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CONTENTS
KHAN BANK’S MISSION
OUR COMMITMENT TO CUSTOMERS
MESSAGE FROM THE CHIEF EXECUTIVE OFFICER
FINANCIAL HIGHLIGHTS
2006 YEAR IN REVIEW
MANAGEMENT AND ORGANIZATION
COMMUNITY SUPPORT
AUDITED FINANCIAL STATEMENTS
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12
16
18
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KHAN BANK’S MISSION
KHAN BANK IS THE NATIONWIDE LEADER IN INNOVATIVE
FINANCIAL SERVICES THAT CHANGE PEOPLE’S LIVES AND
BENEFIT SOCIETY. WE ARE COMMITTED TO TRANSPARENCY,
FAIRNESS AND TO PROVIDING THE HIGHEST LEVEL OF
CUSTOMER SERVICE IN MONGOLIA.
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OUR COMMITMENT TO CUSTOMERS
Khan Bank values and respects our customers. We adhere to the following policies on confidentiality and transparency:
All Khan Bank employees shall serve customers equally and openly without any discrimination as to age, race, sex, occupation, official position, economic status, religion or political affiliation.
Khan Bank employees shall not favor customers because they are friends or relatives, nor shall they have any financial interest in customers or receive any payments, gifts or other benefits from them.
Neither Khan Bank nor any employee shall accept or pay bribes under any circumstances with any person or organization.
Bank employees shall not use any information on customer accounts, deposits or transactions for personal gain nor disclose such information to any individual or other entity except as provided by law or as required by execution of a court decision.
No bank employee shall process any transaction from a customer’s account or deposit without the consent of the customer, nor suspend such transaction except as required by an official notification from a tax officer, social insurance officer, bailiff or other official acting in a legal capacity.
Khan Bank customers may request the full version of the confidentiality policy from any of the Bank’s offices. Any person who is disadvantaged by a Khan Bank employee who has violated these policies should call the office of the CEO in Mongolian or English at 976-11-457880 or email directly to [email protected]
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MESSAGE FROM THE CHIEF EXECUTIVE OFFICER
To Shareholders and Friends:
Khan Bank had an extraordinary year in 2006. After tax earnings increased 158% to MNT 12.0 billion compared with MNT 4.6 billion in 2005. This equated to Return on Assets of 4.4% and Return on Equity of 57.3%.
This performance was driven by MNT 105 billion in loan growth, an increase of 78% over the year before. Total deposits grew MNT 113 billion including an increase in core customer deposits of 62%.
As a result of this growth Khan Bank profits were the highest of any bank in Mongolia. We also became the leading lender in the country and moved to second place in total deposits. Loan quality improved with non performing loans falling to 2.1% of total loans from 2.8% a year earlier. NPLs were 109% covered by reserves at year end.
Khan Bank is in a very strong financial condition. Capital grew to MNT 34.8 billion at year end from MNT 17.5 billion from a year earlier. In addition to retaining all earnings, each of our shareholders contributed to an MNT 5 billion increase in share capital. As part of this new share issuance, I invested personally in the bank.
Midway through the year, we commissioned the Sant Maral Foundation to survey Ulaanbaatar residents on attitudes toward banking and financial institutions, in order to identify the reasons for our rapid growth. The survey participants were asked about issues of confidence and perception of financial institutions. The results, statistically valid at a high level of confidence, showed that 42% of respondents consider Khan Bank to be the safest and most reliable bank in Mongolia. The next bank was rated at 15% and most others in single digits.
During the year, we considerably strengthened our management team. Barry Maddams joined us as Deputy CEO bringing extensive international management experience. We reorganized our banking operations under executives D. Batsaikhan, U. Narantsetseg, N. Oyunkhand and S. Sandagdorj. Respectively, they manage our four focused business groups: Rural Branch Banking, Ulaanbaatar Branch Banking, Wholesale Banking and New Business Development. The latter includes our fast growing card and electronic products, international banking, government focused banking and new product development.
Mike Hyde joined Khan Bank as Information Technology Advisor with primary responsibility for the strategy and organization of our complex IT activities.
