Foreign banks, including Russia’s Renaissance Capital and London-based HSBC, have been considering setting up offices in Mongolia, lured by hopes of investment banking fees and a need for more corporate lending in the country, sources and industry executives said.
Their plans come at a time when Mongolian lenders have been looking to sell stakes to foreign strategic partners to increase their capital base and boost their operational expertise, they said.
RenCap, Russia’s first Western-style investment bank, is considering setting up an investment banking office in Mongolia, Asia Chief Executive Jeremy Sparrow said. Mongolia is a former Soviet satellite where much of the political and business elite speak fluent Russian.
“It’s not going to be this year, but it’s likely to be next year,” Sparrow said. RenCap plans to open an office in Perth next year and is also considering setting up a presence in Mongolia, Singapore and Jakarta, he said.
“We haven’t decided which of those – some or all of those – will be next year,” he said.
HSBC, which earns most of its profit from Asia, has also been mulling setting up an on-the-ground presence in Mongolia, a person familiar with the situation and two industry executives said. The bank, which was founded in Hong Kong in 1865, has been studying internally whether it wants to enter the Mongolian market and which form it might take, the person said.
Two top Mongolian bank executives said they heard HSBC has been mulling an entry into the market. HSBC wants to set up a Mongolian office to focus on investment banking and wealth management, one of them said.
Boosting presence
Macquarie intends to increase its presence in Mongolia and sees opportunities in resources, infrastructure and financial services, a person familiar with the situation said. The bank has hired Enkhmaa Davaanyam, deputy chairperson of Mongolian oil company Petrovis, as an advisor and the head of Mongolia coverage.
HSBC rival Standard Chartered, which has a similar focus on emerging markets and Asia, plans to open a representative office in Ulaanbaatar in the first half of 2012, a spokesperson said. Standard Chartered is seeing opportunities in wholesale banking such as project finance and structured trade finance, she said.
The investment banks that were hired to arrange the initial public offering of Erdenes Tavan Tolgoi, the Mongolian state-owned coal miner, have also considered setting up representative offices in the country to help source further deals, one industry source suggested. Goldman Sachs, Deutsche Bank, BNP Paribas and Macquarie are arranging the planned USD 3bn offering.
Rival operations
ING has an office in the country and has been active in corporate lending, while BNP Paribas and South Africa’s Standard Bank have been lending from offshore. CPS Securities, the Perth-based broker that arranged the IPO of Hunnu Coal, has a marketing office in the country.
A spokesperson for HSBC said the bank is keen to grow with its customers within Asia but does not plan to open an office in Mongolia in the near term. Goldman Sachs, BNP Paribas and Macquarie declined to comment, whereas Deutsche Bank did not respond to a request seeking comment.
Local banks looking for partners
Meanwhile, Mongolian commercial banks have been looking for strategic partners to meet the need for increased corporate lending. The country’s top banks need strategic and financial partners to bring in expertise and capital, Tim O’Neill, vice president of corporate lending at Mongolia’s XacBank, said.
Foreign banks like HSBC and Standard Chartered would be keen on the corporate finance business in Mongolia, a Hong Kong-based sector banker said. International banks looking to enter the Mongolian market could consider taking a strategic stake in a local Mongolian bank, Khan Bank CEO Simon Morris said.
Khan Bank, the country’s largest bank by branch network, would welcome approaches from foreign banks interested in buying a strategic stake, he said.
“If an international bank was interested in coming in, we would hope we would be partners of choice,” Morris said.
There is room for one of the four biggest Mongolian banks to take on a strategic investor, Khan Bank advisor Peter Morrow said. Khan Bank has considered “all options” for its future growth, including selling a strategic stake to a foreign investor in advance of an initial public offering, Morrow said.
Capital shortfall
Bold Baatar, a former JPMorgan banker who is chairman of the Mongolian bourse, said banking and asset management will be among Mongolia’s fastest-growing industries in the next few years. The Mongolian financial services industry is currently worth less than USD 4bn, but the country needs USD 20bn to USD 30bn of investment over the next five years, he said.
“As they seek more capital, that will be an excellent place to put your capital,” Bold said.
The country's largest lenders need to raise at least USD 500m to USD 1bn additional equity over the next five years, XacBank’s O’Neill said. Commercial banks provide over 90% of debt funding in the domestic market, he said.
Local banks are not growing fast enough to keep up with the growth in the economy, Badarch Enkhbat, chief business development officer at Mongolian conglomerate Just Group, said. Mongolian businesses like MCS and Mongolian Mining Corp. started small but now employ tens of thousands of people, and banks need to get bigger to support the business growth of such companies, Enkhbat said.
Khan Bank has a single borrower limit of USD 35m, Morris said. Mongolia needs financing for the required USD 25bn of infrastructure spending over the next few years, Jim Dwyer, a former UBS banker who is executive director of the Business Council of Mongolia, said.
“You can immediately see the problem when you look at the financing opportunities,” Khan Bank’s Morris said. Foreign investment banks have been arranging multibillion-dollar IPOs for mining companies like Mongolian Mining Corp., but there are not many lenders offering USD 100m to USD 200m of debt, he said.
Just Group Finance Director Joel Cachet said his group’s units have been raising offshore debt with the help of Standard Bank and ING because no local lenders could provide enough funding.
“There is this piece in the middle we’ve got to wake up to – it’s overlooked at the moment,” Morris said. “As the country grows and the economy grows, it’s something that will need to be addressed.”
by Ben Scent, Debbi Sutuntivorakoon and Alfred Liu
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