bank of Mongolia in
accordance with Article 23 of the Banking Law of Mongolia and the Bank of Mongolia
Regulation on licensing of the bank and its units, as renewed or supplemented from time to
time, or the reorganisation of the Issuer, save for the purposes of reorganisation on terms
previously approved in writing by the Trustee or by an Extraordinary Resolution of the holders
of such Subordinated Notes, the Trustee may, and if so requested in writing by the holders of
at least one-quarter in nominal amount of the Subordinated Notes then outstanding or if so
directed by an Extraordinary Resolution of the holders of such Subordinated Notes, shall
(subject to being indemnified to its satisfaction) give notice to the Issuer that such Subordinated
Notes are, and they shall, subject to the prior approval of the Bank of Mongolia and, if
necessary, any other relevant authority having been obtained, thereupon immediately become,
due or repayable at the amount provided in, or calculated in accordance with, Condition 8.6,
together with accrued interest as provided in the Trust Deed.
(c)
Each of the events or circumstances referred to in Condition 11.2(a) and (b) shall constitute an
Event of Default in relation to the Subordinated Notes.
11.3 Enforcement
The Trustee may at any time, at its discretion and without notice, take such proceedings against the
Issuer as it may think fit to enforce the provisions of the Trust Deed, or any of the Notes and/or any
related Receipts and Coupons, but it shall not be bound to take any such proceedings or any other
action in relation to the Trust Deed, the Notes and/or any related Receipts or Coupons unless (i) it
shall have been so directed by an Extraordinary Resolution of the holders of the relevant Notes or
so requested in writing by the holders of at least one-quarter in nominal amount of such Notes then
outstanding and (ii) it shall have been indemnified and/or secured to its satisfaction.
No Noteholder, Receiptholder or Couponholder shall be entitled to proceed directly against the Issuer
unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and
the failure shall be continuing.
11.4 Definition
For the purposes of the Conditions, Indebtedness for Borrowed Money means (a) any indebtedness
(whether being principal, premium, interest or other amounts) for or in respect of any notes, bonds,
debentures, debenture stock, loan stock or other securities or any borrowed money or any liability
under or in respect of any acceptance or acceptance credit and (b) to the extent not included in (a),
any guarantee and/or indemnity in respect of any such indebtedness.
12.
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13.
AGENTS
The names of the initial Agents and their initial specified offices are set out below.
The Issuer is entitled, with the prior written approval of the Trustee, to vary or terminate the
appointment of any Agent and/or appoint additional or other Agents and/or approve any change in
the specified office through which any Agent acts, provided that:
(a)
(b)
so long as the Notes are listed on any stock exchange or admitted to trading by any other
relevant authority or entity, there will at all times be a Paying Agent (in the case of Bearer
Notes) and a Transfer Agent (in the case of Registered Notes) with a specified office in such
place as may be required by the rules and regulations of the relevant stock exchange or other
relevant authority or entity;
(c)
the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of
the European Union that is not obliged to withhold or deduct tax pursuant to European Council
Directive 2003/48/EC or any law implementing or complying with, or introduced in order to
conform to, such Directive; and
(d)
so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require,
the Issuer will appoint and maintain a paying agent and transfer agent in Singapore in the event
that such Notes are represented by Notes in definitive form.
In addition, the Issuer shall, with the prior written approval of the Trustee, promptly appoint a Paying
Agent having a specified office in New York City in the circumstances described in Condition 7.5.
Any variation, termination, appointment or change shall only take effect (other than in the case of
insolvency, when it shall be of immediate effect) after not less than 30 nor more than 45 days prior
notice thereof shall have been given to the Noteholders in accordance with Condition 15.
In acting under the Agency Agreement, the Agents act solely as agents of the Issuer and, in certain
circumstances specified therein, of the Trustee and do not assume any obligation to, or relationship
of agency or trust with, any Noteholders, Receiptholders or Couponholders. The Agency Agreement
contains provisions permitting any entity into which any Agent is merged or converted or with which
it is consolidated or to which it transfers all or substantially all of its assets to become the successor
agent.
14.
EXCHANGE OF TALONS
On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet
matures, the Talon (if any) forming part of such Coupon sheet may be surrendered at the specified
office of the Principal Paying Agent or any other Paying Agent in exchange for a further Coupon
sheet including (if such further Coupon sheet does not include Coupons to (and including) the final
date for the payment of interest due in respect of the Note to which it appertains) a further Talon,
subject to the provisions of Condition 10.
15.
NOTICES
All notices regarding the Bearer Notes will be deemed to be validly given if published in a leading
English language daily newspaper of general circulation in Singapore. It is expected that such
publication will be made in the Business Times. The Issuer shall also ensure that notices are duly
published in a manner which complies with the rules of any stock exchange or other relevant
authority on or by which the Bearer Notes are for the time being listed or by which they have been
admitted to trading. Any such notice will be deemed to have been given on the date of the first
publication or, where required to be published in more than one newspaper, on the latest of the date(s)
of the first publication in all required newspapers. If publication as provided above is not practicable,
a notice will be given in such other manner, and will be deemed to have been given on such date,
as the Trustee shall approve.
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All notices regarding the Registered Notes will be deemed to be validly given if sent by first class
mail or (if posted to an address overseas) by airmail to the holders (or the first named of joint holders)
at their respective addresses recorded in the Register and will be deemed to have been given on the
fourth day after mailing and, in addition, for so long as any Registered Notes are listed or have been
admitted to trading on or by any stock exchange (or other relevant authority) and the rules of that
stock exchange (or other relevant authority) so require, such notice will be published in a daily
newspaper of general circulation in the place or places required by those rules.
Until such time as any definitive Notes are issued, there may, so long as any Global Notes
representing the Notes are held in their entirety on behalf of Euroclear and/or Clearstream,
Luxembourg, be substituted for such publication in such newspaper(s) the delivery of the relevant
notice to Euroclear and/or Clearstream, Luxembourg for communication by them to the holders of the
Notes and, in addition, for so long as any Notes are listed or have been admitted to trading on or by
any stock exchange (or other relevant authority) and the rules of that stock exchange (or other
relevant authority) so require, such notice will be published in a daily newspaper of general
circulation in the place or places required by those rules. Any such notice shall be deemed to have
been given to the holders of the Notes on the seventh day after the day on which the said notice was
given to Euroclear and/or Clearstream, Luxembourg.
Notices to be given by any Noteholder shall be in writing and given by lodging the same, together
(in the case of any Note in definitive form) with the relative Note or Notes, with the Principal Paying
Agent (in the case of Bearer Notes) or the Registrar (in the case of Registered Notes). Whilst any of
the Notes are represented by a Global Note, such notice may be given by any holder of a Note to the
Principal Paying Agent or the Registrar through Euroclear and/or Clearstream, Luxembourg, as the
case may be, in such manner as the Principal Paying Agent, the Registrar and Euroclear and/or
Clearstream, Luxembourg, as the case may be, may approve for this purpose.
16.
61
such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the
Noteholders so to do or may agree, without any such consent as aforesaid, to any modification which
is of a formal, minor or technical nature or to correct a manifest error or an error which, in the
opinion of the Trustee, is proven.
In connection with the exercise by it of any of its trusts, powers, authorities and discretions
(including, without limitation, any modification, waiver, authorisation, determination or
substitution), the Trustee shall have regard to the general interests of the Noteholders as a class (but
shall not have regard to any interests arising from circumstances particular to individual Noteholders,
Receiptholders or Couponholders whatever their number) and, in particular but without limitation,
shall not have regard to the consequences of any such exercise for individual Noteholders,
Receiptholders or Couponholders (whatever their number) resulting from their being for any purpose
domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular
territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall
any Noteholder, Receiptholder or Couponholder be entitled to claim, from the Issuer the Trustee or
any other person any indemnification or payment in respect of any tax consequences of any such
exercise upon individual Noteholders, Receiptholders or Couponholders except to the extent already
provided for in Condition 9 and/or any undertaking or covenant given in addition to, or in
substitution for, Condition 9 pursuant to the Trust Deed.
The Trustee may, without the consent of the Noteholders, Receiptholders or Couponholders, agree
with the Issuer, to the substitution in place of the Issuer (or of any previous substitute under this
Condition) as the principal debtor under the Notes, the Receipts, the Coupons and the Trust Deed of
another company, being a Subsidiary of the Issuer, subject to (a) the Trustee being satisfied that the
interests of the Noteholders will not be materially prejudiced by the substitution and (b) certain other
conditions set out in the Trust Deed being complied with.
Any such modification, waiver, authorisation, determination or substitution shall be binding on the
Noteholders, the Receiptholders and the Couponholders and any such modification or substitution
shall be notified to the Noteholders in accordance with Condition 15 as soon as practicable thereafter.
17.
18.
FURTHER ISSUES
The Issuer shall be at liberty from time to time without the consent of the Noteholders, the
Receiptholders or the Couponholders to create and issue further notes having terms and conditions
the same as the Notes or the same in all respects save for the issue date and the amount and date of
the first payment of interest thereon and so that the same shall be consolidated and form a single
Series with the outstanding Notes.
62
19.
20.
63
64
2.
(a)
Series Number . . . . . . . . . . . . . . . . . . []
(b)
Tranche Number . . . . . . . . . . . . . . . . .
[]
(If fungible with an existing Series, details of that
Series, including the date on which the Notes
become fungible and the Aggregate Nominal
Amount of the Series)
3.
4.
5.
(a)
[Series . . . . . . . . . . . . . . . . . . . . . . . . []]
(b)
[Tranche . . . . . . . . . . . . . . . . . . . . . .
(a)
(b)
65
[]]
6.
(a)
Specified Denominations . . . . . . . . . . []
(Notes (including Notes denominated in Sterling) in
respect of which the issue proceeds are to be
accepted by the Issuer in the United Kingdom or
whose issue otherwise constitutes a contravention
of section 19 of the FSMA and which have a
maturity of less than one year must have a minimum
redemption value of 100,000 (or its equivalent in
other currencies).)
Calculation Amount . . . . . . . . . . . . . . []
(If there is only one Specified Denomination, insert
the Specified Denomination. If there is more than
one Specified Denomination, insert the highest
common factor. Note: There must be a common
factor in the case of two or more Specified
Denominations.)
66
7.
(a)
Issue Date . . . . . . . . . . . . . . . . . . . . . []
(b)
8.
9.
Interest Basis . . . . . . . . . . . . . . . . . . . . . . . [[] per cent. Fixed Rate] [[LIBOR/EURIBOR] +/[]% Floating Rate] [Zero Coupon] [Index Linked
Interest] [Dual Currency Interest]
[specify other]
(further particulars specified below)
10.
11.
12.
13.
(a)
(b)
67
(c)
14.
15.
(b)
Interest Payment Date(s) . . . . . . . . . . . [[] in each year up to and including the Maturity
Date]/[specify other]
(N.B. This will need to be amended in the case of
long or short coupons)
(c)
(d)
(e)
(f)
(g)
(h)
68
17.
(b)
(c)
(d)
(e)
(f)
Reference Rate . . . . . . . . . . . . . .
[]
(Either LIBOR, EURIBOR or other, although
additional information is required if other
-including fallback provisions in the Agency
Agreement)
(g)
ISDA Determination
Designated Maturity . . . . . . . . . . []
Reset Date . . . . . . . . . . . . . . . . . []
(h)
(i)
(j)
69
(k)
(l)
18.
19.
(a)
(b)
Reference Price . . . . . . . . . . . . . . . . . []
(c)
(d)
(b)
(c)
(d)
(e)
70
(f)
(g)
(h)
(i)
20.
Dual Currency Interest Note Provisions . . . . [Applicable/Not Applicable] (If not applicable,
delete the remaining subparagraphs of this
paragraph)
(a)
Rate of Exchange/method of
calculating Rate of Exchange . . . . . . .
(b)
(c)
(d)
(b)
(c)
If redeemable in part:
(i)
(ii)
Maximum Redemption
Amount . . . . . . . . . . . . . . . . . . .
71
[]
(d)
22.
(b)
(c)
23.
24.
72
27.
28.
29.
30.
(a)
(b)
31.
DISTRIBUTION
32.
33.
34.
(a)
(b)
[]
73
35.
36.
OPERATIONAL INFORMATION
37.
ISIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . []
38.
Common Code . . . . . . . . . . . . . . . . . . . . . . []
39.
40.
41.
42.
GENERAL
43.
74
RESPONSIBILITY
The Issuer accepts responsibility for the information contained in this Pricing Supplement which, when
read together with the Information Memorandum [and the supplemental Information Memorandum]
referred to above, contains all information that is material in the context of the issue of the Notes.
Signed on behalf of the Trade and Development Bank of Mongolia LLC:
By:
Duly authorised
75
76
For so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Issuer
will appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered
for payment or redemption, in the event that a Bearer Global Note is exchanged for Definitive Bearer Notes
in the circumstances set out above. In addition, in the event that a Bearer Global Note is exchanged for
Definitive Bearer Notes in the circumstances set out above, announcement of such exchange will be made
by or on behalf of the Issuer through the SGX-ST and such announcement will include all material
information with respect to the delivery of the Definitive Bearer Notes, including details of the paying
agent in Singapore.
The following legend will appear on all Bearer Notes which have an original maturity of more than 365
days and on all receipts and interest coupons relating to such Notes:
ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED
STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED
STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND
1287(a) OF THE INTERNAL REVENUE CODE.
The sections of the Internal Revenue Code referred to in such legend provide that United States holders,
with certain exceptions, will not be entitled to deduct any loss on Bearer Notes, receipts or interest coupons
and will not be entitled to capital gains treatment of any gain on any sale, disposition, redemption or
payment of principal in respect of such Notes, receipts or interest coupons.
Notes which are represented by a Bearer Global Note will only be transferable in accordance with the rules
and procedures for the time being of Euroclear or Clearstream, Luxembourg, as the case may be.
Registered Notes
The Registered Notes of each Tranche offered and sold in reliance on Regulation S, which will be sold to
non-U.S. persons outside the United States, will initially be represented by a global note in registered form
(a Registered Global Note). Prior to expiry of the distribution compliance period (as defined in
Regulation S) applicable to each Tranche of Notes, beneficial interests in a Registered Global Note may
not be offered or sold to, or for the account or benefit of, a U.S. person save as otherwise provided in
Condition 2 and may not be held otherwise than through Euroclear or Clearstream, Luxembourg and such
Registered Global Note will bear a legend regarding such restrictions on transfer.
Registered Global Notes will be deposited with a common depositary for, and registered in the name of
a common nominee of, Euroclear and Clearstream, Luxembourg, as specified in the applicable Pricing
Supplement. Persons holding beneficial interests in Registered Global Notes will be entitled or required,
as the case may be, under the circumstances described below, to receive physical delivery of definitive
Notes in fully registered form.
Payments of principal, interest and any other amount in respect of the Registered Global Notes will, in the
absence of provision to the contrary, be made to the person shown on the Register (as defined in Condition
7.4) as the registered holder of the Registered Global Notes. None of the Issuer, the Trustee, any Agent
or the Registrar will have any responsibility or liability for any aspect of the records relating to or
payments or deliveries made on account of beneficial ownership interests in the Registered Global Notes
or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Payments of principal, interest or any other amount in respect of the Definitive Registered Notes will, in
the absence of any provision to the contrary, be made to the persons shown on the Register on the relevant
Record Date (as defined in Condition 7.4) immediately preceding the due date for payment in the manner
provided in that Condition.
Interests in a Registered Global Note will be exchangeable (free of charge), in whole but not in part, for
Definitive Registered Notes without receipts, interest coupons or talons attached only upon the occurrence
of an Exchange Event. The Issuer will promptly give notice to Noteholders in accordance with Condition
15 if an Exchange Event occurs. In the event of the occurrence of an Exchange Event, Euroclear and/or
Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such Registered Global
Note) may give notice to the Registrar requesting exchange. Any such exchange shall occur not later than
10 days after the date of receipt of the first relevant notice by the Registrar.
77
For so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Issuer
will appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered
for payment or redemption, in the event that a Registered Global Note is exchanged for Definitive
Registered Notes in the circumstances set out above. In addition, in the event that a Registered Global Note
is exchanged for Definitive Registered Notes in the circumstances set out above, announcement of such
exchange will be made by or on behalf of the Issuer through the SGX-ST and such announcement will
include all material information with respect to the delivery of Definitive Registered Notes, including
details of the paying agent in Singapore.
Transfer of Interests
Interests in a Registered Global Note may, subject to compliance with all applicable restrictions, be
transferred to a person who wishes to hold such interest in another Registered Global Note. No beneficial
owner of an interest in a Registered Global Note will be able to transfer such interest, except in accordance
with the applicable procedures of Euroclear and Clearstream, Luxembourg, in each case to the extent
applicable.
General
Pursuant to the Agency Agreement (as defined under Terms and Conditions of the Notes), the Principal
Paying Agent shall arrange that, where a further Tranche of Notes is issued which is intended to be
consolidated and form a single Series with an existing Tranche of Notes, the Notes of such further Tranche
shall be assigned a common code and ISIN which are different from the common code and ISIN assigned
to Notes of any other Tranche of the same Series until at least the expiry of the distribution compliance
period (as defined in Regulation S) applicable to the Notes of such Tranche.
For so long as any of the Notes is represented by a Global Note held on behalf of Euroclear and/or
Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the
time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular
nominal amount of such Notes (in which regard any certificate or other document issued by Euroclear or
Clearstream, Luxembourg as to the nominal amount of such Notes standing to the account of any person
shall be conclusive and binding for all purposes save in the case of manifest error) shall be treated by the
Issuer, the Trustee and the Agents as the holder of such nominal amount of such Notes for all purposes
other than with respect to the payment of principal or interest on such nominal amount of such Notes, for
which purpose the bearer of the relevant Bearer Global Note or the registered holder of the relevant
Registered Global Note, as applicable, shall be treated by the Issuer, the Trustee and the Agents as the
holder of such nominal amount of such Notes in accordance with and subject to the terms of the relevant
Global Note, and the expressions Noteholder and holder of Notes and related expressions shall be
construed accordingly.
Any reference herein to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits,
be deemed to include a reference to any additional or alternative clearing system specified in the applicable
Pricing Supplement or as may otherwise be approved by the Issuer and the Trustee.
78
USE OF PROCEEDS
The net proceeds from each issue of Notes will be applied by the Bank for general lending and investment
purposes. If the net proceeds of any particular issue of Notes is intended to be applied by the Bank for
purposes other than as specified herein, such use of proceeds will be stated in the applicable Pricing
Supplement.
79
Low(2)
Average(1)
High(2)
Period End
1,187.00
1,164.00
1,162.20
1,143.95
1,291.25
1,208.00
1,191.00
1,201.47
1,180.13
1,170.33
1,167.76
1,451.77
1,355.83
1,264.10
1,232.50
1,232.50
1,190.50
1,283.76
1,665.00
1,473.00
1,394.50
1,232.50
1,165.00
1,169.60
1,283.76
1,445.00
1,259.00
1,394.50
1,365.50
1,325.00
1,318.50
1,299.00
1,393.34
1,339.08
1,331.98
1,307.00
1,431.50
1,361.50
1,343.50
1,314.00
1,365.50
1,340.00
1,318.50
1,311.00
(1)
Determined by averaging the rates on the last business day of each month during the relevant period for annual periods and
each business day for monthly periods.
(2)
The high and low figures for each period are determined based on the daily middle exchange rates during the period indicated.
Exchange Controls
Under the Currency Settlement Law of 1994, Mongolian commercial banks require approval from the Bank
of Mongolia in order to undertake transactions in amounts that may affect the exchange rate of the Tugrik.
There are no other restrictions on repatriation of foreign currencies from Mongolia and there are no foreign
exchange controls. Foreign currency is generally freely transferable within or from Mongolia. Foreign
exchange policy is under the supervision of the Ministry of Finance and the Bank of Mongolia and is
subject to modification.
80
(US$ millions)
Liabilities:
Deposits from customers ..........................................................................................
Deposits and placements by banks and other financial institutions ..........................
Bills sold under repurchase agreements ....................................................................
Borrowings ...............................................................................................................
Current taxes payable ...............................................................................................
Debt securities issued ...............................................................................................
Subordinated debt securities issued ..........................................................................
Other liabilities (due within one year)......................................................................
1,277,296.0
35,063.6
171,484.5
174,380.5
1,501.2
207,134.0
41,693.5
42,071.6
916.0
25.1
123.0
125.0
1.1
148.5
29.9
30.2
1,950,624.9
1,398.8
Shareholders equity:
Share capital .............................................................................................................
Share premium..........................................................................................................
Treasury shares .........................................................................................................
Revaluation reserves .................................................................................................
Unrealised gain on available-for-sale financial assets ..............................................
Retained earnings .....................................................................................................
6,610.1
7,392.2
(6,001.9)
18,702.1
3,736.0
108,976.3
4.7
5.3
(4.3)
13.4
2.7
78.1
139,414.8
99.9
2,090,039.7
1,498.7
There has been no material change in the Banks total capitalisation or indebtedness since 31 December
2011.
81
2010
2011
(MNT millions)
77,313.6
(45,743.4)
(MNT millions)
89,212.7
(60,062.9)
(MNT millions)
143,500.5
(95,359.0)
31,570.2
29,149.8
48,141.5
6,054.4
6,852.0
12,134.2
5,907.7
55.7
91.6
9,434.7
84.5
(280.6)
38.7
13,339.3
705.8
131.1
6,055.0
9,277.3
14,176.2
12,109.4
16,129.3
26,310.4
43,679.6
45,279.1
74,451.9
(6,891.7)
(1,798.5)
(1,575.5)
(7,417.2)
(8,426.3)
(7,749.1)
(415.7)
(1,970.0)
(8,443.9)
(1,725.4)
(8,939.3)
(720.8)
(1,731.9)
75.0
(8,679.5)
(3,070.9)
17,570.4
(2,598.8)
24,975.0
(4,277.8)
51,384.5
(9,282.7)
14,971.6
20,697.2
42,101.8
(1)
Costs incurred for loan collections, cleaning and other miscellaneous administrative expenses.
Asset:
Cash and cash equivalents:
Cash on hand .........................................................................
Deposits and placements with banks and other financial
institutions.........................................................................
Balances with the Bank of Mongolia(1) .................................
Deposits with the Bank of Mongolia .....................................
Investment securities:
Held-to-maturity investment securities ..................................
Available-for-sale investment securities .................................
Investment in an associate .....................................................
Loans and advances, net.............................................................
Bills purchased under resale agreements ....................................
Subordinated loans .....................................................................
Property, net and equipment, net ................................................
Intangible assets, net ..................................................................
Foreclosed real properties, net ...................................................
Other assets ................................................................................
Total assets ................................................................................
(1)
2009
2010
2011
(MNT millions)
(MNT millions)
(MNT millions)
24,216.0
35,988.0
50,082.9
63,061.7
57,065.7
122,641.4
286,797.9
79,820.4
150,861.6
168,120.7
256,761.0
88,890.5
1,409.9
406,214.7
799.5
7,000.0
21,439.9
800.7
2,099.3
14,724.8
259,138.9
1,596.6
464,466.6
7,000.0
19,811.1
655.9
977.3
31,765.8
105,985.7
241,784.6
2,276.0
1,123,331.9
36,966.1
7,000.0
79,145.0
433.4
579.2
17,573.2
810,364.1
1,338,880.1
2,090,039.7
Bank of Mongolia required that a minimum 5.0% and 11.0% of average customer deposits for two weeks must be maintained
with the Bank of Mongolia as at 31 December 2010 and 2011, respectively. In relation to the daily requirement, the Bank must
maintain no less than 50.0% of the required reserve amount at the end of each day. As at 31 December 2010 and 2011, the
required reserve amount was MNT 48,716.4 million and MNT 168,064.6 million, respectively.
82
As at 31 December
Liabilities:
Deposits from customers ............................................................
Deposits and placements of banks and other financial
institutions .............................................................................
Bills sold under repurchase agreements .....................................
Borrowings .................................................................................
Current taxes payables ...............................................................
Debt securities issued.................................................................
Subordinated debt securities issued ............................................
Other liabilities ..........................................................................
Total liabilities ..........................................................................
2009
2010
2011
(MNT millions)
(MNT millions)
(MNT millions)
579,522.8
919,944.7
1,277,296.0
31,469.2
53,302.0
1,343.6
59,639.5
17,946.0
53,584.9
50,678.1
1,482.0
173,280.3
31,218.5
20,399.1
35,063.6
171,484.5
174,380.5
1,501.2
207,134.0
41,693.5
42,071.6
743,223.1
1,250,587.6
1,950,624.9
Shareholders equity:
Share capital...............................................................................
Share premium ...........................................................................
Treasury shares ..........................................................................
Revaluation reserves ..................................................................
Unrealised gain on available-for-sale financial assets ...............
Retained earnings .......................................................................
6,610.1
7,392.2
(6,456.2)
13,683.3
45,911.6
6,610.1
7,392.2
(6,001.9)
13,418.3
66,873.8
6,610.1
7,392.2
(6,001.9)
18,702.1
3,736.0
108,976.3
67,141.0
88,292.5
139,414.8
810,364.1
1,338,880.1
2,090,039.7
2009
2010
2011
2.1%
22.6%
5.3%
3.6%
12.7%
10.1%
72.7%
47.0%
40.5%
4.7%
27.7%
67.2%
5.3%
2.3%
26.9%
4.1%
2.9%
16.3%
10.2%
52.0%
66.8%
41.0%
3.3%
35.6%
71.0%
4.1%
2.6%
39.8%
2.5%
1.6%
12.7%
8.2%
89.3%
42.8%
27.0%
3.5%
35.3%
63.6%
2.5%
(1)
Calculated as a ratio of each years profit after tax to average total assets. The figure for average total assets is an average
of the balance sheet total assets for each day of the relevant financial year.
(2)
Calculated as a ratio of each years profit after tax to average equity. The figure for average equity is an average of the balance
sheet equity for each day of the relevant financial year.
(3)
For further information regarding how the Bank classifies its loans, see The Bank Asset Quality Loan Classifications.
(4)
Calculated as the ratio of net operating expenses to net operating income for each period presented.
83
THE BANK
Overview
Trade and Development Bank of Mongolia LLC is a leading banking and financial services provider in
Mongolia, offering a wide range of domestic corporate and retail banking services, including large
corporate, SME and retail lending, deposit-taking, trade finance, remittance, cash management, treasury,
foreign exchange, gold bullion and other precious metals trading and investment banking services. The
Bank ranked as the third-largest bank in the country by equity base with total shareholders equity of MNT
139,414.8 million (US$100.0 million) and by assets with total assets of MNT 2,090,039.7 million
(US$1,498.8 million) as at 31 December 2011, according to the Banks internal data and the Bank of
Mongolia. In addition, the Bank has extensive experience in international banking transactions, including
trade finance, foreign exchange, remittance and syndicated lending activities in the international market.
The Bank has a prominent position in the domestic money markets, leading Mongolias foreign exchange
and gold bullion markets with a market share exceeding 27.8% and 51.0%, respectively, by trading volume
as at 31 December 2011, according to the Banks internal data and the Bank of Mongolia.
As the longest-serving bank in Mongolia, having commenced banking operations in 1990, the Bank acts
as primary lender to many of the countrys leading domestic and foreign corporate credits as well as
foreign representative offices across all major industrial and commercial sectors. Leveraging this
pre-eminent position and its long-standing customer relationships, the Bank has consolidated its
market-leading position in the handling of international trade finance and remittance with access to credit
lines with major international lenders and correspondent banking relationships with over 150 international
financial institutions.
The Banks strong corporate platform and network in the Mongolian banking sector has enabled the Bank
to capitalise on the growth of the Mongolian economy, which has experienced average GDP growth of
8.3% per annum for the period from 2003 through 2011 according to the IMF, and the accompanying
demand for more comprehensive banking solutions, through targeted lending to the growing SME sector
and increasing numbers of high-end retail customers, including staff of its corporate customers as well as
other high net-worth individuals. Such efforts have improved the loan portfolio mix amongst the Banks
corporate, commercial and retail segments. In addition, the Banks position in the corporate banking
market has facilitated expansion into complementary business segments such as treasury, foreign
exchange, gold bullion and other precious metals trading and money markets, as well as the Banks
investment banking services, as the Mongolian credit market continues to grow and becomes more
sophisticated. The Bank believes these dual factors of a strengthening Mongolian economy and the Banks
business growth initiatives have resulted in the Banks earnings increasing at a compound annual growth
rate of 41.8% for the period from 2003 through 2011. The Bank believes its diverse product offerings,
long-term relationships with its corporate customers and well-defined expansion strategy have poised it to
capitalise on the anticipated growth of the Mongolian economy.
As a customer-focused financial institution dedicated principally to serving its corporate customer base,
the Bank recognises the need to provide customers with convenient banking locations and personalised
customer service. From its headquarters in the capital city of Ulaanbaatar, the Bank operated a network of
42 branches in Mongolia as at 31 December 2011 including 30 branches located in Ulaanbaatar, one in
Umnugobi province near the Oyu Tolgoi copper project and 11 in industrial cities, such as Erdenet and
Darkhan. The Bank also operates one of the largest ATM networks in Mongolia with 99 ATMs, including
79 in Ulaanbaatar, seven each in Erdenet and Darkhan, and six in other rural areas. The Bank has a network
of approximately 957 merchants and approximately 1,344 point-of-sale terminals.
With a primary focus on corporate lending and deposit-taking, the Banks activities are concentrated in,
and its distribution strategy centres on, Ulaanbaatar, resulting in an emphasis on the quality of its branch
coverage for corporate customers in Mongolia as opposed to the quantity of branches. The Bank believes
its distribution strategy enables the Bank to service its core corporate customer base without losing
efficiencies through unnecessary expansion into rural regions, which are typically less profitable due to
lower business concentration in such regions. To reflect its primary focus on corporate banking, the Bank
plans to extend its branch network in Mongolia by identifying strategic locations with substantial new
business activity from key sectors of the Mongolian economy, particularly the mining sector. The Bank
intends to open 11 additional branches in 2012 with eight branches to be located in Ulaanbaatar and three
branches to be located outside Ulaanbaatar.
84
Competitive Strengths
The Bank has strong liquidity and as at 31 December 2011, the Banks return on average assets was 2.6%
as compared to 3.0%, 1.6% and 2.4% in respect of Khan Bank, Golomt Bank and XacBank, respectively,
according to public filings made by each bank. The Banks return on average equity was 39.8% as at 31
December 2011 compared to 28.8%, 27.0% and 19.3% in respect of Khan Bank, Golomt Bank and
XacBank, respectively, according to public filings made by each bank. The Bank believes it possesses the
following competitive strengths:
Leading corporate lender in Mongolia. The Bank has built a reputation as a leading corporate
banking service provider in Mongolia through its long-established presence, strong reputation and
extensive experience as well as its wide coverage of corporate and international trade-related
services. The Bank is the market leader in corporate lending with a 24.8% market share in 2011
according to the Bank of Mongolia. The Bank believes corporate customers view the Bank as a
reliable counterparty due to its prudent capital management strategy and position as a leading
corporate bank in Mongolia.
Well-positioned to take advantage of anticipated economic growth in Mongolia. The Bank will
continue its focus on corporate lending as well as developing SME and retail lending to take
advantage of growth in Mongolias mining sector and related development. The Bank believes its
diverse product offering, long-term relationships with corporate customers and well-defined
expansion strategy make the Bank well-positioned to capture future growth in the banking sector as
a result of the anticipated growth of the Mongolian economy in coming years.
Reputation as the international face of Mongolia. With over 150 correspondent relationships with
international financial institutions and 38 nostro accounts with major clearing banks around the
world, the Bank offers a wide range of trade finance instruments and services designed to appeal to
both domestic and international clients. The Bank believes it is the most experienced and advanced
participant among Mongolian banks in the international markets, including areas such as
international investment banking, syndicated and non-syndicated lending, trade finance and
remittance. In addition, the Bank diversified its funding sources by accessing the international capital
markets, as the first Mongolian issuer of debt securities in the international capital markets.
Diversified funding sources. The Bank has access to diversified funding sources from both domestic
depositors and foreign financial institutions, providing the Bank with greater financial flexibility as
compared to its domestic competitors, and believes corporate customers regard it as a preferred
deposit-taking institution. In addition, the Bank believes it has a lower cost of funding compared to
most other banks in Mongolia due to its large corporate deposit base, a significant portion of which
comprises current accounts, which typically carry a lower rate of interest as compared to individual
savings accounts.
Well-balanced asset portfolio. The Bank strives to maintain a balanced corporate loan portfolio and
has diversified overall credit exposure amongst the corporate, commercial and retail business
segments, thereby reducing the Banks reliance and concentration in any particular sector. The Bank
actively seeks to gain exposure to sectors that it believes it will contribute significantly to the growth
of Mongolias economy in the future, in particular the mining sector and related development.
Prudent risk management and strong corporate governance. The Bank has centralised organisational
and information systems that provide prompt reporting of operating risks, thereby enhancing the
Banks enterprise risk management and internal controls systems. Similarly, the Bank places great
importance on its implementation of sound corporate governance practices and maintains a system
of internal checks and balances and committees, consistent with international best practices, to
support its corporate governance structure. In response to the global financial crisis and other
macroeconomic factors affecting Mongolia, the Banks management increased its efforts in 2009 and
2010 to improve asset quality through enhancing its procedures for approving new loans and
monitoring and collecting existing loans, particularly for corporate customers in the construction
sector. In 2011, the Bank became the first commercial bank in Mongolia to establish an internal and
independent risk management committee to monitor credit, market and operation risks. The Banks
risk management committee is headed by the Chairman of the Banks Board. The Bank also
appointed one independent director to its Board in 2011. The Banks branch managers periodically
review loan usage, business operations of the Banks borrowers and collateral quality.
85
Experienced management team. The Bank has an experienced management team, including members
of its Board, that possesses extensive industry experience in Mongolia and overseas. The Bank
appointed one independent director to its Board in 2011. The management teams ability to provide
strategic direction, execute business initiatives and compete in a highly competitive market is
evidenced by the Banks growth and position in the Mongolian banking sector as well as its prudent
response to the global financial crisis of 2008 and 2009. The average experience of members of its
management team and the Board in the financial services and banking sectors exceeds 20 years, with
certain members of the management and the Board having held senior positions in other leading local
and international financial institutions.
Strategy
The Banks core strategy is to be the nations most profitable financial institution, while maintaining its
leading position as the largest lender to the Mongolian corporate sector and capitalising on its foundation
and reputation in the domestic market to diversify its products and services. The key components of the
Banks strategy to achieve these objectives include:
Consolidating its status as a preferred financial institution for Mongolian corporate customers. The
Bank aims to maintain its leading position in the Mongolian corporate banking sector by continuing
to improve its customer service and the range and quality of its product and service offerings. The
Bank wishes to further broaden its partnerships with international banks expand the banking services
it offers outside its core lending activities, including the development of cash management and
depository services and investment banking services, and use its position to cross-sell other corporate
finance products.
Expanding its services to SMEs in a focused manner. Although the Banks historical focus has been
on large corporate customers, it has increased its efforts to solidify its position as the preferred bank
of Mongolian SMEs by offering a range of loans and deposit products designed to meet the growing
demand for more sophisticated financial products in the Mongolian financial services market. With
its strong reputation and expertise in the Mongolian corporate banking sector, the Bank believes it
will be able to replicate and extend the core competencies of its corporate banking operations to the
SME sector.
Maintaining and strengthening its loan portfolio quality. The Bank intends to maintain and
strengthen its financial condition through rigorous monitoring of and, where possible, by improving
the quality of its loan portfolio. The Bank has implemented numerous initiatives in pursuit of this
strategy, including improvements made in the credit due diligence and loan approval process, the
deployment of a systemised credit monitoring and collection process and advanced training for its
account managers, risk analysts and credit officers. The Bank is committed to a strategy of growing
market share in the credit market without compromising its asset quality and, to that end, closely
monitors its non-performing loan to total loan ratio.
Targeting niche segments of the retail market. Drawing on synergies with its corporate and SME
strategies, the Bank targets the growing financial needs of the employees of its corporate and SME
customers by offering personal banking services such as payroll, remittance and savings products. In
addition, the Bank has also focused its marketing and product development efforts on retail services
for high net-worth individuals, who typically generate higher-margin business and represent better
asset quality as compared to the mass-market retail segment. As the Banks retail platform expands,
it expects such increased scale to enhance its ability to target high net-worth retail clients.
Expanding its deposit base. The Bank strives to manage its competitive cost of funding, increase its
operating margins and maintain its ability to leverage its asset base. To this end, the Bank expects
to continue to enlarge its deposit base by competing with other Mongolian banks to obtain
attractively priced deposits denominated in Tugriks and U.S. dollars in the domestic market. As the
Mongolian economy relies heavily on U.S. dollar pricing for certain goods, many local and foreign
86
corporate and SME customers operating in Mongolia maintain both Tugrik-denominated and U.S.
dollar-denominated deposits as a hedging strategy against inflationary pressures. Moreover, the Bank
believes that its extensive experience in foreign exchange and remittance, together with its
correspondent bank network and reputation for strong financial management, places it in an
advantageous position to attract foreign customers seeking a deposit-taking financial institution in
Mongolia.
Corporate History
The Bank was wholly owned by the Government at the time of its establishment in 1990. In 2002, the Bank
underwent a privatisation process, which resulted in Globull, a consortium owned by Banca Commerciale
Lugano and Gerald Metals Inc., owning the majority of the Banks share capital. In January 2005, the ADB
and IFC subscribed for newly issued shares of the Bank and became the Banks second-largest shareholders
representing 14.5% of the Banks then total issued and outstanding shares. In addition, the ADB and IFC
contributed MNT 9.6 billion to the Banks capital in the form of subordinated debt in 2004. The Banks
minority shareholders, mainly comprised of the Banks employees, were diluted from a 24.0% to a 19.0%
ownership position following a subsequent rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). The ADB and IFC exercised their tag-along rights and sold their shares to US Global, making
it the sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by
Central Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg
holds 100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of
2,760,841 ordinary shares of the Bank representing an 83.5% equity interest.
In February 2012, the Bank sold treasury stock representing 4.78% of its total issued and outstanding
shares to GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc. As at 31
December 2011, US Global Investment LLC held, directly and indirectly through Globull, 73.14% of the
Banks shares with the remaining shares held by minority shareholders. See Principal Shareholders. The
Bank was named the Development Supporting Bank of the Year by the Government in 2011.
On 14 August 2008, the Bank established a wholly owned subsidiary, TDB Capital LLC (TDB Capital),
which provides access to the international capital markets to the Banks corporate, institutional and high
net-worth customers. TDB Capital provides investment banking services such as corporate finance,
research and advisory, securities brokerage and asset management services. TDB Capital obtained an
underwriting and brokerage licence from the Financial Regulatory Commission of Mongolia in March
2011. As at 31 December 2011, its total Government bond trading volume was MNT 105.8 billion
(US$75.9 million). TDB Capital acted as the coordinator for a US$5 million private placement of
subordinated notes issued by the Bank in May 2011. TDB Capital became a member of the Mongolian
Stock Exchange in April 2011 and commenced security trading in May 2011.