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Our highest business volume continues to be small loans, deposits and transfers for individuals and businesses all over Mongolia. However, two new business initiatives in 2006 are expected to contribute significantly to our growth in the future:
In December the Bank declared 2007 as the year of SME support. The Khan Bank Incubator was launched to target small and medium sized enterprises and significantly increase our market share in the Ulaanbaatar business market.
Corporate Banking was expanded in 2006 and loans and deposits from this sector rose sharply. We have now developed a full corporate banking capability and expect this business to grow rapidly.
Each year four major organizations award one Mongolian bank as the ‘‘Best Bank’’or ‘‘Bank of the Year’’: Euromoney magazine, Banker magazine, Global Finance magazine and the Government of Mongolia in conjunction with Mongolian National Chamber of Commerce. Khan Bank received all four awards in 2006. All were repeat awards except for Euromoney which made its award in 2006 for the first time.
As part of our ongoing commitment to social and economic development in Mongolia, Khan Bank again made substantial contributions to several projects that will benefit communities throughout the country.
We added 412 new employees to the bank during 2006 and now have a total staff of 2681. I would like to thank all Khan Bankers for their hard work over the past year. I also join with each of them in thanking our customers and friends for their confidence in us. We look forward to 2007 with anticipation and optimism.
Very truly yours,
J. Peter MorrowChief Executive Officer
March 15, 2007
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FINANCIAL HIGHLIGHTS
Profitability
Khan Bank’s financial performance in 2006 was again extraordinary. After tax earnings were MNT 12.0 billion, compared to MNT 4.6 billion in 2005. Average ROA was 4.4%, the highest in Mongolia.
Capital
Total capital grew to MNT 34.8 billion from MNT 17.5 billion a year earlier. The growth came from retained earnings and the new MNT 5 billion capital injection in December. This represents 13.1% of risk adjusted assets, which exceeds the Bank of Mongolia’s regulatory requirement of 10%.
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Liquidity
Liquid assets of MNT 83.0 billion and a liquidity ratio of 26% are adequate and improved from previous levels.
Deposits
In 2006 we maintained the momentum of prior years and achieved strong growth across all our activities. Total deposits reached MNT 296 billion, up MNT 113 billion or 62% in the year. Current and demand accounts reached MNT 115 billion, an increase of MNT 59 billion or 106%. Time deposits increased by MNT 47 billion reaching MNT 164 billion.
As part of our deposit strategy, we launched various new deposit products tailored to meet the specific needs of our target customer market. They included deposit products for Herders, Children and Young Couples.
Loans
The loan portfolio grew by MNT 105 billion or 78% to MNT 239 billion. Of the MNT 105 billion increase, MNT 61 billion or 58% occurred in rural areas, where yields and loan quality are highest. Our Ulaanbaatar loans grew MNT 29 billion, and also reflected substantially improved loan quality over prior years.
Within a year of its establishment, Corporate Banking Department achieved loan growth of MNT 17 billion, which underlines the potential growth opportunity presented by the corporate market.
As a result of rigorous loan procedures the non-performing loan ratio declined from 2.8% in 2005 to 2.1% in 2006.
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2006 YEAR IN REVIEW
Strategic Achievements
In August, the globally recognized microfinance rating agency Planet Rating SAS issued its official evaluation of Khan Bank as Excellent (A-). Its summary statement reads:
‘‘The institution excels in the evaluation area and is a model for the sector. There is a long-term vision for continual improvement. There are no risks in the short and medium term for operations. Long term risks are well managed and monitored.’’
Khan Bank remains a leader in innovative financial services that positively change people’s lives all over Mongolia. We continued to increase our focus on the Bank’s core branch based business and formed two new business groups to effectively address different needs of traditional rural market and fastest growing urban market.
We have also continued to expand our online branch network rolling out another 66 branches into our real time online system thereby increasing our electronic network to 178 branches. UB Business Unit continued to build its market share and opened six new offices.
We grew our retail customer base by 58% reaching over 900,000 customers throughout the country. Our commitment to customer service delivered through the largest network of branches in Mongolia is reflected in the positive results of our customer service survey conducted by the Sant Maral Foumdation. Our good service has helped us to achieve strong growth in our share of customers.
