09.10.2011 what will it take to get there, addressing mongolia’s investment needs and...

Mongolian Financial Services IndustryMongolian Financial Services Industry

Mr O. OrkhonFirst Deputy CEOAugust, 2011Hong Kong

Mongolian Financial Services IndustryMongolian Financial Services Industry

What Will It Take To Get There?What Will It Take To Get There?

Addressing Mongolia’s Investment Needs and Opportunities

Mr. Randolph S. KoppaPresident

Mongolia Investment Summit, London, December 8, 2011

MONGOLIAN SIGNIFICANT EVENTS

• 209 B.C. formation of the Hunnu Empire

A lot of other things happen….

• 1206 A.D. Chinggis Khan forms the modern Mongolian state

A lot of other things happen….

• 1921 A.D. Mongolia a sovereign state• 1921 A.D. Mongolia a sovereign state

• 1990 A.D. Mongolia a democratic republic

• 2005 A.D. Mongolia exports coking coal to China

• 2009 A.D. Mongolia signs the Oyu Tolgoi investment agreement

with Ivanhoe Mines and Rio Tinto. (Oct. 9)

WHAT IS THE SIGNIFICANCE OF THE LATEST EVENTS?

Let's answer that with a METAPHOR.

Imagine that these events are as if the world had granted to Mongolia and placed in the middle of the Gobi

Desert…..

AN A380 FILLED WITH US 100 DOLLAR BILLS

HOW MUCH WOULD THAT BE?

$10,000, $1 million, $ 1 billion

ONE BILLION DOLLARS LOOKS LIKE THIS

HOW MUCH CAN AN A380 HOLD?

• In the passenger luggage hold, USD 2 billion

• As a cargo plane, USD 15 billion, which weighs almost 150 tons which represents the plane’s maximum payload.maximum payload.

THERE IS ONE CONDITION

You have to get the plane to fly!

Then the money can be showered down for the Then the money can be showered down for the

Mongolian people to collect.

LEARN TO FLY AND BUILD THE RUNWAY!

• At present the plane is taxing and has turned onto the runway for take off. It is picking up speed.

• The runway is being built.

• 2.8 million Mongolians are watching.

• Will the runway be completed in time?

WHAT HAPPENS NEXT?

WILL IT BE THIS?

OR WILL THIS FOIL THE TAKEOFF?

EXPLAINING THE METAPHOR

• Mining investment and development and

increasing mining operations in coal and iron

ore, in particular, are advancing at a faster pace

than the underlying infrastructures necessary to

handle the growth.

MINING INVESTMENT LEADS MONGOLIA’S ECONOMIC GROWTH

• OT has spent over USD 3 billion in building the copper mine

to over 60% completion.

• Coal mining operators have raised USD1.5 to 2 billion on

foreign exchanges to fund mine developments in coking

coal.coal.

• Erdenes TT is planning a large IPO to finance developing its

East Tsenkhi field

• The West Tsenkhi tender will result in further substantial

investments by an international consortium.

CHINA DEMAND DRIVES EXPORT BOOM

Even though the mega projects of OT and TT

have not yet gone into production, for the past

three years Chinese demand for coal, iron ore,

petroleum and other minerals have propelled thepetroleum and other minerals have propelled the

operational development of mines throughout

Mongolia and have put Mongolia on the map.

NOW TOP EXPORTER OF COKING COAL TO CHINA

• Chinese Coking Coal Import volumes by country of origin

June 10 June 11 Change %

Mongolia 5.8 7.9 +36%Australia 9.7 4.2 -57%USA 1.6 2.7 +66%

• In million tones

USA 1.6 2.7 +66%Canada 1.6 1.5 -9%Russia 2.2 1.4 -37%Indonesia 1.1 1.2 +12%

Total 22.3 19.2 -14%

Source: China Coal Resource

2630

35

40

45

16.620.5

20

30

40

50

Mongolian Coking Coal Exports to China

Actual

Forecast

AND VOLUME WILL CONTINUE TO GROW

13.8

3.7 4.27.1

16.6

0

10

20

2007 2008 2009 2010 2011 2012 2013 2013 2014 2015

Forecast

• Average price in 2011 $100 per ton• Average price in 2010 $50 per ton

Source: Frontier Securities, TDB

IRON ORE, ALSO

300

400

600

300

400

500

600

700

Forecast

USD mln

87 81

250300

0

100

200

300

2008 2009 2010 2011 2012

Actual

EXPORTS BOOM DESPITE LAGGING INFRASTRUCTURE

• Exports increased 53% in 2010 to USD 2.9 bn

• Exports increasing at 65% rate in 2011 ( USD 3.5 bn

9 mos)