The following table sets forth significant milestones achieved by the Bank:
Year
Milestone
1990
1992
1992
1993
1996
2001
2004
2004
2004
2006
2007
2008
2010
87
Year
2010
2010
2010
2011
2012
Milestone
Celebrated its twentieth anniversary as Mongolias longest serving and one of its largest banks
First bank in Mongolia to introduce the Europay, Mastercard and Visa (EMV) chips in credit cards
First Mongolian company to be a repeat issuer in the international capital markets; upsized its US$150
million programme to US$300 million and issued US$175 million notes
TDB Capital, a wholly owned subsidiary of the Bank, became the first to obtain an underwriting and
brokerage licence from the FRC
GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc., acquired 4.78% of the
Banks shares
Business Segments
The Bank organises its principal activities into five segments: corporate banking, treasury activities, retail
banking, SME banking and international and investment banking. The following table sets forth the
operating income (including interest income, net fee and commission income and other operating income
but excluding interest expenses) of each segment, and percentage of each segment to total operating
income, for the periods presented:
Years ended 31 December
2009
2010
2011
(MNT millions)
53,933.8
10,316.9
21,371.9
3,475.0
325.4
%
(MNT millions)
60.3
54,629.2
11.5
29,428.7
23.9
16,943.1
3.9
3,190.3
0.4
405.2
745.6
%
(MNT millions)
51.9
76,654.9
27.9
48,373.3
16.1
37,399.2
3.0
6,135.9
0.4
661.4
0.7
661.1
%
45.1
28.5
22.0
3.6
0.4
0.4
Total .............................................................
89,423.0
100.0
100.0
100.0
105,342.1
169,885.8
Corporate banking
Corporate banking is the core business of the Bank. The Bank provides a wide range of corporate banking
services in Mongolia to approximately 400 leading Mongolian corporate customers and serves
substantially all of Mongolias major commercial business sectors. The Bank classifies a business
customer as corporate where the level of financing it provides to such customer is MNT 1.0 billion (or
its U.S. dollar equivalent) or more in the aggregate rather than basing the classification on the size or
turnover of the underlying business. The Bank aims to be the corporate banking service provider of choice
to its existing customers while, at the same time, seeking to attract new corporate customers. The Banks
corporate banking products and services include corporate lending, trade finance, syndicated lending and
deposit-taking. The Bank also provides its corporate customers with a variety of fee and commission-based
services, such as cash management services and remittances. In 2011, the Bank was named The Best
Mining Sector Financing Bank by the Mining Journal and The Best Contributing Bank in Urban
Development by the Mongolian Ministry of Roads, Transportation, Construction and Urban Development
and the Mongolian National Construction Association.
The Bank restructured its corporate banking activities in February 2007 by dividing the corporate business
unit into three sections: sales, appraisals and monitoring. The Bank believes this new structure makes it
more responsive to its customers needs, enhances its processing efficiency for loan applications, provides
enhanced cross-selling opportunities and supports the implementation of consistent loan documentation
and monitoring.
As at 31 December 2009, the Banks total corporate banking assets totalled MNT 344,406.5 million, which
increased by 7.1% to MNT 368,880.4 million as at 31 December 2010, which in turn increased by 110.3%
to MNT 775,630.6 million (US$556.2 million) as at 31 December 2011.
The growth in the Banks corporate banking business in 2010-2011 was primarily attributable to increased
demand for corporate loans fuelled by growth in the domestic market, expansion of the Banks corporate
customer base, and growth of the businesses of the Banks corporate customers; increases in the Banks
single borrower legal lending limit; the diversification and customisation of the Banks product and service
offerings in accordance with the needs of, and in response to feedback from, customers; the adoption of
enhanced marketing and cross-selling strategies; increases in the prices of fuel and petroleum products and
commodities such as copper, coal and gold; the growth of the commodities industry and the improved
condition of the Mongolian economy in general which has led to the improved financial position of many
88
of the Banks corporate customers. Due to the economic downturn in Mongolia in 2009, demand for
corporate loans fell significantly, which affected the Banks corporate banking business. Growth of the
mining sector and related industries has led to a corresponding increase in demand for corporate loans and
has generally boosted the corporate loan market in Mongolia.
Corporate lending
Corporate lending accounted for MNT 72,455.1 million (US$52.0 million), or 50.5%, of the Banks total
interest income for 2011, making corporate banking the largest contributor to the Banks operating income.
The following table sets forth the contribution to the Banks corporate banking operating income, by type
of corporate banking product, for the periods presented:
Years ended 31 December
2009
2010
2011
(MNT millions)
52,151.4
1,136.7
349.2
296.4
%
(MNT millions)
96.8
52,443.7
2.1
1,802.8
0.6
283.6
0.5
99.1
%
(MNT millions)
96.0
72,455.1
3.3
3,184.1
0.5
881.8
0.2
133.9
%
94.5
4.2
1.1
0.2
Total .............................................................
53,933.7
100.0
100.0
100.0
(1)
54,629.2
76,654.9
Trade finance includes letters of credit and letters of guarantee only, which credit activities are primarily directed to the
Banks corporate customers to finance import and export activities.
The Banks corporate lending activities include providing loan and credit facilities in Tugriks and foreign
currencies, principally U.S. dollars, to corporate clients in Mongolia, overdraft and revolving credit
facilities, investment loans, saving collateralised loans, gold collateralised loans, working capital loans and
commercial mortgages with tenors ranging from six months to seven years. The Banks corporate loans
typically fund its customers imports, general working capital needs and capital expenditure requirements,
with a majority of such loans having maturities of three years or less. As demand for long-term financing
from customers increases, the Bank intends to increase its loan maturity limits accordingly. It is the Banks
policy to ensure that all of its domestic corporate loans are fully secured. The Bank also participates in
international syndicated lending activities. See International Banking.
As at 31 December 2009, the Banks corporate loans amounted to MNT 350,755.4 million, which increased
by 6.2% to MNT 372,606.2 million as at 31 December 2010, which in turn increased by 110.4% to MNT
783,778.4 million (US$562.0 million) as at 31 December 2011. As at 31 December 2009, interest income
from the Banks corporate loan portfolio totalled MNT 52,151.5 million, which increased by 0.6% to MNT
52,443.7 million as at 31 December 2010, which in turn increased by 38.1% to MNT 72,455.1 million
(US$52.0 million) as at 31 December 2011. The increase in corporate lending in 2010 was mainly due to
an increase in the demand for corporate loans driven by the growth in the trading sector. The increase in
corporate lending in 2011 was driven mainly by growth in the mining and corporate trading sectors. The
increase in interest income in 2010 and 2011 was due mainly to increase in corporate lending. As at 31
December 2011, the Bank had a 24.8% market share in corporate lending in Mongolia. The Bank had
15,515, 17,421 and 19,991 corporate customers as at 31 December 2009, 2010 and 2011, respectively.
89
The Bank aims to limit its exposure to each industry sector to 15%-20% of its total loan portfolio. In order
to manage the rapid growth in the mining sector and mining-related industries, the Bank partners with local
and international financial institutions to provide loans to its customers and aims to distribute loans among
mining-related borrowers to prevent loan concentration. The Bank obtains low risk financing from
international banks to provide financing to trading companies and obtains syndicated financing to service
the increase in demand for financing of petrol imports. The following table sets forth the industry
breakdown by amount and percentage of the Banks total corporate loans as at 31 December 2011:
As at 31 December 2011
Industry
247.7
143.8
111.2
104.1
81.3
29.6
23.6
42.5
Percentage of Banks
corporate loan portfolio
31.6%
18.4%
14.2%
13.3%
10.4%
3.8%
3.0%
5.3%
Trade finance
The Bank provides corporate customers with various types of documentary credit instruments, including
import letters of credit, export letters of credit, standby letters of credit, letters of guarantee, collections
and structured transactions. These instruments are designed to provide the Banks corporate customers
with working capital funds and medium term financing with tenors of up to three years. The Bank also acts
as a leading participant in the international trade finance business in Mongolia, and has established
correspondent relationships with over 150 international financial institutions. See International
Banking. The Bank serves high-profile corporate customers in numerous industries, including wholesale
and retail goods, food, energy (primarily related to the import of oil), mining, transportation and
construction. The aggregate amount of credit limits established by major international financial institutions
with the Bank for international trade finance operations amounted to approximately US$177.4 million as
at 31 December 2011 as import activity increased due to a stronger Mongolian economy and increased
mining and infrastructure spending. The Bank handled 48.5% of the trade finance transactions in Mongolia
in 2011.
In August 2006, the Bank became the first Mongolian bank to be included in the Global Trade Finance
Program managed by the IFC. Under this program, the Bank had a credit limit of US$5.0 million for
transactions with tenors of up to three years and was able to expand its trade finance transactions within
an extensive network of countries and banks and enhance its trade finance coverage until 2008. In 2003,
ING Bank N.V. approved a credit facility in favour of the Bank which was increased to =C 11 million in
2011. In 2007, Commerzbank approved a =C 3.0 million credit facility in favour of the Bank which was
increased to =C 6.0 million in 2011.
In April 2009, the Russian Agricultural Bank approved a US$25.0 million interbank credit facility, which
has been successfully utilised for financing imports from Russia.
In March 2010, the Bank launched a trade finance program in cooperation with the ADB pursuant to which
letters of credit and guarantees issued by the Bank were backed by ADB. As at 31 December 2011, the total
trade finance transactions covered by the ADB guarantee amounted to US$7.7 million and total credit line
extended by ADB was US$15.0 million. In 2010, the Bank and Commerzbank signed a Basic Loan
Agreement for =C 15.0 million to foster trade relations between Mongolia and The Organisation for
Economic Cooperation and Development and the European Union countries. The funds are intended to be
used for long-term financing for imports of mining equipment and other products from European countries.
In July 2010, Export-Import Bank of Korea (KEXIM) increased the Banks credit facility from US$5.0
million to US$10.0 million and again to US$20.0 million to facilitate imports from Korea. In December
2010, the Bank and the Industrial and Commercial Bank of China entered into the Export Credit Agreement
to finance imports from China.
90
In March 2011, Export-Import Bank of Taiwan increased the Banks credit facility from US$2.0 million
to US$4.0 million to support the import of machinery and other finished products from Taiwan. The credit
facility was further increased to US$6.0 million in January 2012. In July 2011, the Bank entered into a
facility agreement with Commerzbank for refinancing of letters of credit and telegraphic transfers. In July
2011, the Bank also entered into a Export Credit Agreement with the Agricultural Bank of China to finance
imports from China. The Bank has also entered into loan agreements with Bayarn LB, BHF Bank and AKA
Bank to provide financing covered by export credit agencies to its customers. These increased direct and
uncovered lines of credit have expanded the Banks trade finance capacity both in terms of size and
geographic coverage. At present, the Bank is actively utilising these credit limits for its trade finance
transactions. The Bank was named the Best Trade Finance Bank in Mongolia for 2011 by the Global
Trade Review.
For 2009, the total transaction volume of the Banks trade finance business amounted to MNT 123,279.4
million, which increased by 59.1% to MNT 196,181.3 million for 2010, which in turn increased by 58.0%
to MNT 309,974.9 million (US$222.3 million) for 2011. For 2009, fee and commission income derived
from the Banks trade finance business totalled MNT 1,244.2 million, which increased by 56.4% to MNT
1,945.6 million for 2010, which in turn increased by 73.4% to MNT 3,373.0 million (US$2.4 million) for
2011. The Bank believes that the increase in the volume of trade finance activities between 2009 and 2010
was largely attributable to global economic recovery and improved financial performance of the Bank. The
increase in volume of trade finance activities between 2010 and 2011 was largely due to an increase in
imports and increased spending in the mining and infrastructure sectors.
Corporate deposit taking
The Bank is one of the leading banks in the corporate deposit-taking market in Mongolia. As at 31
December 2009, the Banks corporate deposit base totalled MNT 289,285.8 million, which increased by
64.8% to MNT 476,827.7 million as at 31 December 2010, which then increased by 18.8% to MNT
566,451.7 million (US$406.2 million) as at 31 December 2011. Corporate deposits represented 44.2% of
the Banks customer deposit base as at 31 December 2011.
The increase in the Banks corporate deposits from 31 December 2009 to 31 December 2011 was largely
due to a stronger Mongolian economy and improved financial performance of the Bank with 77.8% of the
Banks corporate deposits as current accounts. This provides a lower cost funding base than that of certain
competitors that rely more heavily on the retail markets for term deposits.
The Banks corporate deposit products consist of deposits, current accounts and escrow accounts. The
Bank maintains its policy of low fees and commissions for its current account related services such as
foreign and interbank remittances and cash withdrawals, and provides flexible currency rates with
conversion features.
Cash management services
The Bank provides various fee-based cash management services to its corporate customers, including wire
transfer, cash collection, processing of salary and other benefit payments and clearance of cheques. The
Bank is the first bank to provide cash management services in Mongolia and believes that it is a leading
supplier of foreign currency bank notes in Mongolia. For 2009, the Bank generated a fee and commission
income of MNT 169.4 million from its cash management services activities, which increased by 20.5% to
MNT 204.1 million generated for 2010, which in turn increased by 42.6% to MNT 291.1 million (US$0.2
million) for 2011. Such fee increase resulted primarily from improved cash collection. As at 31 December
2011, the Banks total bank notes import was approximately US$213.9 million.
Remittances
Since its establishment, the Bank has played a leading role in the international settlement and payment
system of Mongolia. The Bank generates revenue from remittances by charging a fee for each transaction.
These charges vary depending upon the service required from the Bank and the country of origin of the
remittance. The Bank also generates a margin from the daily conversion of inward foreign exchange into
local currency. Remittances are carried out on behalf of the Banks corporate customers in Mongolia.
91
For 2009, the Bank generated operating income of MNT 1,301.7 million from its corporate remittance
activities, which increased by 7.5% to MNT 1,399.5 million for 2010, which in turn increased by 43.6%
to MNT 2,009.8 million (US$1.4 million) for 2011 demonstrating the strengthening Mongolian economy
and increased economic activity primarily related to the mining sector and business sectors supporting
such operations.
Treasury activities
The Banks treasury activities include deposits with financial institutions, securities trading and liquidity
management, foreign exchange trading and gold and silver trading. In September 2008, the Bank
substantially ceased its proprietary trading operation in securities, foreign exchange and gold and silver
trading (apart from holding minimal positions for its own account from time to time to meet or anticipate
customer needs). Although the Bank still handles transactions in these areas, the primary focus of such
transactions is to meet client needs rather than directly generate revenue for the Bank. For 2010, income
generated from treasury activities accounted for MNT 29,428.6 million, or 27.9%, of the Banks total
operating income and accounted for MNT 48,373.4 million (US$34.7 million), or 28.5%, of the Banks
total operating income for 2011. The following table sets forth the contribution to the Banks total treasury
activity operating income, by type of treasury activity, for the periods presented:
Years ended 31 December
2009
2010
(MNT millions)
(MNT millions)
2011
%
(MNT millions)
6,317.6
(1,269.5)
5,017.5
372.6
(317.0)
195.7
61.2
(12.3)
48.6
3.6
(3.0)
1.9
15,466.7
9,434.7
4,278.6
43.9
40.6
164.1
52.6
32.1
14.5
0.1
0.1
0.6
29,385.4
13,339.3
4,559.4
703.7
2.1
383.5
60.7
27.6
9.4
1.5
0.8
Total .............................................................
10,316.9
100.0
29,428.6
100.0
48,373.4
100.0
The Bank was the largest bank in Mongolia in terms of foreign currency-denominated assets as at 31
December 2011 according to the Bank of Mongolia. The Bank was the leader in money-market activities
as at 31 December 2011 and held a market share of 28.2% of the Mongolian money market as at 31
December 2011. The Banks total portfolio of Government bonds was MNT 103.3 billion (US$74.1
million) and total portfolio of Bank of Mongolia bills was MNT 199.3 billion (US$142.9 million), as at
31 December 2011. The Bank is also cooperating with a branch of ING Bank N.V. to implement an
electronic trading and settlement platform to facilitate online trading of foreign exchange for its customers.
As at 31 December 2009, the Banks treasury assets amounted to MNT 273,095.3 million, which increased
by 117.5% to MNT 593,867.7 million as at 31 December 2010, which then decreased by 28.5% to MNT
424,457.7 million (US$304.4 million) as at 31 December 2011. The increase in treasury assets in 2010 was
due largely to prepayment of the Banks international debt obligations. The decrease in treasury assets in
2011 was due to an increase in money market assets related to an increase in the Banks loan portfolio.
Deposits with financial institutions
As at 31 December 2011, the Bank had placed local and foreign currency denominated deposits with
various international banks and financial institutions totalling approximately US$50.2 million, which had
a maturity of three to 182 days. As at 31 December 2011, the average maturity was 33 days and such
deposits had interest rates ranging from 4.75% to 6.35%, averaging 5.05%.
92
2010
2011
Term
(days)
7
4
(MNT
millions)
33,082.0
799.7
Yield
(percentage)
10.00
5.00
Term
(days)
7
(MNT
millions)
135,834.0
Yield
(percentage)
11.0
Term
(days)
7
5
3
(MNT
millions)
69,928.6
61,337.4
36,966.1
Yield
(percentage)
12.25
12.25
11.00
(Repurchase
agreements)
84
51,108.4
11.02
84
86,432.9
9.04
84
196
49,021.8
19,010.5
16.25
13.94
Total
84,190.4
222,266.9
199,298.3
Total
(including
Repurchase
agreements)
84,990.1
222,266.9
236,264.4
The following table sets forth details of the Banks trading securities in Government bonds:
As at 31 December
2009
2010
WA Yield
(percentage)
Term
days
365
776
(MNT
millions)
5,000.0
28,121.0
2011
Term
days
(MNT
millions)
WA Yield
Term
(percentage)
days
7.2
365-366
8
436-546
730-733
744-801
1,095-1,097
(MNT
millions)
33,200.0
5,000.0
16,063.8
43,568.9
5,500.0
Total
33,121.0
103,332.7
Total
(including
(Repurchase
Agreements)
33,121.0
103,332.7
WA Yield
(percentage)
7.87
7.58
8.41
8.37
8
Since early 2000, the Bank has offered a deposit-backed margin trading facility for individual and
corporate customers. Margin trading is a form of capital-based investment for which the Bank serves as
an agent for principal clients trading on international foreign exchange and commodities markets. To take
advantage of the Banks margin trading facility, a client must pledge their account with the Bank as
collateral and the Bank charges the income from the investment as a fee for the service. The Bank
introduced a new margin trading product in 2007, whereby customers can pledge their gold accounts,
regardless of currency, as a collateral account to conduct trading by leveraged funds in foreign markets,
which allows customers to generate more trading profits.
The Banks securities trading assets (consisting of Bank of Mongolia bills and Government bonds) totalled
MNT 84,990.1 million as at 31 December 2009, which increased by 200.5% to MNT 255,387.9 million as
at 31 December 2010, primarily due to reduced lending by the Bank, which subsequently increased by
18.5% to MNT 302,631.0 million (US$217.0 million) as at 31 December 2011. The growth in the Banks
securities trading business in 2011 is largely due to implementation of short-term and investment
strategies.
93
94
The Banks retail banking products and services include retail lending (such as mortgages, small business
loans and consumer loans), deposit-taking and debit and credit card activities. Although the Bank has
historically also focused on corporate lending activities, which remains its core business area, in recent
years the Bank has expanded its retail banking business, recognising the potential for increased revenues,
particularly from small businesses and high net-worth customers.
The Bank is one of the leading banks in the retail deposit-taking market in Mongolia. As at 31 December
2011, deposits from retail customers were MNT 710.8 billion (US$509.7 million), representing an increase
of 60.4% compared to 2010.
The Bank is continuing to develop a private banking service for owners, executives or employees of
corporate customers of the Bank and other high net-worth individuals. As at 31 December 2011, the Bank
had approximately 1,000 private banking customers, who made deposits with the Bank in money-market
term deposit instruments denominated primarily in Tugriks and U.S. dollars. As at 31 December 2011,
deposits generated by private banking amounted to MNT 86,569.8 million (US$62.1 million) and
accounted for 12.2% of the Banks retail deposit base. As at 31 December 2009, the Banks retail deposit
base totalled MNT 290,237.0 million, which increased by 52.7% to MNT 443,117.0 million as at 31
December 2010, which in turn increased by 60.4% to MNT 710,844.3 million (US$509.7 million) as at 31
December 2011. As at 31 December 2011, retail deposits accounted for 55.6% of the Banks total deposit
base. The Bank believes this growth was largely due to an increase of consumer confidence in the
Mongolian banking sector.
To provide convenient means of completing transactions to its customers, the Bank currently operates one
of the largest ATM network in Mongolia, comprising ATMs strategically located at its branches and other
convenient locations, of which 79 are situated in Ulaanbaatar, seven in Erdenet, seven in Darkhan and the
remaining in rural areas. The Banks ATM network accepts both domestic and international cards and
accounts for approximately 12% of all ATMs in Mongolia, according to the Banks internal data. The Bank
charges domestic interchange fees for accepting cards from the Bank of Mongolias switching centre and
also a reimbursement fee for international transactions. The Bank believes that its ATM services assist it
in attracting new customers and increasing cross-selling opportunities. As a result, the Bank intends to
continue to upgrade and expand its ATM network in the future.
In 2004, the Bank was the first in Mongolia to launch a 24-hour mobile banking service, which enables
its customers to access various services, including balance enquiries, fund transfers, making requests for
cheque books and bank statements, reporting lost and stolen cards, MoneyGram transfers, American
Express transactions and access to customer care. The Banks telephone banking service, which is operated
through its in-house call centre, is available to all customers of the Bank. As at 31 December 2011,
approximately 3,750 customers had registered for the mobile banking service. The Bank was also the first
in Mongolia to offer electronic billing services to its customers.
The following table sets forth the contribution to the Banks retail operating income, by type of retail
banking product, for the periods presented:
Years ended 31 December
2009
2010
2011
(MNT millions)
10,139.6
2,366.6
1,340.4
7,470.3
%
(MNT millions)
47.4
12,293.8
11.1
2,207.6
6.3
1,428.1
35.2
1,013.6
%
(MNT millions)
72.6
29,734.0
13.0
3,385.6
8.4
2,030.0
6.0
2,249.6
%
79.5
9.1
5.4
6.0
Total .............................................................
21,371.9
100.0
100.0
100.0
16,943.1
37,399.2
The Banks retail banking assets were MNT 69,646.5 million as at 31 December 2009, which increased by
53.0% to MNT 106,574.2 million as at 31 December 2010, which in turn increased by 210.3% to MNT
330,662.3 million (US$237.1 million) as at 31 December 2011. The increase in the Banks retail banking
assets in 2011 was a result of increase in lending operations.
95
2010
2011
(MNT millions)
26,724.8
9,936.1
9,049.1
496.3
3,370.2
2,529.5
112.2
1,116.5
%
(MNT millions)
50.1
32,136.4
18.6
29,631.6
17.0
12,606.0
0.9
971.8
6.3
5,142.4
4.8
3,432.3
0.2
145.3
2.1
1,590.0
%
(MNT millions)
37.5
137,099.3
34.6
74,761.3
14.7
46,072.2
1.1
11,732.4
6.0
9,696.9
4.0
6,944.5
0.2
4,369.4
1.9
4,262.5
%
46.5
25.3
15.6
4.0
3.3
2.4
1.5
1.4
Total .............................................................
53,334.7
100.0
100.0
100.0
85,655.8
294,938.5
For 2009, interest income from the Banks retail loan portfolio totalled MNT 10,139.6 million, which
increased by 21.2% to MNT 12,293.8 million for 2010, which in turn increased by 141.9% to MNT
29,734.0 million (US$21.3 million) for 2011. The increase in the Banks retail lending in 2011 was a result
of competitive product pricing and branch-based sales teams instructed to promote retail lending products
to the Banks existing customers.
The Bank offers Mongolian residents mortgage housing loans, which can be used for the purchase or
construction of residential property as well as subsequent renovations. The Bank believes the competitive
interest rates and larger loan sizes associated with this product have been attractive to retail customers. The
Bank also offers the option of an adjustable/variable interest rate, which during a period of declining
interest rates has been attractive to customers and has enabled the Bank to control its lending margins as
compared to long-term fixed rate products. The Banks evolving strategy has been to market its mortgage
loans first to employees of corporate customers and subsequently to target salaried or self-employed
high-income individuals. The majority of customers drawing a mortgage loan from the Bank are existing
retail customers.
The Bank also believes that one of its competitive strengths in this business segment is its ability to
provide flexible mortgage products (such as multicurrency loans) with tenors of up to a maximum of 15
years. As at 31 December 2011, the Bank had a retail mortgage loan portfolio of MNT 137.1 billion
(US$98.3 million) comprising approximately 4,308 borrowers and representing 46.5% of the Banks total
retail loan portfolio. The NPL ratio for mortgage loans was 0.37% in 2011. The Bank requires security for
all residential mortgage loans in the form of a first ranking fixed charge on the property. For 2011, the
average amount of a mortgage loan was MNT 31.8 million (US$22,804.0) and the average rate of interest
charged is 14.1% per annum for mortgages denominated in Tugriks and 12.6% per annum for mortgages
denominated in U.S. dollars. The average market price of properties financed by mortgage loans varies:
in Ulaanbaatar, the average is approximately MNT 76.8 million (US$55,074.0); in Erdenet, the average is
approximately MNT 48.0 million (US$34,421.0); and in Darkhan, the average is approximately MNT 34.2
million (US$24,525.0). Approximately 82% of the Banks mortgage loan customers are based in
Ulaanbaatar. The maximum loan-to-value ratio for mortgage loans is set at 70% for all borrowers. As at
31 December 2011, the Banks loan-to-value ratio was 61.4%.
The Bank has issued salary cards to majority of its customers in connection with its payroll services
provided to corporate clients, particularly in the mining industry. The Bank directly deducts the instalments
due to it from the customers account every month. The Bank provides special consumer credit products
to the salary card holders, including salary loans and credit lines. As at 31 December 2011, the Bank had
issued approximately 96,000 salary cards.
96
Card activities
The Bank issues debit cards and credit cards from Visa and Mastercard to its retail customers. In 2011, the
Bank issued approximately 49,000 new cards. As at 31 December 2011, the Bank had issued approximately
160,000 bank cards, of which approximately 159,000 were Visa and Mastercard debit cards and
approximately 1,000 were Visa and Mastercard credit cards, comprising approximately 36.0% of the total
number of bank cards in issue in Mongolia according to the Banks internal data. As at 31 December 2011,
the total number of the Banks cardholders exceeded 160,000. The Banks credit card portfolio increased
approximately 82.3% in 2011, as measured by the number of cards issued, generating a 53.4% increase in
card service fees and commissions for 2011. Consistent with international trends in card security, the Bank
began issuing new cards with EMV chips in 2010 to improve security and decrease fraudulent transactions.
In 2010, the Bank launched the latest e-commerce solution with Verified by VisaTM and MasterCard Secure
Code TM to make shopping online safer for its cardholders.
The Bank remains one of a few financial institutions in Mongolia allowing its merchant partners to accept
transactions from any of the major international card issuers: Visa, MasterCard, JCB and Discover and
Diners Club International. The Bank has focused on improving and expanding its service quality by
establishing a number of co-branding initiatives with leading Mongolian corporations, including the
issuance of co-branded cards with Mobicom Co. Ltd., a leading domestic mobile operator, Magnai Trade
Co. Ltd., one of Mongolias largest petrol retailers and Oriflame Co. Ltd., an international cosmetics
company.
In 2010, the Bank, together with Bank of Mongolia and the national Clearing and Switching Center,
established a uniform electronic terminal network for its ATMs and POS terminals in order to provide
better service quality to its customers and merchants. In 2012, the Bank was the first to launch loyalty
cards exclusively for its female customers which offer a 5.0% to 10.0% discount at select merchants. The
Bank also issued co-branded cards in partnership with Magnai Trade LLC and M-Oil LLC to award bonus
points on purchases that can be redeemed for discounts. The Bank also introduced gift cards in 2011.
In 2010, the Bank launched the international EMV chip cards which is a global safety standard for cards.
The Bank believes EMV cards will reduce fraudulent card transactions and provide users with increased
security. The Bank has also developed a fraud detection tool designed to analyse card operations to detect
fraudulent transactions, which is expected to increase security and efficiency and reduce operating costs.
The Banks card business represents a major source of fee and commission income and provides significant
cross-selling opportunities. As at 31 December 2011, the Banks total outstanding overdraft and credit card
advances amounted to MNT 1,550.1 million, which represented 0.5% of the Banks retail loan portfolio.
For 2009, income from bank card fees and commissions totalled MNT 2,366.6 million, which decreased
by 6.7% to MNT 2,207.6 million for 2010, which in turn increased by 53.4% to MNT 3,385.6 million
(US$2.4 million) for 2011. The growth in bank card fees and commissions was due to greater card usage
driven primarily by an increase in the number of cards in issue and by the installation of new ATMs,
increased number of points of sale and the success of the sales and marketing campaigns conducted by the
Bank.
Retail remittances and cheques
Similar to its corporate remittance service, the Bank also provides remittance services to retail customers.
The Bank accepts all major cheques issued by reputable banks and financial institutions (such as The
Hongkong and Shanghai Banking Corporation Limited, American Express, Thomas Cook and JCB
International) and customers can send and receive money via MoneyGram and SWIFT. In November 2007,
the Bank received approval from American Express Travel Related Service Company Inc. to sell American
Express U.S. Dollar Gift Cheques in Mongolia. This product is currently available only in the United
States, Canada and Mongolia.
In 2008, the Bank was the named the Best Co-operational Agent in Asia-Pacific Region by MoneyGram
International Company. The Bank also recently became the first in Mongolia to begin multi-currency
payouts from MoneyGram and also began receiving Euro transfers from MoneyGram. The Bank was also
the first in Mongolia to offer printed forms for money transfer to its customers. In September 2009, the
Bank entered into a cooperation agreement with Hana Bank of Korea and PayOne LLC to introduce the
PayEasy remittance service and, in August 2009, the Bank launched a Swedish krona remittance service.
97
In 2011, the Bank generated fee and commission income of MNT 2,030.0 million (US$1.5 million) from
retail remittance and checking transactions, compared to MNT 1,428.1 million for 2010. The growth in fee
and commission income was primarily due to increased remittances to foreign banks and MoneyGram
transfers as a result of increase in transaction volumes driven mainly by reduced fees applicable to
MoneyGram transfer from April 2011. The following table sets forth the fee and commission income of
the Banks remittance and checking activities by type for the periods presented
Years ended 31 December
2009
2010
2011
(MNT millions)
942.7
249.5
26.1
82.1
40.0
%
(MNT millions)
70.3
1,034.8
18.6
253.7
2.0
37.8
6.1
69.9
3.0
31.9
%
(MNT millions)
72.4
1,501.6
17.7
298.1
2.8
59.6
4.9
133.1
2.2
37.6
%
74.0
14.6
3.1
6.5
1.8
Total .............................................................
1,340.4
100.0
100.0
100.0
1,428.1
2,030.0
Internet banking
The Bank has a well-developed Internet banking platform, with a two-step authentication security system,
which it believes is an essential component of its retail banking and corporate businesses as it provides
customers with greater convenience and improved access to the Banks services as well as reducing costs
and branch traffic. The Banks Internet banking services are accessible 24 hours a day, seven days a week,
and allow customers to carry out a wide variety of transactions, including inter-domestic bank payments
and foreign remittance through SWIFT network to companies and individuals, monitoring of account
balances online, transferring funds between accounts, ordering bank cards, making standing order and bill
payments and extending the term of savings accounts. As at 31 December 2011, approximately 1,421 of
the Banks customers had registered for its Internet banking services. Since 2011, the Bank charges service
fees to its customers for Internet banking services. Internet banking money transferring service fees
amounted to MNT 75.4 million in 2011.
SMS banking
The Bank has operated a short messaging service (SMS) mobile telephone-based banking facility for its
customers since January 2005 in conjunction with Mobicom Co. Ltd., Unitel LLC and Skytel LLC. The
Banks SMS banking service was launched primarily for the convenience of its retail customers and
provides instant access to account balance information and currency exchange information. As at 31
December 2011, approximately 65,599 of the Banks customers had registered for its SMS banking facility,
which represented approximately 23.6% of the Banks entire retail customer base.
Electronic billing service
The Bank was the first in Mongolia to launch an electronic billing service in partnership with leading
Mongolian telecommunications companies such as Mobicom Co. Ltd, Skytel LLC, Unitel LLC, Citinet
LLC, Ulusnet LLC, Tunamal Com LLC, MCS Com LLC and G-mobile LLC. The Banks electronic billing
service provides greater flexibility and convenience to customers and enables them to pay bills from
current or saving accounts. As at 31 December 2011, approximately 6,946 of the Banks customers had
registered for its electronic billing service.
SME banking
The Bank identified the SME sector as a business segment with potential for high margins and rapid
growth and as a significant source of future corporate customers. The Bank classifies a business customer
as an SME where the level of financing it provides to that customer is between MNT 150.0 million and
MNT 1,000.0 million, rather than basing the classification on the size or turnover of the business itself.
The SME Banking Department seeks to develop new revenue opportunities and new product offerings to
service the needs of this segment, while adhering to a better structured and customised lending policy. One
of the main objectives of the SME Banking Department is to assist SME clients to progress and mature
into the Banks corporate banking portfolio as their credit quality and scale increases. Since establishing
the SME Banking Department in January 2006, the Bank has designed a range of banking products and
98
services for SMEs similar to those offered generally under its corporate banking umbrella, but tailored to
meet the needs of SME customers using financing tools available in Mongolia. The Banks SME products
include a commercial mortgage product pioneered in Mongolia by the Bank. The maximum loan-to-value
ratio of a commercial mortgage is 80.0% as compared to 70.0% for residential mortgages.
Some of the Banks SME products and service initiatives include the SME Toolkit website, which the
Bank hosts in cooperation with IFC. The SME Toolkit website serves as a online portal through which
SMEs receive free professional advice on business issues, such as the planning and management of
businesses, financial accounting, the development of sales and marketing policies.
The Bank has been committed to offering competitive terms to its SME customers across a wide variety
of commercial sectors and has deepened its cooperation with the World Bank, Kreditanstalt fr
Wiederaufbau (KfW) and the Japan International Cooperation Agency (the JICA) so as to continue to
offer its customers low interest loans with funds provided by these institutions. In addition, the Bank has
worked with the Mongolian Ministry of Food, Agriculture and Light Industrys fund for promoting SMEs
to coordinate low interest project loans funded by the Ministry.
For 2011, the SME sector accounted for MNT 6,135.9 million (US$4.4 million), or 3.6%, of the Banks
total operating income. As at 31 December 2010, the Banks loan portfolio extended to the SME sector was
MNT 20,208.5 million which increased by 209.5% to MNT 62,534.8 million (US$44.8 million) as at 31
December 2011. For 2010, interest income from the Banks loan portfolio extended to the SME sector
totalled MNT 3,105.1 million, which increased by 93.4% to MNT 6,006.5 million (US$4.3 million) for
2011, at an average interest rate of 14.5% per annum. The increase in the Banks SME loan portfolio from
31 December 2010 to 31 December 2011 was primarily due to an increase in financial support from
developed countries.
International banking
The international banking department of the Bank covers three main areas of business: correspondent
banking and establishing relations with international financial institutions; nostro account management and
establishing trade finance lines; and syndicated lending. The Bank provides import, stand-by and revolving
letters of credit and guarantees to its customers to support cross border transactions. In 2010 and 2011,
approximately 57.0% and 48.5%, respectively of Mongolias trade finance related transactions were
implemented by the Bank according to the Banks internal data.
In 2011, income from the Banks international banking activities totalled MNT 661.4 million. As at 31
December 2011, the Banks trade finance facility was US$222.3 million comprising of US$74.1 million
import-related letters of credit, US$57.3 million export-related letters of credit, US$86.6 million of foreign
and domestic guarantees and US$4.0 million of import collections. The total amount of the Banks
incoming remittances for 2009, 2010 and 2011 was US$1.2 billion, US$2.1 billion and US$2.7 billion,
respectively. The total amount of the Banks outgoing remittances for 2009, 2010 and 2011 was US$0.9
billion, US$1.3 billion and US$2.5 billion, respectively.
As at 31 December 2011, the Bank also has credit lines with 25 major international banks and financial
institutions including KEXIM, Export-Import Bank of Taiwan, Commerzbank AG, Atlantic Forfaitierungs
AG, ING Bank N.V., Industrial and Commercial Bank of China and Baoshang Bank, which support the
services the Bank provides to its customers that are in the business of importing products from Korea,
Taiwan, Europe and China. The Bank also began a trade facilitation program managed by ADB in 2010.
Total borrowings from international financial institutions increased from US$29.4 million in 2010 to
US$70.3 million in 2011.
The Bank has direct correspondent relationships with more than 150 counterparties located in Europe,
North America and Asia, including Standard Chartered Bank, HSBC Bank N.A., Citibank N.A., Bank of
Tokyo-Mitsubishi UFJ Ltd., Commerzbank AG, Credit Suisse, Australia and New Zealand Banking Group
Limited, Euroclear Group, Bank of China (Hong Kong) Limited and ING Bank N.V..
Currently, the Bank maintains 38 nostro accounts in 14 currencies at 27 top rated foreign banks in 16
different countries. This enables the Bank to carry out payments in all the major currencies and to receive
up-to-date information online regarding the movement of funds in the accounts. The Bank is also a member
of SWIFT.
99
The Bank has on-lending programmes with the World Bank, ADB, KfW, JBIC, Export-Import Banks of
Taiwan and Korea, Commerzbank and Russian Agricultural Bank. These are instrumental in providing long
term financing to the Banks SME and private sector clients.
The Bank has implemented the Credit Program for Small and Medium Sized Enterprises and Promotion
of the Financial Sector II program in partnership with KfW bank for over 14 years. In 2011, Bank was
able to accumulate =C 605,530.0 for three sub-loans. As at 31 December 2011, the total outstanding loan
amount was MNT 3,457.6 million (US$2.5 million).
In 1999, the Bank entered into a subsidiary loan agreement with the World Bank through the Mongolian
Ministry of Finance to finance sub-loan under the Private Sector Development Credit program. Under
the second phase of the program, the Bank entered into a subsidiary loan agreement with the World Bank
to finance sub-loans. Within the World Bank projects, the Bank implemented technical support projects to
improve the knowledge and qualification of its staff. It also developed a training assistance program
approved and financed by the World Bank. As at 31 December 2011, the total outstanding loan amount was
MNT 6,674.6 million (US$4.8 million).
In 2006, the Bank entered into a loan financing agreement with Japan International Cooperation Agency
(JICA) through the Mongolian Ministry of Finance to finance borrowers under the Two-Step Loan
Project for small and medium scale enterprises development and environmental protection program. In
2011, the Bank was re-selected as a participating bank for the second phase of the program. As at 31
December 2011, the total outstanding loan amount was MNT 6,640.1 million (US$4.8 million).