Corporate Banking – Since the establishment of corporate banking as a separate business unit in August 2005, Khan Bank’s corporate business has grown significantly and delivered a strong performance with deposits reaching MNT 17.3 billion and the loan portfolio reaching MNT 19.5 billion.
New Business – In August 2006 we opened our own card and payment processing center becoming the only bank linking cards directly to customer current accounts. This significantly expanded our capability with VISA and doubled the number of our card holders from a year earlier.
In December we launched the Khan Bank Incubator that will be the driving force to target the Small and Medium Enterprise (SME) sector in Ulaanbaatar. The Incubator team will provide advisory services, conferences, seminars and networking events for the business community.
Internet banking services became available from December 2006. We offered fee free services for primary customers during the first quarter 2007 to let our clients become familiar with the new services and to attract and increase the number of users.
We made good progress with the major Korean banks in terms of serving Mongolians working and living in Korea. Now Mongolians in Korea are able to open Khan Bank savings accounts, benefit from the interest
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rates offered in Ulaanbaatar, make direct account transfers, and apply for mortgage loans at the lowest rates.
The Institutional Banking Department continued to successfully expand relations with the Government of Mongolia, NGOs, foreign embassies and international projects enabling the Bank to disburse Government and international project payments all over Mongolia as well as pension payments.
The EBRD-funded technical assistance project successfully concluded in March 2006. The project contributed to a deepening of the Bank’s penetration of the micro loan market as well as enhancing the actual loan and loan reporting process through access to real-time information from the system.
Following the Bank’s joining of the SWIFT international funds transfer network in 2005, we continued to improve our money transfer capability. By the end of 2006, the number of daily international transfers had increased 150% over a year earlier.
As a result of Khan Bank becoming a member in 2006 of BAFT, the US Bankers Association for Finance and Trade, the Bank staff has access to on-line training programs and other educational resources.
Information Technology Achievements
The year 2006 was another record year for Khan Bank’s IT investment and expansion.
We rolled out 66 more branches online bringing the total number of online branches to 178.
As part of our commitment to provide the most up to date debit/credit card facilities to our customers, a new state of the art card and payment center was opened in August 2006.
A new computer room was constructed to stabilize the network and upgrade switches to enable smooth and instant customer transactions.
We continued to connect some of the most remote areas of Mongolia to the worldwide web, opening internet cafes in Gurvansaikhan and Delgerkhangai soums of Dundgobi, Khongor soum of Darkhan Uul and Munkhkhaan soum of Sukhbaatar aimag.
Khan Bank Internet Cafe in Khongor soum, Darkhan Uul aimag
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Khan Bank Awards
In 2006, Khan Bank again received all the principal awards given to banks in Mongolia:
Euromoney magazine named Khan Bank as ‘‘Best Bank in Mongolia’’. This is the first time this prestigious magazine has extended its awards to banks worldwide.
For the third time in the last four years The Banker magazine selected Khan Bank as ‘‘Bank of the Year’’ in Mongolia.
Khan Bank was awarded ‘‘Best Bank of 2006’’ by Global Finance magazine for the third year in a row.
The Mongolian National Chamber of Commerce and Industry (MNCCI) and the Government of Mongolia named Khan Bank as ‘‘Best Bank among Top Five Banks’’ for the second year in a row.
In December 2006, MNCCI selected Khan Bank as ‘‘TOP 10’’ enterprise for 2006 and awarded it the Mercury Cup for excellence and achievement.
MNCCI and the Mongolian Intellectual Property Agency have named Khan Bank ‘‘Socially Responsible Brand of the Year’’ for its outstanding contribution and commitment to community and social development of Mongolia.
Activities in Rural Mongolia
In 2006, Khan Bank worked to build and expand relations with the Government of Mongolia as well as NGOs, embassies and international projects, primarily in order to reach and support rural communities. Successful linkages achieved included:
As a result of new agreements with the Social Insurance Agency, Khan Bank disbursed pensions in 21 aimag centers, 330 soum centers and 9 Ulaanbaatar districts
Pensioners at the Khan Bank open day
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in the total amount of MNT 9 billion to 170 thousand pensioners. To handle the increased government services we opened several new offices dedicated to pension and welfare payments.
