OREANDA-NEWS. November 30, 2015.  Fitch Ratings has today downgraded the Long-Term Issuer Default Ratings (IDRs) of Mongolia-based State Bank LLC to 'B-' from 'B'. The Outlook is Stable. Fitch has affirmed the IDRs of Khan Bank LLC at 'B', with Negative Outlook.

At the same time, the Support Rating (SR) of State Bank was downgraded to '5' from '4' and Support Rating Floor (SRF) was revised to 'B-' from 'B'. These actions follow the downgrade in the Mongolian sovereign to 'B' from 'B+' on 24 November 2015.

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

KEY RATING DRIVERS
IDRs AND VRs
The affirmation of Khan Bank's IDRs and VR reflects the bank's manageable asset quality, reasonable risk standards and adequate capitalisation that is better than that of its Fitch-rated peers. The bank's large retail loan portfolio of 59% of total loans at end-1H15 had an impaired loan ratio of just 0.5%. The Fitch Core Capital ratio remained stable at 14.1% end-1H15. The bank maintains a strong business franchise and has better strategic discipline compared with peers.

Khan Bank has good liquidity support from bilateral institutions and the bank's corporate governance benefit from the involvement of international shareholders in its management.

Khan Bank's Outlook remains Negative because of the pressure on asset quality from the weakening operating environment.

State Bank's VR reflects the bank's limited loss-absorption capacity, less stable liquidity relative to Fitch-rated peers and low profitability. Capital is considered tight and the bank has weak access to capital and funding from multilateral institutions. Profitability continues to be constrained by the regulatory net loan-to-total asset ratio cap of 57%. The bank's VR is balanced by its large franchise, stable asset quality and low risk appetite relative to Fitch-rated peers.

IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR
The downgrade of State Bank's IDRs, SR and SRF is a function of the downgrade of the sovereign's rating as this indicates the state's ability to support the bank has weakened, although our expectation of the government's propensity to provide support has not reduced. The bank is 100% state-owned and remains the domestic bank most likely to receive state support in case of need. The Outlook on State Bank is Stable, which mirrors the Outlook on the sovereign's IDRs.

Khan Bank'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 VRs
Fitch would downgrade Khan bank's IDRs and VR if the bank were to become more vulnerable to the deteriorating operating environment than in the past. Positive rating actions could be driven by a stabilisation of the operating environment leading to improved asset quality and liquidity conditions.

State Bank's VR is sensitive to any change in its intrinsic profile, including but not limited to, the bank's capital, loan quality, operating performance and liquidity position.

The VR of State Bank now sits on its SRF. The bank's IDRs would be downgraded only if Fitch were to downgrade its VR and SRF.

SUPPORT RATING AND SUPPORT RATING FLOOR
The banks' 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:

State Bank LLC
Long-Term Foreign-Currency IDR downgraded to 'B-' from 'B'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR downgraded to 'B-' from 'B'; Outlook Stable
Viability Rating affirmed at 'b-'
Support Rating downgraded to '5' from '4'
Support Rating Floor revised to 'B-' from 'B'

Khan Bank 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-'