• Coking coal export value up 178% • Coking coal export value up 178%

• Iron ore export value up 86%

• Copper concentrate export value up 32%

• Crude oil value up 56%

MINERAL EXPORT VALUES BOOM

Source: NSO

SO FAR MOST COAL AND IRON HAS GONE TO MARKET IN THIS MANNER

This method clearly is not sustainable

TRUCKS AND MORE TRUCKS

Source: NSO

TRANSPORT

• Today 1000 trucks daily travel on dirt roads delivering coal and iron to the Chinese border

• Supplies from UB and elsewhere to the mines go by road

Yes, the word today in Mongolia is TRUCKSYes, the word today in Mongolia is TRUCKS

• UB Railway capacity is strained

• Border crossings are jammed

The word tomorrow will be TRAINS

THERE IS A LOT TO DO!

The mines and the people need:

• Power

• Transport

• Housing

• Public services

• Educational services

POWER – NEW PLANTS DELAY

Source: World Bank

MEANING MORE POWER IMPORTS

• Need to double capacity in next four years

• USD 2 to 3 billion investment needed

• Tariffs need to increase 30%-60%

POWER

• Mine site plants can be project financed

• Chandgana another option

• Financing of UB plants

DIESEL: CRITICAL FOR POWER

• Diesel powers mine operations

• 464,000 tons this year, up 36%

• Almost all comes from Russia

• Supplies were threatened early summer• Supplies were threatened early summer

• Alternative suppliers being sought

• More storage capacity being built

• Strategic solution is a an in country refinery

PRESENT TRANSPORTATION NETWORK

Source: MRTCUD

ULAANBAATARULAANBAATAR

MRTCUD HIGHWAY PLAN

Size 5,571.9km

Investment US$ 2.1 bn

Time frame 2010-2016

PLUS, A REAL MOTORWAY!