Under a new agreement with the Social Welfare Agency, we disbursed child benefits in 13 aimag centers, 292 soums and 66 municipal districts of Ulaanbaatar. In total, the Bank handles 60% of total funds for children.
For the fourth year in a row, we disbursed aid funds for The Swiss Agency for Development and Cooperation to 1,400 herder households.
We disbursed the Japanese Embassy’s rural financial aid through our bank accounts.
The Western Region Energy System opened collection accounts in western aimag branches of Khan Bank.
Ulaanbaatar – Tuv branch now handles payments from electricity users in 16 Tuv aimag soums.
All Khan Bank branches now sell mobile cards of Mongolia’s leading mobile operators: Mobicom, Skytel and Unitel.
Activities in Ulaanbaatar
Khan Bank has continued to aggressively expand its network in Ulaanbaatar. In 2006, six new branches were opened in the city and most of our city branches opened up secondary offices to handle pension and children’s funds effectively.
Together with CHF’s GER (Growing Entrepreneurship Rapidly) Initiative, we provided advisory services to help small entrepreneurs in ger districts to set up their businesses. We also jointly organized community
meetings and community days in Yarmag, Bayankhoshuu, Tolgoit, Bayangol and Bayanzurkh districts of Ulaanbaatar to promote projects and initiatives of the two organizations to people living in those communities.
In order to meet specific needs of our clients and customers in Ulaanbaatar, the Bank launched two new services: the Khan Bank Incubator and the Leasing Center. We also signed a memorandum of cooperation with MNCCI to closely coordinate our efforts to support small and medium enterprises.
Community day to support customers in ger district, UB
Customer at the Khan Bank office
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MANAGEMENT AND ORGANIZATION
The Bank’s shareholders continue to be H.S. Securities, the Tavan Bogd Group of Companies of Ulaanbaatar, the International Finance Corporation (IFC) and Development Alternatives, Inc. (DAI). IFC is an arm of the World Bank. DAI has a management contract with the Bank.
In December 2006, shareholders invested MNT 5 billion in new capital on a pro-rata basis. In addition, CEO J. Peter Morrow has invested directly into the Bank, becoming a shareholder.
The Board of Directors of Khan Bank, consists of Mr. Hideo Sawada as Chairman and Mr. Yoshiaki Mishima of H.S. Securities, Ms. D. Hulan of the Tavan Bogd Group of Companies, Mr. Hiroshi Arichi, Director of IFC’s Tokyo office, and Mr. J. Peter Morrow, the Bank’s Chief Executive Officer.
Hiroshi ArichiDirector of the Tokyo office
of IFC
Yoshiaki MishimaGeneral Manager, Capital Market
Department H.S. Securities
J. Peter MorrowChief Executive Officer,
Khan Bank
Hideo Sawada, ChairmanPresident, H.S Securities
D. KhulanSenior Vice President,
Tavan Bogd Group of Companies
BOARD OF DIRECTORS
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Management Team
In early 2007, Khan Bank extended its management contract with DAI for another four years. DAI has managed the Bank since 2000, and the joint Mongolian and foreign management team will continue at least through December 31, 2010.
J. Peter Morrow serves as Chief Executive Officer. Barry Maddams joined the senior executive team as Deputy Chief Executive Officer in November 2006 bringing extensive international bank management, credit and risk management experience. S. Sukhbold serves as Chief Operating Officer.
J. Peter MorrowChief Executive Officer
SENIOR EXECUTIVES
Barry MaddamsDeputy CEO
E. OyunbilegChief Administrative Officer
S. SukhboldChief Operating Officer
D. BatsaikhanRural Business Executive
U. NaranstetsegUB Business Executive
R. MunkhtuyaChief Financial Officer
S. SandagdorjBusiness Executive
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In 2006 staff grew to 2,681 employees throughout the system, and the Bank’s management team was significantly strengthened through a number of new appointments and realignments:
Recognizing the growing importance of the Bank’s non-branch businesses, in November S. Sandagdorj was appointed Business Executive, responsible for four departments: the Card and Payment Center, International Relations Department, Public Sector Banking Department and Product Development Department. S. Sandagdorj also joined the Executive Committee.