The Bank entered into a finance agreement with ADB under which it can borrow upto US$11.0 million
from ADB through the Mongolian Ministry of Finance under the Agriculture and Rural Development
Project to provide loans to customers to finance the cost of goods, works and consulting services required
to carry out value chain development sub-projects. In 2011, the total funding received was MNT895.0
million and the total outstanding loan amount was US$85,482.0.
Syndicated lending
The Bank was the first in Mongolia to offer syndicated loan facilities and partners with international and
domestic financial institutions to syndicated loan facilities to its corporate customers particularly, in the
petroleum and mining sectors. The Bank is the only bank in Mongolia to have arranged syndicated loan
financing denominated in U.S. dollars as well as Tugriks with international financial institutions for MNT
58.0 billion and US$171.2 million since 2005. Initially, the Bank participated in international syndicated
lending activities, primarily aimed at providing primary and secondary syndicated loans, arranged on the
international market, to banks in countries comprising the Commonwealth of Independent States but has
not participated in such syndication since 2008. The Bank continues to arrange, together with other foreign
banks, syndicated transactions for its local corporate customers when such customers have required loans
above the single borrower exposure limits of the Bank. In 2011, the Bank arranged a total of four
syndicates denominated in U. S. dollars as well as Tugriks, with an aggregate transaction value of US$65.0
million and MNT 50.0 billion on behalf of clients. The Bank arranged a US$14.2 million syndicated loan
to the MSE along with five other local commercial banks.
Investment banking
Investment banking is one of the main areas of the Banks planned future growth and is part of the Banks
strategy to diversify its overall business portfolio. The Bank has used its leading position and expertise in
the industry to provide this new area of client service by graduating from basic service types to more
diversified investment banking products.
100
In January 2007, the Bank established its US$150.0 million Euro Medium Term Note Programme, which
was subsequently increased to US$300.0 million (the 2007 Programme), and issued US$75.0 million of
senior notes bearing interest at a rate per annum of 8.625%, due 2010, which represented the first issuance
of international debt securities from an issuer in Mongolia. The issuance was repaid in full in January
2010. The Bank was the first Mongolian issuer of debt securities in the international capital markets.
To diversify its product and to leverage its strong corporate relationships in Mongolia, the Bank launched
its investment banking operations in 2007. As part of its equity securities investment activities, the Bank
acquired equity securities in certain foreign financial institutions in November 2007. The continued
downturn in the global financial services sector caused the Banks Asset and Liability Committee
(ALCO), consistent with its internal risk management procedures, to convene a meeting in January 2008
to evaluate these positions. The ALCO decided to close these positions and recognise a net investment loss
of approximately MNT 3,000.0 million (US$2.2 million) and which resulted in the Bank ceasing equities
investment from January 2008.
In August 2007, as part of the Banks overall strategy, the Bank established an investment banking
department to introduce and offer investment banking products to the Mongolian market, in particular, to
leading corporations in the countrys key economic sectors, and to attract funds from foreign capital
markets.
In 2008, following its belief that there is significant potential in the local Mongolian capital markets, the
Bank separated its investment banking department formed TDB Capital as its wholly owned subsidiary.
TDB Capital provides investment banking services such as corporate finance, research and advisory,
securities brokerage and asset management services. The Bank is the first Mongolian bank to establish an
investment banking subsidiary, TDB Capital which obtained underwriting and brokerage licences from the
Financial Regulatory Commission of Mongolia in March 2011. TDB Capital acted as the coordinator for
a US$5 million private placement of subordinated notes issued by the Bank in May 2011. TDB Capital
became a member of the Mongolian Stock Exchange in April 2011 and commenced security trading in May
2011. The Bank plans to leverage its international banking experience in the Mongolian markets to provide
a gateway for its investment banking business.
In October 2010, the Bank launched an issue of US$175.0 million notes of which US$150.0 million were
senior unsecured notes and US$25.0 million were subordinated notes bearing interest at the rate per annum
of 8.500% and 12.500%, respectively, under its 2007 Programme. The proceeds from the issuance of the
notes were used to increase the Banks funding and capital base. The Bank was named Foreign Investment
Envoy by the Foreign Investment and Foreign Trade Agency of Mongolia in 2011.
101
Organisational Chart
The following chart sets forth the organisational structure of the Bank as at 31 December 2011:
Supervisory
Board
Shareholders
meeting
Audit
Committee
RGB
Risk
Committee
Executive
Committee
President
Asset Liability
Committee
CEO
General Audit
Unit
Internal Audit
Department
Chief Auditor
Administration &
HR Department
Special Audit
Unit
HR Unit
Board of
Directors
Credit
Committee
Product
Development
Committee
Corporate
Banking
Department
International
Banking
Department
Marketing
Department
Mining
Department
Retail Banking
Department
Branch
Management
Department
Branches
Customer
Service
Unit
Risk Management
Department
Loan
Administration
Unit
Operational Risk
Management
Unit
Treasury
Department
Trading
Unit
Legal Department
Corporate
Security
Department
Special Asset
Unit
Interbank
Settlement Unit
Trade Finance
Settlement Unit
General Affairs
Unit
Deputy CEO
Sub-credit
Committee
Card
Management
Department
Customer
Information
Unit
Deputy CEO
Tender
Committee
Deputy CEO
Financial
Management &
Controlling Department
Deputy CEO
Operational Risk
Committee
Deputy CEO
Ethics
Committee
Treasury Trading
Settlement Unit
IT Department
Settlement Unit
Branch Network
The Banks business activities are conducted principally through its branch network in Mongolia under
supervision from its head office. The Banks branches are the first and most frequent point of contact for
its customers. Each branch conducts marketing research in their respective region, seek out new business
opportunities and meet with potential customers. Therefore, in order to deliver the best possible services,
the Bank has staffed its branches with employees who have undergone training at the head office and who
are also familiar with the local region and its customers. The Bank operated a network of 30 branches in
Ulaanbaatar, mainly in districts with relatively high concentrations of business activities and population,
and 12 branches in rural areas, which are located in close proximity to the road and railway networks as
at 31 December 2011. The Bank currently has approximately 345 employees working at its branches in
Ulaanbaatar and 150 employees working in its branches in the rural areas. The Bank tailors its services to
match customer demand in each market segment. For example, its branch in the Kharkhorin area which is
located in a marketplace offers a variety of loan products to small business owners in the vicinity. The
Banks branches in rural and semi-urban areas offer specialised collateral criteria to its lower income
earning customers.
102
In addition to its branches, the Bank operates the Private Banking Centre and the Card Service Centre in
Ulaanbaatar, and five settlement centres, which are located in rural areas. In September 2010, the Bank
opened two branches in the main districts of Ulaanbaatar, Sukhbaatar and Bayanzurkh. The Bank
periodically reviews the profitability, effectiveness and potential of the existing branches and 16 new
branches were opened in 2010 and 2011. The Banks strategy for branch coverage focuses on districts with
a higher population and more economic activity, mainly Ulaanbaatar and other major cities such as
Darkhan and Erdenet as well as locations along the road and the railway networks and areas with strategic
mining deposits such as Oyu Tolgoi, Tavan Tolgoi and Mardai. Future branch expansion will focus on
broader product distribution with improved efficiency through quality and strategic branch coverage.
The Bank seeks to expand the number of physical contact points available to customers through the dual
strategy of opening more branches and by cooperating with other Mongolian banks to allow customers to
receive the Banks products and services at the branches of those banks. In May 2010, the Bank launched
an integrated card payment clearing system with Khan Bank, Capital Bank, Ulaanbaatar City Bank and
Savings Bank to allow cardholders of each bank to make card payments at any point of sale terminal
operated by any other member bank. The Bank intends to continue to expand its branch network through
the addition of branches and settlement centres in strategic locations, based upon considerations relating
to growth potential, profitability, productivity and compatibility with its general strategy.
The Bank is also improving its alternative client contact points by building up its call centres and its
electronic banking network, which are cost effective and efficient options for customers to access the
Banks products and services.
Funding
The Banks primary source of the funding is derived from the current and deposit accounts of its corporate
and retail customers. Retail customers maintain current accounts in several major currencies. The Bank
also provides alternative deposit products such as term deposits, deposits with advanced interest payment
and savings accounts in both local and foreign currency. For its corporate customers, the Bank provides
several products such as corporate time deposits and escrow accounts. In 2011 as compared to 2010, the
Bank experienced significant increases in retail and corporate funding. The Bank believes that its deposit
products are competitive not only because of high interest rates but also due to the Banks service quality,
extensive branch network, and convenient and secure banking products and services. As at 31 December
2011, customer deposits accounted for 65.5% of the Banks liabilities. The following table sets out the
composition of the Banks customer deposit portfolio as at the dates specified:
As at 31 December
2009
2010
(MNT millions)
Corporate:
Current accounts:
Domestic ..................................................
Foreign .....................................................
Deposit accounts:
Domestic ..................................................
Foreign .....................................................
Retail:
Current accounts:
Domestic ..................................................
Foreign currencies ....................................
Deposit accounts:
Domestic ..................................................
Foreign currencies ....................................
Total .............................................................
(MNT millions)
2011
%
(MNT millions)
84,971.2
123,621.6
14.7
21.3
138,183.6
161,300.5
15.0
17.5
270,988.1
169,608.4
21.2
13.3
45,878.0
34,814.9
7.9
6.0
16,715.5
160,628.1
1.8
17.5
50,921.4
74,933.9
4.0
5.9
11,681.9
19,867.4
2.0
3.4
19,852.2
23,826.9
2.2
2.6
32,962.3
54,384.6
2.6
4.3
145,314.1
113,373.5
25.1
19.6
265,522.9
133,915.0
28.9
14.6
400,399.2
223,098.2
31.3
17.5
579,522.8
100.0
919,944.7
100.0
1,277,296.0
100.0
103
The following table sets forth the Banks funding costs in relation to its corporate and retail deposits as
a percentage of its total funding costs as at the dates specified:
As at 31 December
Current account:
Domestic .................................................. ............................
Foreign ................................................... ..............................
Time and savings deposits:
Current ................................................ .................................
Foreign ............................................... ..................................
2009
2010
2011
3.1%
1.3%
3.9%
1.6%
3.4%
1.4%
12.8%
6.9%
12.7%
5.9%
10.8%
5.1%
The Bank also relies on the interbank market, primarily to manage its liquidity position, and on funding
from other financial institutions for its longer-term needs. The proceeds from the issue of US$5.0 million
private placement notes due 2016 issued in May 2011, and US$150.0 million senior notes due 2013 and
US$25.0 million subordinated notes due 2015 under its Euro Medium Term Note Programme in October
2010 were used for loan allocation, investments and to fulfil the minimum reserve requirement limit set
by the Bank of Mongolia.
As the Mongolian economy has developed, the Banks clients have increased their investment activity and
capital expenditures, resulting in increased demand for financing, particularly large-scale financing, and
for longer-term borrowings. The Bank anticipates that this trend will continue, particularly in the mining
sector. To capitalise on such developments, the Bank is exploring possible methods of establishing new
sources of funding in both foreign and domestic currency. This may include development of a strategic
partnership with another international financial institution, expansion of the Banks shareholder base and
accessing equity or debt capital markets.
In February 2012, The Goldman Sachs Group, Inc. acquired a 4.78% stake in the Bank for a total
consideration of 157,862 shares.
Loan Portfolio
As at 31 December 2011, the Bank had a total loan portfolio of MNT 1,141,251.7 million (US$818.4
million), of which approximately 44.9% was denominated in Tugriks and approximately 54.8% was
denominated in U.S. dollars. The following table sets forth the composition of the Banks loans by
currency as at the dates specified:
As at 31 December
Loans
Loans
Loans
Loans
in
in
in
in
Total .............................................................
2009
2010
2011
(MNT millions)
220,067.9
193,559.7
7,709.4
0.3
%
(MNT millions)
52.2
263,253.5
45.9
208,590.4
1.8
6,520.7
105.9
%
(MNT millions)
55.0
625,531.2
43.6
512,748.6
1.4
2,971.9
%
54.8
44.9
0.3
100.0
100.0
100.0
421,337.3
478,470.5
1,141,251.7
The increased percentage of loans denominated in Tugriks in 2011 has been due largely to increased
demand as a result of the appreciation of the local currency against the U.S. dollar.
104
2010
(MNT millions)
Due in one month or less .............................
26,303.7
Due after one month but before or
at six months ............................................
60,625.4
Due after six months but before or
at one year ...............................................
140,833.3
Due after one year but before or
at three years............................................
140,368.4
Due after three years but before or
at five years .............................................
25,684.5
Due after five years but before or
at 10 years................................................
26,839.4
Due after 10 years ........................................
502.6
Total .............................................................
421,337.3
(MNT millions)
6.2
24,693.2
2011
%
(MNT millions)
5.2
29,349.0
%
2.6
14.4
54,230.2
11.3
151,374.6
13.3
33.4
136,706.6
28.6
238,933.6
20.9
33.3
209,930.5
43.9
493,204.2
43.2
6.1
19,807.3
4.1
60,516.9
5.3
6.4
0.1
21,609.9
11,492.8
4.5
2.4
68,137.2
99,736.2
6.0
8.7
100.0
478,470.5
100.0
1,141,251.7
100.0
Loan types
The following table sets forth the composition of the Banks loans by type as at the dates specified:
As at 31 December
2009
2010
2011
(MNT millions)
193,574.9
Long-term loans(1) ........................................
227,762.4
Short-term loans(2) ........................................
%
(MNT millions)
46.0
262,840.5
54.0
215,630.0
%
(MNT millions)
54.9
721,594.5
45.1
419,657.2
%
63.2
36.8
100.0
100.0
100.0
(1)
(2)
421,337.3
478,470.5
1,141,251.7
Loan concentrations
The Bank limits its total exposure to any single borrower as required by Mongolian regulations. Currently,
the Banks exposure to any single borrower or obligor may not, and does not, exceed 20.0% of the Banks
total capital and total loan exposure to any industry will not exceed 25% of the Banks total loan issuance.
The Bank monitors concentrations of credit risk by industry sector, customer type and geographic location.
The Bank plans to limit loan concentration in the Ulaanbaatar area by expanding in other provinces and
in the rural areas. The Bank expects to funds its lending operations with assistance from domestic and
international financial institutions.
Further information regarding the Banks loan portfolio by industry sector and customer type is provided
below.
105
2010
2011
(MNT millions)
64,554.9
54,499.5
30,728.6
103,251.5
96,088.3
17,932.7
11,052.2
1,846.1
22,347.6
276.3
3,370.2
2,425.0
1,038.8
143.9
3,859.1
7,922.6
%
(MNT millions)
15.3
74,974.3
12.9
72,763.7
7.3
37,433.6
24.5
77,532.6
22.8
75,773.0
4.3
47,735.9
2.6
30,568.8
0.4
2,701.9
5.3
19,519.6
0.1
253.2
0.8
17,940.5
0.6
1,036.8
0.2
768.4
0.0
430.3
0.9
2,462.4
1.9
16,575.5
%
(MNT millions)
15.7
252,935.0
15.2
190,332.6
7.8
146,144.0
16.2
136,709.9
15.8
117,683.1
10.0
82,931.3
6.4
76,311.4
0.6
32,484.0
4.1
26,502.9
0.1
4,824.8
3.7
9,696.9
0.2
16,930.5
0.2
1,946.2
0.1
1,654.3
0.5
1,167.2
3.4
42,997.6
%
22.2
16.7
12.8
12.0
10.3
7.3
6.7
2.8
2.3
0.4
0.8
1.5
0.2
0.1
0.1
3.8
Total .............................................................
421,337.3
100.0
100.0
100.0
478,470.5
1,141,251.7
2010
2011
(MNT millions)
Corporate ......................................................
350,755.4
Retail ............................................................
53,334.7
SME..............................................................
17,247.2
%
(MNT millions)
83.2
372,606.2
12.7
85,655.8
4.1
20,208.5
%
(MNT millions)
77.9
783,778.4
17.9
294,938.5
4.2
62,534.8
%
68.7
25.8
5.5
Total .............................................................
100.0
100.0
100.0
421,337.3
478,470.5
1,141,251.7
2010
2011
(MNT millions)
352,322.1
55,124.5
13,417.8
80.2
392.7
%
(MNT millions)
83.6
370,712.9
13.1
97,380.1
3.2
9,322.6
0.0
250.1
0.1
804.8
%
(MNT millions)
77.4
852,640.0
20.4
280,446.0
1.9
4,648.8
0.1
1,177.5
0.2
2,339.4
%
74.7
24.6
0.4
0.1
0.2
Total .............................................................
421,337.3
100.0
100.0
100.0
478,470.5
1,141,251.7
2010
2011
(MNT millions)
Ulaanbaatar ...................................................
411,982.4
Outside Ulaanbaatar......................................
9,354.9
%
(MNT millions)
97.8
449,905.2
2.2
28,565.3
%
(MNT millions)
94.0
1,054,575.3
6.0
86,676.4
%
92.4
7.6
Total .............................................................
100.0
100.0
100.0
421,337.3
106
478,470.5
1,141,251.7
Sales: dedicated to attracting new customers, expanding relationships with existing customers,
promoting the Banks products and cross-selling opportunities and getting customer feedback;
Analysis: responsible for analysing the loan requests and conducting the procedure to get approval
from the Banks Credit Committees; and
Monitoring: responsible for reducing credit risk by monitoring loan disbursement and subsequent
repayment and also by monitoring the borrowers business activity.
In addition to improving its responsiveness to customers needs, the Bank believes its new corporate
structure has shortened the loan approval procedure, delegated the credit analysis and risk management
duties to a specialised unit, divided the responsibilities to achieve greater efficiency and promoted
teamwork. The Bank believes the clear segregation of responsibilities among the three units has
strengthened the enforcement of its credit policies and has enhanced the monitoring of existing loans. As
a second measure to address the growth in its loan portfolio, the Bank has recruited and trained more staff
who will have greater experience in areas such as project financing and risk management.
Loan approval process
Prior to granting a loan, the Bank carries out an assessment of the risk profile of the potential borrower
and the loan based upon various qualitative and quantitative factors, including:
the purpose for which the loan is sought and the capacity and sources of funds for repayment;
the proposed terms and conditions and covenants of the loan; and
availability of collateral and the adequacy of and ability to enforce against the collateral offered as
security for the loan.
For all loan applications, the initial analysis, due diligence and assessment of preliminary risks are carried
out by an account manager, who is part of the analysis unit assigned to the application. The account
manager prepares a credit proposal, which includes a basic information report, legal opinion, an income
statement, balance sheet and cash flow projection as well as a credit rating model that shows the current
rating of the borrower and the applicable interest rate for the proposed facility. This is then submitted to
the Banks risk management department (the RMD).
107
All applications are also assigned to a risk analyst from the RMD. Within the RMD, two risk analysts are
assigned to corporate risk assessment and two risk analysts are assigned to SME credit risk assessment.
In addition, there are 16 branch risk analysts, nine of whom are based in the head office and are each
responsible for three to four branches in Ulaanbaatar. The other seven are based in branches outside of
Ulaanbaatar. The risk analyst reviews the credit proposal and is responsible for the credit risk assessment,
the appraisal of the collateral and participation in the final decision regarding the approval of the loan. In
the case of corporate or SME loans, the Director of the RMD reviews the credit assessment. All risk
analysts report directly to the RMD at the head office. The risk analyst prepares an executive risk summary
which is compiled on the basis of an assessment of various factors including a financial analysis of the
applicant, the type of business and the management of the applicant, macroeconomic conditions, an
appraisal of the collateral and concludes with a recommendation by the RMD. This executive risk summary
is submitted directly to the relevant Credit Committee together with, but independent of, the credit
proposal of the account manager. By separating the risk management function from the business operation
function, the Bank has attempted to enhance the independent nature of its credit risk analysis.
Depending on the loan amount, one of the three Credit Committees makes the final decision regarding
approval of the loan:
For loans of MNT 100.0 million or less, the decision is made by the BCC. Each branch has a BCC.
The maximum loan size which an individual BCC is authorised to approve can vary with the highest
possible limit being MNT 100.0 million. The credit limit for each BCC is set by the RMD and is
based on quantitative factors such as the branchs loan portfolio amount and its existing
non-performing loan amount as well as on qualitative factors such as the qualification and experience
of the branch manager and the account managers and the location of the branch. The maximum limit
is subject to quarterly review by the RMD which takes into account elements of the branchs
performance including its loan portfolio quality and the volume of business proposals it generates.
In addition, the Bank assesses each branchs maximum limit by review of the branch staff s
experience and the Branchs financial position.
For loans which are above MNT 100.0 million or above the maximum limit of an individual BCC and
are below MNT 350.0 million, the decision is made by the SCC, which is based in the head office.
The SCC bases its decision on a review of the credit proposal and the recommendation given by a
BCC.
For all loans above MNT 350.0 million, the decision is made by the CCC.
The Credit Committees consider several factors, both financial and non-financial, including the customers
creditworthiness, collateral sufficiency and any existing relationship the customer has with the Bank.
Approvals of the Credit Committees require unanimous approval by all committee members. The following
table sets forth the constitution of each of the Credit Committees:
Position
Members of the
Branch Credit Council
(1)
Member of the
Sub-Credit Committee
Members of the
Central Credit Committee
Deputy CEO
Chief Risk Officer
Director of Retail Banking
Department
Deputy CEO
Director of Corporate Banking
Department
The Risk Analyst may exercise veto power in connection with lending decisions of the BCC.
Collateral policy
According to the Banks collateral policy, the Bank requires all loans to be 100% collateralised except for
salary loans. In June 2009, the Risk Management Department revised the Banks collateral policy and
collateral valuation procedure to require a minimum ratio of real estate collateral to the principal amount
of the loan ranging from 60% (for short-term working capital financing) to 95% (for long-term project
108
loans and investment loans). It is the Banks policy to ensure that it receives adequate first priority
collateral as security for each of its loans. The risk analysts of the RMD use three types of valuation
methods to appraise the value of collateral, namely the income approach, the cost approach and the
market-based approach. The key features of these approaches are set out below:
Income approach: the income approach uses the present value of any future income expected from
an asset. This will include any rental income that the asset may generate and, if the asset includes
equipment, the income from any products produced by that equipment.
Cost approach: the cost approach compares the construction or replacement cost of the relevant
assets with those of the same function, age, condition and location, deducting physical, operational
and economic amortisation. Using this approach, the Bank also analyses the market prices of raw
materials, labour, equipment and utility.
Market-based approach: the market-based approach values an asset by comparing it to the value of
other assets that have the same function, age, condition and location.
The most common forms of collateral accepted by the Bank as security for its loans are real property,
equipment, mining licences, gold, deposited savings accounts receivable, inventory and sales proceeds.
The Bank also accepts personal and corporate guarantees in circumstances where other forms of collateral
are deemed inadequate. The Bank prefers loans to be secured on real estate and mining licence collateral
since such collateral can be perfected by registration with state agencies.
After the loan has been approved, the Bank continues to monitor the value of the collateral. The frequency
with which the Bank revalues any collateral varies depending on its type and quality, and the repayment
schedule for the related loan. In general, the Banks credit assessment and approval systems have been
designed to facilitate the making of consistent credit decisions, provide for regular reviews of collateral
values and provide the Bank with an objective methodology for risk-based pricing determinations.
Credit surveillance
The Bank continuously reassesses the credit risk on each loan by (i) monitoring the financial and market
position of the borrower and (ii) assessing the sufficiency of the collateral or other security for the loan.
The financial and market position of the borrower is regularly reviewed, and on the basis of such review,
the internal credit rating of the borrower may be revised. The review is based on the flow of funds into
the customers accounts, its most recent financial statements, condition of the economy and other business
and financial information submitted by the borrower or otherwise obtained by the Bank.
The current market value of the collateral or other security is monitored regularly to assess its sufficiency
with respect to the loan in question. The reappraisal of collateral is performed by the RMD and a report
submitted to the CCC.
The RMD has overall responsibility for the oversight of the Banks credit risk and amending the Banks
risk management systems, and reports directly to the CCC and makes recommendations to the Banks
business divisions. The director of the RMD reports directly to the Chief Risk Officer. The broad areas of
the RMDs responsibility are:
formulating credit policies, in consultation with the business units, which cover the Banks position
on collateral requirements, credit assessment, risk grading and reporting, documentary and legal
compliance with regulatory requirements;
establishing an authorisation structure for the approval and renewal of credit facilities: renewals and
reviews of existing facilities are subject to the same process as a first-time application;
reviewing and assessing credit risk: prior to making a commitment to a customer, the Bank assesses
all credit exposure which is in excess of the designated limit; and
providing advice, guidance and training to business units on general risk management and fostering
a culture of risk awareness amongst the employees of the Bank.
109
The Bank has established a two-stage monitoring system, which comprises the preparation of the review
report and excess control report, to monitor the existing credit status and exposure of each loan more
accurately.
Review report. For corporate, SME and retail loans, the relevant account manager will prepare a review
report for each borrower at least once a year, which is presented directly to the CCC. A more frequent
review is conducted by the Bank if the borrower breaches the repayment schedule. The report details the
latest information on the business activity and financial situation of the borrower, the borrowers financial
performance against the initial projection, the condition of the collateral and the condition of the
borrowers assets and liabilities. The main purpose of the review report is to assess the risks after the
disbursement of the loan including ensuring use of proceeds in accordance with the terms of the loan and
the accuracy of credit rating.
Excess control report. For corporate and SME loans with a payment default exceeding 20 days, the relevant
account manager will prepare an excess control report at the end of each month, which is submitted to the
relevant senior risk analyst within RMD. The senior risk analyst will prepare a list of all loans in default
of more than 20 days as well as a provisioning report setting out the corresponding estimated classification
proposal based on qualitative and quantitative factors. The senior risk analyst will then present the excess
control report and the provisioning report to the CCC. In respect of corporate and SME loans, the CCC
will then decide whether to maintain, downgrade or upgrade the loan classification, or to forward the loan
to the special asset unit (the SAU) for restructuring.
For retail loans with a payment default exceeding 20 days, a senior risk analyst will prepare an excess
control report at the end of each month, which is submitted to the centre for retail excess loans and then
to the Sub-Credit Committee. The senior risk analyst will finally report to the Credit Committee.
Problem loans are identified on a daily basis based on signs of daily servicing deterioration, these may
include loans which have overdue payments but are not yet classified as non-performing loans and loans
which are non-performing loans but have not yet been transferred to the SAU for further action and
continue to be monitored by the relevant business unit. Once identified, an account manager with the
monitoring unit, monitors, the problem loan firstly by confirming through, among other things, checking
of contracts and invoices that the loan amount has been used for the stated purpose. Subsequent periodic
onsite monitoring is done to appraise the financial situation and business activities of the borrower and its
compliance with the covenants in the loan agreement. The account manager may also gather information
about the borrower from third party sources. Finally, the account manager monitors the repayment of the
loan and follows up with borrower to emphasise the repayment schedule. The Bank carries out the daily
analyses of problem loans by collecting information about such loans in the above manner, looking into
the causes of problems and working out measures to effect their early redemption. On the basis of the
findings of such analyses, an excess control report is submitted to the CCC regarding the problematic loans
in the Banks loan portfolio and the level of acceptable credit risk. The report is then distributed to the
Banks branches on a daily basis to update each branch with information on problem loans and past dues.
The Bank writes-off a loan when the CCC determines that it is uncollectible upon approval from the Banks
representative governing board. This determination is made after considering the position of the borrower
such as any dramatic changes in the borrowers financial position and the insufficiency of the collateral
proceeds to cover the entire exposure. The determination is made in accordance with the Asset
Classification and Provisioning Regulation approved by the Governor of the Bank of Mongolia and the
Minister of Finance. The write-off proposal to the CCC is initiated by the SAU and reviewed by the RMD.
The Bank established the SAU in July 2007 with the primary function of reducing overall credit risk and
recovering problem loans. When the CCC classifies a loan as a problem loan after review of the Excess
Reports, the loan file is transferred to the SAU. The SAU takes the required steps to recover the loan either
through non-court methods where a settlement is reached between the bank and the borrower directly or
by lodging a claim with the courts. Due to the early stage of development of the Mongolian legal systems,
a claim can take one to two years to work its way through the courts and then for recovery to be made
through the bailiff. The SAU is under the supervision of the Deputy Chief Executive Officer of the Bank
and submits its proposals on a monthly basis to the CCC.
The SAU utilises a variety of methods to recover delinquent loan amounts through settlements with
borrowers. Primarily, the SAU will work with borrowers in delaying repayment, rescheduling payments or
extending the term of a loan (although Mongolian law imposes certain restrictions on the Banks ability
to extend the term of a loan). Additionally, during the recent economic downturn in Mongolia, many
110
construction projects encountered increased costs due to shortages of construction materials imported from
the PRC, limited labour supply and decline in demand for completed projects exacerbated by a reduction
in mortgage financing available to potential buyers. In some cases, the Bank increased the principal
amount of the loan to enable completion of construction, sale of the project or project units and recovery
for the Bank.
Each business unit is required to implement the Banks credit policies and procedures within its day-to-day
business activities and is supervised by the RMD to ensure that such implementation is effective. Each
branch is responsible for the quality and performance of its credit portfolio and for monitoring and
controlling the credit risks in its portfolios including those that were subject to approval by the SCC and
the CCC. A further level of oversight is provided by the Internal Audit Department (the IAD) which
conducts regular audits of the business units.
During 2007, the Bank took additional steps to centralise its loan approval process and bring it under the
greater scrutiny of the CCC. It has also increased the number of staff in the RMD and invested in more
comprehensive training for the risk analysts who receive their training at the head office and are then
deployed to the branches. All loan disbursements and drawdowns are now reviewed by the risk analysts.
These measures resulted in tighter overall monitoring of the Banks loan portfolio.
Asset Quality
Loan classifications
The Bank classifies its loans and maintains loss reserves in compliance with requirements set by the Bank
of Mongolia. The RMD is responsible for loan classification and loan loss provisioning.
The loan classifications employed by the Bank are generally determined by reference to the number of days
that the relevant loan is overdue with qualitative factors also taken into account and are as follows.
Performing loans
These are loans under which no sums are in arrears.
Past due loans
These are loans under which sums are up to 90 days in arrears.
Non-performing loans
Non-performing loans include:
substandard loans: loans under which sums are greater than 91 days but equal to or less than 180 days
in arrears;
doubtful loans: loans under which sums are equal to or greater than 181 days but equal to or less than
360 days in arrears; and
bad loans: loans under which sums are equal to or in excess of 361 days in arrears.
The following table sets out the composition of the Banks loans by asset quality classification as at the
dates specified:
Years ended 31 December
2009
2010
2011
Performing (0%(1))........................................
In arrears (5%(1)) ..........................................
Non-performing ............................................
Substandard (25%(1)) ................................
Doubtful (50%(1)) .....................................
Bad (100%(1))...........................................
(MNT millions)
380,003.2
18,841.8
22,492.2
1,407.1
14,512.8
6,572.3
%
(MNT millions)
90.2
441,840.5
4.5
16,904.4
5.3
19,725.6
0.3
3,677.0
3.4
7,618.4
1.6
8,430.2
%
(MNT millions)
92.4
1,107,176.3
3.5
5,893.7
4.1
28,181.7
0.8
602.8
1.6
20,209.0
1.7
7,369.9
%
97.0
0.5
2.5
0.1
1.8
0.6
421,337.3
100.0
100.0
100.0
(1)
478,470.5
This percentage is the standard provisioning requirement set by the Bank of Mongolia.
111
1,141,251.7
As at 31 December 2009, the proportion of total loans which were non-performing was 5.3%, which
decreased to 4.1% as at 31 December 2010, and decreased to 2.5% as at 31 December 2011.
Non-performing loans as a percentage of the total loan portfolio decreased from 2009 to 2011 principally
due to increase in the demand for loans and prudent management policies of the Bank.
As a result of its experience during the economic downturn in 2008, the Bank instituted several changes
in its policies for approving new construction loans. The Bank has decreased the number of builders to
which it will provide financing and now provides funding for only larger-scale construction projects. In
order to safeguard against any future economic downturn, the Bank ensures that only its corporate banking
team, rather than individual branches, can approve new construction loans and project owners must fund
more than 30% of the total project costs. The percentage of loans for each economy sector as against the
Banks total loan portfolio was below 25% as at 31 December 2011.
Allowances and loan loss provisioning policy
The Bank classifies and estimates risks of loan losses, contingent liabilities and other assets based on
quantitative (the number of days for which the loan has been overdue) and qualitative factors in accordance
with the Asset Classification and Provisioning Regulation approved by the President of the Bank of
Mongolia and the Minister of Finance.
The RMD is responsible for ensuring that the Bank maintains an allowance for loan losses, in accordance
with the requirements set by the Bank of Mongolia, which is available to absorb losses incurred in its loan
portfolio. This allowance is based upon the classification of the Banks loans and guarantees as at each
balance sheet date. If additions or changes to the allowance for loan losses are required, the Bank will
record provisions for loan losses, which will be treated as charges against operating income. Loan
exposures that the Bank deems to be uncollectible, including actual loan losses, net of recoveries of
previously provisioned amounts, are charged against the allowance for loan losses only after all domestic
legal remedies available to enforce the loan and any collateral offered as security in connection therewith
are exhausted or realised, as the case may be.
The Bank classifies its loans as described above as at each balance sheet date. The allowance for loan
losses is calculated, based on such classifications, by RMD using the percentages indicated in the table
below setting forth the Banks allowances for loan losses by loan classification, each of which is at least
equal to the minimum requirement set by the Bank of Mongolia. The following table sets forth details of
the Banks provisioning for the periods specified:
Years ended 31 December
2009
2010
2011
(MNT millions)
6,984.3
8,301.1
(168.4)
5.6
(MNT millions)
15,122.6
1,915.4
(1,750.7)
(1,285.7)
2.2
(MNT millions)
14,003.8
5,228.2
(1,252.0)
(60.2)
15,122.6
14,003.8
17,919.8
The following table sets forth an analysis of the Banks allowances for loan losses as at the dates specified:
As at 31 December
2009
Performing (0%(1)) .....................................................................
Past due (5%(1)) .........................................................................
Non-performing ..........................................................................
Substandard (25%(1)) .............................................................
Doubtful (50%(1)) ..................................................................
Bad (100%(1)) ........................................................................
942.1
14,180.5
351.8
7,256.4
6,572.3
Total ..........................................................................................
15,122.6
(1)
2010
(MNT millions)
845.2
13,158.6
919.2
3,809.2
8,430.2
This percentage is the standard provisioning requirement set by the Bank of Mongolia.
112
14,003.8
2011
294.7
17,625.1
150.7
10,104.5
7,369.9
17,919.8
The total non-performing loans of the Bank amounted to MNT 28,181.7 million (US$20.2 million) in
principal as at 31 December 2011. In total, the Banks 10 largest non-performing loans amounted to MNT
24,764.9 million (US$17.8 million) as at 31 December 2011. The Bank is taking steps to realise the
collateral securing the loans, which principally consists of buildings and industrial equipment, or to
re-structure the loans according to applicable Bank of Mongolia regulations.
Risk Management
Overview
The Banks Risk Management Committee (RMC) was established in 2011. The main duties of the RMC
is setting the risk appetite and limits, designing the risk profile of the Bank and developing and
implementing risk governance policies. The Board appointed a Chief Risk Officer who is in charge of
creating its risk governance framework and monitoring risk appetite. The Chief Risk Officer independently
reports to the Board and the RMC on a quarterly basis. The RMC is headed by the Chairman of the RGB
and includes the Chief Risk Officer and the Boards independent director. The RMC reports to the Board
on a quarterly basis in respect of compliance by the Bank of corporate governance principles, and monitors
the risk profile of the Bank and compliance of risk limits and risk appetite of each business division of the
Bank. The Chief Risk Officer supervises the Risk Management Department which in turn supervises and
monitors the Credit Committee, ALCO and the Operational Risk Management Committee on a daily basis
with respect to controlling the risk appetites and monitoring limits of the business divisions. The Chief
Risk Officer is a member of the Credit Committee and ALCO.
The Bank is in the process of implementing a program in partnership with PricewaterhouseCoopers which
is designed to support and improve compliance of the Bank with its risk management policies. Under the
program, a database will be created to store necessary information in respect of customers in order to
mitigate money laundering risks and to perform customer checks against the Banks internal sanction list.
The following chart shows the organisational structure and reporting lines of the Banks internal risk
management and control function:
Board
Risk Management
Department
Support to CC
Credit risk
Counterparty risk
Country risk
Problem loan
management
Loan monitoring
Risk Management
Committee
Market risk
Operational risk
Trading risk
Liquidity risk
Interest rate risk
Portfolio management
Market Risk
Management
SME
credit risk
Corporate
credit risk
Collateral appraisal
and monitoring
Retail
credit risk
Loan review
113
Procedure
System
People
External factors
Compliance
Operational Risk
Management
114
conditions, have sufficient liquidity to meet its contractual and regulatory financial obligations. The Bank
formulates its risk management policies in accordance with the guidelines provided by the Bank of
Mongolia and the Basel Committee. The Bank revised its liquidity risk management policy and
methodology in August 2011. Some of the main principles of the Banks risk management policy are:
using the gap method to prevent and check liquidity risk and shortage and excess of financial inflow
and outflow;
systematically controlling liquid assets by foreign currencies, foreign currency transactions and
foreign currency cash flow movements;
analysing normal and extraordinary market circumstances by using its internal net reserve controlling
system to manage/allocate liabilities to assets under the contingency plan.
The Bank uses the following ratios to determine its liquidity position:
maintaining a higher cash inflow over cash outflow in the short term;
dividing market funds in four types based on volatility and monitoring liability allocation.
The Bank evaluates its liquidity risk management on a quarterly basis for breach of limit, current level of
liquidity risk, etc. In the event of a liquidity crunch the Bank intends on rely on interbank deposits and
loans and deposits from Bank of Mongolia.
Interest rate risk management
Increased competition among commercial banks in Mongolia has led to relatively favourable terms and
conditions being offered to customers and has become one of the key factors influencing interest margins.
The interest rate risk is measured by the extent to which changes in market interest rates impact the Banks
margins and net income. The interest rate risk is managed through the monitoring of interest rate gaps and
by ensuring compliance with pre-approved policies and limits set by the ALCO (subject to final approval
of the Risk Management Committee). These policies and limits are based on the cost of funding, other
operating costs, the inflation rates, the interest rate of the central bank securities and other factors. The
RMD is responsible for the modification of the borrowers credit rating model and the day-to-day review
of compliance with such policies and limits.
Operational risk management
Operational risk management focuses on supporting and advising the management of the Banks business
units and branches with regards to the formulation, development and implementation of operational risk
management policies designed to balance the avoidance of financial losses and damage to the Banks
reputation against maintaining cost efficiencies. The key aspects of operational risk management include:
115
At the end of 2009, the Bank established the Operational Risk Management Committee comprised of
management from the Banks units such as the RMD, Internal Audit Department, the IT Unit, the Legal
Unit, the Human Resources Department, the Corporate Security Department and the Financial Accounting
and Control Department. The Operational Risk Management Committee is responsible for the
improvement and development of operational risk management policies. The IAD provides further
inspection by way of periodic reviews to ensure that the policies are being complied with. The results of
the internal audit reviews are discussed with the management of each of the business units and a summary
submitted to the Banks executive committee including the Banks chief executive officer, the first deputy
chief executive officer and four deputy chief executive officers.