Size 990.4 km



RAILROAD STRATEGIC PLAN

Size 1,040 km



RAILROAD CONNECTION TO THE PACIFIC

URBAN DEVELOPMENT

• Ulaanbaatar has 1.25 million inhabitants, 45% of

Mongolia’s population

• 60% live in substandard housing

• Heat by coal and wood stoves

• Existing district heating also highly polluting

• Ulaanbaatar is world’s most polluted city in winter

MRTCUD 5 YEAR HOUSING PLAN

УЛААНБАÀТАР

ДАРХАН

ТӨ

В

DUNDGOB

МАНДАЛГОВЬ

SUKHBAATAR

DORNODKHOVD

ӨЛГИЙ

ZAVKHAN

GOBI-ALTAI

ЧОЙР

МӨРӨН

БАЯНХОНГОР

UVURKHANGAI

ЭРДЭНЭТ

ЦЭЦЭРЛЭГ

АРВАЙХЭЭР

ARKHANGAI

KHUVSGUL

BAYAN-ULGII

ULAANGOM

УЛИАСТАЙ

ХОВД

UVS

САЙНШАНД

GOBISUMBER

ЧОЙБАЛСАН

БАРУУН-УРТ

ӨНДӨРХААН

ЗУУНМОД

KHENTII

SELENGE

АЛТАЙ

75 000 household housing in Ulaanbaatar

city

ДАЛАНЗАДГАД

DORNOGOBI

DUNDGOBI

UMNUGOBI

AIBAYANKHONGO

R

САЙНШАНД

10 000 household housing

in the Central region

5 000 household

housing in the Eastern

region

5 000 household

housing in the

western region5 000 household

housing in the

Khangai region

Size •75,000 in Ulaanbaatar

•25,000 in Provinces



35363165

4579

3725

5416 6338

9899

6040

4000

6000

8000

10000

MONGOLIAN HOUSING MARKET GROWTH

680 1010 1045 1478

3536 3725

108 119 123 287 267 278 477 447445 512 722

3630

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-III

Source: MRTCUD

Housing supply, by thousand sq m Housing supply, by units

WATER

• THE key scarce resource in Mongolia

• UB under strain

• Desert mining areas have fossil aquifers

• Estimates vary, but aquifer supplies are finite • Estimates vary, but aquifer supplies are finite and may not sustain total mining and urban development expected in next several years

• Water recycling is essential

The word for the future may indeed be WATER

• Water resources for Gobi: $300 million for

ground resources

• Piping water from northern rivers: $400

million

WATER

million

• Solving Ulaanbaatar’s needs: $300 million?

• Total: $1 billionSource: World Bank study

PUBLIC AND SOCIAL SERVICES

• Hospitals and medical services

• Education

- education in engineering and technical areas

- better teachers properly paid- better teachers properly paid

- better facilities

Total needs USD 1 to 2 billion

THREATS TO THE LAND OF BLUE SKY

• Air pollution in UB and other cities

• Rivers and lakes pollution

• Land degradation from mining

• Desertification• Desertification

• Deforestation

• Wildlife endangerment

Easily USD 1 to 2 billion in next five years

OTHER INFRASTRUCTURES

• Agricultural

• Industrial and commercial• Industrial and commercial

• Financial

AGRICULTURAL

• Cashmere: 25% of world’s production but need to move

up the value added chain

• Grains: almost self sufficient but need more for animal

feeds; better quality for humans

• Vegetables: plenty of potatoes but more vegetables • Vegetables: plenty of potatoes but more vegetables

needed

• Meat: potential for further processed products for export

• Organic farming potential

Opportunities for USD 1 to 2 billion investment

INDUSTRIAL AND COMMERCIAL PRESENT A USD 20 BILLION POTENTIAL

• Building materials such as cement

• Clean energy building materials

• Petroleum refining

• Coke plant

• Coal gasification

• Smelting

• Steel

• Steel fabrication such as coal cars

• Consumer goods

FINANCIAL SECTOR INFRASTRUCTURE

• Government and municipal debt market

• Banking sector

• Stock exchange• Stock exchange

GOVERNMENT DEBT

MONGOLIAN SOVEREIGN DEBT

• Current foreign debt to GDP less than 50% and at

favorable rates

• Development Bank of Mongolia designated to Raise up

to USD 600 million for infrastructure with Ministry of

Finance GuaranteeFinance Guarantee

• With growing GDP Mongolia can raise USD 3 to 5 billion

in sovereign debt, including bilateral debt, the next few

years and maintain a sound debt to GDP ratio.

DOMESTIC PUBLIC DEBT

• MoF raised over USD 150 million in local currency bonds

in past three months

• Purposes: to support cashmere and wool industry, SME

and civil servant housing

• Investors still mainly local banks

• Domestic institutional investor base still small

• Limited interest among foreign investors

• Need to expand to USD 1 to 2 billion

TAXES AND DIVIDENDS TO SPEND

• Strong budget surplus in 2011

• Heavy spending plans for next two years

• Eventually USD 2 to 4 billion surplus over next

few years to spend on infrastructure, public few years to spend on infrastructure, public

services and environment

BANKING SECTORBANKING SECTOR

THE STRONG GROWTH OF BANKS BEGUN IN 2004 HAS RESUMED

Sources: Bank of Mongolia; TDB;

Amounts converted from MNT at constant rate of 1,250.* Percentages in annualized rate.