Anticipating substantial growth opportunities in the corporate banking sector, N. Oyunkhand was appointed to organize and direct the Wholesale Banking.
S. Nemekhbayar has joined the Bank as Head of the Mining Department reflecting the growing importance of this sector and its specialized needs.
In August, Mike Hyde became Information Technology Advisor to guide the Bank’s IT development. The IT Department was reorganized, with department heads D. Enkhbold, D. Sukhbaatar and B. Doljin responsible for Database Administration, IT Operations and User Support, respectively.
D. Ayush joined the Bank in September as Head of the Executive Office.
deparTmenT heads
(from left back row)L. Batkhuyag - Head of New Product Development Department,Ya. Tuvdendorj - Head of Ulaanbaatar Credit epartment,a. Ganchimeg - Head of Marketing Department,sh. Ulzii-ayush - Head of Financial Management Department,s. nemekhbayar - Head of Mining Department
(from left front row)Ch. sainjargal - Head of Institutional Banking Department,n. Oyunkhand - Head of Wholesale Banking Department,n. amgalan - Head of UB Operation Department
deparTmenT heads
(from left back row)s. Batzaya - Head of Planning and Analysis Department,G. enkhtsetseg - Head of Treasury Department,d. enkhbold - Head of IT Database AdministrationDepartment,d. ayush- Head of the Executive Office,B. naidalmaa - Head of Risk Management Department
(from left front row)Ts. mongol - Head of Legal Department,B. doljin - Head of IT User Support Department,d. sukhbaatar - Head of IT Operation Department
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In December, the Human Resources Department was reorganized and expanded to include three divisions: Development, Personnel Administration and Training. M. Chantsalmaa was promoted to oversee all functions.
Kh. Binderee joined the Bank in August as Head of the new Security Department, responsible for all issues related to security and safety.
Sh. Ganbyamba and N. Ariuntungalag joined the Bank to manage Human Resource Development and Personnel Administration Divisions respectively.
D. Haliun was named Head of the newly established International Relations Department to aggressively expand the Bank’s international banking relationships.
D. Tumendemberel joined the Bank to strengthen the Bank’s linkages with government agencies and non-governmental organizations (NGOs).
L. Batkhuyag, who successfully managed our Sansar branch, was promoted to Head of the New Product Development Department to oversee and coordinate the Bank’s new product launches.
deparTmenT heads
(from left back row)Ts. altangerel - Head of Corporate Banking Department,sh. Ganbyamba- Head of Human Resource Division,Ch. Batsaikhan - Head of Internal Auditing Department,B. Undarmaa - Head of Training and DevelopmentDivision,n. ariuntungalag - Head of Personnel Administration Division
(from left front row)Kh. Binderee - Head of Security Department,m. Chantsalmaa - Head of Human Resource Department,d. nyamdavaa - Head of Procurement Department
deparTmenT heads
(from left back row)d. Ganbaatar - Head Special Assets Department,n. Baigalmaa - Head of Payment Center,B. Batgerel- Head of Card Center,d. Khaliun - Head of International Relations Department
(from left front row)d. Tumendemberel - Head of Public Sector Banking Department,m. Unurtsetseg - Head of Maintenance and Service Department,m. erdenechimeg - Head of Rural Operations Department
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COMMUNITY SUPPORT
At Khan Bank, we realize the growth of the Bank depends as much on our understanding and fulfillment of our social corporate responsibilities and commitment as on our financial skills and performance. We focus on three programs we believe have a strong impact on community: Education, Art and Culture, and Social Development.
As a dedicated patron of Mongolian children’s education, Khan Bank awarded 100 scholarships worth MNT 40 million to our employee’s children. In line with our mission and objectives we initiated and supported many other educational projects that meaningfully contributed to the communities we serve. These include scholarships to five male students from rural Mongolia in partnership with the ‘‘Friends of Mongolia’’ NGO, annual support of the Zorig Foundation’s ‘‘Young Leaders Program’’, as well as our already traditional sponsoring of the annual English speaking contest organized by the English Speakers’ Union of Mongolia and the British Embassy.