The Operational Risk Management Unit (ORMU) of the Bank is responsible for preparing a detailed plan
for risk identification and assessment based on Basel guidelines and implements processes to mitigate risk.
The Operational Risk Management Committee considers risks identified by the ORMU and implements
rules for new and existing products and services offered by the Bank to reduce operational risks faced by
the Bank.
The Bank periodically develops and upgrades risk and control self-assessment procedures for treasury,
loan, deposits and operational software and technology by identifying risks in these areas, assessing risk
impacts and existing controls and defining mitigation options for unacceptable risks.
The IAD conducts regular audits of the business units and the credit processes and is responsible for
periodic reviews to ensure compliance with, and effectiveness of, the risk management policies
implemented by the RMD. The Bank regularly arranges for training for members of the IAD at the
Mongolian Institute of Internal Auditors and the European Bank of Reconstruction and Development and
on Bank of Mongolia training programmes and certified public accounting training courses. The IAD is
regularly reviewed by the RMC and reports directly to the Board and the Executive Committee.
The following table sets forth a comparison of the Banks NPL ratio as a percentage of its total loan
portfolio with the NPL ratio of the Mongolian banking industry for the periods presented:
As at
31 December 31 December
2009
2010
The Bank ......................................
Mongolian banking sector(1)...........
(1)
5.3%
17.1%
4.1%
11.3%
31 March
2011
30 June
2011
5.1%
10.0%
3.7%
8.5%
30 September
2011
3.5%
7.4%
31 December
2011
2.5%
5.8%
The following table sets forth the Banks loans in arrears as a percentage of its total loan portfolio for the
periods presented:
As at
31 December 31 December
2009
2010
In arrears ......................................
4.5%
3.5%
31 March
2011
30 June
2011
0.8%
0.4%
30 September
2011
0.4%
31 December
2011
0.5%
The following table sets forth the Banks NPL coverage ratio for the periods presented:
As at
31 December 31 December
2009
2010
NPL coverage ratio .......................
67.2%
71.0%
31 March
2011
30 June
2011
48.5%
48.9%
30 September
2011
49.3%
31 December
2011
63.6%
The following table sets forth the Banks capital adequacy ratio for the periods presented:
As at
31 December 31 December
2009
2010
Capital adequacy ratio ..................
12.7%
16.3%
116
31 March
2011
13.1%
30 June
2011
12.5%
30 September
2011
12.5%
31 December
2011
12.7%
Capital Adequacy
The Bank of Mongolia monitors the capital requirements of all Mongolian banks, including the Bank. The
Bank of Mongolia has established a minimum capital adequacy ratio for Mongolian banks, which currently
exceeds guidelines recommended under Basel Capital Accord Standards. This ratio is currently set at
12.0%, based on total equity and total assets as adjusted for their risk. The Bank complies and has at all
times complied with the prevailing mandatory capital adequacy ratios set by the Bank of Mongolia. The
Banks capital adequacy ratio was 16.3% and 12.7% as at 31 December 2010 and 31 December 2011,
respectively.
The following table sets forth additional information regarding the Banks capital base, as at the dates
specified:
As at 31 December
2009
2010
2011
(MNT millions)
(MNT millions)
(MNT millions)
Tier 1 capital:
Share capital...............................................................................
Retained earnings .......................................................................
Additional paid-in capital...........................................................
Treasury stock ............................................................................
Adjustment .................................................................................
6,610.1
45,911.6
7,392.2
(6,456.2)
(544.9)
6,610.1
66,873.8
7,392.2
(6,001.9)
6,610.1
108,976.3
7,392.2
(6,001.9)
52,912.8
74,874.3
116,976.7
Tier 2 capital:
Preferred stock ...........................................................................
Revaluation fund ........................................................................
Unrealised gain on available-for-sale financial assets ................
Subordinated debt securities issued ............................................
13,683.3
13,418.3
31,218.5
18,702.1
3,736.0
41,693.5
13,683.3
44,636.8
64,131.6
66,596.1
119,511.1
181,108.3
523,167.3
12.7%
10.1%
2.6%
733,794.3
16.3%
10.2%
6.1%
1,429,184.3
12.7%
8.2%
4.5%
(1)
Total Tier I ratio has been expressed as a percentage of risk weighted assets.
The Bank issued US$175.0 million of senior Notes in 2010, the proceeds of which were not deployed
before year end 2011 resulting in 16.3% CAR. In 2011, when the bond proceeds of such issuance were
deployed, the Banks CAR fell to 12.7%.
Property
The Bank owns or leases premises where its head office and branches are located. The Banks premises
are mainly leased on a short-term basis of one to two years. However, the Bank generally acquires premises
where possible and where it believes that the value of real estate is likely to appreciate in value and that
rental costs are likely to increase. As at 31 December 2011, 30 of the Banks branches were leased and 12
branches were owned. The total net book value of the Bank owned premises was MNT 21,961.1 million
(US$15.7 million) as at 31 December 2011.
Information Technology
The Bank views IT as an integral part of its operations and is committed to investing in its IT infrastructure
to support its existing operations and growth. The core element of the Banks IT infrastructure is its
software system, which is located at the Banks head office and networked with all of the Banks branches.
This system facilitates full-scale operational and analytical support for wire transfers and cash settlements,
credit decisions, lending activities, bank deposit maintenance, transactions in foreign currencies and
remote account management services such as Internet banking and telephone banking.
117
To minimise system downtime, the Bank maintains an off-site IT back-up recovery centre, which is
updated in real time and is located at a separate site from the Banks head office, to safeguard information
in the event of a technical or operational failure. This back-up facility contains a substantially complete
duplicate of all of the Banks core IT systems and can provide emergency back-up data if the Banks
primary electronic data centre fails. The Bank conducts IT disaster recovery drills twice annually to
enhance the effectiveness of its back-up systems.
In December 2007, the Bank upgraded its core software system moving to the core banking system,
GRAPE BANK system, the information management system GRAMIS and a GRAPEMASTER system for
general ledger system. The Bank has continued to improve its technology platform through upgrades to the
core system, including implementation in 2009 of the treasury system Grats, a new trade financing
system, complete credit card module and fraud detection system GraPolicy. In addition, the Bank also
continues to utilise technology to centralise and standardise its operations.
The new core software system has the following advantages intended to support and enhance the Banks
overall operational efficiency and improve security:
specifically designed for business processes to reduce the cost of individual transactions;
features a sophisticated security system with a two-step transaction control. Therefore, depending on
certain factors such as amount limits, transaction types and exchange rates, the system will not allow
the transaction to proceed without the approval of a senior officer;
able to generate an overview of a single customers different relationships with the Bank;
The Bank implemented EMV technology to limit fraudulent transactions and to provide global
interoperability. In 2009, the Bank installed video camera surveillance near all its ATM machines, which
provide round-the-clock monitoring. The Bank has also implemented an improved version of loan
information database designed to reduce defaults on loans and to allow the Bank to maintain and monitor
its customers credit history. The Bank has also integrated its card and core banking systems to avoid
duplication, reduce expense and enhance monitoring.
In 2010, the Bank implemented the Money Gram Agent Bank Connection Project in all of its branches
with the aim to increase efficiency by reducing application processing time. The Bank also implemented
an information delivery system which allows its customers to control their account usage and receive
information on their mobile phones or by electronic mail.
The Bank, in cooperation with Bank of Mongolia, implemented an integrated card payment system in
Mongolia in 2009 and entered into a memorandum of understanding with the Bank of Mongolia and Khan
Bank to kick-off card payments by participant banks through the integrated payment system from June
2010.
Since 2011, the Banks ATM machines have accepted Pulse, Diners Club and Discover brand cards.
Further, the Bank also launched co-branded and gift cards, extended its sub-agent network, upgraded its
core banking system, implemented a back-up Internet network, upgraded to SWIFT 7.0 and implemented
a mobile banking system. The Banks IT department has upgraded its salary and property, plant and
equipment accounting systems and has linked approximately 300 point-of-service machines and 20 ATM
machines to its service network.
The Bank invested approximately MNT 519.1 million on IT infrastructure during 2009, which increased
by 67.9% to MNT 872.0 million invested during 2010 which in turn increased by 28.3% to MNT 1,119.5
million (US$0.8 million) invested during 2011.
118
Competition
As at 31 December 2011, there were 14 commercial banks in Mongolia, 13 of which were privately owned
and one of which was state-owned. Pursuant to the Law of Mongolia on Development Bank, a
government-owned policy oriented, statutory financial institution named Development Bank of Mongolia
LLC was established in March 2011. There were also approximately 195 non-bank financial institutions
(NBFIs) and 162 saving and credit cooperatives. The Banks principal competitors include Golomt Bank
and Khan Bank, and international banks such as ING Bank N.V. and Standard Chartered Bank.
As at 31 December 2011, the Bank was one of the top three banks in Mongolia in terms of total assets,
total deposits, total loan portfolio and shareholders equity, according to data published by the Bank of
Mongolia. Although the Bank currently has a comparatively small branch network, representing
approximately 2.5% of the total number of bank branches in Mongolia, it intends to focus on selectively
expanding its branch network in the near future as it targets the expansion of its retail lending business.
In 2011, the Bank established a branch in the Umnugobi province near the Oyu Tolgoi copper project. The
Bank plans to establish new branches in strategically important rural areas and near mining projects such
as Oyu Tolgoi and Tavan Tolgoi.
As at the date of this Information Memorandum, the Bank operated one of Mongolias largest ATM
network. The Bank has a market share of approximately 24.8% in the corporate lending sector. As at 31
December 2011, total savings of the Bank amounted to MNT 740.5 billion (US$531.0 million) or
approximately 19.7% of the total savings and total deposits were MNT 1,277.3 billion (US$916.0 million)
or 18.4% of the total deposits in the Mongolian banking sector. As at 31 December 2011, the Banks total
assets amounted to MNT 2,090 billion (US$1.5 billion) and capital was MNT 139.4 billion (US$100.0
million) representing a market share of 22.3% and 20.6%, respectively.
Despite the challenges posed to the Banks leading position by competitors backed by foreign investors and
certain factors such as the Banks comparatively smaller branch network, the Bank believes that its large
corporate customer base, high operating standards, high quality and price competitive products, its skilled
and well-trained staff and strong international banking relationships provide a solid platform for it to
continue to strengthen its position as the premier bank in Mongolia.
Employees
As at 31 December 2009, 2010 and 2011, the Bank had 689, 751 and 1,014 active full-time employees,
respectively. As at such date, the Bank did not employ any staff on a part-time basis. The Bank believes
it remains the employer of choice for many applicants and continues to receive applications exceeding its
available vacancies. The Banks net profit per employee increased from MNT 21.7 million as at 31
December 2009 to MNT 27.6 million as at 31 December 2010 and further increased to MNT 41.5 million
(US$29,759.8) as at 31 December 2011. The Bank has been working with the State Labour Exchange and
Altan Focus LLC (a recruitment agency) to survey the available labour pool and select the best candidates.
The Bank is also expanding its cooperation with local universities so as to enable first pick of qualified
graduates, and substantially all new employees possess a university degree or above.
Each year the Human Resources Department, in cooperation with international training providers, prepares
and implements a series of training programmes designed to improve the professional skills of the Banks
employees. In 2011, the Bank conducted 128 training programmes in more than 10 areas including
General Banking Training, IT Training, Securities Safety Products and Services Training, Financial
Reporting Training, Audit Training, Risk Training, Legal Training and Customer Service
Training. These were coordinated by the Human Resources Department and involved other departments
of the Bank as well. The Bank also sends its employees on overseas courses in the United States, Germany,
Luxembourg, Russia and Singapore, particularly in areas such as risk management, treasury, trade and
information technology. Through this approach, the Bank benefits from the knowledge of international
methods and helps to ensure that its workforce has an understanding of international banking standards and
practices.
The Bank issues salary loans and mortgage loans to its employees on favourable terms. The interest rate
on salary loans is 1.0% per month and 6.0% per annum in respect of mortgage loans. As at 31 December
2011, the Bank had issued salary loans in the amount of MNT 982.9 million and mortgage loans in the
amount of MNT 7,103.6 million.
119
None of the Banks employees are members of a trade union and, since its inception, the Bank has not
experienced any strikes or disruptions due to labour disputes. The Bank believes that it has good relations
with its employees.
Legal Proceedings
In April 2006, the Bank identified through an internal audit that a former branch manager had been
fraudulently obtaining loans for her own use, which loans were secured against deposits in the Banks
customers accounts. The Bank believes that such fraudulent activity resulted in a loss to the Bank of
approximately MNT 3,456.8 million (US$2.5 million) of which MNT 1,378.6 million (US$1.0 million) has
been recovered. On 14 December 2007, the court ordered that the former branch manager transfer MNT
2,078.2 million (US$1.5 million) to the Bank.
As a result of an internal investigation, the Bank improved its internal investigations and audit systems and
reviewed its ongoing risk management policies in an effort to reduce the likelihood of further incidents.
In particular, the Bank centralised important decision-making responsibilities and created the Operational
Risk Management Unit within the Risk Management Department. The Bank has also purchased additional
software to enable real-time monitoring of the Banks activities and has implemented such software in
August 2010. In 2009, the Bank experienced another occurrence involving the misappropriation of funds
by a branch employee involving a small sum which it recovered subsequently.
The Bank is, from time to time, the subject of legal proceedings and other investigations which arise in
the ordinary course of business. The Bank is not involved in any, and does not believe that there are any
pending or threatened actions, suits or proceedings against or affecting it which, if determined adversely
to the Bank, could individually or in the aggregate have a material adverse effect on the Banks financial
condition or results of operations or might be material in the context of the Notes.
120
MANAGEMENT
Representative Governing Board
The Representative Governing Board (RGB) of the Bank consists of five members (including one
independent director) (the Board and the Directors, respectively) who are remunerated at a rate
approved by the shareholders at a shareholders meeting. Between shareholders meetings, the Banks
authority is vested in the Board, which is required to meet at least once a year. The Directors are required
to report to the shareholders at least once a year at a shareholders meeting.
As at the date of this Information Memorandum, the Directors are as follows:
Mr. Erdenebileg Doljin
Mr. Erdenebileg Doljin was appointed as the Chairman of the RGB on 28 December 2006. He is currently
a member of the representative governing board of Ulaanbaatar City Bank. He holds a Bachelors degree
in Law from the Institute of Law in Mongolia and a Masters degree in Business Administration from the
Academy of Management in Mongolia. Mr. Erdenebileg has over 10 years of experience in the banking
industry.
Mr. Batjargal Dorligjav
Mr. Batjargal Dorligjav was appointed as an independent director of the RGB on 27 April 2011. Mr.
Batjargal also serves as a director of business consultant service in the Institute of Finance and Economics
of Mongolia. He holds a Masters degree in Business Administration from Maastricht University of
Management in the Netherlands and a doctorate in Macroeconomics from the Bishkek State and Economic
and Commercial Institute in Kyrgyzstan.
Mr. Enkhbold Chuluunbaatar
Mr. Enkhbold Chuluunbaatar was appointed to the Board on 28 December 2006. Prior to joining the Bank,
he was employed as an engineer with Mongolian Telecommunications Company from 1999. He holds a
Bachelors degree in Electrical Engineering from the Technical University of Novosibirsk in the Russian
Federation and a degree in Telecommunications Engineering from the Polytechnics University in
Mongolia. Since 2005, he has also been a member of the Institute of Finance and Economics of Mongolia.
Mrs. Tsolmon Tamir
Mrs. Tsolmon Tamir was appointed to the Board on 28 December 2006. She is also a project officer for
the Economic Policy Project at the International Development Agency of the United States since 2004.
Prior to joining the Bank, she was an Officer of the United States Peace Corps from 2002 to 2004. She
holds a Masters degree in Education from Kurtin University in Perth.
Mr. Randolph S. Koppa
Mr. Randolph S. Koppa was appointed as the President of the RGB in July 2007. He was first appointed
as the Chief Executive Officer of the Bank in October 2004 and President in July 2007. He has held various
management positions at financial institutions in 12 different countries during his 45-year career in
banking, including 16 years at ING Bank N.V.. He holds a Bachelor of Arts degree in International
Relations from the University of Wisconsin in Madison.
Executive Committee
The members of the Banks Executive Committee are selected by its Board and as of the date of this
Information Memorandum are as follows:
Name
Age
Medree Balbar.....................................
Orkhon Onon ......................................
Khurelbaatar Dambiijav .....................
Orgodol Sanjaasuren ..........................
Soronzonbold Lkhagvasuren ..............
Otgonbileg Demchigjav .....................
58
37
51
43
36
38
Title
121
The biographies of members of the Executive Committee of the Bank are as follows:
Mr. Medree Balbar
Mr. Medree Balbar was appointed Chief Executive Officer of the Bank in July 2007. Mr Medree was one
of the co-founders of the Bank and has worked at the Bank from 1991 to 2000, holding several positions,
including Chief Executive Officer from 1999 to 2000. From 2000 to July 2007, Mr. Medree held several
positions in other Mongolian financial institutions, including Chief Executive Officer of Capitron Bank
and Chief Executive Officer of the Gurvan Bar Credit, a non-banking financial institution in
Ulaanbaatar. Mr. Medree has over 19 years of experience in the banking industry.
Mr. Orkhon Onon
Mr. Orkhon Onon, First Deputy Chief Executive Officer, was appointed as the Deputy Chief Executive
Officer of the Bank in January 2007. He was later promoted to First Deputy Chief Executive Officer in
October 2007. Mr. Orkhon previously held the position of Chief Executive Officer of Ulaanbaatar City
Bank and, prior to his role with Ulaanbaatar City Bank, was a financial advisor to the National Council
of the Millennium Challenge Account. Between 2003 and 2004, he was a Senior Banking Officer in the
Banks Corporate Banking Department. Mr. Orkhon has over 13 years of experience in the banking
industry.
Mr. Khurelbaatar Dambiijav
Mr. Khurelbaatar Dambiijav was appointed Deputy Chief Executive Officer in August 2007. He has
worked at the Bank between 1993 and 2005 first as Director of the Cash and Customer Service Department
and then as the Director of the Branch Management Department. Between 2005 and August 2007, he held
the position of Vice Director at Mongol Post Bank. Mr. Khurelbaatar has over 21 years of experience in
the banking industry.
Mr. Orgodol Sanjaasuren
Mr. Orgodol Sanjaasuren was appointed Deputy Chief Executive Officer in December 2009. He was
previously with the Bank between 1996 and 2001 as Director of Personnel and Administrative Department.
Mr. Orgodol has held several positions in the financial industry including serving as Chairman of the
Mongol Post Bank; Director General of Zoos Gold LLC, Legal Adviser to the Ministry of Fuel, energy,
Geology and Mining, and has held positions with World Bank and IFC. Mr. Orgodol obtained his
Bachelors degree from the National University of Mongolia in 1992 and a Masters degree in International
Banking and Finance from the Boston University in 2003. Mr. Orgodol has over 12 years of experience
in the banking industry.
Mr. Soronzonbold Lkhagvasuren
Mr. Soronzonbold Lkhagvasuren was appointed Deputy Chief Executive Officer in 2011. Prior to joining
the Bank, he was the First Deputy Chief Executive Officer at XacBank from 2010 to 2011 and has also
worked in XacBanks strategic planning and marketing division, customer service division, public
relations and has been involved in upgrading the banks IT system. Mr. Soronzonbold has over nine years
of experience in the banking industry.
Mrs. Otgonbileg Demchigjav
Mrs. Otgonbileg Demchigjav was appointed Deputy Chief Executive Officer in 2011 prior to which she
was a Director in the Banks Risk Management Department. Mrs. Otgonbileg has over 14 years of
experience in the banking industry.
122
Title
Chief Executive Officer
President
First Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Director of Financial and Control Department
Director of Treasury Department
Position in ALCO
Chairman
Member
Member
Member
Member
Member
Chief Risk Officer
Member
Secretary
Audit Committee
The Audit Committee was established in August 2011. The Audit Committees specific duties include
preparing valuations, implementing risk management guidelines, ensuring compliance with accounting
rules, monitoring internal audit and preparing reports for review by the Banks Board and shareholders and
implementing corporate governance principles. As at the date of this Information Memorandum, the
members of the Audit Committee are as follows:
Name
Erdenebileg Doljin ........................................
Batjargal Dorligjav .......................................
Gantugs Damdin ...........................................
Erdenebileg Jadambaa...................................
Bayarsaikhan Khurtsbileg .............................
Title
Chairman of the RGB
Independent Director
Deputy Chief Executive Officer - Ulaanbaatar City Bank
Deputy Chief Executive Officer - Ulaanbaatar City Bank
Chief Executive Officer - National Finance Corporation
Position in Audit
Committee
Chairman
Member
Member
Member
Member
Risk Committee
The Risk Committee was established in August 2011. The Risk Committees specific duties include
formulating the Banks risk management methodology, risk management development, risk profile and risk
governance development of the Bank. The Risk Committee consists of three members who meet once every
six months to discuss the Banks risk strategy and has the power to define the Banks risk management
policies. As at the date of this Information Memorandum, the members of the Risk Management Committee
are as follows:
Name
Title
Position in Risk
Committee
Chairman
Member
Chief Risk Officer
Supervisory Board
The supervisory board of the Bank (the Supervisory Board) was established by a resolution of the
shareholders of the Bank dated 30 April 2008, for the primary purpose of independent monitoring of the
Banks activities and reports directly to the Banks shareholders.
123
As at the date of this Information Memorandum, the members of the Supervisory Board are as follows:
Nanzaddorj Tsagaan
Nanzaddorj Tsagaan was appointed to the newly established Supervisory Board on 30 April 2008. Mr.
Nanzaddorj is a qualified lawyer and had previously held the position of executive director of Nukht LLC,
a company specialising in tourism and trade activities in Ulaanbaatar. He was previously the department
head of the State Property Committee of Mongolia.
Erdenebileg Jadamba
Erdenebileg Jadamba was appointed to the newly established Supervisory Board on 27 April 2011. Mr.
Erdenebileg is a lawyer and has worked in several positions prior to joining the Bank in 2010. Currently,
Mr. Erdenebileg also serves as the Deputy Chief Executive Officer of the Ulaanbaatar City Bank.
Employees
As at 31 December 2011, the Bank had 800 employees in Ulaanbaatar (including 461 employees in the
head office) and 142 employees in its branches in other provinces and 72 employees were on a long leave
of absence. The Bank plans to set up 11 new branches in 2012 which is expected to create further job
opportunities. The Bank maintains cordial relations with its employees and has not experienced any
industrial actions in the past three years.
Compensation
Total remuneration and employee benefits paid to executive officers and directors of the Bank amounted
to MNT 1.6 billion in 2010 and MNT 2.5 billion in 2011.
124
PRINCIPAL SHAREHOLDERS
History and Background
The Bank was formed in October 1990 by the Government pursuant to resolution no. 71. The Bank initially
functioned as the international banking department of the State Banking Committee for the Government.
In April 1993, the Mongolian Minister of Finance ratified the Banks charter and henceforth the Bank
operated as a separate state bank wholly owned and controlled by the Government. By November 2001,
following the implementation of an employee stock ownership scheme, approximately 24.0% of the Banks
shares were owned by its employees and the remaining 76.0% by the Government.
As part of the Governments privatisation programme, the Government announced a public bidding process
to privatise the Bank in 2002. In December 2002, Globull, a consortium formed by Gerald Metals, Inc. and
Banca Commerciale Lugano, bought 76.0% of the Banks shares from the Government. Given Banca
Commerciale Luganos profile and limited experience operating banks in emerging market economies,
ING Bank was retained to provide technical assistance to the Bank as part of a management and technical
assistance programme until the end of 2006. In January 2005, ADB and IFC subscribed for newly issued
shares of the Bank and became the Banks second-largest shareholders representing 14.5% of the Banks
then total issued and outstanding shares. In addition, ADB and IFC contributed MNT 9.6 billion to the
Banks capital in the form of subordinated debt. The Banks minority shareholders, mainly comprised of
the Banks employees, were diluted from a 24.0% to a 19.0% ownership position following a subsequent
rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). ADB and IFC exercised their tag-along rights and sold their shares to US Global, making it the
sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by Central
Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest.
In February 2012, the Bank sold treasury stock representing 4.78% of its total issued and outstanding
shares to GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc.
Current Ownership Structure
As used herein, beneficial ownership means the sole or shared power to vote or direct the voting or to
dispose of or direct the sale of any security. A person is deemed to be the beneficial owner of securities
that can be acquired within 60 days upon the exercise of any option, warrant or right. Shares subject to
options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the ownership percentage of the person holding the options, warrants or rights,
but are not deemed outstanding for computing the ownership percentage of any other person. The amounts
and percentages are based upon the shares of the Bank outstanding as at the date of this Information
Memorandum.
The following table sets forth information regarding beneficial ownership of the Banks shares as at the
date of this Information Memorandum held by:
each person who is known to the Bank to have more than 5.0% beneficial share ownership;
Name of shareholder
Number of shares
Percentage of shares
2,175,594
603,801
241,784
157,862
126,015
65.8%
18.3%
7.3%
4.8%
3.8%
Total...................................................................................................................
3,305,056
100.0%
125
(1)
(2)
As at 31 March 2012, US Global was a joint venture owned equally by Central Asia Mining LLC and Mr. Erdenebileg Doljin
(the current Chairman of the Board) and owned 2,175,594 or 65.8% shares of the Bank indirectly through Globull Investment
& Development SCA, its investment vehicle, and 241,784 or 7.31% shares directly. As at 31 March 2012, Central Asia Mining
LLC was 100.0% owned by Mr. Erdenebileg Doljin and is the sole ultimate beneficial owner of 2,760,841 ordinary shares of
the Bank representing an 83.5% equity interest.
(3)
GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc., acquired a 4.78% stake in the Bank in
February 2012.
126
127
The next parliamentary elections were held in May 2008 which once again resulted in MPRP winning the
majority in the parliament. Accusations of electoral fraud brought forward by the opposition led to riots
which caused property damage and a number of deaths. Subsequently, MPRP chose to invite opposition
politicians to the cabinet, thus forming the coalition government. In January 2012, the Democratic Party
announced its decision to withdraw from the coalition government that was formed with the MPRP in
2008.
In May 2009, Democratic Party figure Elbegdorj Tsakhia was elected President, ending the long tenure of
MPRP politicians in the presidential seat.
MPRP changed its name to the Mongolian Peoples Party (the MPP) in 2010 and thereafter former
president of Mongolia Enkhbayar Nambaryn received judicial permission to re-register the name
Mongolian Peoples Revolutionary Party as a different party than the MPP. The Parliamentary Election
Law was revised on 15 December 2011. Parliamentary elections are set for June 2012, and presidential
elections is scheduled for 2013.
An Overview of the Mongolian Economy
The modern Mongolian state operated on the basis of a planned economy up until 1990, when the
establishment of a new consensus government undertook a sustained transition to a free market economy.
The Government relinquished its role as the primary factor in the economy and began limiting itself to
policies supporting a market-oriented economy. Main components of the Governments programme include
privatisation of state enterprises, price liberalisation, changes in national law, and an action plan for
environmental protection.
Mongolias economy is currently one of the fastest growing economies in the region with its newly
discovered mineral wealth and increasing foreign interest. Foreign direct investment in Mongolia increased
from US$1.0 billion as at 31 December 2009 to US$1.6 billion as at 31 December 2010 and further
increased to US$5.3 billion as at 31 December 2011, according to data published by the World Bank in its
quarterly economic update in February 2012. Total exports increased from US$1.9 billion as at 31
December 2009 to US$2.9 billion as at 31 December 2010 and further increased to US$4.8 billion as at
31 December 2011, according to data published by the World Bank in its quarterly economic update in
February 2012. Mongolias GDP growth averaged nearly 9.0% annually from 2004 to 2008, underpinned
by an increase in foreign direct investment (FDI), with capital inflows predominantly directed to the
mining industry and assisted by upward price trends for commodities such as copper, gold and iron. In
2011, the countrys economy continued to expand and achieved nominal GDP of approximately US$8.6
billion and GDP per capital of approximately US$3,067.0.
Macroeconomic data
2008
2009
2010
2011
6,555.6
5.2
1,946.0
8.9%
24.2%
2,534.5
3,244.5
40.2%
112.8%
6,590.4
4.6
1,685.0
-1.3%
1.9%
1,885.4
2,137.7
40.3%
87.6%
8,414.5
6.7
2,434.0
6.1%
13.0%
2,908.5
3,200.1
38.6%
69.6%
10,829.7
8.6
3,067.0
16.0(2)
11.1
4,780.4
6,526.9
49.6%
81.7%
Mongolia Quarterly Economic Update, The World Bank - February 2012. The following exchange rates were applied: 2008
- MNT1,267.0 = US$1.00; 2009 - MNT1,443.0=US$1.00; 2010 - MNT1,257.0=US1.00; and 2011 - MNT1,264.79=US$1.00.
(2)
Traditionally, economic activity in Mongolia has been based on agriculture and animal husbandry, but
recently the focus has shifted to the mining sector as the country is well-endowed with some of the largest
mineral deposits in the world. Mongolia currently has the fourth-largest copper reserves and ninth-largest
128
coal reserves globally. There is also evidence of significant deposits of uranium, gold, lead, zinc and rare
earth metals. The mining sector is also a predominant source of foreign currency for the country, with
mineral products representing approximately 81.1%, 85.3% and 90.0% of total exports in 2009, 2010 and
2011, respectively.
To reduce its reliance on commodity reserves, to create new job opportunities and to develop a diverse and
sustainable economy, the Government has proposed building industrial parks in strategic locations around
the country to increase value-added natural resources exports. For example, the Sainshand industrial park,
expected to be located in southern Mongolia with intersecting rail access to the Tavan Tolgoi-Choibalsan
railway, has been designed to include an oil refinery, a copper smelter, a coking coal plant and a water
supply network project. Developing and strengthening downstream businesses that can service the mining
boom will be important for Mongolia to ensure development of goods and services beyond mining as well
as to provide more equitable wealth distribution.
In the Spring 2010 session, Parliament passed the State Policy of Railway Development. According to the
policy, construction will be divided into three phases as the Government aims to link the eastern railways
directly to the sea ports in China and Russia to increase access to international markets. Phase I involves
the construction of a 1,100-kilometre main railway line from the Tavan Tolgoi coal deposit to Choibalsan
on the northern Russian border via the Sainshand Industrial Park. Phase II will connect the mineral
deposits along the southern perimeter of Mongolia to the main railway line and to the PRC market and is
expected to be completed in 2014. A total investment of approximately US$8 billion will be required to
renew existing railway capacities and build new lines.
Nominal GDP Composition by Sector
2009
2010
2011
19.5%
17.9%
6.6%
8.3%
6.4%
7.3%
4.7%
4.1%
25.2%
22.7%
14.3%
8.3%
7.7%
6.4%
6.6%
4.0%
3.6%
26.4%
20.2%
13.0%
9.7%
7.2%
7.1%
6.6%
4.0%
3.5%
28.8%
Others is comprised of electricity, gas steam and air conditioning supply; construction; public administration and defence;
compulsory social security; human health and social work activities; water supply; accommodation and food; information and
communication; professional scientific activities; administrative and support; arts, entertainment; other service activities and
net taxes on products.
129
The external shock also led to a sharp deterioration in Mongolias current account balance and its trade
balance deteriorated markedly through late 2008 and early 2009. The value of exports fell with
international commodity prices, more than outstripping moderation in the growth rate of imports. As a
result, the current account balance moved from a surplus of 6.7% of GDP in 2007 to a deficit of 14.0%
in 2008 and increased to a deficit of over 15.0% in the first two quarters of 2009.
The Mongolian currency weakened significantly due to a currency flight which was further aggravated by
the Bank of Mongolias attempt to defend the currency and maintain its de facto currency peg to the US
dollar. In the process, the Bank of Mongolia lost US$500 million of foreign currency reserves between July
2008 and February 2009 while the Mongolian currency depreciated, by approximately 38.0% between the
end of October 2008 and the middle of March 2009.
Subsequent measures were taken to prevent an overshooting of the exchange rate included abandoning the
de facto peg and the introduction a transparent bi-weekly foreign exchange auctioning mechanism. The
Bank of Mongolia significantly raised interest rates in March 2009 to 14.0% per annum from 9.75% per
annum in an attempt to restore confidence in the local currency. These policies, combined with a narrowing
trade deficit, resulted in a stabilisation of the nominal exchange rate since April 2009 and enabled the Bank
of Mongolia to rebuild international reserves. Meanwhile, the spread between the ask and bid rates in the
parallel and commercial bank foreign exchange markets, which is often a strong indicator of market
liquidity, has remained low, after the sharp spikes in late 2008 and early 2009. In January 2010, the
exchange rate against the U.S. dollar depreciated slightly, by 0.6%, compared with December 2009.
Mongolias Transformation to a Market Economy
Mongolia continues its transformation to a market economy notwithstanding the severe adverse impact of
the global economic slowdown in 2008 and 2009. Mongolia experienced a turnaround in late 2009 and the
beginning of 2010. In terms of nominal GDP, the economy recorded a healthy growth of 16.0% for 2011,
following an expansion of 27.7% in 2010, due to an improvement in business environment and increases
in FDI that resulted from the growth in mining production and money circulation. The growth supported
by the mining sector translated into expansion for other economic sectors such as wholesale, retail, trade,
transportation, manufacturing and construction sectors.
Mongolias turnaround may be attributable to the authorities policy response to the crisis, supported by
significant resources from the international community, including a US$229.2 million stand-by loan
facility from the IMF. In addition, overall global economic recovery, strong demand for natural resources
from the PRC and an upswing in copper prices contributed to the recovery. At the same time, having
identified and learnt from previous economic instabilities, legislative reforms and tightened fiscal
framework including the, Fiscal Stability Law, have been approved for 2011 that is intended to encourage
continued macroeconomic stability.
The signing of an investment agreement in October 2009 to develop the Oyu Tolgoi mine, which is
considered to be one of the worlds largest untapped copper deposits, is a major milestone in the
development of Mongolias mining sector and is expected to be a key driver of its future economic growth.
According to Asian Development Outlook 2011 published by the Asian Development Bank, US$4.0 billion
of investment is expected over the next two years in this project alone, an amount roughly equivalent to
Mongolias entire GDP in 2009. The mine is scheduled to start production in 2013. Preparations are also
being made to develop the coal deposits of one of the largest undeveloped coalfields in the world, Tavan
Tolgoi.
As at 31 December 2011, the fiscal deficit increased to 3.6% of GDP in 2011, down from a 0.5% surplus
in 2010, reflecting the large cash handouts and increase in infrastructure spending. However, revenues
have improved markedly, increasing annually by 40.9% in real terms as of the end of 2011. Imports
increased to 104.0% year-on-year, mainly driven by transport equipment and machinery as the mining
sector expands, in particular the Oyu Tolgoi copper mine. On the other hand, Mongolian exports were up
by 64.4% year-on-year in 2011 supported by the upward momentum in metal prices and large coal and
copper imports by China, the export destination for 92.1% of Mongolias exports on 2011.
With the recent developments in the mining industry, Mongolia shows promising growth prospects. The
ADB expects Mongolias economic growth to continue its momentum in 2012, supported by high global
mineral prices, development of new mines, and fiscal spending while the IMF estimates that Mongolia will
become the fourth-fastest growing economy in the world over the next five years.
130
Economy:
Nominal GDP.....................................
GDP growth rate ................................
GDP per capita...................................
Unemployment rate ...........................
Major exports.....................................
Exports...............................................
Key export partners............................
Major imports ....................................
Imports...............................................
Key import partners ...........................
State Budget.......................................
2.8 million(1)
1.7%(1) (2008 2010)
Total population average: 66.9 years(2) (2009 actual)
Mongol (94.9%), Kazakh (5%), others (including Chinese and Russian) (0.1%)
Buddhist (50%), Others (6%), Muslim (4%), none (40%)
Mixed parliamentary/presidential
Ulaanbaatar
President (elected by a universal popular vote for a term of four years)
Prime Minister and Cabinet: Prime Minister and Cabinet appointed by the State Great Khural
(Parliament) in consultation with the President (Prime Minister is usually the Chairman of
the political party having majority in Parliament)
State Great Khural (Unicameral, 76 seats; members elected for a term of four years)
Supreme Court (serves as appeals court for peoples and provincial courts; judges are
nominated by the General Council of Courts for approval by the President)
With the departure of the Democratic Party from the coalition government effective 5
January 2012, the MPP is the current ruling party
18 years of age; universal
Unitary State; territory of Mongolia is divided administratively into 21 aimags and the
capital city
(1)
(2)
(3)
131
132
These changes reflect greater prudence with a focus on obtaining earlier indications of loan problems.
More recently, the authorities have further tightened prudential ratios on asset classification and loss
provisions. New requirements mandate the recognition of restructured loans as nonperforming and the
establishment of provisioning for excessive related-party loans. Recognition of the problem assets and the
corresponding increase in loss provisions will reduce capital ratios and raise nonperforming loans.
Prudential norms introduced in 1996 closely mirror key international norms, particularly the capital
adequacy principle. The minimum capital adequacy ratios for commercial banks are currently at 6.0% for
the tier 1 ratio and 12.0% for the total capital ratio. The Bank of Mongolia also increased the minimum
paid-in capital required for commercial banks to MNT 16.0 billion by 1 May 2013 which banks are
required to comply to avoid having their licenses revoked. These steps were intended not only to improve
the safety and soundness of the banking system but also to induce the shareholders of existing banks to
pay closer attention to their investments. In order to monitor the health and stability of the financial
system, a financial stability committee was established and approved by the Ministry of Finance in 2005.
The committee works to ensure that the public is alerted to possible financial crises, interacts directly with
the management of financial institutions, and gives financial support where and when it is needed.
Recent Developments in the Banking Sector
The banking crisis of 2008-2009 represented a significant setback and highlighted the increased
vulnerabilities of Mongolian commercial banks balance sheets. At the height of the economic crisis,
Parliament adopted the Law on Deposit Guarantee in November 2008 to calm depositors fears. The
guarantee was adopted for a period of four years, with amendments in March 2009 and July 2010, to
include current accounts. Pursuant to this legislation, Mongolian banks are required to deposit into a
government account with the Bank of Mongolia, a fee equal to 0.5% of their deposits. In the aftermath of
the crisis, banking system profitability fell, and NPLs more than doubled. Anod Bank was taken into
conservatorship in December 2008 and a State Bank was established when Zoos Bank failed in November
2009. The State Bank was established with a capital injection of MNT28.0 billion from the Government
and took over the deposits and receivables of Zoos Bank. Towards the goal of maintaining stabilisation of
deposits subsequent to the expiration of the blanket guarantee, the Bank of Mongolia has submitted a draft
deposit insurance law to the Parliament.