Sources: Bank of Mongolia; TDB;

BUT BANK LENDING TO GDP IS STILL LOW

Source: World Bank;

LENDING MUST INCREASE DRAMATICALLY

Sources: IMF; TDB;

THIS WILL REQUIRE ADDITIONAL CAPITAL

Assumes ROAA ranging from 2% down to 1.5%30% dividend payout10% capital to total liabilities

Sources: TDB;

MORTGAGE LENDING WILL GROW

Sources: BoM; MIK; IMF; TDB;

PROVIDING HOME OWNERSHIP TO MORE AND MORE MONGOLIAN FAMILIES

Potential development ofthe Mongolian mortgage market

Sources: TDB; MIK;

WHICH WILL PUT PRESSURE ON BANK FUNDING PROFILES

• Fixed rate mortgages preferred

• Maturity gap mismatches

Interest rate risks• Interest rate risks

• Fixed rate funding required

REQUIRING DEVELOPMENT OF A SECONDARY MARKET

• Domestic investors needed. Issues:

- Yield curve

- Depth of investors base

• International investors needed. Issues:

- Credit rating- Credit rating

+ Good yield

+ Currency appreciation

• Potentially, MNT 1.5 trillion to MNT 2 trillion of covered bonds

or mortgage backed securities

INTERNATIONAL DEBT CAPITAL MARKET FUNDING WILL EXPAND

Sources: TDB;Assumes: Maximum 20% of total foreign currency funding.

Maximum 10% of domestic currency funding.Foreign currency loans decline to 20% of total loans.

STOCK EXCHANGE

MSE MARKET CAP HAS GROWN DRAMATICALLY IN 2010, BUT IT IS STILL RELATIVELY LOW COMPARED TO PEERS

Source: World Bank;

THE REAL IMPACT IN TRADING AND CAPITAL GENERATION IS STILL VERY SMALL

Source: World Bank;

THE MONGOLIAN STOCK EXCHANGE MUST DEVELOP INTO A REAL SOURCE OF FUNDING FOR CORPORATE GROWTH

• Local (non-mining) corporations will look to raise USD 3 to 5

billion.

• Locally owned mining companies will look to raise USD 10 to 20

billion

State owned entities must list locally• State owned entities must list locally

• Dual listings will be needed to attract international investors

LSE is reforming the MSE with new systems and rules to be ready

end 2011!

MONGOLIA WILL ALSO NEED TO ACCESS FOREIGN COMMERCIAL DEBT

• Structured and project finance

• Private placements• Private placements

• Public debt markets

TO COMPLEMENT GROWING FOREIGN INVESTMENT

2.5

3

2.2

2.8

3.65

4.6

2

2.5

3

3.5

4

4.5

5

0.50.7 0.8

1.5

0

0.5

1

1.5

2

2007 2008 2009 2010 2011 2012 2013 2014 2015

Actual Projected based on 30%annual CGR

STORM CLOUDS GATHERING?

ECONOMY OVERHEATING?

• GDP growth 20% p.a. in Q3 2011

• Core inflation rate now over 12% p.a.

• Transfer payments continue

• Money supply growing• Money supply growing

• Construction up dramatically

• Bank of Mongolia taking action

• But government still wants to spend

Source: World bank

MINE SPENDING AND TRANSFER PAYMENTS DRIVE INFLATION.

Source: World bank

CONSTRUCTION ACTIVITY BACK UP

Source: World bank

WAGES UP, ESPECIALLY FOR MINERS

600569

715

788

894

500.00

600.00

700.00

800.00

900.00

1,000.00

Mongolia Average Wages by Sector (MNT '000)

2009 Jan-Oct

2010 Jan-Oct

2011 Jan-Oct

297

392

279258

219 231

324333 348

267229

264

324

423395

371

275308

346

-

100.00

200.00

300.00

400.00

500.00

Agriculture Mining &

Quarring

Manufacturing Construction Wholesale &

Retail Trade

Hotels &

Restaurants

Financial

Intermediation

Public

Administration

Source: NSO

TOTAL FINANCING AND INVESTMENT NEEDS ANDOPPORTUNITIES 2011 TO 2015

• Mine Development $ 12 bn. to $ 20 bn.

• Infrastructure $ 8 bn. to $ 12 bn.

• Urban development $ 6 bn. to $ 8 bn.

• Agriculture $ 1 bn. to $ 2 bn.

