OREANDA-NEWS. Fitch Ratings has today affirmed the Long-Term Issuer Default Ratings (IDRs) of Mongolia-based XacBank LLC at 'B' with Negative Outlook. The Viability Rating (VR) of XacBank has been affirmed at 'b'. The affirmation follows the downgrade of the Mongolian sovereign to 'B' from 'B+' on 24 November 2015.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRs AND VR
The affirmation of XacBank's IDRs and VR reflects the bank's tightened lending policies which led to a 7% loan contraction in the first 10 months of 2015. In addition it helped to contain loan deterioration under Mongolia's tougher operating conditions at a level in line with the current rating. The rating also reflects Fitch's expectation that the bank will maintain its strategic discipline as indicated by very low budgeted loans growth in the coming year even if the environment were to improve.

XacBank remains exposed to losses on its larger corporate loans stemming from its expansion strategy before 2014. The bank's overall portfolio composition has improved and is now more in line with that of similarly rated peers. The bank's foreign currency loans dropped to 16% of the total at end-October 2015 (end-June 2014: 30%) and mining-related exposure declined to below 5%. This compares with 24% and 9% respectively for the system and 14% and 3% for Khan Bank (B/Negative).

XacBank's capital remains acceptable at this rating level. Its Fitch Core Capital ratio increased to 11.8% from 9.0% in the first 10 months of 2015 driven by lower growth. More stringent risk management led to better reserve coverage and net-impaired loans to equity stood at a manageable 11% at end-October 2015.

XacBank maintains good access to bilateral funding, most of it in USD and swapped into local currency with the Bank of Mongolia. The swap costs should improve as some of the short-dated funds, which the bank converts into tugrik at the higher short-term rates, will be replaced with medium-term funds for which cheaper swap rates apply.

The Outlook remains Negative as XacBank remains exposed to losses on its larger corporate loans stemming from its expansion strategy before 2014. Fitch-adjusted impaired loans ratio increased to 6.8% at end-October 2015 from 3.7% at end-2014. In addition, the portfolio is more concentrated than peers' while XacBank's capital is weaker increasing the bank's sensitivity to a more material worsening of the operating environment.

SUPPORT RATING AND SUPPORT RATING FLOOR
XacBank's SR and SRF have been affirmed at '5' and 'B-' respectively, reflecting Fitch's view that sovereign support, although possible, cannot be relied upon. This is in spite of Fitch's views that the sovereign's propensity to support the bank remains strong given its systemic importance.

RATING SENSITIVITIES

IDRs AND VR
Fitch would downgrade XacBank's IDRs and VR if the bank were to become materially more vulnerable to an intensified deterioration in the operating environment. Downgrade triggers include a material erosion of its capitalisation, insufficient profitability to absorb credit costs, a significant increase in foreign currency related risk and noticeable increases in risk appetite that led to opportunistic growth without commensurate capital strength.

Positive rating actions could be driven by a stabilisation of the operating environment leading to improved asset quality, capitalisation and liquidity conditions.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's SR and SRF are sensitive to the sovereign's ability and propensity to support, as expressed in any change in the sovereign ratings of Mongolia.

The rating actions are as follows:

XacBank LLC
Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Negative
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR affirmed at 'B'; Outlook Negative
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.