Mongolia has since successfully restored economic stability, which has in turn supported a turnaround for
the banking sector. Banks have returned to profitability since 2010 and the average NPL ratio declined
from a peak of 17.1% in 2009 to 5.8% in 2011. The system-wide CAR also showed improvement and
increased to 15.0% in 2011. Following the recovery, the authorities have tightened the coverage of the
blanket deposit guarantee in June 2010, to eliminate coverage for interbank deposits and expand the
restriction on the coverage of deposits of related parties. In addition, guarantees of deposits with interest
paid in excess of the Central Bank Bill rate are no longer provided. Since 2008, banks have begun to
increase their reliance on domestic deposits to finance their loans. This resulted in reduced banking system
vulnerability to volatile funds. Hence, the loan to deposit ratio (LDR) decreased substantially from its
high of 112.8% in 2008 to 81.7% in 2011.
As at 31 December 2011, the Mongolian financial sector comprises 14 commercial banks, two
representative offices of foreign banks, 195 licensed NBFIs and 162 Saving and Credit Cooperatives. The
Mongolian financial system is dominated by the commercial banks. Of the 14 banks operating in Mongolia,
13 are privately owned, and one is state-owned. As at December 2011, the 14 banks accounted for 95.0%
of total financial system assets. The non-bank financial sector, including insurance and the stock market,
is significantly smaller. As at 31 December 2009, 2010 and 2011, the aggregate net profits of the four
leading banks of Mongolia namely, the Bank, Khan Bank, Golomt Bank and XacBank, was US$29.6
billion, US$55.8 billion and US$102.5 billion, respectively, according to public filings made by each bank.
On 7 April 2011, the London Stock Exchange Group (the LSE) and the State Property Committee of
Mongolia entered in to an exclusive Strategic Partnership Agreement (the Partnership Agreement) to
restructure and develop the MSE. Pursuant to the Partnership Agreement, the LSE appointed a management
team of five members to oversee MSEs development. The management team from LSE will be involved
in advisory and training capacities for creating infrastructure for the capital markets and appropriate
legislative framework, modernisation of market rules and operations for expansion of tradable asset classes
(derivatives and exchange traded funds) and introduction of international standards in the Mongolian
market index. The MSE is expected to go through a comprehensive reform and upgrade of facilities.
133
Pursuant to the Master Service Agreement, Millennium IT Software Limited, a subsidiary of London Stock
Exchange group, installed Millennium IT integrated trading platform, at the Mongolian Stock Exchange
and Securities Clearing House and Central Depositary. Millennium IT trading platform is a software
combined with high performance connectivity which provides the global trading community with
innovative tools and access to liquidity in Mongolian capital market.
The Bank was the first commercial bank in Mongolia to be appointed as the clearing bank by the central
depository of Mongolia on 12 April 2012.
Deposit Funding and Lending Activity
The banking system has shown rapid growth. Total banking assets have grown at a solid compounded
annual growth rate (CAGR) of 29.0% from 2007. By the end of 2011, total banking assets amounted to
MNT9.4 trillion. Improving macroeconomic conditions, rising personal income and competition among
commercial banks fuelled the asset growth. In 2011, the ratio of total banking assets to GDP reached at
86.5%, which was 18.3% higher than in 2007. Current account and deposits (excluding government
deposits) represent 61.2% of total banking assets in 2011, a marked increase from 51.2% in 2008. In
December 2011, the volume of local currency demand, time and saving deposits climbed to a new peak of
approximately MNT2.8 trillion, up 44.2% from a year ago due to the combined effect of the publics
expectations of domestic currency appreciation and the blanket guarantee law covering bank deposits
besides the post-crisis economic growth led by the mining sector. In addition, foreign currency demand,
time and saving deposits increased by 29.1% from December 2010 and peaked at MNT 964.3 billion in
December 2011. In February 2011, the Bank of Mongolia increased the rate of reserve requirement from
5.0% to 9.0% and again in August 2011 to 11.0%. The minimum liquidity ratio applicable to all
commercial banks in Mongolia was amended to 25.0% on 1 January 2012.
Meanwhile, bank lending grew at a strong pace. Total loans outstanding increased at CAGR of 28.3% since
December 2007. In December 2011, total loans outstanding amounted to MNT5.7 trillion, an increase of
72.3% since December 2010. However, risk aversion amongst the commercial banks remains high and
banks have been accumulating deposits. Total deposits have increased by 44.0% since December 2010. As
deposits grew at a relatively slower pace than loan portfolio, the LDR reached to 84.8% in December 2011
from 70.9% in December 2010. The following table sets forth the year-on-year credit and deposit growths
of the banking sector as at the dates indicated:
As at 31 December
2008
Loans .....................................................................................................................
% year-on-year.......................................................................................................
Deposits .................................................................................................................
% year-on-year.......................................................................................................
Loan to deposit ratio % .........................................................................................
2,691.9
28.2
2,386.4
0.1
112.8%
2009
2,703.8
0.7
3,085.2
33.9
87.6%
2010
3,284.1
22.4%
4,720.5
58.3%
69.6%
2011
5,659.5
72.3%
6,929.7
44.0%
81.7%
Source: Bank of Mongolia; deposits include current, savings and time deposits
134
MNT 326.9 billion, a decrease of 29.2% and 11.8% from December 2009 and 2010, respectively. Indeed,
the banking system witnessed a marked improvement of NPL ratio, which stood at 5.8% as at 31 December
2011. The following table sets forth the change in quality of loans outstanding as at the dates indicated:
As at 31 December 2011
Mongolian
banking
sector(1)
Percentage of
the Mongolian
banking
sectors total
loans
The Bank
Percentage of
the Banks total
loans
5,180.7
72.7
326.9
57.6
29.4
239.8
92.8
1.3
5.9
1.0
0.5
4.3
1,107.2
5.9
28.2
0.6
20.2
7.4
97.0
0.5
2.5
0.1
1.8
0.6
Total .............................................................................
5,580.3
100.0
1,141.3
100.0
(1)
Bank of Mongolia.
2007
2008
2010
2011
376.4
14.0
2009
676.9
15.0
Trade and
Development
Bank of
Mongolia LLC
Golomt Bank
Khan Bank
XacBank
12.7%
14.7%
15.4%
20.2%
135
accept deposits;
provide loans;
engage in other financial activities or services licensed by the Bank of Mongolia and permitted under
Mongolian law.
Further, subject to the permission of the Financial Regulatory Committee of Mongolia and the Bank of
Mongolias confirmation that it does not object, the Banking Law allows commercial banks and their
controlled entities and subsidiaries to engage in the following additional activities:
trustee services;
insurance brokerage;
136
underwriting;
custodial services;
factoring; and
Summary of the Main Provisions of the Banking Law (as amended in 2010)
The transfer of a banks shares
Banks are required to inform the Bank of Mongolia in writing if changes occur in the size or structure of
their share capital. Further, in the event that a party attempts to become a shareholder with significant
influence in a bank, or an existing shareholder with significant influence changes the size or structure
of his ownership interest in the bank, then the bank must inform the Central Bank in writing and obtain
permission prior to making any such change.
A shareholder with significant influence in one bank, along with parties that are related to such
shareholder, are prohibited from becoming shareholders with significant influence in another bank. If
such a situation arises, or if a party alone or with others becomes a shareholder with significant influence
without the permission of the Central Bank, and this situation is discovered following an inspection, then
the Central Bank will suspend all dividend issues and the voting rights related to the shares in question.
In order to satisfy the law, the Bank of Mongolia will require the sale of said shares within 30 days
following the last date of possession of the shares.
Subsidiaries and controlled entities
Upon obtaining the permission of the Bank of Mongolia, a bank may incorporate controlled entities and
subsidiaries with the sole purpose of conducting financial activities.
Capital requirements
The Banking Law provides that the minimum amount of paid-in capital for a bank is be determined by the
Bank of Mongolia, after taking into consideration factors such as the state of the national economy, the
local inflation rate, the solvency of banks, and the specific types of operations to be undertaken by a bank.
Pursuant to decree No. 200, dated 8 April 2004, the President of the Bank of Mongolia has set the minimum
required amount of paid-in capital for banks to MNT 8.0 billion. In July 2011, the President of the Bank
of Mongolia issued Order No. 404 pursuant to which the minimum required paid-in capital for commercial
banks was increased to MNT 16 billion effective 1 May 2013.
A bank may only distribute dividends if, after said distribution, it will continue to meet the mandatory
prudential ratios set by the Bank of Mongolia. A bank must determine the amounts of any decrease or
increase in its capital in accordance with profits earned or losses accrued from banking activities and
fluctuations in the amount of its compulsory reserve fund.
The Bank of Mongolia, together with the Mongolian Ministry of Finance, issues procedures for the
establishment and allocation of funds from a reserve fund created to cover losses that may accrue from
defaults on loan repayments.
Single borrower and related party limits
The total value of loans, loan equivalent assets and guarantees provided to a single borrower or related
parties of said borrower by a bank must not exceed 20% of the capital of said bank.
Guarantee limits
The total value of guarantees provided by a bank may not exceed the total amount of said banks capital.
137
Conflicts of interests
If loans, loan equivalent assets and guarantees to a single borrower fall past due by more than six months,
or if the total value of loans, loan equivalent assets and guarantees provided to a single borrower exceeds
5% of the total capital of a bank, said borrower shall be prohibited from participating in such banks
management.
Exposure limits
The total amount of securities that may be purchased by a bank must not exceed 20% of the capital of a
bank, or, in respect of any specific issuer, 10% of the total amount of the shares issued by it. This does
not apply to securities issued by the Government, the Bank of Mongolia, shares issued by a credit
information bureau, or shares affiliated companies or subsidiaries of the bank.
Disclosure requirements
In addition to publishing the requisite financial statements, a bank is required to publicly disclose
information on (i) the identities of shareholders with significant influence, executive officers, their
deputies, the chief accounting officer, senior executives of the banks branches, and the names of the
supervisory committees members; (ii) information on the banks loans, credit facilities, obligations,
services and transactions provided to related parties; (iii) the form, timeline and implementation approach
for re-organization, legal status and location of the proposed new entity, nature of operation that will be
carried out by the bank, principal documents with respect to financial activities; and (iv) other information
considered necessary by the Bank of Mongolia to assess the banks exposure to risks.
Law of Mongolia on Deposits, Loans, and Transactions of the Bank and Authorised Legal Person (1995)
The Law of Mongolia on Deposits, Loans and Transactions of the Bank and Authorised Legal Person
regulates deposit of funds with banks and legal persons authorised to carry out deposit taking activity;
conduct of transactions through the banks and legal persons authorised to conduct banking transactions;
and operations of granting loan from and repayment of loans to banks and legal persons authorised to carry
out lending activities. Under this law, banks are required to pay deposits at the depositors first demand
in accordance with the deposit agreements and pay interest on deposits in accordance with applicable law
and regulations.
Law on Deposit Guarantee (2008)
Pursuant to the Deposit Guarantee Law, enacted in 2008, the Mongolian State insures the current accounts
and deposit accounts of citizens and legal entities at Mongolian commercial banks for the term of the
Deposit Guarantee Law, or until 25 November 2012. The Deposit Guarantee Law covers all situations of
non-payment of deposits by Mongolian banks, regardless of whether such non-repayment is due to
insolvency or other reasons. As a measure to prevent abuse and unnecessary expense, deposits of related
persons (as defined by the Banking Law), depositors or holders of subordinated or convertible debts and
deposits from the interbank market or from foreign banks and financial institutions are excluded from this
scheme.
Law on Executing Domestic Settlement Transactions by National Currency (2009)
The Mongolian Parliament enacted this legislation to control fluctuations as a response to a sudden
devaluation of the Tugrik. According to this law, all prices, settlements and advertisements within the
territory of Mongolia must be conducted in Tugriks, thereby prohibiting the use of foreign currency for
domestic transactions. The law also prohibits the indexing of Mongolian Tugrik contracts to any foreign
exchange index. However, this legislation allows savings deposits, loans from bank and non-bank entities,
other equivalent services, and derivative financial agreements and their obligations to be expressed and
executed in foreign currencies.
Law on Combating Money Laundering and Terrorist Financing (2006)
The Law on Combating Money Laundering and Terrorist Financing was adopted by Parliament on 8 July
2006 for the purpose of combating money laundering and terrorist financing. The law defines a suspicious
transaction as a transaction that involves funds with no clear source or recipient or a transaction that is
conducted through a country that does not have a financial monitoring mechanism to combat money
138
laundering and terrorist financing or a transaction that is suspected of money laundering and terrorist
financing and permits the Financial Information Service (an affiliate organisation of the Bank of Mongolia
with specific purpose of combating money laundering and terrorist financing activities) to suspend and
investigate such transactions.
Law on Non-Banking Financial Activities (2002)
The Law on Non-Banking Financial Activities allows NBFIs to engage in lending, factoring, foreign
currency exchange, electronic payments, remittance services, issuing of guarantees and payment
instruments, investments in short-term financial instruments, trust services and financial and investment
consultancy services. These activities must be licensed separately and are subject to prudential regulation
by the Financial Regulatory Committee of Mongolia. NBFIs are not allowed to accept deposits.
Accounting Law (2001)
The Accounting Law requires all business entities to adopt and adhere to IFRS as modified by Bank of
Mongolias guidelines and to submit audited quarterly financial statements and reports to the Mongolian
Ministry of Finance. The Mongolian Ministry of Finance has prescribed a format promulgated by the IFRS
as modified by Bank of Mongolias guidelines for these reports, the implementation of which became
effective in 1995.
Mongolia also has three accounting associations: the Accounting Council (with 26 members), the National
Association of Certified Public Accountants (with a membership of 200 associate unlicensed accountants)
and the Union of Finance Specialists Association (comprising accountant members employed by the
Ministry of Finance). Under the provisions of the Accounting Law, the Accounting Council is responsible
for developing accounting forms and methodology, and for training, while the Ministry of Finance is
responsible for implementing all reforms to the accounting and auditing systems.
The Asian Development Bank, the World Bank and other non-governmental organisations provide
technical assistance in the ongoing development of policy, legal and regulatory measures in the field of
accounting law and practice. The Ministry of Finance and the accounting associations are committed to the
formulation of generally accepted accounting principles and the implementation of international
accounting standards.
Law of Mongolia on Asset-Backed Securities (2010)
The Law of Mongolia on Asset-Backed Securities regulates the issuance of asset-backed securities,
supervision thereof, and protects the interests of the investor. The law provides that only SPVs, banks and
housing finance companies may issue asset-backed securities that are classified as (i) guaranteed
security issued by SPVs, and (ii) securitised security issued by banks and housing financing companies.
The issuance of asset-backed securities requires a specific license granted by the FRC and the asset-backed
securities must be registered with the FRC.
Law of Mongolia on Mortgages (2009)
The Law of Mongolia on Mortgages regulates pledges of immovable property and property rights to secure
performance of obligations; conclusion of immovable property pledge agreement; and performance of the
obligation thereto. Under this law, pledgers and pledgees may agree upon non-judicial foreclosure of
immovable property. However, proceedings relating to foreclosure of land can only be brought before the
courts of Mongolia. The concept of mortgage deed was introduced by this law whereby the pledger
prepares a mortgage deed to be submitted to the state registry along with pledge agreement.
The Law on Drivers Insurance (2011)
The Law on Drivers Insurance was enacted on 6 October 2011 and became effective on 1 January 2012.
The objective of the Law on Drivers Insurance is to insure drivers under official insurance schemes in
order to recover damages caused in a car accident and to protect the victim(s) rights. Under this law, a
drivers insurance is based on the following guidelines: mandatory insurance for the auto vehicles;
compensation payment for the victims; reinstating breached rights and generating financial resources to
compensate for damages occurred in a traffic accident.
139
140
The new minimum capital adequacy ratio requirement will be effective from 30 June 2012 according to
Order 726 and provides for staged increase in the minimum capital adequacy ratio in the following manner:
Effective date:
Tier 1 capital to risk weighed asset adequacy ratio ...................
Capital to risk weighed asset adequacy ratio .............................
Additional capital requirement(1) ................................................
Total capital to risk weighed asset adequacy ratio .....................
(1)
As at
30 June 2012
As at
1 December 2012
As at
30 June 2013
7.0%
12.0%
0.5%
12.5%
8.0%
12.0%
1.0%
13.0%
9.0%
12.0%
2.0%
14.0%
Commercial banks in Mongolia, including the Bank, which constitute more than 5.0% of total assets of the Mongolian banking
system during the course of past six months upon issuance of Order 726 will be subject to additional capital requirement.
141
TAXATION
The following is a general description of certain relevant tax considerations relating to the Notes. It does
not purport to be a complete analysis of all tax considerations relating to the Notes, whether in the
jurisdictions mentioned below or elsewhere. Prospective purchasers of Notes should consult their own tax
advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of Notes and
receiving payments of interest, principal and/or other amounts under the Notes and the consequences of
such actions under the tax laws of those countries. This summary is based upon the law as in effect on the
date of this Information Memorandum and is subject to any change in law that may take effect after such
date.
Mongolian Taxation
Tax laws of Mongolia underwent substantial reforms in 2006 to provide a more favourable tax environment
to business entities and individuals. Under the 2006 Business Entities Income Tax Law of Mongolia, local
entities are subject to 10% income tax on interest (including, among others, interest on loans, savings
account, warranties and notes). In accordance with the Personal Income Tax Law of Mongolia, interest
income earned by local and foreign individuals is subject to tax at the flat rate of 10%. However,
individuals are exempt from personal income tax on interest income until 1 January 2013.
Pursuant to amendments to the 2006 Business Entities Income Tax Law in Mongolia, which became
effective on 1 January 2012, non-resident legal entities are subject to Mongolian income tax at 20.0% on
income which is sourced from Mongolia, including interest earned in respect of the Notes. As at the date
of this Information Memorandum, the Mongolian tax authorities have not provided guidance as to the
scope of this new source concept, and thus, its potential application to capital gains on the disposal of
Notes is uncertain.
If the beneficial owner of the income is a resident of a country with which Mongolia has a bilateral treaty
for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and
property, a lower tax rate will be applied to interest income and relief from potential capital gains tax may
be available. Interested parties should consult their own tax advisors to determine potential applicability.
No stamp duties or similar taxes or charges are payable under the laws of Mongolia in respect of the
execution, issue, sale or transfer of the Notes. There is no capital gains tax payable by a holder of Notes
in connection with its interest in the Notes.
EU Savings Tax Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State of the
European Union (each, a Member State) are required to provide to the tax authorities of another Member
State details of payments of interest (or similar income) paid by a person within its jurisdiction to an
individual resident in that other Member State. However, for a transitional period, Luxembourg and Austria
are instead required (unless during that period they elect otherwise) to operate a withholding system in
relation to such payments (the ending of such transitional period being dependent upon the conclusion of
certain other agreements relating to information exchange with certain other countries). A number of
non-EU countries and territories including Switzerland have adopted similar measures (a withholding
system in the case of Switzerland).
On 15 September 2008, the European Commission issued a report to the Council of the European Union
on the operation of the Directive, which included the Commissions advice on the need for changes to the
Directive. On 13 November 2008, the European Commission published a more detailed proposal for
amendments to the Directive, which included a number of suggested changes. The European Parliament
approved an amended version of this proposal on 24 April 2009. If any of those proposed changes are made
in relation to the Directive, they may amend or broaden the scope of the requirements described above.
142
except to the extent permitted under U.S. Treas. Reg. Section 1.163-5(c)(2)(i)(D) (the D Rules),
each Dealer has represented, and each further Dealer appointed under the Programme will be required
to represent, that (i) it has not offered or sold, and agrees that during the restricted period it will not
offer or sell, Notes in bearer form to a person who is within the United States or its possessions or
to a United States person, and (ii) it has not delivered and agrees that it will not deliver within the
United States or its possessions definitive Notes in bearer form that are sold during the restricted
period;
143
(b)
each Dealer has represented, and each further Dealer appointed under the Programme will be required
to represent, that it has and agrees that throughout the restricted period it will have in effect
procedures reasonably designed to ensure that its employees or agents who are directly engaged in
selling Notes in bearer form are aware that such Notes may not be offered or sold during the restricted
period to a person who is within the United States or its possessions or to a United States person,
except as permitted by the D Rules;
(c)
if it is a United States person, each Dealer has represented, and each further Dealer appointed under
the Programme will be required to represent, that it is acquiring Notes in bearer form for purposes
of resale in connection with their original issuance and if it retains Notes in bearer form for its own
account, it will only do so in accordance with the requirements of U.S. Treas. Reg. Section
l.163-5(c)(2)(i)(D)(6); and
(d)
with respect to each affiliate that acquires Notes in bearer form from a Dealer for the purpose of
offering or selling such Notes during the restricted period, such Dealer repeats and confirms the
representations and agreements contained in subparagraphs (a), (b) and (c) on such affiliates behalf.
Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and
regulations thereunder, including the D Rules.
In respect of Bearer Notes where TEFRA C is specified in the applicable Pricing Supplement, such Bearer
Notes must be issued and delivered outside the United States and its possessions in connection with their
original issuance. Each Dealer has represented and agreed, and each further Dealer appointed under the
Programme will be required to represent and agree, that it has not offered, sold or delivered, and will not
offer, sell or deliver, directly or indirectly, such Bearer Notes within the United States or its possessions
in connection with their original issuance. Further, each Dealer has represented and agreed, and each
further Dealer appointed under the Programme will be required to represent and agree, in connection with
the original issuance of such Notes that it has not communicated, and will not communicate, directly or
indirectly, with a prospective purchaser if such purchaser is within the United States or its possessions and
will not otherwise involve its U.S. office in the offer or sale of such Bearer Notes.
Each issue of Index Linked Notes or Dual Currency Notes shall be subject to such additional U.S. selling
restrictions as the Issuer and the relevant Dealer may agree as a term of the issue and purchase of such
Notes, which additional selling restrictions shall be set out in the applicable Pricing Supplement. The
relevant Dealer agrees that it shall offer, sell and deliver such Notes only in compliance with such
additional U.S. selling restrictions.
Public Offer Selling Restriction under the Prospectus Directive
In relation to each Member State of the European Economic Area which has implemented the Prospectus
Directive (each, a Relevant Member State), each Dealer has represented and agreed, and each further
Dealer appointed under the Programme will be required to represent and agree, that with effect from and
including the date on which the Prospectus Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make an offer of Notes which are the subject
of the offering contemplated by this Information Memorandum as completed by the Pricing Supplement
in relation thereto to the public in that Relevant Member State except that it may, with effect from and
including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant
Member State:
(a)
if the Pricing Supplement in relation to the Notes specifies that an offer of those Notes may be made
other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a
Non-exempt Offer), following the date of publication of a prospectus in relation to such Notes
which has been approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the competent authority in
that Relevant Member State, provided that any such prospectus has subsequently been completed by
the Pricing Supplement contemplating such Non-exempt Offer, in accordance with the Prospectus
Directive, in the period beginning and ending on the dates specified in such prospectus or Pricing
Supplement, as applicable and the Issuer has consented in writing to its use for the purpose of that
non-exempt offer;
(b)
at any time to any legal entity which is a qualified investor as defined under the Prospectus Directive;
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(c)
at any time to fewer than 100 or, if the Relevant Member State has implemented the relevant
provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant
Dealer or Dealers nominated by the Issuer for any such offer; or
(d)
at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of Notes referred to in paragraphs (b) to (d) above shall require the Issuer or
any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a
prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes
in any Relevant Member State means the communication in any form and by any means of sufficient
information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to
purchase or subscribe the Notes, as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and the expression Prospectus Directive
means Directive 2003/71/EC (and the amendments thereto, including the 2010 PD Amending Directive, to
the extent implemented in the Relevant Member State), and includes any relevant implementing measure
in the Relevant Member State and the expression 2010 PD Amending Directive means Directive
2010/73/EU.
United Kingdom
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that:
(a)
in relation to any Notes which have a maturity of less than one year, (i) it is a person whose ordinary
activities involve it in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell any
Notes other than to persons (A) whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or as agent) for the purposes of their businesses
or (B) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as
principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise
constitute a contravention of Section 19 of the FSMA by the Issuer;
(b)
it has only communicated or caused to be communicated and will only communicate or cause to be
communicated an invitation or inducement to engage in investment activity (within the meaning of
Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in
circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(c)
it has complied and will comply with all applicable provisions of the FSMA with respect to anything
done by it in relation to any Notes in, from or otherwise involving the United Kingdom.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of
Japan (Act No. 25 of 1948, as amended; the FIEA). Each Dealer has represented, and each further Dealer
appointed under the Programme will be required to represent, that it will not offer or sell any Notes,
directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (as defined under Item 5,
Paragraph 1, Article 6 of the Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended)),
or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, a resident
of Japan except pursuant to an exemption from the registration requirements of, and otherwise in
compliance with, the FIEA and any other applicable laws, regulations and ministerial and ministerial
guidelines of Japan.
145
Hong Kong
Each of the Dealers has represented and agreed, and each further Dealer appointed under the Programme
will be required to represent and agree, that:
(a)
it has not offered or sold, and will not offer or sell, in Hong Kong, by means of any document, any
Notes (except for Notes which are a structured product as defined in the Securities and Futures
Ordinance (Cap. 571) of Hong Kong) other than (i) to professional investors as defined in the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance,
or (ii) in other circumstances which do not result in the document being a prospectus as defined
in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public
within the meaning of that Ordinance; and
(b)
it has not issued, or had in its possession for the purposes of issue, and will not issue or have in its
possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement,
invitation or document relating to the Notes which is directed at, or the contents of which are likely
to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities
laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only
to persons outside Hong Kong or only to professional investors as defined in the Securities and
Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance.
Republic of Korea
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that the Notes have not been and will not be registered under the Financial
Investment Services and Capital Markets Act (Act No. 8635, as amended). Each Dealer represents and
agrees, and each new Dealer further appointed under the Programme will be required to represent and
agree, that it has not offered, delivered or sold directly or indirectly any Notes in Korea or to, or for the
account or benefit of, any resident of Korea (as such term is defined in the Foreign Exchange Transaction
Regulation (Act No. 5550, as amended)), except as otherwise permitted under applicable Korean laws and
regulations. Each Dealer undertakes to ensure that any securities dealer to which it sells Notes confirms
that it is purchasing such Notes as principal and agrees with such Dealer that it will comply with the
restrictions described above.
Republic of the Philippines
Under Republic Act No. 8799, known as the Securities Regulation Code (the Code), and its
implementing rules, securities, such as the Notes, are not permitted to be sold or offered for sale or
distribution within the Philippines unless such securities are approved for registration by the Philippine
SEC or are otherwise exempt securities under Section 9 of the Code or sold pursuant to an exempt
transaction under Section 10 of the Code.
The Notes will only be offered in the Philippines to qualified buyers under an exempt transaction pursuant
to section 10.1(l) of the Code. A confirmation of exemption from the Philippine SEC that the offer and sale
of the Notes in the Philippines qualifies as an exempt transaction under the Code is not required to be, and
has not been, obtained.
The Notes have not been registered with the Philippine SEC under the Code, any future offer or sale
thereof is subject to registration requirements under the Code unless such offer or sale qualifies as an
exempt transaction.
Peoples Republic of China
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that neither it nor any of its affiliates has offered or sold or will offer or
sell any of the Notes in the Peoples Republic of China (excluding Hong Kong, Macau and Taiwan) as part
of the initial distribution of Notes.
146
Singapore
This Information Memorandum has not been registered as a prospectus with the Monetary Authority of
Singapore under the Securities and Futures Act, Chapter 289 of Singapore (the Securities and Futures
Act) and the Notes will be offered pursuant to exemptions under the Securities and Futures Act.
Accordingly, the Notes may not be offered or sold or made the subject of an invitation for subscription or
purchase, nor may this Information Memorandum or any other document or material in connection with
the offer or sale or invitation for subscription or purchase of such Notes be circulated or distributed,
whether directly or indirectly, to the public or any member of the public in Singapore other than (a) to an
institutional investor or other person falling within Section 274 of the Securities and Futures Act, (b) to
a relevant person, under Section 275 (1) of the Securities and Futures Act, or any person pursuant to
Section 275 (1A) of the Securities and Futures Act, and in accordance with the conditions specified in
Section 275 of the Securities and Futures Act, or (c) pursuant to, and in accordance with the conditions
of, any other applicable provision of the Securities and Futures Act. Where the Notes are subscribed or
purchased under Section 275 of the Securities and Futures Act by a relevant person which is:
(a)
a corporation (which is not an accredited investor (as defined in Section 4A of the Securities and
Futures Act)) the sole business of which is to hold investments and the entire share capital of which
is owned by one or more individuals, each of whom is an accredited investor; or
(b)
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and
each beneficiary is an individual who is an accredited investor; or
(c)
securities (as defined in Section 239(1) of the Securities and Futures Act) of that corporation or the
beneficiaries rights and interest (howsoever described) in that trust shall not be transferable for 6
months after that corporation or that trust has acquired the Notes pursuant to an offer under Section
275 of the Securities and Futures Act except:
(i)
(ii)
147
The Notes may not be sold or offered to or for the benefit of any person (including legal entities) that are
resident, incorporated, established or having their usual residence in the Russian Federation or to any
person located within the territory of the Russian Federation unless and to the extent otherwise permitted
under Russian law; it being understood and agreed that the Dealers may distribute Information
Memorandum to qualified investors (as defined under Russian law) in the Russian Federation in a manner
that does not constitute an advertisement (as defined in Russian law) of Notes and may sell Notes to
Russian qualified investors in a manner that does not constitute placement or public circulation of the
Notes in the Russian Federation (as defined in Russian law).
Since neither the issuance of the Notes nor a Russian securities prospectus in respect of the Notes has been
registered, or is intended to be registered, with the Federal Service for Financial Markets of the Russian
Federation, the Notes are not eligible for initial offering or public circulation in the Russian Federation.
Mongolia
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that neither it nor any of its affiliates has offered or sold or will offer or
sell any of the Notes in the territory of Mongolia.
General
Each Dealer has represented and agreed that it will (to the best of its knowledge and belief) comply with
all applicable securities laws and regulations in force in any jurisdiction in which it purchases, offers, sells
or delivers Notes or possesses or distributes this Information Memorandum and will obtain any consent,
approval or permission required by it for the purchase, offer, sale or delivery by it of Notes under the laws
and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases,
offers, sales or deliveries and neither the Issuer, the Trustee and any other Dealer shall have any
responsibility therefore.
None of the Issuer, the Guarantor, the Trustee and any of the Dealers represents that Notes may at any time
lawfully be sold in compliance with any applicable registration or other requirements in any jurisdiction,
or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating any such
sale.
With regard to each Tranche, the relevant Dealer will be required to comply with any additional restrictions
as the Issuer and the relevant Dealer shall agree and as shall be set out in the applicable Pricing
Supplement.
148
GENERAL INFORMATION
Authorisation
The establishment of the Programme and the initial issue of Notes was duly authorised by a resolution of
the shareholders of the Bank dated 28 December 2006 and a resolution of the Representative Governing
Board of the Bank dated 19 September 2006. Further updates of the Programme and the issue of further
Notes thereunder were duly authorised by a resolution of the shareholders of the Bank dated 30 April 2008
and a resolution of the Representative Governing Board dated 4 April 2008 as well as a resolution of the
Representative Governing Board dated 7 October 2010.
This update of the Programme and the issue of further Notes thereunder was duly authorised by
shareholder resolution no. 2 dated 30 March 2012 and by a resolution of the Board on 12 April 2012.
Listing of Notes on the SGX-ST
Application has been made and approval in-principle has been granted for the listing and quotation of
Notes that may be issued pursuant to the Programme and which are agreed at or prior to the time of issue
thereof to be so listed and quoted on the SGX-ST. Permission to list such Notes will be granted when such
Notes have been admitted to the Official List of the SGX-ST. The Notes may also be listed on such other
or further stock exchange(s) as may be agreed between the Issuer and the relevant Dealer in relation to each
Series. If the application to the SGX-ST to list a particular series of Notes is approved, such Notes listed
on the SGX-ST will be traded on the SGX-ST in a minimum board lot size of S$200,000 (or its equivalent
in another currency).
For so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Bank will
appoint and maintain a paying and transfer agent in Singapore if any Global Note is exchanged for
definitive Notes.
Documents Available
For the period of 12 months following the date of this Information Memorandum and, for so long as any
Note remains outstanding and listed on the SGX-ST, copies of the following documents will, when
published, be available from the registered office of the Bank and from the specified office of the Trustee
and the Principal Paying Agent for the time being in Hong Kong:
(a)
(b)
the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2011, together with the independent auditors audit reports;
(c)
the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2010, together with the independent auditors audit reports;
(d)
the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2009, together with independent auditors audit reports;
(e)
the Trust Deed, the Agency Agreement and the forms of the Global Notes, the Notes in definitive
form, the Receipts, the Coupons and the Talons;
(f)
(g)
any future information memoranda, offering circulars, prospectuses and supplements including
Pricing Supplements (save that a Pricing Supplement relating to an unlisted Note will only be
available for inspection by a holder of such Note and such holder must produce evidence satisfactory
to the Bank and the Principal Paying Agent as to its holding of Notes and identity) to this Information
Memorandum and any other documents incorporated herein or therein by reference.
Clearing Systems
The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg (which are
the entities in charge of keeping the records). The appropriate Common Code and ISIN for each Tranche
of Notes allocated by Euroclear and Clearstream, Luxembourg will be specified in the applicable Pricing
Supplement. If the Notes are to clear through an additional or alternative clearing system the appropriate
information will be specified in the applicable Pricing Supplement.
149
150
F-1
F-2
F-3
F-4
Note
2011
MNT000
2010
MNT000
Assets
Cash and due from banks
Investment securities
Investment in an associate
Loans and advances, net
Bills purchased under resale agreements
Subordinated loans
Property and equipment, net
Intangible assets, net
Foreclosed real properties, net
Other assets
4
5
6
7
8
9
10
11
12
13
474,964,634
347,770,318
2,275,956
1,123,331,907
36,966,114
7,000,000
79,144,992
433,398
579,190
17,573,180
553,467,811
260,735,448
464,466,630
7,000,000
19,811,084
655,894
977,345
31,765,857
2,090,039,689
1,338,880,069
14
1,277,295,962
919,944,749
15
16
17
35,063,555
171,484,469
174,380,516
1,501,188
207,134,041
41,693,522
42,071,592
53,584,874
50,678,147
1,481,974
173,280,281
31,218,538
20,398,957
1,950,624,845
1,250,587,520
6,610,113
7,392,191
(6,001,872)
18,702,066
3,736,050
108,976,296
6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841
139,414,844
88,292,549
2,090,039,689
1,338,880,069
Total assets
18
19
20
Total liabilities
Shareholders equity:
Share capital
Share premium
Treasury shares
Revaluation reserves
Unrealised gain on available-for-sale financial assets
Retained earnings
21
22
10
5
F-5
Note
Interest income
Interest expense
23
24
2011
MNT000
2010
MNT000
143,500,481
(95,359,061)
89,212,736
(60,062,936)
48,141,420
29,149,800
12,134,233
14,176,216
6,852,031
9,277,305
26,310,449
16,129,336
Operating income
74,451,869
45,279,136
(20,071,451)
74,955
(3,070,865)
(18,578,760)
(1,725,360)
51,384,508
24,975,016
(9,282,677)
(4,277,777)
42,101,831
20,697,239
3,736,050
5,284,414
9,020,464
51,122,295
20,697,239
25
26
Operating expenses
Share of profit of an associate
Impairment losses
27
6
28
30
5
10
F-6
Unrealised
gain on
available-for-
Note
1 January 2010
Share
Share
Treasury
Revaluation
sale financial
capital
premium
shares
reserves
assets
earnings
Total
MNT000
MNT000
MNT000
MNT000
MNT000
MNT000
MNT000
(6,456,232)
13,683,324
45,911,554
67,140,950
6,610,113
7,392,191
Retained
20,697,239
20,697,239
22
454,360
454,360
10
(265,048)
265,048
31 December 2010
6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841
88,292,549
1 January 2011
6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841
88,292,549
42,101,831
42,101,831
3,736,050
3,736,050
10
5,284,414
5,284,414
10
(624)
624
6,610,113
7,392,191
(6,001,872)
18,702,066
3,736,050
108,976,296
139,414,844
Amount transferred to
retained earnings
31 December 2011
F-7
Note
Cash flows from operating activities:
Net profit
Adjustments for:
Depreciation and amortisation
Share of profit of an associate
Net interest income
Income tax expense
Gain on disposition of property and equipment
Property and equipment written off
Impairment losses
10, 11, 27
6
23, 24
30
27
28
2011
MNT000
2010
MNT000
42,101,831
20,697,239
2,218,699
(74,955)
(48,141,420)
9,282,677
(351)
302
3,070,865
2,473,750
-(29,149,800)
4,277,777
-2,258
1,725,360
8,457,648
26,584
(662,841,490)
18,129,030
357,351,213
(58,393,449)
(12,448,853)
340,421,971
(18,521,319)
14,656,679
22,115,633
(184,550)
(119,348,252)
2,949,865
141,516,264
(87,418,713)
(9,263,463)
(18,535,546)
16,640,593
81,795,098
(57,256,310)
(4,139,389)
(354,332,538)
310,041,782
(85,431,472)
(168,891,248)
8
10
11
12
10
6
(36,966,114)
(56,033,312)
(264,336)
1,283,019
252,000
(2,000,001)
799,556
(1,233,200)
(358,878)
819,716
889,720
-
(179,160,216)
(167,974,334)
*Represents fluctuation of other assets and other liabilities other than changes in accrued interest receivables
and accrued interest payables, respectively.
F-8
2010
MNT000
123,702,369
171,484,469
32,962,459
10,441,893
--
(2,623,846)
-113,475,566
31,214,570
454,360
338,591,190
142,520,650
(194,901,564)
284,588,098
498,188,028
213,599,930
303,286,464
498,188,028
Note
Cash flows from financing activities:
Net proceeds from (repayments of) borrowings
Proceeds from bills sold under repurchase agreements
Proceeds from debt securities issued
Proceeds from subordinated debt securities issued
Disposal of treasury shares
17
16
18
19
22
32
F-9
10
F-10
Basis of preparation
Statement of compliance
The accompanying financial statements are consolidated financial statements that have been prepared in
accordance with International Financial Reporting Standards (IFRS) as modified by the BOM guidelines.
The major items that are not in compliance with IFRS include the following, and the details are included in
the corresponding notes:
z
z
Allowance for loan loss reserves, receivables, letters of credit, unused credit
commitments and foreclosed properties
Accounting for deferred tax
The consolidated financial statements were authorised for issue by the Board of Directors on 22 March
2012.
Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except for the following:
z
z
z
11
F-11
(ii)
12
F-12
F-13
Classification (continued)
Derivatives recorded at fair value through profit or loss include certain derivative contracts that are not
designated as effective hedging instruments. All trading derivatives in a net receivable position
(positive fair value), as well as options purchased, are reported as trading assets. All trading
derivatives in a net payable position (negative fair value), as well as options written, are reported as
trading liabilities.