• Industry and Commerce $ 15 bn. to $ 20 bn.

• Environment $ 1 bn. to $ 2 bn.

• Social $ 1 bn. to $ 2 bn.

• Financial Sector $ 1 bn. to $ 2 bn.

Totals: $ 45 bn. to $ 68 bn.

COULD BE MET LIKE THIS

• FDI $ 11 bn. to $ 14 bn.

• Domestic sources $ 12 bn. to $ 18 bn.

• Sovereign Borrowing $ 3 bn. to $ 6 bn.

• Foreign Capital Markets $ 11 bn. to $ 16 bn.

• IFI & Foreign bank Loans $ 7 bn. to $ 12 bn.

• Donors and NGOs $ 1 bn. to $ 2 bn.

Total $ 45 bn. to $ 68 bn.

OR, JUST 3 OR 4 OF THESE, FULLY LOADED

Better yet, simply wire the funds through TDBBETTER YET, SIMPLY WIRE THE FUNDS WIRE THE FUNDS THROUGH TDB

BANK HIGHLIGHTSFinancial Results (mln.USD)*■ Mongolia’s #1 corporate bank

■ Rapid growth and improving asset quality

■ Dominant market share in the corporate and SME client segments, FX, money and bullion markets

■ Leading international trade facilitator of Mongolia

■ The country’s first and still only the

2008 2009 2010 2011.09

Total Asset 520.3 564.6 1065.0 1336.3

Total Loans 347.4 281.2 369.5 726.9

Total Deposits 404.6 435.1 912.2 1199.3

Total Equity 54.0 47.1 78.2 120.5

Net Profit 12.9 10.5 16.5 21.8

Capital Adequacy 14.7% 13.0% 15.9 % 11.4%

ROA 2.8% 2.1% 1.5 % 2.2%

ROE 24.9% 19.5% 22.9 % 32.1%

Bank Ratings by Moody’s

■ The country’s first and still only the second time bond issuer on the international debt markets

■ Continuously strong credit fundamentals:

�Very high profitability with well-managed cost/expenses

�Diversified loan base and good quality assets

� Prudent risk management and corporate governance

� Senior Unsecured EMTN (foreign currency) Ba3� LT/ST Bank Deposits (foreign currency) B2/NP� LT/ST Bank Deposits (domestic currency) Ba3/NP� LT/ST Issuer Rating Ba3� Subordinated foreign currency issue B1� Local currency bank deposit Ba3� Outlook Stable

ROE 24.9% 19.5% 22.9 % 32.1%

MNT/USD = 1280.83

MONGOLIA’S MARKET LEADER

HIGHLIGHTS OF INTERNATIONAL BUSINESS

• Mongolia’s #1 leading corporate bank

• Top international expertise derived from State Bank ofMongolia origins

• 60% market share of foreign remittances

• 57% of Mongolia’s trade finance related transactions

• $175 million in trade finance credit facilities frominternational banks

• 26 correspondent accounts in all major currencies

BEST TRADE FINANCE BANK IN MONGOLIA 2011

• TDB has proven itself to be

the premier trade finance

facilitator taking the majority

of votes from world’s major

financial institutions to win financial institutions to win

“The Best Trade Finance

Bank of Mongolia 2011”

award, by the journal GTR.

STRONG PROFITABILITY AND EFFICIENCY

TDB Capital - OverviewTDB Capital, TDB’s wholly owned subsidiary, acts as its

investment banking arm. It is the first investment bank of

Mongolia, which provides corporate finance, research and

advisory, securities brokerage, underwriting IPO and debt notes

and asset management services. TDB Capital provides access

to the world’s capital markets for its institutional, corporate and

high net worth individual clients.

Thank you for your attention!

Juulchin Street - 7

Baga Toiruu - 12

Ulaanbaatar, Mongolia

Tel: 976-11-31 99 43

Fax: 976-11-31 24 18

Email: [email protected]

http://www.tdbm.mn

http://www.bankcard.mn

http://www.mongolianbusinessguide.com

09.10.2011 what will it take to get there, addressing mongolia’s investment needs and...

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