Financial assets or financial liabilities at fair value through profit or loss include those financial assets
and financial liabilities designated at initial recognition because 1) such designation eliminates or
significantly reduces an accounting mismatch; or 2) respective financial assets and financial liabilities
are part of a group of financial assets, liabilities or both and their performance is evaluated on a fair
value basis in accordance with a documented risk management or investment strategy; or 3) the
embedded derivative does not meet the separation criteria. Financial assets and financial liabilities at
fair value through profit or loss are recorded at fair value and changes in fair value are recorded in the
current operations.
Originated loans and receivables are loans and receivables created by the Group providing money to a
debtor other than those created with the intention of short-term trading. Originated loans and
receivables comprise loans and advances to customers and are reported net of an allowances to
reflect the estimated recoverable amounts. The allowance is estimated in accordance with the
Regulations on Asset Classification and Provisioning, jointly approved by the President of BOM and
the Ministry of Finance.
Held-to-maturity assets are non-derivative assets with fixed or determinable payments and fixed
maturity that the Group has the intent and ability to hold to maturity, and are not designated at fair
value through profit or loss or as available-for-sale. This includes certain investment securities held by
the Group.
Available-for-sale assets are financial assets that are neither held for trading purposes, nor held to
maturity.
(ii)
Initial recognition
A financial asset or financial liability is measured initially at fair value plus transaction costs that are
directly attributable to its acquisition or issue.
14
F-14
Subsequent measurement
Subsequent to initial recognition, all financial assets and liabilities held for trading, derivatives
recorded at fair value through profit or loss, financial assets and liabilities at fair value through profit or
loss and available-for-sale assets are measured at fair value, except that any instrument that does not
have a quoted market price in an active market and whose fair value cannot be reliably measured is
stated at cost, including transaction costs, less impairment losses. Gains and losses arising from
changes in the fair value of trading instruments and available-for-sale assets are recognised in the
profit or loss and directly in equity, respectively.
All non-trading financial liabilities, originated loans and receivables and held-to-maturity asset are
measured at amortised cost less impairment losses where applicable. Amortised cost is calculated on
the effective interest rate method. Premiums and discounts, including initial transaction costs, are
included in the carrying amount of the related instrument and amortised based on the effective
interest rate of the instrument.
Financial assets
A financial asset is considered for derecognition when the contractual rights to the cash flows from
the financial asset expire, or the Group has either transferred the contractual right to receive the cash
flows from that asset, or has assumed an obligation to pay those cash flows to one or more
recipients, subject to certain criteria, or if it transfers substantially all the risks and rewards of
ownership.
The Group enters into transactions in which it transfers previously recognised financial assets but
retains substantially all the associated risks and rewards of those assets. In transactions in which
substantially all the risks and rewards of ownership of a financial asset are neither retained nor
transferred, the Group derecognises the transferred asset if control over that asset (i.e. the practical
ability to sell the transferred asset) is relinquished. The rights and obligations retained in the transfer
are recognised separately as assets and liabilities, as appropriate. If control over the asset is retained,
the Group continues to recognise the asset to the extent of its continuing involvement, which is
determined by the extent to which it remains exposed to changes in the value of the financial asset
transferred.
The derecognition criteria are also applied to the transfer of part of an asset, rather than the asset as a
whole, or to a group of similar financial assets in their entirety, when applicable. If transferring a part
of an asset, such part must be a specifically identified cash flow, a fully proportionate share of the
asset, or a fully proportionate share of a specifically-identified cash flow.
15
F-15
(ii)
Depreciation
Depreciation is charged to profit or loss on a straight-line basis over the estimated useful life of each
item of property and equipment. The estimated useful lives of property and equipment are as follows:
40 years
10 years
3-5 years
Construction-in-progress
Construction-in-progress represents the cost of construction of new buildings and premises, which have
not been fully completed or installed. No depreciation is provided for construction-in-progress during the
period of construction.
Intangible assets
(i)
16
F-16
Amortisation
Amortisation is charged to the consolidated statements of comprehensive income on a straight-line
basis over the estimated useful lives of intangible assets unless such lives are indefinite. The
estimated useful life of intangible assets is as follows:
3 years
Impairment
The carrying amounts of the Group's assets are reviewed at each reporting date to determine whether
there is any indication of impairment. If such an indication exists, the asset's recoverable amount is
estimated.
(i)
17
F-17
Assets other than loans and advances and cash and cash equivalents
The Group assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is required, the
Group estimates the recoverable amount of the respective asset. The recoverable amount is the
higher of the asset's or cash generating units fair value less costs to sell and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. For an asset that does not generate cash inflows largely independent of
those from other assets, the recoverable amount is determined for the cash-generating unit to which
the asset belongs. An impairment loss is recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment is recognised as loss of current
operation in the consolidated statements of comprehensive income.
An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised. All reversals of impairment are
recognised as profit in the consolidated statements of comprehensive income.
Repurchase agreements
The Group enters into purchase (sale) of investments under agreements to resell (repurchase) substantially
identical investments at a certain date in the future at a fixed price. Investments purchased subject to
commitments to resell them at future dates are not recognised on the consolidated statements of financial
position. The amounts paid are recognised in loans to either banks or customers. The receivables are
shown as collateralised by the underlying security. Investments sold under repurchase agreements
continue to be recognised in the consolidated statement of financial position and are measured in
accordance with the accounting policy for either assets held for trading or available-for-sale as appropriate.
The proceeds from the sale of the investments are reported as liabilities to either banks or customers. The
difference between the sale and repurchase considerations is treated as interest income or expense and is
accrued over the period of the agreement using the effective interest method.
Share capital
(i)
Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of
ordinary shares and share options are recognised as a deduction from equity, net of taxes.
(ii)
Treasury shares
When share capital recognised as equity is repurchased, the amount of the consideration paid, which
includes directly attributable costs, is net of any tax effects, and is recognised as a deduction from
equity. Repurchased shares are classified as treasury shares and are presented as a deduction from
total equity. When treasury shares are sold or reissued subsequently, the amount received is
recognised as an increase in equity, and the resulting surplus or deficit on the transaction is
transferred to / from retained earnings.
18
F-18
Interest income
Interest income and expense is recognised in the consolidated statements of comprehensive income
as it accrues, taking into account the effective yield of the asset or liability. Interest income and
expense include the amortisation of any discount or premium or other differences between the
carrying amount of an interest bearing instrument and its amount at maturity calculated on an
effective interest rate basis except that the Group does not amortize loan originating costs and fees
on an effective interest rate basis but rather recognises them immediately in current operations.
(ii)
19
F-19
The amendments to IFRS 7 Disclosures Transfers of Financial Assets as well as the accounting
pronouncements IFRS 9 and IFRS 9R Financial Instruments will be relevant to the Group but were
not effective as of 31 December 2011 and therefore have not been applied in preparing these
consolidated financial statements. The Group is currently evaluating the potential impact that the
adoption of these new accounting pronouncements will have on its consolidated financial
statements.
In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements to
require companies to group together items within other comprehensive income (OCI) that may
be reclassified to the statement of income. The amendments also reaffirm existing requirements
that items in OCI and profit or loss should be presented as either a single statement or two
separate statements. The amendments are effective for annual periods beginning on or after 1
July 2012, with earlier application permitted. The Group is currently evaluating the potential
impact that the adoption of the amendments will have on presentation of its consolidated financial
statements.
20
F-20
In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, IFRS 12 Disclosures of Interests in Other Entities, a revised version of IAS 27
Separate Financial Statements which has been amended for the issuance of IFRS 10 but retains
the current guidance for separate financial statements, and a revised version of IAS 28
Investment in Associates and Joint Ventures which has been amended for conforming changes
based on the issuance of IFRS 10 and IFRS 11.
Each of the standards are effective for annual periods beginning on or after 1 January 2013, with
earlier application permitted as long as each of the other standards are also early applied.
However, entities are permitted to include any of the disclosure requirements in IFRS 12 into their
consolidated financial statements without early adopting IFRS 12. The Group is currently
evaluating the potential impact that the adoption of the standards will have on its consolidated
financial statements.
In May 2011, the IASB issued IFRS 13 Fair Value Measurement which establishes a single source
of guidance for fair value measurement under IFRS. IFRS 13 provides a revised definition of fair
value and guidance on how it should be applied where its use is already required or permitted by
other standards within IFRS and introduces more comprehensive disclosure requirements on fair
value measurement. IFRS 13 is effective for annual periods beginning on or after 1 January 2013,
with earlier application permitted. The Group is currently evaluating the potential impact that the
adoption of the standard will have on its consolidated financial statements.
21
F-21
2010
MNT000
50,082,881
35,987,964
168,120,730
256,761,023
-
286,797,880
79,820,367
150,861,600
474,964,634
553,467,811
* At 31 December 2011, BOM requires that a minimum 11% of average customer deposits for two
weeks (5% at 31 December 2010) must be maintained with BOM. In relation to the daily requirement,
the Group also should maintain no less than 50% of the required reserve amount at the end of each day.
At 31 December 2011 and 2010, the required reserve amount was MNT 168,064,650 thousand and
MNT 48,716,398 thousand, respectively.
Investment securities
2011
MNT000
Available-for-sale investment securities
Unquoted equity securities, at cost (*1)
Equity securities, at fair value (*2)
BOM treasury bills (*3)
2010
MNT000
17,639,412
24,846,858
199,298,305
241,784,575
1,596,562
1,596,562
103,332,743
2,653,000
105,985,743
222,266,870
33,121,016
3,751,000
259,138,886
347,770,318
260,735,448
22
F-22
Investment in an associate
2011
MNT000
Investment in MMC
2,275,956
2010
MNT000
9
-
In 2009, the Group made a MNT 201,000 thousand investment acquiring approximately a 9.1% equity
interest in MMC, which was previously included in investment securities as of 31 December 2010. MMC
is currently engaged in acquiring mortgage loans issued by commercial banks and securitizing these
mortgages by issuing mortgage backed securities. The Group made an additional investment of MNT
2,000,001 thousand on 4 August 2011. As a result of this transaction, the Groups ownership interest in
MMC increased to approximately 31.6%. Effective 4 August 2011, the Group accounts for the investment
in MMC under the equity method and recognised its share of profit of MMC of MNT 74,955 thousand in
2011. In applying the equity method, the Group used the financial information of MMC as of 30 June 2011
with adjustments made for the effects of any significant transactions or events occurring between 30 June
2011 and 4 August 2011, since the financial information of MMC as of the date of the additional acquisition
of equity interest was unavailable.
23
F-23
2011
MNT000
2010
MNT000
1,131,816,506
9,435,210
1,141,251,716
473,923,449
4,547,005
478,470,454
(17,919,809)
(14,003,824)
1,123,331,907
464,466,630
Movements in the allowance for loan losses during the year are as follows:
2011
MNT000
2010
MNT000
At 1 January
Charge for the year
Written back/recoveries
Written off
Effect of foreign currency movements
14,003,824
5,228,218
(1,252,005)
(60,228)
-
15,122,602
1,915,443
(1,750,743)
(1,285,655)
2,177
At 31 December
17,919,809
14,003,824
At 31 December 2011 and 2010, MNT 556,851,619 thousand and MNT 261,131,278 thousand of loans and
advances are expected to be recovered in more than 12 months after the reporting date.
Transfers of mortgage portfolios
In 2008, the Group transferred its mortgage loans with carrying amounts of MNT 404,864,410 or USD
294,334 to MMC in exchange for cash. In 2009, the Group transferred another pool of mortgage loans with
carrying amounts of MNT 4,700,819,887 in exchange for the bonds issued by MMC. There were no
mortgage portfolios transferred to MMC during 2011 and 2010.
The loans were transferred on a recourse basis and do not qualify for derecognition criteria for financial
assets since significant risks and rewards were not transferred to MMC. Accordingly, the Group accounted
for these transactions as collateralized financing for which the balance at 31 December 2011 and 2010
amounted to MNT 2,197,608 thousand and MNT 3,537,518 thousand, respectively.
Contract party
Ulaanbaatar City Bank
(UB City Bank)
Ss
Purchase
date
30 Dec 2011
Maturity
2 Jan 2012
Interest
rate
11%
2011
MNT000
36,966,114
2010
MNT000 9
-
In 2011 the Group entered into reverse repurchase agreements with UB City Bank where the Group
purchased BOM treasury bills under resale agreements at MNT 37,000,000 thousand at maturity. The
purchased securities are collateralized for the receivables pertaining to the respective agreements.
9
Subordinated loans
24
F-24
2011
MNT000
UB City Bank
Capitron Bank
2010
MNT000
4,000,000
3,000,000
4,000,000
3,000,000
7,000,000
7,000,000
The loan to UB City Bank bears fixed interest of 8% per annum and is to be repaid in full on 25 September
2012. The loan to Capitron Bank bears interest of 12% at 31 December 2011 (12.5% at 31 December 2010)
per annum and is to be repaid in full on 14 August 2014.
10
Buildings
Office
equipment and
motor vehicles
Computers
and others
Constructionin-progress
Total
At cost/revaluation
At cost
At revaluation
4,698,701
12,580,623
3,218,568
602,389
3,985,043
235,264
336,651
-
12,238,963
13,418,276
At 1 January 2011
17,279,324
3,820,957
4,220,307
336,651
25,657,239
1,472,719
(275,208)
95,783
5,140,509
1,037,127
-
1,434,721
(330)
-
52,088,745
(95,783)
-
56,033,312
(275,208)
(330)
5,140,509
At 31 December 2011
23,713,127
4,858,084
5,654,698
52,329,613
86,555,522
5,848,714
17,864,413
4,255,695
602,389
5,419,434
235,264
52,329,613
-
67,853,456
18,702,066
23,713,127
4,858,084
5,654,698
52,329,613
86,555,522
1,281,970
637,531
(23,559)
(143,905)
1,614,474
412,534
-
2,949,711
681,802
(28)
-
5,846,155
1,731,867
(23,559)
(28)
(143,905)
At 31 December 2011
1,752,037
2,027,008
3,631,485
7,410,530
Carrying amounts
At 31 December 2011
21,961,090
2,831,076
2,023,213
52,329,613
79,144,992
Additions
Disposals
Write offs
Transfers
Revaluation surplus
Accumulated depreciation
At 1 January 2011
Charge for the year
Disposals
Write-offs
Revaluation surplus
25
F-25
10
Buildings
At cost/valuation
At cost
At revaluation
Office
equipment and
motor vehicles
Computers
and others
Constructionin-progress
Total
4,434,388
12,833,875
2,843,562
613,532
3,666,331
235,917
1,077,229
-
12,021,510
13,683,324
17,268,263
3,457,094
3,902,248
1,077,229
25,704,834
(800,884)
811,945
467,416
(10,000)
(272,622)
179,069
272,277
(197,289)
243,071
493,507
(1,234,085)
At 31 December 2010
17,279,324
3,820,957
4,220,307
336,651
25,657,239
4,698,701
12,580,623
3,218,568
602,389
3,985,043
235,264
336,651
-
12,238,963
13,418,276
17,279,324
3,820,957
4,220,307
336,651
25,657,239
478,932
849,746
(46,708)
-
1,378,837
381,732
(5,700)
(140,395)
2,407,156
738,569
(196,014)
4,264,925
1,970,047
(52,408)
(336,409)
At 31 December 2010
1,281,970
1,614,474
2,949,711
5,846,155
Carrying amounts
At 31 December 2010
15,997,354
2,206,483
1,270,596
336,651
19,811,084
At 1 January 2010
Additions
Disposals
Write-offs
Transfers
Accumulated depreciation
At 1 January 2010
Charge for the year
Disposals
Write-offs
1,233,200
(810,884)
(469,911)
-
The Group disposed of an apartment unit and one of its branch buildings in 2011 and 2010, respectively,
both of which were revalued in 2008. Revaluation surplus of MNT 624 and MNT 265,048 which was
allocated to each of the property in 2008 were released into retained earnings in 2011 and 2010 upon
disposal, respectively.
Construction-in-progress account primarily represents costs for construction of the Groups office building
in Ulaanbaatar, Mongolia. The construction of the Groups office building commenced during the second
quarter of 2011 and is expected to be completed during the fourth quarter of 2012. There were no
capitalized borrowing costs related to the acquisition of property and equipment during 2011 and 2010.
26
F-26
10
Description of property
Valuation amount
Buildings
Buildings
Basis of valuation
17,076,514
21,961,090
Market value
Market value
If the revalued property and equipment had been carried at historical cost less accumulated depreciation,
the carrying amounts of the revalued assets that would have been included in the consolidated financial
statements as of 31 December 2011 and 2010 would be as follows:
2011
MNT000
Buildings
Office equipment and motor vehicles
11
3,833,704
89,009
2010
MNT000
2,619,962
118,679
Intangible assets
2011
MNT000
9 999998
2010
MNT000
Cost
At 1 January
Additions
2,517,126
264,336
2,158,248
358,878
At 31 December
2,781,462
2,517,126
Amortisation
At 1 January
Amortisation charge for the year
1,861,232
486,832
1,357,529
503,703
At 31 December
2,348,064
1,861,232
433,398
655,894
Carrying amounts
At 31 December
Intangible assets consist of only purchased software.
27
F-27
12
2010
MNT000
26,500
812,269
(259,579)
420,799
1,777,779
(1,221,233)
579,190
977,345
Properties acquired through foreclosure are initially recognised at fair value, recorded as foreclosed
properties and are held for sale. The allowance is subsequently estimated in accordance with the
Regulations on Asset Classification and Provisioning, jointly approved by the President of BOM and Ministry
of Finance. Such a model classifies the Groups foreclosed properties based on time characteristics and
makes allowances at the rates of 0%, 5%, 25%, 50% and 100% for credit classification categories of
performing, in arrears, substandard, doubtful and loss, respectively. During 2011 and 2010, an allowance of
MNT 884,864 thousand and MNT 694,945 thousand were written back upon disposition of foreclosed real
properties, respectively, and foreclosed real properties amounting to MNT 82,157 thousand and MNT
375,138 thousand, respectively, were written off against impairment losses.
13
Other assets
2011
MNT000
Precious metals
Accrued interest receivables
Prepayments(*)
Inventory supplies
Other receivables, net
2010
MNT000
31,151
14,929,123
936,201
490,954
1,185,751
31,151
11,013,254
18,591,792
471,859
1,657,801
17,573,180
31,765,857
(*) Included in prepayments as of 31 December 2010 were USD 3,000,000 million (MNT 3,502,950
thousand) related to the Groups investment in UB City Bank for acquiring 800 shares or 10% of the total
outstanding shares of UB City Bank, and a deposit of USD 11,000,000 made for construction of the Groups
office building. These were reclassified to investment securities and construction-in-progress in property
and equipment during 2011, respectively.
Other receivables are presented net of impairment losses amounting to MNT 2,156,497,138 and MNT
2,176,980,635 as of 31 December 2011 and 2010, respectively.
28
F-28
14
Current accounts
Savings deposits
Time deposits
Other deposits
2011
MNT000
2010
MNT000
524,418,099
206,263,343
534,258,396
12,356,124
343,163,179
112,323,575
452,065,821
12,392,174
1,277,295,962
919,944,749
Current accounts and other deposits generally bear no interest. However, for depositors maintaining
current account balances above the prescribed limit, interest is provided at rates of approximately 1.5% and
3.4% (2010: 1.0% and 3.0%) per annum for foreign and local currency accounts, respectively.
Foreign and local currency savings deposits bear interest at a rate of approximately 1.9% and 6.3% (2010:
2.4% and 6.0%), respectively.
Foreign and local currency time deposits bear interest at a rate of approximately 6.5% and 12.3% (2010:
5.1% and 12.0%), respectively.
15
16
2010
MNT000
12,361,181
99,390
249,214
22,353,770
53,507,922
783
76,169
-
35,063,555
53,584,874
Contract party
Ss
Sold
date
Maturity
Interest
rate
2011
MNT000
2010
MNT000
9
BOM
BOM
BOM
28 Dec 2011
28 Dec 2011
30 Dec 2011
2 Jan 2012
3 Jan 2012
2 Jan 2012
16.25%
16.25%
16.25%
66,816,502
39,314,997
65,352,970
171,484,469
In 2011 the Group entered into repurchase agreements with BOM where the Group sold BOM treasury
bills under repurchase agreements at an aggregate amount of MNT 177,000,000 thousand at various
maturities. The securities sold are collateralized for the payables pertaining to the respective agreements.
29
F-29
17
Borrowings
2011
MNT000
Kreditanstalt fuer Wiederaufbau
World Bank
Asian Development Bank
International Development Association
Export-Import Bank of Korea
VTB Bank Austria
Export-Import Bank of Republic of China
Japan International Cooperation Agency
Atlantic Forfaitierungs AG
Russian Agricultural Bank
SME Project Fund from MoF
Commerzbank AG
Industrial and Commercial Bank of China
ING Bank
Baoshang Bank
MMC
2010
MNT000
3,457,600
6,674,634
1,139,259
750,880
18,094,576
50,548,594
148,118
6,640,131
3,265,411
74,217,691
2,228,909
740,110
848,337
3,428,658
2,197,608
2,792,307
5,484,868
118,068
691,118
5,539,417
11,314,620
50,287
1,592,081
2,357,213
11,085,650
6,115,000
3,537,518
174,380,516
50,678,147
2010
MNT000
80,498
6,594,136
122,761
5,362,107
6,674,634
5,484,868
Loan I
In 2003, the Group entered into the Project Agreement with World Bank under the World Bank
Training Program via the Ministry of Finance for the purpose of financing the Group's implementation
of institutional development programme, including credit management system renewal, staff training,
provision of equipment and consultants' services. The outstanding World Bank loan under this
program amounted to USD 57,648 and USD 97,648 at 31 December 2011 and 2010, respectively. The
loan bears interest at a fixed rate of 2% per annum. The loan is repayable semi-annually until final
repayment due in December 2024.
30
F-30
17
Borrowings (continued)
Loan II
Loan Il comprises the following loans:
(a)
In 2006, the Group entered into the TDB Subsidiary Loan Agreement with World Bank, under which
the Group can borrow up to USD 4,000,000 from the World Bank via the Ministry of Finance to
finance the Second Private Sector Development Project through the provision of sub-loans. The
outstanding World Bank USD loan amounted to USD 2,897,219 and USD 2,789,280 at 31 December
2011 and 2010, respectively. The loan bears interest at six-month London Inter-Bank Offering Rate
(LIBOR) USD rate plus a margin of 1% per annum (1.48% at 31 December 2011). The repayment
dates for this loan vary in accordance to the tenor of loans granted to the various borrowers.
(b)
Under the TDB Subsidiary Loan Agreement as described in (a) above, the Group can also borrow
amounts in various currencies including in Togrog up to Special Drawing Rights (SDR) 6,250,000 from
the World Bank via the Ministry of Finance to finance specific investment projects through the
provision of sub-loans. The outstanding World Bank MNT loan amounted to approximately MNT 2,178
million and MNT 1,603 million at 31 December 2011 and 2010, respectively. The loan bears interest at
a rate equal to the average rate for MNT demand deposits published by BOM for the preceding
twelve months (6.33% at 31 December 2011). The repayment dates for this loan vary in accordance
with the tenor of loans granted to the various borrowers.
(c)
In 2006, the Group obtained a USD loan in the amount of USD 300,000 from the World Bank under
the World Bank Training Program loan via the Ministry of Finance for the purpose of financing the
Group's implementation of institutional development program, including staff training in the areas of
credit analysis and risk assessment and risk-based internal auditing. The outstanding World Bank loan
under this program amounted to USD 265,212 and USD 200,830 at 31 December 2011 and 2010,
respectively. The loan bears interest at a fixed rate of 2% per annum. The loan is repayable semiannually until final repayment due in May 2025.
In 1999, the Group obtained a USD loan in the amount of USD 134,164 from ADB via BOM to
upgrade the Groups accounting information system. The outstanding loan amounted to USD 89,442
and USD 93,915 at 31 December 2011 and 2010, respectively. The loan matures in 2031 and bears
interest at a fixed rate of 2% per annum and is repayable in 30 annual installments which commenced
in 2002.
(b)
In 2011, the Group entered into a Finance Agreement with ADB, under which the Group can borrow
up to USD 11,000,000 from ADB via the Ministry of Finance to provide loans exclusively to customers
who need to finance the cost of goods, works, and consulting services required to carry out Value
Chain Development (VCD) subprojects. The outstanding USD loan amounted to USD 85,482 at 31
December 2011. The loan matures in June 2018 and bears interest at a fixed rate of 9% per annum.
The repayment dates for this loan vary in accordance to the tenor of loans granted to the various
borrowers.
(c)
Under the Finance Agreement as described in (b) above, the Group can also borrow amounts in
Togrog. The outstanding MNT loan amounted to approximately MNT 895,000 thousand as of 31
December 2011.
31
F-31
17
Borrowings (continued)
International Development Association ("IDA")
In 1998, the Group obtained a USD loan in the amount of USD 600,000 from IDA to finance the Twinning
Agreement with Norwegian Banking Resources Ltd. ("NBR"), under which NBR had transferred operational
knowhow and technical skills to the Group. The outstanding IDA loan amounted to USD 537,737 and USD
549,737 at 31 December 2011 and 2010, respectively. The loan bears interest at a fixed rate of 1% per
annum. Principal repayments commenced in August 2007 with the final repayment due in February 2037.
Export-Import Bank of Korea ("KEXIM")
In 2004, the Group entered into the Comprehensive Interbank Export Credit Agreement with KEXIM under
which the Group can borrow up to USD 2,000,000 for relending purposes to finance customers who
purchase goods from Korean exporters. Effective April 2011, the maximum amount of facility increased to
USD 20,000,000. The outstanding borrowings under this line of credit agreement amounted to USD
12,958,297 and USD 4,406,225 at 31 December 2011 and 2010, respectively. This line of credit expires in
July 2012, and the interest of this particular loan varies with each drawdown, which is determined by
KEXIM. The Group shall repay KEXIM the principal amount of each disbursement on the last day of each
financing period.
VTB Bank (Austria) AG (VTB)
Risk Participation I
Risk Participation II
Risk Participation III
Risk Participation IV
Risk Participation V
2011
MNT000
2010
MNT000 9
1,675,644
20,945,550
13,963,700
13,963,700
7,543,080
3,771,540
-
50,548,594
11,314,620
The Group and VTB entered into various participation agreements, under which the VTB loans were
extended to other borrowers. Under these participation agreements, VTB is at its sole risk and has no right
of recourse against the Group for any loss it incurs as a result of default by the borrower. These loans bear
interest at fixed rates ranging from 8% to 9% per annum.
Export-Import Bank of Republic of China ("TEXIM")
In 2004, the Group entered into a line of credit agreement with TEXIM under which the Group could borrow
up to USD 6,000,000 for relending purposes to finance customers who purchase machinery and other
manufactured goods produced in Taiwan. The outstanding borrowings under this line of credit agreement
amounted to USD 106,073 and USD 40,000 at 31 December 2011 and 2010, respectively. This line of
credit was extended to January 2013.
32
F-32
17
Borrowings (continued)
Japan International Cooperation Agency (JICA)
JICA (formerly Japan Bank for International Cooperation) Loan comprises the following loans:
(a) In 2006, the Group entered into a Loan Financing Agreement with JICA, under which the Group can
borrow USD or MNT up to the amount equivalent to JPY 2,981,000,000 from JICA via the Ministry of
Finance which was channelled to various borrowers for the purpose of Small and Medium-Scaled
Enterprises ("SME") Development or Environmental Protection. The outstanding USD loan amounted to
USD 377,000 and USD 192,400 at 31 December 2011 and 2010, respectively. The loan matures in
March 2019 and bears interest at six-month LIBOR USD rate plus a margin of 1% per annum (1.4% at
31 December 2011). The maturity dates for this loan vary in accordance with the tenor of loans granted
to the various borrowers.
(b) Under the Loan Financing Agreement as described in (a) above, the outstanding MNT loan amounted to
approximately MNT 1,179 million and MNT 1,350 million at 31 December 2011 and 2010, respectively.
The MNT loan bears interest at a rate equal to the average rate for MNT demand deposits published by
BOM for the preceding twelve months (4% at 31 December 2011).
(c) In 2011, the Group entered into another Loan Financing Agreement with JICA, under which the Group
can borrow USD or MNT up to the amount equivalent to JPY 5,000,000,000 from JICA via the Ministry
of Finance which was channelled to various borrowers for the second phase of developing SME or
environment projection. The outstanding MNT loan amounted to approximately MNT 4,935 million at
31 December 2011. The loan matures in March 2020 and bears interest at a rate equal to the average
rate for MNT demand deposits published by BOM for the preceding twelve months (4% at 31
December 2011). The maturity dates for this loan vary in accordance with the tenor of loans granted to
the various borrowers.
33
F-33
17
Borrowings (continued)
SME Project Fund MoF
SME Project Fund MoF comprises the following loans:
(a) In 2009, the Group entered into a credit facility loan agreement with the Ministry of Food, Agriculture
and Light Industry for the purpose of SME development. The Ministry of Food, Agriculture and Light
Industry budgeted MNT 30 billion for this facility which is available to all Mongolian commercial banks
with no specific set amount allocated to individual banks. In 2010 and 2011, the Group renewed this
facility agreement, and the aggregate budget increased to MNT 60 billion and MNT 150 billion,
respectively. This credit facility expires in June 2016 and bears interest at a fixed rate of 7.0% per
annum (9.6% at 31 December 2010) with varying repayment dates depending on the draw date. The
outstanding borrowings under this credit facility amounted to approximately MNT 20,471 million and
MNT 6,115 million at 31 December 2011 and 2010, respectively.
(b) In October 2011, the Group signed the second credit facility agreement with the Ministry of Food,
Agriculture and Light Industry for the purpose of Wool and Cashmere sector development. The
Ministry of Food, Agriculture and Light Industry budgeted MNT 150 billion for this facility. This credit
facility agreement expires in October 2016 and bears interest at a fixed rate of 7.0% per annum with
varying repayment dates depending on the draw date. The outstanding borrowings under this credit
facility amounted to approximately MNT 53,747 million at 31 December 2011.
Commerzbank AG
In 2011, the Group entered into an Uncommitted Bilateral Trade Finance Facility Master Agreement with
Commerzbank AG for the purpose of relending to customers to finance import and export transactions. The
amount and currency of each drawdown, the applicable interest rate, disbursement date, repayment date
and certain other terms and conditions of each drawdown shall be agreed upon by the Group and the
customer on a case by case basis. Under this facility agreement, the Group has outstanding loans of EUR
444,824 and USD 1,020,660 at 31 December 2011, maturing in July and December 2012, respectively.
Industrial and Commercial Bank of China (ICBC)
In 2011, the Group obtained a USD loan in the amount of USD 530,024 from ICBC to promote imports from
China. This loan matures in March 2012 and bears interest as defined by the Central Bank of China on a
case by case basis.
ING Bank
In 2011, the Group obtained a USD loan in the amount of USD 607,530 from ING Bank for relending
purposes. This loan matures in November 2012.
34
F-34
17
Borrowings (continued)
Baoshang Bank
The Group entered into various facility agreements with Baoshang Bank, under which the Baoshang Bank
loans were extended to other borrowers. At 31 December 2011, the Group has the following loans under
this facility:
(a) The Group obtained a USD loan totaling USD 2,333,682 which was extended to various corporate
customers. The repayment dates for this loan vary in accordance with the tenor of loans granted to the
various borrowers.
(b) The Group obtained a CNY loan in the amount of CNY 766,932. This facility expires in November 2012.
MMC
The Group transferred certain mortgage portfolios to MMC in prior years on a recourse basis and
determined that the transfer did not qualify for derecognition criteria for financial assets since significant
risks and rewards were not transferred to MMC. Accordingly, the Group accounted for these transactions
as collateralized financing. See note 7 for further details of the transactions. There were no mortgage
portfolios transferred to MMC during 2011 and 2010.
18
207,134,041
2010
MNT000 (
173,280,281
On 5 January 2007, the Group launched a Euro Medium Term Note ("EMTN") Programme under which USD
75 million was issued on 22 January 2007 at a price of 98.176%. These bonds bear interest at 8.625% per
annum payable semi-annually. The principal was paid off on 22 January 2010.
On 25 October 2010, the Group issued USD 150,000,000 senior notes due on 25 October 2013 at a price
of 99.353% under its USD 300,000,000 EMTN Programme which was launched on 9 October 2010. These
bonds bear interest at 8.5% per annum payable semi-annually. The Group is also obligated to bear
withholding tax of 5% of the amount of interest expenses paid to the investors on its senior notes in
accordance with the double tax treaty between Mongolia and Singapore, and these additional cash
outflows effectively increase actual interest rates for the notes.
In November 2010, the Group repurchased USD 10,000,000 of its senior notes which was treated as a
redemption of debt securities. The related redemption loss of MNT 280,589 thousand was recognised in
2010. From July through December 2011, the Group reissued its senior notes totalling USD 10,000,000,
which were bought back during 2010.
During 2011 and 2010, the respective debt securities accreted by 891,301 thousand and MNT 165,159
thousand, respectively, using the effective interest method.
35
F-35
19
2011
MNT000
2010
MNT000 9
41,693,522
31,218,538
On 16 November 2010, the Group issued USD 25,000,000 subordinated notes due on 17 November 2015
at a price of 99.999% under its USD 300,000,000 EMTN Programme which was launched on 9 October
2010. These bonds bear interest at 12.5% per annum payable semi-annually. On 24 May 2011, the Group
additionally issued USD 5,000,000 subordinated notes due on 25 May 2016 at face value. These bonds
bear interest at 11.0% per annum payable semi-annually. The Group is also obligated to bear withholding
tax of 5% of the amount of interest expenses paid to the investors on its subordinated notes in accordance
with the double tax treaty between Mongolia and Singapore, and these additional cash outflows effectively
increase actual interest rates for the notes. The above liabilities will, in the event of the winding-up of the
Bank, be subordinated to the claims of depositors and all other creditors of the issuer. During 2011 and
2010, the subordinated debt securities accreted by MNT 33,091 thousand and MNT 3,968 thousand,
respectively, using the effective interest method.
20
Other liabilities
2011
MNT000
Accrued interest payables
Delay on clearing settlement
Other payables
Dividends payable
21
2010
MNT000
23,199,760
14,215,203
4,290,684
365,945
16,183,804
711,906
3,137,302
365,945
42,071,592
20,398,957
Share capital
00000
2011
MNT000
2010
MNT000 .
At 1 January
Issued during the year
3,305,056
-
3,305,056
-
6,610,113
-
6,610,113
-
At 31 December
3,305,056
3,305,056
6,610,113
6,610,113
At 31 December 2011 and 2010, 3,305,056 shares were issued and outstanding out of the total 4,000,000
authorized shares. All issued shares were fully paid and have a par value of MNT 2,000.
36
F-36
22
Treasury shares
2011
MNT000
2010
MNT000
At 1 January
Sale of treasury shares
6,001,872
-
6,456,232
(454,360)
At 31 December
6,001,872
6,001,872
On 21 December 2010, the Group sold 30,700 treasury shares out of the total 314,577 treasury shares at
MNT 14,800 per share to US Global. The outstanding treasury shares at 31 December 2011 and 2010
were 283,877 shares, representing approximately 8.59% of the total issued and outstanding ordinary
shares.
In February 2012, the Group sold 157,862 treasury shares, representing approximately 4.78% of the total
issued and outstanding ordinary shares, to a private investor.
23
Interest income
2011
MNT000
Loans and advances
Investment securities
Deposits and placements with banks and other
financial institutions
Bills purchased under resale agreements
Subordinated loans
24
2010
MNT000
108,869,075
29,252,203
68,749,442
15,445,848
4,559,357
133,183
686,663
4,278,640
20,826
717,980
143,500,481
89,212,736
Interest expense
2011
MNT000
Deposits
Borrowings
Bills sold under repurchase agreements
Debt securities issued
Subordinated debt securities issued
37
F-37
2010
MNT000
68,489,599
4,059,540
1,128,593
17,052,569
4,628,760
50,654,319
4,090,307
189,165
4,603,135
526,010
95,359,061
60,062,936
25
2010
MNT000
3,742,399
3,385,622
5,575,020
543,779
2,568,171
2,207,594
2,756,699
434,039
13,246,820
7,966,503
915,184
197,403
961,604
152,868
1,112,587
1,114,472
12,134,233
6,852,031
26
38
F-38
2010
MNT000
13,339,291
705,834
131,091
9,434,706
84,495
(280,589)
38,693
14,176,216
9,277,305
27
Operating expenses
2011
MNT000
Staff costs
Technical assistance and foreign bank remittance fees
Depreciation on property and equipment (note 10)
Amortisation on intangible assets (note 11)
Write-off of property and equipment
Professional fees
Insurance
Advertising and public relations
Rental expenses
Business travel expenses
Cash handling
Stationary and supplies
Communication
Training expenses
Utilities
Repairs and maintenance
Security
Meals and entertainment
Transportation
IT maintenance
Others (*)
2010
MNT000
8,939,306
720,837
1,731,867
486,832
302
393,122
166,598
1,114,943
1,700,901
623,795
499,742
505,928
678,238
129,794
239,790
439,098
96,956
247,317
219,940
608,708
527,437
7,749,108
415,777
1,970,047
503,703
2,258
555,537
632,195
1,306,091
1,158,818
680,462
350,184
393,178
600,325
118,642
221,754
172,626
189,313
317,152
215,522
520,018
506,050
20,071,451
18,578,760
* Included in other operating expenses are costs incurred for loan collections, cleaning and other
miscellaneous administrative expenses.
28
Impairment losses
2011
MNT000
Impairment losses for loans, net
Increase in (reversal of) impairment losses for
other assets and foreclosed real properties, net
29
2010
MNT000
(3,976,213)
(164,700)
905,348
(1,560,660)
(3,070,865)
(1,725,360)
Leases
The Group leases some of its branch offices and computers under various lease agreements. Minimum
lease commitments under the non-cancellable operating lease agreements with initial terms of one year or
more at 31 December 2011 and 2010 were as follows:
2011
2010
MNT000
9
MNT000
Within a year
1 year 5 years
Thereafter
39
F-39
1,504,534
2,514,774
-
1,206,228
1,157,313
-
4,019,308
2,363,541
30
2010
MNT000
9,212,154
70,523
4,277,777
-
9,282,677
4,277,777
2010
MNT000
51,384,508
24,975,016
12,846,127
161,476
(3,262,224)
6,243,754
948,923
(2,458,300)
(450,000)
70,523
(83,225)
(450,000)
(6,600)
9,282,677
4,277,777
According to Mongolian Tax Laws, the Group is required to pay the Government Income Tax at the rate of
10% of the portion of taxable profit up to MNT 3 billion and 25% of the portion of taxable profits in excess
of MNT 3 billion.
31
Dividends
There were no dividends declared for the years ended 31 December 2011 and 2010.
32
2010
MNT000
474,964,634
553,467,811
(3,613,520)
(168,064,650)
(6,563,385)
(48,716,398)
303,286,464
498,188,028
40
F-40
33
Segment reporting
Segment information is presented in respect of the Group's business segments. The primary format,
operating segments, is based on the Group's management and internal reporting structure.
Operating segments pay to and receive interest from the Treasury on an arm's length basis to reflect the
allocation of capital and funding costs.
Segment capital expenditure is the total cost incurred during the period to acquire property and equipment,
and intangible assets other than goodwill.
Operating segments
The Group comprises the following main operating segments:
Corporate Banking
SME Banking
Includes loans, deposits and other transactions and balances with SME
customers. The Group classifies a business customer as SME where the
level of financing it provides to a customer is between USD $100,000 to
USD $500,000 rather than the classification on the size of the business
itself.
Retail Banking
Includes loans, deposits and other transactions and balances with retail
customers and card customers.
Investment and
International Banking
Treasury
Others
41
F-41
F-42
466,326
Capital expenditures
Total liabilities
Unallocated liabilities
Segment liabilities
Segment assets
2,893
(3,288)
52,094,869
52,094,869
775,630,552
64
(518)
61,634,782
-
42
2,359,699
(989,623)
1,248,114,379
1,248,114,379
330,662,265
664
(1,609)
210,640,758
210,640,758
1,083,675
1,887,330
2,893
(13,605)
259,473,325
259,473,325
424,457,667
(6,472,866)
(661,189)
(5,811,677)
(29,237,322)
(1,580,696)
113,753
24,892,588
Treasury
53,931,435
(1,210,056)
180,301,514
1,501,186
178,800,328
496,570,748
(10,252,709)
126,085
74,955
(9,642,025)
(811,724)
5,121,482
416,750
246,361
(6,596,317)
Other
51,384,508
(3,070,865)
74,955
(20,071,451)
74,451,869
14,176,216
12,134,233
48,141,420
Total
56,297,648
(2,218,699)
1,950,624,845
1,501,186
1,949,123,659
2,090,039,689
(9,282,677)
32,956,710
(294,844)
2,182,174
18,574,891
8,029
(16,400,746)
Investment and
International
Banking
42,101,831
3,915,684
531,090
(8,903,392)
41,329,012
49,541,926
14,871,915
7,445,015
(30,529,844)
Retail
Banking
29,350,359
296,948
(42,646)
3,661,382
(2,475,150)
1,921
128,093
6,006,518
SME
Banking
(4,024,988)
(527,355)
Operating expenses
33,902,702
(41,525,827)
4,192,982
70,769,221
Corporate
Banking
Segment results
External revenue
(In MNT000)
33
F-43
Capital expenditures
Total liabilities
Unallocated liabilities
Segment liabilities
Segment assets
1,593
(2,796)
19,304,243
19,304,243
368,880,416
1,680
(869)
18,888,908
-
43
155,531
(1,067,756)
817,987,675
817,987,675
106,574,231
176,095,265
176,095,265
1,083,675
1,304
(20,994)
160,461,217
160,461,217
593,867,694
(635,759)
(523,717)
(112,042)
(16,022,722)
1,224,630
92,939
14,593,111
Treasury
1,431,970
(1,381,335)
76,739,120
1,481,974
75,257,146
249,585,145
(18,617,105)
(1,278,328)
(10,716,642)
(6,622,135)
(3,913,650)
1,406,528
197,389
(4,312,402)
Other
24,975,016
(1,725,360)
(18,578,760)
45,279,136
9,277,305
6,852,031
29,149,800
Total
1,592,078
(2,473,750)
1,250,587,520
1,481,974
1,249,105,546
1,338,880,069
(4,277,777)
(41,899)
(156,106)
114,207
3,175,821
16,612
(3,078,226)
Investment and
International Banking
20,697,239
18,840,387
788,847
(6,686,539)
24,738,079
46,456,472
6,649,719
4,304,446
(32,672,558)
Retail
Banking
1,858,812
535,826
(174,843)
1,497,829
(1,709,034)
20,459
81,289
3,105,115
SME
Banking
23,570,580
(320,913)
(1,771,705)
Operating expenses
25,663,198
(27,986,887)
(24,031)
2,159,356
51,514,760
Corporate
Banking
Segment results
External revenue
(In MNT000)
33
34
UB City Bank
Capitron Bank
MMC
The Groups executive officers and their immediate relatives are also considered as the Groups related
parties.
Significant transactions and balances with related parties as of 31 December 2011 and 2010 and for the
years then ended were as follows:
2011
2010
MNT000 9
MNT000
UB City Bank:
During the year ended 31 December
Interest income
Interest expense
Fees and commission income
Fees and commission expenses
As at 31 December
Deposits and placements with banks
and other financial institutions
Deposits and placements by banks
and other financial institutions
Subordinated loans (note 9)
Bills purchased under resale agreements (note 8)
4,283,319
(201,616)
15,000
(19)
3,455,202
(300,791)
-
70,721,544
20,397,401
1,272,336
4,000,000
36,996,114
4,119,866
4,000,000
-
593,764
(3,845)
525,816
(42,900)
578,403
3,000,000
70,214
3,000,000
480,845
(434,084)
627,078
(657,262)
2,653,000
2,197,608
3,751,000
3,537,518
Capitron Bank:
During the year ended 31 December
Interest income
Interest expense
As at 31 December
Deposits and placements by banks
and other financial institutions
Subordinated loans (note 9)
MMC:
During the year ended 31 December
Interest income
Interest expense
As at 31 December
Asset-backed securities (note 5)
Borrowings (note 17)
44
F-44
34
2011
MNT000
2010
MNT000 9
Executive officers:
During the year ended 31 December
Interest income
As at 31 December
Loans to executive officers
209,186
123,326
3,092,463
1,215,070
The loans to executive officers are included in loans and advances of the Group. Interest rates charged on
mortgage loans extended to executive officers are less than would be charged in an arms length
transaction. The mortgages granted are secured by the properties of the respective borrowers.
Total remuneration and employees benefit paid to the executive officers and directors for the years ended
31 December 2011 and 2010 amounted to MNT 2,458,660 thousand and MNT 1,647,874 thousand,
respectively.
45
F-45
As at 31 December 2011
Held-tomaturity
investments
Financial assets
Cash and due from banks
Investment securities
Loan and advances
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements of
banks and other financial
institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Financial
liabilities
measured
at amortised
cost
Availablefor-sale
financial
assets
Loans and
receivables
Total
105,985,743
-
474,964,634
1,123,331,907
241,784,575
-
474,964,634
347,770,318
1,123,331,907
36,966,114
7,000,000
16,114,874
36,966,114
7,000,000
16,114,874
105,985,743
1,658,377,529
241,784,575
2,006,147,847
1,277,295,962
1,277,295,962
35,063,555
35,063,555
171,484,469
174,380,516
207,134,041
171,484,469
174,380,516
207,134,041
41,693,522
41,984,986
41,693,522
41,984,986
1,949,037,051
1,949,037,051
46
F-46
As at 31 December 2010
Held-tomaturity
investments
Financial assets
Cash and due from banks
Investment securities
Loan and advances
Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements of
banks and other financial
institutions
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Financial
liabilities
measured
at amortised
cost
Availablefor-sale
financial
assets
Loans and
receivables
Total
259,138,886
-
553,467,811
464,466,630
7,000,000
12,671,055
1,596,562
-
553,467,811
260,735,448
464,466,630
7,000,000
12,671,055
259,138,886
1,037,605,496
1,596,562
1,298,340,944
919,944,749
919,944,749
53,584,874
50,678,147
173,280,281
53,584,874
50,678,147
173,280,281
31,218,538
20,379,678
31,218,538
20,379,678
1,249,086,267
1,249,086,267
47
F-47
Interest
income
Fees and
commission
income
Interest
expenses
Held-to-maturity
investments
5,177,140
Loans and receivables
114,248,278
Available-for-sale
financial assets
24,075,063
Financial liabilities measured
at amortised cost
- (95,359,061)
143,500,481 (95,359,061)
Other
operating
income
Net
gains
(losses)
Impairment
losses
5,575,020
15,904
5,575,020
15,904
Other
comprehensive
income
5,177,140
(3,976,213) 115,847,085
-
24,090,967
3,736,050
- (95,359,061)
(3,976,213)
49,756,131
3,736,050
Interest
income
Held-to-maturity
investments
Loans and receivables
Financial liabilities measured
at amortised cost
Fees and
commission
income
Interest
expenses
15,445,848
73,766,888
Other
operating
income
Impairment
losses
2,756,699
2,985
-
- (60,062,936)
89,212,736 (60,062,936)
2,756,699
2,985
48
F-48
Net
gains
(losses)
(164,700)
Other
comprehensive
income
15,448,833
76,358,887
- (60,062,936)
(164,700)
31,744,784
36
49
F-49
36
Investment securities
2011
2010 .
Carrying amount
1,123,331,907
464,466,630
347,770,318
260,735,448
1,107,176,325
441,840,494
347,770,318
260,735,448
5,893,671
16,904,372
602,764
20,209,044
7,369,912
3,677,058
7,618,378
8,430,152
1,141,251,716
(17,919,809)
478,470,454
(14,003,824)
1,123,331,907
464,466,630
347,770,318
260,735,448
Gross amount
Allowance
Net carrying amount
*Loans included in this classification are those for which contractual interest or principal payments are
past due, but the Group believes that impairment is not appropriate based on the level of security
/collateral available and/or the stage of collection of amounts owed to the Group.
50
F-50
36
2011
MNT000
Gross
In arrears
Substandard
Doubtful
Loss
Net
2010
MNT000
Fair value of
collateral
Gross
Net
Fair value of
collateral
5,893,671 5,598,987
602,764
452,073
20,209,044 10,104,522
7,369,912
-
9,201,702
835,869
25,649,350
14,088,045
16,904,372
3,677,058
7,618,378
8,430,152
16,059,153
2,757,793
3,809,189
-
18,821,035
7,941,407
10,171,200
18,797,633
34,075,391 16,155,582
49,774,966
36,629,960
22,626,135
55,731,275
The Group holds collateral against loans and advances to customers in the form of mortgage interests
over property, other registered securities over assets, and guarantees. Collateral generally is not held
over loans and advances to banks except when securities are held as part of reverse repurchase and
securities borrowing activities. Collateral usually is not held against investment securities, and no such
collateral was held at 31 December 2011 or 2010.
During 2011 and 2010, trade activity and foreign investment inflows related to mining increased
dramatically and the countrys foreign exchange reserves reached record levels. However, there has
been pickup in the inflation rate which could adversely affect the economic recovery and growth rate.
The ultimate collectability of the loans is subject to a number of factors, including the successful
performance of the debtors under various restructuring plans in place or in process of negotiation and
their ability to perform on loan and debt obligations given the status of the Mongolian economy and the
potential continuation of adverse trends or other unfavorable developments. Consequently, it is
reasonably possible that adjustments could be made to the reserves for impaired loans and to the
carrying amount of investments in the near term in amounts that may be material to the Groups
consolidated financial statements.
51
F-51
36
2010
MNT000
26,142,458
245,635,697
133,488,634
82,917,312
188,765,060
114,972,883
1,654,294
16,828,971
4,824,841
32,484,016
1,167,209
1,862,323
145,761,610
76,100,447
9,696,934
41,029,218
19,469,628
73,163,350
73,666,141
47,721,926
69,706,606
71,830,777
430,250
885,811
250,085
2,700,793
2,416,299
763,115
37,002,717
30,362,475
17,940,526
16,156,131
1,123,331,907
464,466,630
As stipulated in the Banking Law of Mongolia, the total value of loans, loan equivalent assets and
guarantees provided to one person or group of related persons shall not exceed 20% of the total equity
of the Group. The maximum value of loans, loan equivalent assets and guarantees provided to a
shareholder, the chairman, a member of the Representative Governing Board, an executive director or a
bank officer or any related person thereof shall not exceed 5% of the capital of the bank, and the their
total amount shall not exceed 20% of the capital of the Group respectively. The criteria for
concentration of loan as at 31 December 2011 are as follows:
Suitable ratios 31 December 2011
Description
The loan and guarantee given to one borrower
The loan and guarantee given to the single related party
Total loans and guarantees given to the related parties
52
F-52
<Eq 20%
<Eq 5%
<Eq 20%
19.28%
0.14%
5.26%
Violation
None
None
None
36
At 31 December
53
F-53
2011
2010
43%
67%
36
Less than
three
months
Three to six
months
Over five
years
Total
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with BOM
Investment securities
Loans and advances
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements by
banks and other financial
Institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Issued financial guarantee
contracts
Unrecognised loan
commitments
50,082,881
164,507,210
256,761,023
190,288,320
157,193,922
3,613,520
4,935,000
142,224,407
36,966,114
11,071,193
866,870,663
50,082,881
43,230,986
66,829,742
270,585,048 423,227,062
42,486,270
130,101,468
168,120,730
256,761,023
347,770,318
1,123,331,907
238,663
151,011,590
4,000,000
3,000,000
1,605,223
3,080,805
319,421,257 496,137,609
118,990
172,706,728
36,966,114
7,000,000
16,114,874
2,006,147,847
1,003,029,541
104,920,628
130,060,162
39,285,631
1,277,295,962
12,806,845
13,222,910
9,033,800
35,063,555
171,484,469
9,488,089
-
2,536,009
-
33,011,844
-
116,573,536
207,134,041
12,771,038
-
171,484,469
174,380,516
207,134,041
23,845,440
1,540,471
3,066,030
41,693,522
13,422,653
110,392
41,693,522
41,984,986
98,373,660
98,373,660
131,121,269
1,450,149,313
122,220,018
175,171,836
418,109,383
12,881,430
131,121,269
2,178,531,980
(583,278,650)
28,791,572
144,249,421
78,028,226
159,825,298
(172,384,133)
54
F-54
36
Less than
three
months
Three to six
months
Over five
years
Total
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with BOM
Deposits with BOM
Investment securities
Loans and advances
Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements by
banks and other financial
Institutions
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Issued financial guarantee
contracts
Unrecognised loan
commitments
35,987,964
285,957,895
79,820,367
150,861,600
222,527,870
92,332,037
9,779,482
877,267,215
35,987,964
268,000
55,221,671
2,440
55,492,111
839,985
5,569,000
30,774,016
118,710,644 175,998,480
7,000,000
112,633
2,641,651
125,232,262 216,414,147
1,596,562
22,203,798
134,849
23,935,209
286,797,880
79,820,367
150,861,600
260,735,448
464,466,630
7,000,000
12,671,055
1,298,340,944
602,396,176
82,131,265
219,566,200
15,851,108
919,944,749
53,584,874
8,656,916
-
727,550
-
6,571,988
-
28,312,092
173,280,281
6,409,601
-
53,584,874
50,678,147
173,280,281
7,701,692
978,270
3,196,945
31,218,538
8,160,104
342,667
31,218,538
20,379,678
73,427,994
73,427,994
45,236,892
791,004,544
83,837,085
229,335,133
256,822,123
6,752,268
45,236,892
1,367,751,153
(28,344,974) (104,102,871)
(40,407,976)
17,182,941
(69,410,209)
86,262,671
55
F-55
36
56
F-56
F-57
Effective
Interest rate
1,949,037,051
57
408,680,633
54,791,831
35,063,555
171,484,469
174,380,516
207,134,041
41,693,522
41,984,986
4.00
16.25
4.14
9.84
13.58
-
57,110,796
12,806,845
41,984,986
1,277,295,962
5.99
(733,073,949)
1,184,002,099
171,484,469
9,488,089
-
1,003,029,541
450,928,150
463,472,464
2,006,147,847
-
66,479,794
190,288,320
157,193,922
36,966,114
-
98,027,416
256,761,023
42,486,270
16,114,874
168,120,730
256,761,023
347,770,318
1,123,331,907
36,966,114
7,000,000
16,114,874
Less than
three months
50,082,881
Non-interest
sensitive
50,082,881
Total
Financial liabilities
Deposits from customers
Deposits and placements by banks
and other financial institutions
Bills sold under repurchase agreements
Borrowings
Debt securities issued
Subordinated debt securities issued
Other liabilities (**)
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
2.18
Balances with BOM
Investment securities
10.21
Loans and advances
13.28
Bills purchased under resale agreements11.00
Subordinated loan
9.71
Other assets (*)
-
(In MNT000)
As at 31 December 2011
30,093,380
120,679,547
13,222,910
2,536,009
-
104,920,628
150,772,927
3,613,520
4,935,000
142,224,407
-
Three to six
months
145,710,228
172,105,806
9,033,800
33,011,844
-
130,060,162
317,816,034
43,230,986
270,585,048
4,000,000
-
Six months
to one year
88,370,074
404,686,730
116,573,536
207,134,041
41,693,522
-
39,285,631
493,056,804
66,829,742
423,227,062
3,000,000
-
One to five
years
117,330,430
12,771,038
12,771,038
-
130,101,468
130,101,468
-
Over five
years
F-58
36
130,075,948
1,298,340,944
1,249,086,267
58
56,111,396
73,964,552
53,584,874
50,678,147
173,280,281
31,218,538
20,379,678
6.87
9.81
13.78
-
49,254,677
53,584,874
20,379,678
919,944,749
6.54
79,820,367
1,596,562
12,671,055
286,797,880
79,820,367
150,861,600
260,735,448
464,466,630
7,000,000
12,671,055
0.77
0.09
9.47
14.51
9.93
-
35,987,964
Non-interest
sensitive
35,987,964
Total
Effective
Interest rate
Financial liabilities
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Debt securities issued
Subordinated debt securities issued
Other liabilities (**)
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Balances with BOM
Deposits with BOM
Investment securities
Loans and advances
Subordinated loan
Other assets (*)
(In MNT000)
As at 31 December 2010
140,626,310
611,053,092
8,656,916
-
602,396,176
751,679,402
285,957,895
150,861,600
222,527,870
92,332,037
-
Less than
three months
(27,369,144)
82,858,815
727,550
-
82,131,265
55,489,671
268,000
55,221,671
-
Three to six
months
(101,018,559)
226,138,188
6,571,988
-
219,566,200
125,119,629
839,985
5,569,000
118,710,644
-
Six months
to one year
(34,889,523)
248,662,019
28,312,092
173,280,281
31,218,538
-
15,851,108
213,772,496
30,774,016
175,998,480
7,000,000
-
One to five
years
15,794,197
6,409,601
6,409,601
-
22,203,798
22,203,798
-
Over five
years
(5,862,038)
5,862,038
2010
At 31 December
806,877
(806,877)
59
F-59
(In MNT000)
2011
Foreign
MNT
denominated currencies
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
instruments
Balances and deposits with
the BOM
Investment securities
Loan and advances
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placement by
bank and other financial
institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt
Other liabilities (**)
21,715,130
MNT
denominated
Total
28,367,751
50,082,881
31,294,094 136,826,636
Total
21,302,792
35,987,964
168,120,730
13,363,860 273,434,020
286,797,880
103,966,754 152,794,269
347,770,318
502,295,898 621,036,009
256,761,023
347,770,318
1,123,331,907
36,131,526 194,550,441
260,735,448
200,209,626 264,257,004
230,681,967
260,735,448
464,466,630
36,966,114
7,000,000
9,569,447
6,545,427
1,060,577,755 945,570,092
36,966,114
7,000,000
16,114,874
2,006,147,847
7,000,000
7,000,000
7,346,519
5,324,536
12,671,055
539,472,151 758,868,793 1,298,340,944
755,270,967 522,024,995
1,277,295,962
440,274,228 479,670,521
242,032
34,821,523
35,063,555
171,484,469
85,539,860 88,840,656
- 207,134,041
- 41,693,522
22,696,568 19,288,418
1,035,233,896 913,803,155
171,484,469
174,380,516
207,134,041
41,693,522
41,984,986
1,949,037,051
25,343,859
31,766,937
57,110,796
14,685,172
2010
Foreign
currencies
27,033
53,557,841
919,944,749
53,584,874
12,505,774 38,172,373
50,678,147
- 173,280,281
173,280,281
- 31,218,538
31,218,538
13,317,694
7,061,984
20,379,678
466,124,729 782,961,538 1,249,086,267
73,347,422 (24,092,745)
49,254,677
Ten percent
strengthening
MNT000
9
2011
At 31 December
(3,176,694)
2010
At 31 December
2,409,275
At ten percent weakening of the MNT against the USD at 31 December 2011 and 2010 would have had the equal but
opposite effect on the above currency to the amounts shown above, on the basis that all other variables remain constant.
60
F-60
61
F-61
Tier II Capital
Revaluation reserve
Unrealised gain on available-for-sale financial assets
Subordinated debt securities issued
2010
MNT000
6,610,113
7,392,191
(6,001,872)
108,976,296
116,976,728
6,610,113
7,392,191
(6,001,872)
66,873,841
74,874,273
18,702,066
3,736,050
41,693,522
64,131,638
13,418,276
31,218,538
44,636,814
181,108,366
119,511,087
2010
MNT000
21,339,512
177,548,559
1,195,358,903
3,170,362
31,766,937
42,476,431
44,116,891
582,218,086
40,874,390
24,108,494
1,429,184,273
733,794,292
Capital ratios
Total regulatory capital expressed as a percentage of
total risk-weighted assets (CAR)
12.67%
16.29%
8.18%
10.20%
On 30 October 2008, BOM revised their capital adequacy prudential ratio calculation by ceasing the
value-at-risk (VaR) method and reverting to the traditional method for the calculation of foreign
currency exposure as part of its risk weighted average assets.
62
F-62
Financial assets and liabilities for which fair value approximates carrying amount
For financial assets and financial liabilities that are liquid or having short term maturity of less than one year,
it is assumed that the carrying amounts approximate to their respective fair value. This assumption is also
applicable to demand deposits, time deposits and variable rate financial instruments, which is principally
due to the fact that the current market rates offered for similar deposit products do not differ significantly
from market rates at inception.
(ii)
The fair value of fixed rate financial assets and liabilities carried at amortized cost basis are estimated by
comparing market interest rates when they were first recognised with the current market rates offered for
the similar financial instruments available in Mongolia. For quoted debt issued, the fair values are
measured based on quoted market prices and in case where observable market inputs are not available, a
discounted cash flow model is employed.
63
F-63
(In MNT000)
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Investment securities
Loans and advances to customers
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)
4
4
5
7
8
9
13
50,082,881
50,082,881
35,987,964
35,987,964
424,881,753 424,881,753
347,770,318 347,689,891
1,123,331,907 1,178,452,870
517,479,847
260,735,448
464,466,630
517,479,847
260,680,153
478,965,440
7,000,000
12,671,055
7,000,000
12,671,055
36,966,114
7,000,000
16,114,874
36,966,114
7,000,000
16,114,874
14
1,277,295,9621,220,954,963
919,944,749
906,916,013
15
35,063,555
35,063,555
53,584,874
53,584,874
16
17
18
19
20
171,484,469
174,380,516
207,134,041
41,693,522
41,984,986
171,484,469
174,380,516
200,563,416
49,190,702
41,984,986
50,678,147
173,280,281
31,218,538
20,379,678
50,678,147
177,113,446
31,822,526
20,379,678
64
F-64
As at 31 December
Letters of credit and guarantees
Loan and credit card commitments
98,373,660
131,121,269
2010
MNT000
73,427,994
45,236,892
These commitments and contingent liabilities have off balance-sheet credit risk for which provisions are not
currently made which is a local banking industry practice acknowledged by BOM. A significant portion of
the contingent liabilities and commitments will expire without being advanced in whole or in part.
Accordingly, the amounts do not represent expected future cash flows.
65
F-65
F-66
Tel. 82-2-2112-0100
Fax. 82-2-2112-0101
www.kr.kpmg.com
Members
Trade and Development Bank of Mongolia LLC:
We have audited the accompanying cosolidated financial statements of Trade and Development Bank of
Mongolia (the Bank) and its subsidiary (together the Group), which comprise the consolidated statements of
financial position as at 31 December 2010 and 2009, and the consolidated statements of comprehensive income,
changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as modified by Bank of Mongolia guidelines and for
such internal control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with International Standards on Auditing. Those standards require that we
comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to the entitys preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal
control. An audit also includes evaluating the appropriateness of accounting principles used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
F-67
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial
position of the Group as at 31 December 2010 and 2009, and of its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards
as modified by Bank of Mongolia guidelines.
Other Matters
This report is made solely to the members of the Bank, as a body, and for no other purpose. We do not assume
responsibility to any other person for the content of this report.
F-68
2009
MNT000
553,467,811
260,735,448
464,466,630
7,000,000
19,811,084
655,894
977,345
31,765,857
266,984,760
90,300,363
406,214,658
799,556
7,000,000
21,439,909
800,719
2,099,347
14,724,800
1,338,880,069
810,364,112
13
919,944,749
579,522,778
14
15
53,584,874
50,678,147
1,481,974
173,280,281
31,218,538
20,398,957
31,469,241
53,301,993
1,343,586
59,639,556
17,946,008
1,250,587,520
743,223,162
6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841
6,610,113
7,392,191
(6,456,232)
13,683,324
45,911,554
88,292,549
67,140,950
1,338,880,069
810,364,112
Note
Assets
Cash and cash equivalents
Investment securities
Loans and advances, net
Bonds purchased under resale agreements
Subordinated loans
Property and equipment, net
Intangible assets, net
Foreclosed properties, net
Other assets
4
5
6
7
8
9
10
11
12
Total assets
16
17
18
Total liabilities
Shareholders equity:
Share capital
Share premium
Treasury shares
Revaluation reserves
Retained earnings
19
20
9
F-69
Note
Interest income
Interest expense
21
22
2010
MNT000
2009
MNT000
89,212,736
(60,062,936)
77,313,558
(45,743,365)
29,149,800
31,570,193
6,852,031
9,277,305
6,054,442
6,054,990
16,129,336
12,109,432
Operating income
45,279,136
43,679,625
(18,578,760)
(1,725,360)
(17,683,001)
(8,426,289)
24,975,016
17,570,335
(4,277,777)
(2,598,784)
20,697,239
14,971,551
20,697,239
14,971,551
23
24
Operating expenses
Allowance for impairment losses
25
26
27
F-70
Note
1 January 2009
Share
capital
MNT000
Share
premium
MNT000
Treasury
shares
MNT000
Revaluation
reserves
MNT000
Retained
earnings
MNT000
Total
MNT000
6,610,113
7,392,191
(6,456,232)
13,683,324
47,268,024
68,497,420
14,971,551
14,971,551
14,971,551
14,971,551
- (16,328,021)
(16,328,021)
31 December 2009
6,610,113
7,392,191
(6,456,232)
13,683,324
45,911,554
67,140,950
1 January 2010
6,610,113
7,392,191
(6,456,232)
13,683,324
45,911,554
67,140,950
20,697,239
20,697,239
20,697,239
20,697,239
454,360
454,360
(265,048)
265,048
6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841
88,292,549
Dividends to equity
holders
Amount transferred to
retained earnings
31 December 2010
28
F-71
Note
Cash flows from operating activities:
Net profit
Adjustments for:
Depreciation and amortisation
Net interest income
Income tax expense
Property and equipment written off
Allowance for impairment losses
2010
MNT000
2009
MNT000
20,697,239
14,971,551
2,473,750
(29,149,800)
4,277,777
2,258
1,725,360
2,004,581
(31,570,193)
2,598,784
2,630
8,426,289
26,584
(3,566,358)
(58,393,449)
(12,448,853)
340,421,971
23,228,088
(2,650,389)
205,052,704
22,115,633
-(184,550)
81,795,098
(57,256,310)
(4,139,389)
(2,008,475)
(3,000,000)
(205,682)
76,949,688
(45,760,347)
(1,731,202)
311,936,735
246,308,027
(168,704,504)
799,556
(1,233,200)
(358,878)
819,716
889,720
(186,744)
(50,859,226)
(799,223)
(1,169,993)
(246,679)
578,041
-(65,793)
(167,974,334)
(52,562,873)
25
25
26
F-72
Note
2010
MNT000
2009
MNT000
(2,623,846)
113,475,566
-31,214,570
454,360
--
(5,734,587)
(35,391,800)
(10,140,080)
--(16,305,467)
142,520,650
(67,571,934)
286,483,051
126,173,220
266,984,760
140,811,540
553,467,811
266,984,760
F-73
Basis of preparation
Statement of compliance
The accompanying financial statements are consolidated financial statements that have been prepared in
accordance with International Financial Reporting Standards (IFRSs) as modified by Bank of Mongolia
guidelines.
The major items that are not compliant with IFRS include the followings and the details are included in the
corresponding notes:
z
z
Allowance for loan loss reserves, receivables, letters of credit, unused credit
commitments and foreclosed properties
Accounting for deferred tax
The consolidated financial statements were authorised for issue by the Board of Directors on 18 March
2011.
Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except for the following:
z
Derivative financial instruments are measured at fair value
z
Available-for-sale financial assets that have been measured at fair value
z
Property and equipment which are subsequently measured at fair value
F-74
(ii)
(iii) Improvements to IFRSs 2010 Amendments to IAS 27 Consolidated and Separate Financial
Statements
The Group has adopted Amendments to IAS 27, effective 1 July 2010. The amendments requires
the effects of all transactions with noncontrolling interests to be recorded in equity if there is no
change in control. Transactions resulting in a loss of control result in a gain or loss being recognized in
profit or loss. The gain or loss includes a remeasurement to fair value of any retained equity interest
in the investee. In addition, all items of consideration transferred by the acquirer are measured and
recognized at fair value, including contingent consideration as of the acquisition date. Transaction
costs incurred by the acquirer in connection with the business combination do not form part of the
cost of transaction but are expensed as incurred unless they relate to the issuance of debt or equity
securities, in which case they are accounted for under IAS 39. The Groups adoption of
amendements to IFRS 3 did not have any impact to the Groups consolidated financial statements.
F-75
F-76
Initial recognition
A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value
through profit or loss, transaction costs that are directly attributable to its acquisition or issue.
Financial assets
A financial asset is considered for derecognition when the contractual rights to the cash flows from
the financial asset expire, or the Group has either transferred the contractual right to receive the cash
flows from that asset, or has assumed an obligation to pay those cash flows to one or more
recipients, subject to certain criteria, or if it transfers substantially all the risks and rewards of
ownership.
The Group enters into transactions in which it transfers previously recognized financial assets but
retains substantially all the associated risks and rewards of those assets. In transactions in which
substantially all the risks and rewards of ownership of a financial asset are neither retained nor
transferred, the Group derecognizes the transferred asset if control over that asset, i.e. the practical
ability to sell the transferred asset, is relinquished. The rights and obligations retained in the transfer
are recognized separately as assets and liabilities, as appropriate. If control over the asset is retained,
the Group continues to recognize the asset to the extent of its continuing involvement, which is
determined by the extent to which it remains exposed to changes in the value of the transferred.
The derecognition criteria are also applied to the transfer of part of an asset, rather than the asset as a
whole, or to a group of similar financial assets in their entirety, when applicable. If transferring a part
of an asset, such part must be a specifically identified cash flow, a fully proportionate share of the
asset, or a fully proportionate share of a specifically-identified cash flow.
F-77
(ii)
Depreciation
Depreciation is charged to the statement of comprehensive income on a straight-line basis over the
estimated useful life of each part of an item of property and equipment. The estimated useful lives are
as follows:
Buildings
Office equipment and motor vehicles
Computers
F-78
40 years
10 years
3-5 years
(ii)
Amortisation
Amortisation is charged to the statement of comprehensive income on a straight-line basis over the
estimated useful lives of intangible assets unless such lives are indefinite. The estimated useful life is
as follows:
Software and licenses
3 years
Impairment
The carrying amounts of the Group's assets are reviewed at each statement of financial position date to
determine whether there is any indication of impairment. If such an indication exists, the asset's
recoverable amount is estimated.
(i)
F-79
Assets other than loans and advances and cash and cash equivalents
The Group assesses at each statement of financial position date whether there is an indication that an
asset may be impaired. If any such indication exists, or when annual impairment testing for an asset
is required, the Group estimates the recoverable amount of the respective asset. The recoverable
amount is the higher of the asset's or cash generating units fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset. For an asset that does not generate cash inflows largely independent
of those from other assets, the recoverable amount is determined for the cash-generating unit to
which the asset belongs. An impairment loss is recognised whenever the carrying amount of an asset
or its cash-generating unit exceeds its recoverable amount. Impairment is recognised as loss of
current operation in the statements of comprehensive income.
An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised. All reversals of impairment are
recognised in the statements of comprehensive income.
Repurchase agreements
The Group enters into purchases (sales) of investments under agreements to resell (repurchase)
substantially identical investments at a certain date in the future at a fixed price. Investments purchased
subject to commitments to resell them at future dates are not recognised on the statements of financial
position. The amounts paid are recognised in loans to either banks or customers. The receivables are
shown as collateralised by the underlying security. Investments sold under repurchase agreements
continue to be recognised in the balance sheet and are measured in accordance with the accounting policy
for either assets held for trading or available-for-sale as appropriate. The proceeds from the sale of the
investments are reported as liabilities to either banks or customers. The difference between the sale and
repurchase considerations is treated as interest income or expense and is accrued over the period of the
agreement using the effective interest method.
Share capital
(i)
Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary
shares and share options are recognised as a deduction from equity, net of taxes.
(ii)
Treasury shares
When share capital recognised as equity is repurchased, the amount of the consideration paid, which
includes directly attributable costs, is net of any tax effects, and is recognised as a deduction from
equity, Repurchased shares are classified as treasury shares and are presented as a deduction from
total equity, When treasury shares are sold or reissued subsequently, the amount received is
recognised as an increase in equity, and the resulting surplus or deficit on the transaction is
transferred to / from retained earnings.
F-80
Interest income
Interest income and expense is recognised in the statements of comprehensive income as it accrues,
taking into account the effective yield of the asset. Interest income and expense include the
amortisation of any discount or premium or other differences between the carrying amount of an
interest bearing instrument and its amount at maturity calculated on an effective interest rate basis
except that the Group does not amortize loan originating costs and fees on an effective interest rate
basis but rather recognize them immediately in current operations.
(ii)
F-81
In May 2010, the IASB issued Improvements to IFRSs 2010, which resulted from the IASBs
annual improvement project. They comprise amendments that result in accounting changes for
presentation, recognition or measurement purposes as well as terminology or editorial
amendments related to a variety of individual IFRS standards. Most of the amendments are
effective for annual periods beginning on or after 1 January 2011, with earlier application
permitted. The adoption of the amendments is not expected to have a material impact on the
Groups consolidated financial statements.
Revised IAS 24 Related Party Disclosures provides a partial exemption from the disclosure
requirements for government-related entities and clarifies the definition of a related party. The
amendments are effective for the Groups 2011 financial statements and are not expected to
have any impact on the Groups financial statements.
IFRS 9 Financial Instruments was issued on November 2009 as a first step to replace IAS 39.
IFRS 9 introduces new requirements on classification and measurement of financial assets that
are in the scope of IAS 39, on the basis of the entitys business model for managing the financial
assets and the contractual cash flow characteristics of the financial asset. A financial asset is
measured at amortized cost if the objective of the business model is to hold the financial asset for
the collection of the contractual cash flows and the contractual cash flows under the instrument
solely represent payments of principal and interest. A financial asset meeting the criteria to be
measured at amortized cost basis can be designated at fair value through profit or loss under the
fair value option if doing so would significantly reduce or eliminate an accounting mismatch.
F-82
F-83
2009
MNT000
49,351,824
24,215,992
273,434,020
79,820,367
150,861,600
63,061,651
57,065,717
122,641,400
553,467,811
266,984,760
* Bank of Mongolia (BOM) requires that minimum 5% of average customer deposits for two weeks must
be maintained with BOM. At 31 December 2010 and 2009, the required reserve amount was MNT
48,716,398 thousand and MNT 30,180,852 thousand, respectively.
Investment securities
2010
MNT000
Available-for-sale investment securities
Unquoted equity securities, at cost
2009
MNT000
1,596,562
1,409,818
222,266,870
33,121,016
3,751,000
84,190,545
4,700,000
260,735,448
90,300,363
Unquoted equity securities represent investments made in unlisted companies and are recorded at cost as
there is no market for them thus fair value cannot be reasonably estimated and the range of possible
estimates is expected to be significant. The Group plans to hold them on a long term basis.
At 31 December 2010 and 2009, MNT 32,370,578 thousand and MNT 6,109,819 thousand of investment
securities are expected to be recovered more than 12 months after the reporting date.
2009
MNT000
473,923,449
4,547,005
418,371,076
2,966,184
478,470,454
421,337,260
(14,003,824)
(15,122,602)
464,466,630
406,214,658
F-84
Movements in the allowance for loan losses during the year are as follows:
2010
MNT000
2009
MNT000
At 1 January
Charge for the year
Written back/recoveries
Written off
Effect of foreign currency movements
15,122,602
1,915,443
(1,750,743)
(1,285,655)
2,177
6,984,279
8,301,114
(168,419)
5,628
At 31 December
14,003,824
15,122,602
At 31 December 2010 and 2009, MNT 274,073,537 thousand and MNT 197,857,616 thousand of loans and
advances are expected to be recovered more than 12 months after the reporting date.
Transfers of mortgage portfolios
In 2008, the Group transferred its mortgage loans with carrying amounts of MNT 404,864,410 and USD
294,334 to Mongolian Mortgage Corporation LLC (MMC) in exchange of cash. In 2009, the Group
transferred another pool of mortage loans with carrying amounts of MNT 4,700,819,887 in exchange of the
bonds issued by MMC. There were no mortgage portfolios transferred to MMC during 2010.
The loans were transferred on a recourse basis and do not qualify for derecognition criteria for financial
assets since significant risks and rewards were not transferred to MMC. Accordingly, the Group accounted
for these transactions as collateralized financing of which balance at 31 December 2010 and 2009
amounted to MNT 3,537,518 thousand and MNT 5,129,577 thousand, respectively.
7
Capitron Bank
Purchase
date
Maturity
12/31/2009
01/04/2010
Interest
rate
2010
MNT000
2009
MNT000
5%
799,556
In 2009 the Group entered into reverse repurchase agreements with Capitron Bank where the Group
purchases and resells investments at MNT 800,000 thousand at maturity. The purchased securities are
collateralized for the receivables pertaining to the respective agreements. There were no bonds purchased
under resale agreements in 2010.
8
Subordinated loans
2010
MNT000
Ulaanbaatar City Bank (UB City Bank)
Capitron Bank
2009
MNT000
4,000,000
3,000,000
4,000,000
3,000,000
7,000,000
7,000,000
The loan to UB City Bank bears fixed interest of 8% per annum and is to be repaid in full on 25 September
2012 and the loan to Capitron Bank bears fixed interest of 12.5% per annum and is to be repaid in full on 14
August 2014.
F-85
Buildings
At cost/valuation
At cost
At valuation
Computers
and others
Constructionin-progress
Total
219,396
17,048,867
2,741,063
716,031
3,657,314
244,934
1,077,229
-
7,695,002
18,009,832
17,268,263
3,457,094
3,902,248
1,077,229
25,704,834
(800,884)
811,945
467,416
(10,000)
(272,622)
179,068
272,277
(197,289)
243,072
493,507
(1,234,085)
1,233,200
(810,884)
(469,911)
-
At 31 December 2010
17,279,324
3,820,956
4,220,308
336,651
25,657,239
1,031,340
16,247,984
3,218,568
602,389
3,985,043
235,264
336,651
-
8,571,602
17,085,637
17,279,324
3,820,957
4,220,307
336,651
25,657,239
478,932
849,746
(46,708)
2,407,156
738,569
1,378,837
381,732
(5,700)
(140,395)
-
(196,014)
-
4,264,925
1,970,047
(52,408)
(336,409)
-
1,281,970
1,614,474
2,949,711
5,846,155
15,997,354
2,206,483
1,270,596
336,651
19,811,084
At 1 January 2010
Additions
Disposals
Write offs
Transfers
Elimination against
accumulated depreciation
Revaluation surplus
Accumulated depreciation
At 1 January 2010
Charge for the year
Disposals
Write offs
Transfers
Elimination against cost
At 31 December 2010
Carrying amounts
31 December 2010
The Group disposed one of its branch building in 2010 which was revalued in 2008. Revaluation surplus of
MNT 265,048 which was allocated to this property was released into retained earnings upon disposal.
There were no capitalized borrowing costs related to acquisition of property and equipment during 2010
and 2009.
F-86
Buildings
At cost/valuation
At cost
At valuation
Office
equipment and
others
Computers
and others
Constructionin-progress
Total
87,132
17,048,867
2,135,822
728,302
2,666,234
322,866
712,879
-
5,602,067
18,100,035
17,135,999
2,864,124
2,989,100
712,879
23,702,102
43,543
26,793
183,228
(13,205)
-
552,739
(107,054)
-
518,501
(154,151)
1,298,011
(120,259)
(127,358)
61,928
-
422,947
-
467,463
-
952,338
-
At 31 December 2009
17,268,263
3,457,094
3,902,248
1,077,229
25,704,834
219,396
17,048,867
2,741,063
716,031
3,657,314
244,934
1,077,229
-
7,695,002
18,009,832
17,268,263
3,457,094
3,902,248
1,077,229
25,704,834
59,485
357,519
61,928
545,265
422,148
(11,523)
422,947
1,249,275
795,864
(105,446)
467,463
1,854,025
1,575,531
(116,969)
952,338
At 31 December 2009
478,932
1,378,837
2,407,156
4,264,925
Carrying amounts
At 31 December 2009
16,789,331
2,078,257
1,495,092
1,077,229
21,439,909
At 1 January 2009
Additions
Disposals
Write offs
Transfers
Elimination against
accumulated depreciation
Revaluation surplus
Accumulated depreciation
At 1 January 2009
Charge for the year
Disposals
Write offs
Elimination against cost
Details of the latest independent professional valuation of buildings valued by McHD LLC are as follows:
Date of valuation
31 October 2008
Description of property
Buildings
Valuation amount
Basis of valuation
17,048,867
Market value
F-87
10
1,796,879
118,679
-
2009
MNT000
2,221,126
322,320
42,304
Intangible assets
2010
MNT000
2009
MNT000
Cost
At 1 January
Additions
2,158,248
358,878
1,911,569
246,679
At 31 December
2,517,126
2,158,248
Amortisation
At 1 January
Amortisation charge for the year
1,357,529
503,703
928,479
429,050
At 31 December
1,861,232
1,357,529
655,894
800,719
Carrying amounts
At 31 December
Intangible assets only consist of purchased software and there were no capitalized borrowing costs
related to the internal development of software during 2010 and 2009.
11
Foreclosed properties
2010
MNT000
Industrial buildings
Apartment buildings
Less: Allowances
2009
MNT000
420,799
1,777,779
(1,221,233)
998,866
2,484,101
(1,383,620)
977,345
2,099,347
Properties and equipment acquired through enforcement of security over loans and advances are initially
recognized at fair value, recorded as foreclosed properties and are held for sale. The allowance is subsequently
estimated in accordance with the Regulations on Asset Classification and Provisioning, jointly approved by the
President of Bank of Mongolia and Ministry of Finance. Such model classifies the Groups foreclosed properties
based on time characteristics and makes allowances at the rates of 0%, 5%, 25%, 50% and 100% (2009: 1%,
5%, 25%, 50% and 100%) for credit classification categories of performing, in arrears, substandard, doubtful
and loss, respectively. During 2010 and 2009, allowance of MNT 694,945 thousand and MNT 578,041 thousand
were reversed upon disposition of foeclosed properties, respectively and foreclosed properties amounting to
MNT 375,138 thousand and nil ,respectively, were written off against impairment losses.
F-88
12
Other assets
2010
MNT000
Precious metals
Accrued interest receivables
Prepayments(*)
Inventory supplies
Other receivables, net
2009
MNT000
31,151
11,013,254
18,591,792
471,859
1,657,801
806,627
5,139,452
3,738,011
356,418
4,684,292
31,765,857
14,724,800
Other receivables are presented net of impairment losses amounting to MNT 2,176,980,635 and MNT
897,540,969 as of 31 December 2010 and 2009, respectively.
(*)The Group entered into the Share Purchase and Sale Agreement with the shareholder of the
Ulaanbaatar City Bank (UB City Bank) on 9 April 2008 where the Bank agreed to acquire 10 percent (800
shares) of total share of UB City Bank for USD 3 million (MNT 3,502,950 thousand). The Group remitted
USD 3 million in 2008 but the shares have not been transferred to the Bank yet due to the delay of approval
by Bank of Mongolia. In addition, the Group prepaid USD 11 million for purchase of real property.
13
Current accounts
Savings deposits
Time deposits
Other deposits
2010
MNT000
2009
MNT000
343,163,179
112,323,575
452,065,821
12,392,174
240,142,168
74,641,716
259,901,760
4,837,134
919,944,749
579,522,778
Current accounts and other deposits generally bear no interest. However, for depositors maintaining
current account balances above a prescribed limit, interest is provided at rates of approximately 1.0% and
3.0% (2009: 1.0% and 3.0%) per annum for foreign and local currency accounts, respectively.
Foreign and local currency savings deposits bear interest at a rate or approximately 2.4% and 6.0% (2009:
2.4% and 6.0%), respectively.
Foreign and local currency time deposits bear interest at a rate of approximately 5.1% and 12.0% (2009:
7.2% and 14.5%), respectively.
14
F-89
2009
MNT000
53,507,922
783
76,169
-
3,671,770
341,673
41,838
27,413,960
53,584,874
31,469,241
15
Borrowings
2010
MNT000
Kreditanstalt fuer Wiederaufbau (KfW)
World Bank
Asian Development Bank (ADB)
International Development Association (IDA)
Export-Import Bank of Korea (KEXIM)
VTB Bank Austria (VTB)
Export-Import Bank of the Republic of China (EXIM)
Japan Bank for International Cooperation (JBIC)
MG Leasing Corporation (MGLC)
Atlantic Forfaitierungs AG (AF)
Russian Agriculture Bank (RHSB)
SME Project Fund MoF
Mongolian Mortgage Corporation (MMC)
2009
MNT000
2,792,307
5,484,868
118,068
691,118
5,539,417
11,314,620
50,287
1,592,081
2,357,213
11,085,650
6,115,000
3,537,518
2,156,584
6,611,363
141,956
810,497
651,908
6,492,780
62,523
1,043,462
3,217,533
2,524,970
21,722,839
2,736,000
5,129,578
50,678,147
53,301,993
2009
MNT000
122,761
5,362,107
335,674
6,275,689
5,484,868
6,611,363
Loan I
Loan I comprises the following loan:
The World Bank Training Program loan amounting to USD 97,648 (2009: USD 137,648) is obtained via
the Ministry of Finance in 2003 for the purpose of financing the Group's implementation of
institutional development programme, including credit management system renewal, staff training,
provision of equipment and consultants' services. The loan bears interest at a fixed rate of 2% per
annum (2009: 2% per annum). The loan is repayable semi-annually until final repayment due in
December 2024.
F-90
15
Borrowings, continued
Loan II
Loan Il comprises the following loans:
(a)
The World Bank USD loan amounting to USD 2,789,280 (2009: USD 2,882,780) is obtained via the
Ministry of Finance. This is to finance specific investment projects through the provision of sub-loans.
The loan bears interest at a rate of LIBOR 6 months USD rate + 1% per annum (2009: LIBOR 6
months USD rate + 1% per annum). The repayment dates for this loan vary in accordance to the tenor
of loans granted to the various borrowers.
(b)
The World Bank MNT loan amounting to MNT 1,603 million (2009: MNT 2,015 million) is obtained via
the Ministry of Finance. This is to finance specific investment projects through the provision of subloans. The loan bears interest at a rate equal to the average rate for MNT demand deposits published
by Bank of Mongolia for the preceding twelve months.
(c)
The World Bank Training Program loan amounting to USD 200,830 (2009: USD 70,555) is obtained via
the Ministry of Finance for the purpose of financing the Group's implementation of institutional
development programme, for staff training in the areas of credit analysis and risk assessment and
risk-based internal auditing. The loan bears interest at a fixed rate of 2% per annum. The loan is
repayable semi-annually until final repayment due in May 2025.
F-91
15
Borrowings, continued
VTB Bank (Austria) AG (VTB)
2010
MNT000
Risk Participation III
11,314,620
2009
MNT000
6,492,780
The Group and VTB had entered into participation agreements in which the VTB loans were extended to
other borrowers. Under these participation agreements, VTB is at its sole risk and have no right of recourse
against the Group for any loss it incurs as a result of default by the borrower. The loans bear interest at
rates ranging from 9% to 12% per annum.
Export-Import Bank of the Republic of China ("EXIM")
The EXIM loan amounting to USD 40,000 (2009: USD 43,333) was entered into for relending purposes to
finance customers who purchase machinery and other manufactured goods produced in the Republic of
China. The line of credit is limited to an aggregate amount of USD 6 million. This particular loan bears
interest at a rate of LIBOR 6 months USD rate + 0.25% per annum (LIBOR 6 months USD rate + 1.25%
per annum). This line of credit is available until January 2012.
Japan Bank for International Cooperation (JBIC)
The JBIC loan comprises the following loans:
(a)
The JBIC USD loan amounting to USD 192,400 (2009: USD 30,400) is obtained via the Ministry of
Finance. The loan is channelled to various borrowers for the purpose of Small and Medium-Scaled
Enterprises ("SME") Development or Environmental Protection. The loan bears interest at a rate of
LIBOR 6 months USD rate + 1% per annum. The repayment dates for this loan vary in accordance to
the tenor of loans granted to the various borrowers.
(b)
The JBIC MNT loan amounting to MNT 1,350.2 million (2009: MNT 999.6 million) is obtained via the
Ministry of Finance. The loan is channelled to various borrowers for the purpose of SME Development
or Environmental Protection. The loan bears interest at a rate equal to the average rate for MNT
demand deposits published by Bank of Mongolia for the preceding 12 months. The repayment dates
for this loan vary in accordance to the tenor of loans granted to the various borrowers.
F-92
15
Borrowings, continued
Russian Agricuture Bank (RHSB)
The credit line of USD 25 million was obtained by the Group for the purpose of relending to customers.
This credit facility bears varying interest rates of 10~12% and expires on 24 August 2012. At 31 December
2010, the Group has utilised USD 8,817,870.
SME Project Fund MoF
The Group obtained a line of credit from Ministry of Food, Agriculture and Light industry for the purpose of
SME development. Ministry of Food, Agriculture and Light industry budgeted MNT 30 billion for this facility
which is available for all Mongolian commercial banks with no specific set amount allocated to individual
bank basis. This credit facility bears interest rate of 9.6% per annum with varying repayment dates
depending on the loans. Expiration date of this credit facility is 12 June 2014 and the Group has utilised
MNT 6,115 million as at 31 December 2010.
Mongolian Mortgage Corporation (MMC)
The Group transferred certain mortgage portfolios to Mongolian Mortgage Corporation in 2008 and 2009 on
a recourse basis and determined that the transfer does not qualify for derecognition criteria for financial
assets since significant risks and rewards were not transferred to MMC. Accordingly, the Group accounted
for these transactions as collateralized financing. See note 6 for the details of the transactions.
16
173,280,281
2009
MNT000
59,639,556
On 5 January 2007, the Group launched a Euro Medium Term Note ("EMTN") Programme of which USD
75,000,000 was issued on 22 January 2007 at a price of 98.176%. These bonds bear interest at 8.625%
per annum payable semi-annually. The principal was due on 22 January 2010 and was paid in full as
scheduled.
On 25 October 2010, the Group issued USD 150,000,000 senior notes due 25 October 2013 under its USD
300,000,000 EMTN Programme at a price of 99.353%. These bonds bear interest at 8.5% per annum
payable semi-annually. The Group is also obligated to pay withholding tax for 5% of the amount of interest
expenses paid to the investors on its senior notes in accordance with double tax treaty between Mongolia
and Singapore and these additional cash outflows effectively increase real interest rate for the notes.
The Group repurchased USD 10 million of its senior notes in November 2010 which is treated as
redemption of debt securities. Related redemption loss of MNT 280,589 thousand was recognized. The
Group has not had any defaults of principal,interest or other breaches with respect to debt securities during
2010 and 2009. During 2010 and 2009, respective debt securities accreted by MNT 165,159 thousand and
MNT 573,821 thousand, respectively, using effective interest method.
F-93
17
2009
MNT000
31,218,538
On 16 November 2010, the Group issued USD 25,000,000 subordinated notes due 17 November 2015
under its USD 300,000,000 EMTN Programme at a price of 99.999%. These bonds bear interest at 12.5%
per annum payable semi-annually. The Group is also obligated to pay withholding tax for 5% of the amount
of interest expenses paid to the investors on its subordinated notes in accordance with double tax treaty
between Mongolia and Singapore and these additional cash outflows effectively increase real interest rate
for the notes. The above liabilities will, in the event of the winding-up of the issuer, be subordinated to the
claims of depositors and all other creditors of the issuer. During 2010, subordinated debt securities
accreted by MNT 3,968 thousand using effective interest method.
The Group has not had any defaults of principal,interest or other breaches with respect to debt securities
during 2010.
18
Other liabilities
2010
MNT000
Accrued interest expense
Delay on clearing settlement
Other payables
Dividend payable
19
2009
MNT000
16,183,804
711,906
3,137,302
365,945
13,543,640
2,157,033
1,879,390
365,945
20,398,957
17,946,008
Share capital
2010
2009
Number of ordinary shares
2010
MNT000
2009
MNT000
At 1 January
Issued during the year
3,305,057
-
3,305,057
-
6,610,113
-
6,610,113
-
At 31 December
3,305,057
3,305,057
6,610,113
6,610,113
At 31 December 2010 and 2009, 3,305,057 shares were issued and outstanding out of total 4,000,000
authorized shares. All issued shares are fully paid and have a par value of MNT 2,000.
F-94
20
Treasury shares
2010
MNT000
2009
MNT000
At 1 January
Sale of treasury shares
6,456,232
(454,360)
6,456,232
-
At 31 December
6,001,872
6,456,232
On 21 December 2010, the Group sold 30,700 treasury shares at MNT 14,800 to US Global Investment
LLC, its parent company.
Pursuant to an agreement dated 18 January 2007 between the Group and its ultimate holding company, US
Global has the option to repurchase 272,000 shares at a future date at a price to be agreed upon taking into
account the net worth of the bank then. This option expired on 30 June 2009 without being exercised.
21
Interest income
2010
MNT000
Loans and advances
Investment securities
Deposits and placements with banks and other
financial institutions
Bonds purchased under resale agreements
Subordinated loan
22
2009
MNT000
68,749,442
15,445,848
66,154,635
5,823,798
4,278,640
20,826
717,980
4,841,249
8,269
485,607
89,212,736
77,313,558
Interest expense
2010
MNT000
Deposits
Borrowings
Subordinated borrowings
Bonds sold under resale agreements
Debt securities issued
Subordinated debt securities issued
F-95
2009
MNT000
50,654,319
4,090,307
189,165
4,603,135
526,010
30,226,102
5,445,728
971,599
346,723
8,753,213
-
60,062,936
45,743,365
23
2009
MNT000
2,568,171
2,207,594
2,756,699
434,039
2,366,562
2,366,587
1,936,465
375,536
7,966,503
7,045,150
961,604
152,868
891,526
99,182
1,114,472
990,708
6,852,031
6,054,442
24
F-96
2009
MNT000
9,434,706
84,495
(280,589)
38,693
5,907,730
55,657
91,603
9,277,305
6,054,990
25
Operating expenses
2010
MNT000
Staff costs
Technical assistance and foreign bank remittance fees
Depreciation on property and equipment (note 9)
Amortisation on intangible assets (note 10)
Write off for property and equipment
Professional fees
Insurance
Advertising and PR
Rental expenses
Business traveling
Cash handling
Stationery
Communication
Others
2009
MNT000
7,749,108
415,777
1,970,047
503,703
2,258
555,537
632,195
1,306,091
1,158,818
680,462
350,184
393,178
600,325
2,261,077
6,891,687
1,798,543
1,575,531
429,050
2,630
505,464
204,978
738,955
841,154
593,770
450,862
467,251
766,953
2,416,173
18,578,760
17,683,001
Included in other operating expenses are costs incurred for trainings, traveling, utilities, security, IT
maintenance, repairs and maintenance, transportation and other miscellaneous administrative expenses.
26
27
2009
MNT000
(164,700)
(8,132,695)
(1,560,660)
(293,594)
(1,725,360)
(8,426,289)
4,277,777
F-97
2009
MNT000
2,598,784
27
2009
MNT000
24,975,016
17,570,335
6,243,754
948,923
(2,458,300)
4,392,584
320,445
(1,664,245)
(450,000)
(6,600)
(450,000)
-
4,277,777
2,598,784
According to Mongolian Tax Laws, the Group has an obligation to pay the Government Income Tax at the
rate of 10% of the portion of taxable profit up to MNT 3 billion and 25% of the portion of taxable profits
above MNT 3 billion.
28
Dividends
2010
MNT000
Dividends of equity holders
2009
MNT000
-
16,328,021
On 1 May 2009, the Group declared a dividend of MNT 5,460 per ordinary share amounting to MNT
16,328,021 thousand. There have been no dividend declared for the year ended 31 December 2009.
F-98
29
Segment reporting
Segment information is presented in respect of the Group's business segments. The primary format,
business segments, is based on the Group's management and internal reporting structure.
Business segments pay to and receive interest from the Treasury on an arm's length basis to reflect the
allocation of capital and funding costs.
Segment capital expenditure is the total cost incurred during the period to acquire property and equipment,
and intangible assets other than goodwill.
Business segments
The Group comprises the following main business segments:
Corporate Banking
SME Banking
Includes loans, deposits and other transactions and balances with SME
customers. The Group classifies a business customer as SME where the
level of financing it provides to a customer is between USD $100,000 to
USD $500,000 rather than the classification on the size of the business
itself.
Retail Banking
Includes loans, deposits and other transactions and balances with retail
customers and card customers.
Investment and
International Banking
Treasury
Others
F-99
29
In MNT000
As at 31 December 2010
Corporate
Banking
SME
Banking
Retail
Banking
Investment
and
International
Banking
51,514,760
3,105,115
(32,672,558)
(3,078,226)
14,593,111
(4,312,402)
29,149,800
2,159,356
81,289
4,304,446
16,612
92,939
197,389
6,852,031
(24,031)
20,459
6,649,719
1,224,630
1,406,528
9,277,305
(27,986,887)
(1,709,034)
46,456,472
3,175,821
(16,022,722)
(3,913,650)
Treasury
Other
Total
Segment result
External revenue
Net interest income
Net fee and commission
income
Other operating income
(expense)
Intersegment revenue
Total segment revenue
Operating expense
(Allowance) reversal for
impairment losses
Profit before tax
25,663,198
-
1,497,829
24,738,079
(320,913)
(174,843)
(6,686,539)
(156,106)
(523,717)
(10,716,642)
(18,578,760)
(1,771,705)
535,826
788,847
(1,278,328)
(1,725,360)
23,570,580
1,858,810
18,840,387
(41,899)
(635,759)
(18,617,105)
24,975,016
114,207
-
(112,042)
-
(6,622,135)
-
45,279,136
-
(4,277,777)
20,697,239
Segment assets
Segment liabilities
368,880,416 18,888,908
106,574,231
1,083,675
593,867,694
249,585,145
1,338,880,069
19,304,243
- 817,987,675
176,095,265
160,461,217
75,257,146
1,249,105,547
1,481,973
1,481,973
19,304,243
817,987,675
176,095,265
160,461,217
76,739,120
1,250,587,520
(1,067,756)
(20,994)
(1,378,333)
(2,473,751)
155,531
1,304
775,166
935,274
Unallocated liabilities
Total liabilities
Depreciation and
amortization
Capital expenditure
(2,796)
1,593
(869)
1,680
F-100
29
In MNT000
As at 31 December 2009
Segment result
External revenue
Net interest income
Net fee and commission
income
Other operating income
(expense)
Intersegment revenue
Corporate
Banking
SME
Banking
Retail
Banking
Investment
and
International
Banking
Other
Treasury
Total
52,143,403
3,370,180
(14,490,015)
(8,455,309)
1,240,174
(2,238,240)
31,570,193
1,485,854
92,795
4,012,028
7,451
195,653
260,661
6,054,442
296,371
(29,816,381)
12,075
(2,039,576)
5,926,996
25,767,972
843
8,239,750
(1,213,870)
(4,888,689)
1,032,575
2,736,924
6,054,990
-
24,109,247
1,435,474
21,216,981
(207,265)
(4,666,732)
1,791,920
43,679,625
Operating expense
(Allowance) reversal for
impairment losses
(358,134)
(153,275)
(5,422,376)
(1,275,056)
(512,669)
(5,859,886)
(1,543,246)
(963,894)
(59,263)
(8,426,289)
17,891,227
(261,047)
14,830,711
(1,482,321)
(5,179,401)
(8,228,834)
17,570,335
(2,598,784)
14,971,551
344,406,517
15,290,191
69,646,533
8,861,547
512,823,430
62,013,300 106,189,653
51,991,646 741,879,576
8,861,547
512,823,430
62,013,300 106,189,653
53,335,232 743,223,162
(3,102)
-
(1,311)
95
(2,187)
829,645
Unallocated liabilities
Total liabilities
Depreciation and
amortization
Capital expenditure
(9,961,491) (17,683,001)
1,343,586
F-101
(3,492)
1,960
(10,822)
3,581
(1,983,667)
1,279,930
1,343,586
(2,004,581)
2,115,211
30
2009
MNT000
3,455,202
(300,791)
4,856,928
(61,872)
525,816
(42,900)
1,258,192
(6,793)
3,000,000
-
2,885,680
110,366
3,000,000
800,000
Capitron Bank
During the year ended 31 December
Interest income*
Interest expense*
As at 31 December
Deposits and placements with banks and other financial institutions
Deposits and placements of banks and other financial institutions
Subordinated loans
Reverse repurchase agreements
* Represents the amount incurred during the full years of 2010 and 2009, respectively.
Executive officers
During the year ended 31 December
Interest income
As at 31 December
Loans to executive officers
123,326
59,981
1,215,070
628,890
Interest rates charged on mortgage loans extended to executive officers are less than would be charged in
an arms length transaction. The mortgages granted are secured over property of the respective borrowers.
The loans to executive officers are included in loans and advances of the Group.
Total remuneration and employees benefit paid to the executive officers and directors for the year ended
31 December 2010 amounted to MNT 1,647,874 thousand (2009: MNT 1,303,391 thousand).
F-102
31
F-103
31
Investment securities
2010
2009
Carrying amount
464,466,630
406,214,658
260,735,448
90,300,363
441,840,494
380,003,204
260,735,448
90,300,363
16,904,372
18,841,831
3,677,058
7,618,378
8,430,152
1,407,122
14,512,828
6,572,275
Gross amount
Allowance
478,470,454
(14,003,824)
421,337,260
(15,122,602)
464,466,630
406,214,658
260,735,448
90,300,363
*Loans included in this classification are those for which contractual interest or principal payments are
past due, but the Group believes that impairment is not appropriate on the basis of the level of security
/collateral available and/or the stage of collection of amounts owed to the Group.
F-104
31
2010
MNT000
Gross
In arrears
Substandard
Doubtful
Loss
2009
MNT000
Fair value of
collateral
Net
Gross
Net
Fair value of
collateral
18,841,831
1,407,122
14,512,828
6,572,275
17,899,699
1,055,341
7,256,414
-
20,976,885
5,301,999
24,959,200
17,314,194
36,629,960 22,626,135
41,334,056
26,211,454
68,552,278
55,731,275
The Group holds collateral against loans and advances to customers in the form of mortgage interests
over property, other registered securities over assets, and guarantees. Collateral generally is not held
over loans and advances to banks except when securities are held as part of reverse repurchase and
securities borrowing activities. Collateral usually is not held against investment securities, and no such
collateral was held at 31 December 2010 or 2009.
The adverse economic conditions experienced in Mongolia in 2009 has improved substantially in 2010
as trade activity and foreign investment inflows related to mining increased dramatically and the
countrys foreign exchange reserves reached record levels. However, there has been pickup in the
inflation rate which could adversely affect the economic recovery and growth rate. The ultimate
collectability of the loans is subject to a number of factors, including the successful performance of the
debtors under various restructuring plans in place or in process of negotiation and their ability to
perform on loan and debt obligations given the status of the Mongolian economy and the potential
continuation of adverse trends or other unfavorable developments. Consequently, it is reasonably
possible that adjustments could be made to the reserves for impaired loans and to the carrying amount
of investments in the near term in amounts that may be material to the Groups financial statements.
F-105
31
2009
MNT000
19,469,628
73,163,350
73,666,141
47,721,926
69,706,606
71,830,777
430,250
885,811
250,085
2,700,793
2,416,299
763,115
37,002,717
30,362,475
17,940,526
16,156,131
22,251,737
62,751,263
98,839,017
17,882,104
52,082,932
90,892,424
94,466
2,248,846
257,728
1,671,414
3,765,036
1,038,783
30,449,897
10,840,582
3,370,184
7,778,245
464,466,630
406,214,658
As stipulated in the Banking Law of Mongolia, the total value of loans, loan equivalent assets and
guarantees provided to one person or group of related persons shall not exceed 20 percent of the
capital of the Group. The maximum value of loans, loan equivalent assets and guarantees provided to a
shareholder, the chairman, a member of the Representative Governing Board, an executive director or a
bank officer or any related person thereof shall not exceed 5 percent of the capital of the bank, and the
their total amount shall not exceed 20 percent of the capital of the Group respectively. The criteria for
concentration of loan as at 31 December 2010 are as follows:
Suitable ratios 31 December 2010 Differences
Description
The loan and guarantee given to one borrower
The loan and guarantee given to the single related party
Total loans and guarantees given to the related parties
F-106
<Eq 20%
<Eq 5%
<Eq 20%
18.17%
0.15%
3.83%
31
At 31 December
F-107
2010
2009
67%
47%
31
Less than
three
months
Three to six
months
Over five
years
Total
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with Bank of
Mongolia
Deposits with Bank of
Mongolia
Investment securities
Loans and advances
Other assets
Financial liabilities
Deposits from customers
Deposits and placements of
banks and other financial
Institutions
Borrowings
Subordinated debt
Debt securities issued
Other liabilities
Issued financial guarantee
contracts
Unrecognized loan
commitments
49,351,824
49,351,824
273,434,020
273,434,020
79,820,367
79,820,367
150,861,600
222,527,890
40,980,440
12,671,055
829,647,176
268,000
29,821,296
30,089,296
5,569,000
30,774,016
132,533,616 228,588,167
138,102,616 266,362,183
1,596,562
32,543,111
34,139,673
150,861,600
260,735,448
464,466,630
12,671,055
1,298,340,944
602,396,176
53,584,874
82,131,265
-
219,566,200
-
15,851,108
-
919,944,749
53,584,874
8,656,916
20,398,957
727,550
-
6,571,988
-
28,312,092
31,218,538
173,280,281
-
6,409,601
-
50,678,147
31,218,538
173,280,281
20,398,957
73,427,994
73,427,994
45,236,892
803,701,809
82,858,815
226,138,188
248,662,019
6,409,601
45,236,892
1,367,770,432
25,945,367
(52,769,519)
(88,035,572)
17,700,164
27,730,072
(69,429,488)
F-108
31
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with Bank of
Mongolia
Deposits with Bank of
Mongolia
Investment securities
Reversed repurchase
agreements
Loans and advances
Subordinated loans
Other assets
Financial liabilities
Deposits from customers
Deposits and placement of
bank and other financial
institutions
Borrowings
Subordinated borrowings
Debt securities issued
Other liabilities
Issued financial guarantee
contracts
Unrecognized loan
commitments
Less than
three
months
Total
Over five
years
24,215,992
24,215,992
38,414,833
3,344,990
21,301,828
63,061,651
57,065,717
57,065,717
122,641,400
84,190,544
326,144
5,783,675
122,641,400
90,300,363
799,556
26,406,983
14,724,800
368,459,825
29,493,274
35,276,949
799,556
406,214,658
7,000,000
14,724,800
786,024,137
264,631,490
579,522,778
4,055,281
2,606,596
59,639,556
17,946,008
- 27,413,960
1,163,648 16,383,078 24,614,190
-
8,534,481
-
31,469,241
53,301,993
59,639,556
17,946,008
32,807,809
8,534,481
30,276,702
804,964,087
26,742,468
(18,939,950)
32,807,809
30,276,702
411,963,442
F-109
31
F-110
F-111
31
Financial liabilities
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Subordinated debt securities issued
Debt securities issued
Other liabilities
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Balances with Bank of Mongolia
Deposits with Bank of Mongolia
Investment securities
Loans and advances
Subordinated loan
Other assets
In MNT000
As at 31 December 2010
611,053,092
76,750,838
73,983,831
69,455,977
53,584,874
50,678,148
31,218,538
173,280,281
20,398,957
1,249,105,548
6.87
13.78
9.81
-
49,235,398
8,656,916
-
53,584,874
20,398,957
919,944,749
6.54
602,396,176
687,803,930
143,439,808
1,298,340,944
273,434,020
150,861,600
222,527,890
40,980,440
-
79,820,367
1,596,562
12,671,055
273,434,020
79,820,367
150,861,600
260,735,448
464,466,630
7,000,000
12,671,055
Less than
three months
0.77
0.09
9.47
14.51
9.93
-
49,351,824
Non-interest
sensitive
49,351,824
Total
Effective
Interest rate
(52,769,519)
82,858,815
727,550
-
82,131,265
30,089,296
268,000
29,821,296
-
Three to six
months
(88,035,572)
226,138,188
6,571,988
-
219,566,200
138,102,616
6,525,000
132,533,616
-
Six months
to one year
17,700,164
248,662,019
28,312,092
31,218,538
173,280,281
-
15,851,108
266,362,183
30,774,016
228,588,167
7,000,000
-
One to five
years
26,133,510
6,409,601
6,409,601
-
32,543,111
32,543,111
-
Over five
years
F-112
31
Financial liabilities
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Debt securities issued
Other liabilities
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Balances with Bank of Mongolia
Deposits with Bank of Mongolia
Investment securities
Reversed repurchase agreement
Loans and advances
Subordinated loan
Other assets
In MNT000
As at 31 December 2009
267,238,086
5,215,230
81,640,845
15,775,482
31,469,241
53,301,993
59,639,556
17,946,008
741,879,576
5.50
7.00
8.63
-
44,144,561
2,606,596
-
4,055,281
59,639,556
17,946,008
579,522,778
6.77
264,631,490
272,453,316
97,416,327
786,024,137
38,414,833
122,641,400
84,190,544
799,556
26,406,983
-
57,065,717
1,409,818
14,724,800
63,061,651
57,065,717
122,641,400
90,300,363
799,556
406,214,658
7,000,000
14,724,800
Less than
three months
7.56
0.11
10.42
5.00
15.96
11.00
-
24,215,992
Non-interest
sensitive
24,215,992
Total
Effective
Interest rate
(136,389,728)
179,727,165
27,413,960
1,163,648
-
151,149,557
43,337,437
3,344,990
39,992,447
-
Three to six
months
40,967,466
122,291,974
16,383,078
-
105,908,896
163,259,440
21,301,828
141,957,612
-
Six months
to one year
93,243,461
82,447,025
24,614,190
-
57,832,835
175,690,486
326,144
168,364,342
7,000,000
-
One to five
years
25,332,650
8,534,481
8,534,481
-
33,867,131
4,373,857
29,493,274
-
Over five
years
121,671
(121,671
2009
At 31 December
339,159
(339,159)
In MNT000
2010
Foreign
MNT
denominated currencies
Financial assets
Cash and hand
Deposits and placements with
banks and other financial
instruments
Balances and deposits with
the Bank of Mongolia
Investment securities
Reversed repurchase
agreements
Loan and advances
Subordinated loans
Other assets
Financial liabilities
Deposits from customers
Deposits and placement of
bank and other financial
institutions
Borrowings
Subordinated debt
Debt securities issued
Other liabilities
Total
MNT
denominat
ed
28,049,032 21,302,792
- 273,434,020
49,351,824
273,434,020
12,008,644
16,600,000
36,131,526 194,550,441
230,681,967
37,298,773
260,735,448
90,300,363
799,556
260,735,448
2009
Foreign
currencies
Total
12,207,348
46,461,651
24,215,992
63,061,651
142,408,344 179,707,117
-
90,300,363
799,556
200,209,626 264,257,004
464,466,630
7,000,000
7,000,000
7,346,519
5,324,536
12,671,055
539,472,151 758,868,793 1,298,340,944
178,840,854
7,000,000
10,955,425
353,803,615
227,373,804 406,214,658
7,000,000
3,769,375 14,724,800
432,220,522 786,024,137
440,274,228 479,670,521
27,033 53,557,841
919,944,749
53,584,874
287,845,392
359,205
291,677,386 579,522,778
31,110,036 31,469,241
12,505,774 38,172,373
50,678,147
- 31,218,538
31,218,538
- 173,280,281
173,280,281
13,321,226
7,077,731
20,398,957
466,128,261 782,977,285 1,249,105,546
10,879,678
8,698,229
307,782,504
42,422,315 53,301,993
59,639,556 59,639,556
9,247,779 17,946,008
434,097,072 741,879,576
73,343,890 (24,108,492)
49,235,398
46,021,111
(1,876,550)
44,144,561
The Group is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its
financial position and cash flows. The Groups management sets limits on the level of exposure by
currencies (primarily USD) and in total. These limits also comply with the minimum requirements of Bank
of Mongolia.
F-113
2,410,849
2009
At 31 December
187,655
At 10 percent weakening of the MNT against the USD at 31 December 2010 and 2009 would have had the
equal but opposite effect on the above currency to the amounts shown above, on the basis that all other
variables remain constant.
(e) Capital Management
The Groups regulator, Bank of Mongolia, sets and monitors capital requirements for the Group as a whole.
The Bank of Mongolia requires the Group to maintain a minimum capital adequacy ratio of 12%, complied
on the basis of total capital and total assets as adjusted for their risk (CAR) and a minimum of 6%
complied on the basis of total tier 1 capital and total assets as adjusted for their risk (TCAR).
Various limits are applied to elements of the capital base. The qualifying tier 2 capital cannot exceed tier 1
capital; and qualifying term subordinated borrowings capital may not exceed 50 percent of tier 1 capital.
Risk-weighted assets are determined according to specified requirements that seek to reflect the varying
levels of risk attached to assets and off-balance sheet exposures.
The Groups policy is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the business. The impact of the level of capital on
shareholders return is also recognised and the Group recognises the need to maintain a balance between
the higher returns that might be possible with greater gearing and the advantages and security afforded by
a sound capital position.
The Group has complied with all externally imposed capital requirements throughout the period. There have
been no material changes in the Groups management of capital during the year.
F-114
Tier II Capital
Revaluation reserve
Subordinated debt
2009
MNT000
6,610,113
7,392,191
(6,001,872)
66,873,841
74,874,273
6,610,113
7,392,191
(6,456,232)
45,911,554
(544,826)
52,912,800
13,418,276
31,218,538
44,636,814
13,683,324
13,683,324
119,511,087
66,596,124
2009
MNT000
42,476,431
44,116,891
582,218,086
40,874,390
24,108,494
12,001,746
1,645,000
30,115,985
456,190,828
23,213,724
733,794,292
523,167,283
Capital ratios
Total regulatory capital expressed as a percentage of
total risk-weighted assets (CAR)
16.29%
12.73%
10.20%
10.11%
On 30 October 2008, the Groups regulator, Bank of Mongolia, revised their capital adequacy prudential
ratio calculation by ceasing the value-at-risk (VaR) method and reverting to the traditional method for
the calculation of foreign currency exposure as part of its risk weighted average assets.
F-115
Fair value of financial assets and liabilities not carried at fair value
The Group determines fair values for those financial instruments which are not carried at fair value in the
financial statements as follows:
(i)
Financial assets and liabilities for which fair value approximates carrying amount
For financial assets and financial liabilities that are liquid or having short term maturity of less than one year,
it is assumed that the carrying amounts approximate to their respective fair value. This assumption is also
applicable to demand deposits, time deposits and variable rate financial instruments, which is principally
due to the fact that the current market rates offered for similar deposit products do not differ significantly
from market rates at inception.
(ii)
The fair value of fixed rate financial assets and liabilities carried at amortized cost basis are estimated by
comparing market interest rates when they were first recognized with the current market rates offered for
the similar financial instruments available in Mongolia. For quoted debt issued, the fair values are
measured based on quoted market prices and in case where observable market inputs are not available, a
discounted cash flow model is employed.
F-116
Financial liabilities
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Subordinated debt
Debt securities issued
Other liabilities
33
4
4
5
6
7
8
12
49,351,824
504,115,987
260,735,448
464,466,630
7,000,000
12,671,055
49,351,824
504,115,987
260,680,153
478,965,440
7,000,000
12,671,055
24,215,992
242,768,768
90,300,363
406,214,658
799,556
7,000,000
14,724,800
24,215,992
242,768,768
90,300,363
421,473,566
799,556
7,000,000
12,282,483
1,298,340,944 1,312,784,459
786,024,137
798,840,728
13
919,944,749
906,916,013
579,522,778
570,583,337
14
15
53,584,874
50,678,147
31,218,538
173,280,281
20,398,957
53,584,874
50,678,147
31,822,526
177,113,446
20,398,957
31,469,241
53,301,993
59,639,556
17,946,008
31,469,241
53,301,993
59,639,556
17,946,008
732,940,135
16
17
F-117
73,427,994
45,236,892
2009
MNT000
32,807,809
30,276,702
These commitments and contingent liabilities have off balance-sheet credit risk for which provisions are not
currently made which is an allowed in practice by Bank of Mongolia. Many of the contingent liabilities and
commitments will expire without being advanced in whole or in part. Accordingly, the amounts do not
represent expected future cash flows.
F-118
MahoneyLiotta
Chinggis Avenue-13
The Landmark, 7th Floor
Ulaanbaatar
Mongolia
GTs Advocates
Suite 403, New Century Plaza
Chinggis Khaan Avenue - 15
Sukhbaatar District, Khoroo 1
Ulaanbaatar 211213
Mongolia
AUDITORS
KPMG
Samjong Accounting Corp.
11 th Floor, Gangnam Finance Center
737 Yeoksam-dong
Gangnam-gu, Seoul 135-984
Republic of Korea