Together with the UB Post newspaper, Khan Bank initiated a nationwide ‘‘News-In-Education’’ project to support Mongolian children’s will and desire to learn the English language. Children all over Mongolia receive a monthly supplementary English language newspaper with educational materials through every branch of Khan Bank. In addition, to reinforce and expand the project reach and efficiency we set up ‘‘Khan Bank English Language Corner’’ at every school in every aimag and soum to display the newspapers as well as books we donated.
Khan Bank also initiated ‘‘Mobile Library’’ book donation partnering with the Asia Foundation, a trip to 20 soums in six aimags distributing 11,000 books to secondary schools. The project will be expanded in 2007 to reach more children.
The School Pairing Project we launched in 2005 in partnership with Western Union was further expanded during 2006 with local Mongolian students making numerous friends in the United States. As part of the project development four students from Mongolia will visit their friends in Colorado in March 2007 under Khan Bank support.
Khan Bank also sponsored a nationwide oratory contest jointly organized by the Ministry of Science, Education and Culture and ‘‘Zalgamjlagch Holboo’’ a children’s NGO established to foster development of young leaders and to encourage appreciation for life and love for homeland in youth.
A student who received Khan Bank Educational Scholarship
Rural students receiving books through the Mobile Library
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As a founding member of the Arts Council of Mongolia (ACM), Khan Bank has initiated an annual grant matching program to contribute to the ACM’s support for Mongolian arts and culture. Among various cultural projects we sponsored are ‘‘Rainbow Horse’’ children’s art and craft’s project which was successfully implemented with a children’s artwork exhibition and parade on Sukhbaatar Square in Ulaanbaatar, and the ‘‘My Culture My History’’ children’s educational tele-vision series.
The year 2006 was a special year for Khan Bank, celebrating its 15th anniversary together with its customers, clients and friends all over Mongolia. To mount the celebration of the anniversary, for the first time in Mongolia the Bank exhibited its corporate contemporary art collection to the public. The best art works of both young and established artists displayed at the exhibition were also exhibited in the ‘‘Khan Bank Contemporary Art Collection’’ catalogue.
As part of our culture support strategy, we sponsored the first CD release of the contemporary and traditional music band ‘‘Altan Urag’’; this was the first performance at the Khan Bank Theatre that came with the purchase of the Bank’s new head office. To further nurture and foster these young talents, Khan Bank signed a sponsorship contract that will enable the band to create many more unique performances both on stage and on CDs.
Khan Bank also extended its exclusive sponsorship contract with popular Mongolian singer B. Sarantuya engaging the singer in the Bank’s customer outreach program. She was the lead singer at the Khan Bank show and concert in Seoul, Korea in November organized to celebrate Mongolia’s independence Day with Mongolians living and working in Korea. An estimated 2,500 Mongolians gathered in Seoul for the celebration.
Khan Bank continued to be a leading supporter of visual arts in Mongolia. In 2006 with the support of Khan Bank, artist S. Sarantsatsralt staged for the first time her Synthesis Art
Performance, a composition of poetry interfaced with fine arts, calligraphy, singing, ballet, circus, theatre and music arts.
It has become a tradition for Khan Bank to support vulnerable and disabled groups in the communities we serve. Khan Bank’s special gifts to many disabled children on New Year’s Eve were appreciated by these children and their parents. We also made a donation to the National Center against Violence to support its effort to build a shelter for abused children, and we are also supported the F.I.R.E volunteer organization in its donation of warm clothes, books and medical supplies to over 8000 children and elders in five aimags.
Rainbow horse created by Khan Bank staff
Opening ceremony of the Khan Bank ContemporaryArt Exhibition
B. Sarantuya performed at the Khan Bank’s show concertin Seoul, Korea
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REPORT OF THE INDEPENDENT AUDITORS
To the shareholders of Khan Bank LLC (formerly known as Agricultural Bank of Mongolia LLC)
We have audited the accompanying financial statements of Khan Bank LLC (formerly known as Agricultural Bank of Mongolia LLC) as at 31 December 2006 set out on pages 3 to 33.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors’ Responsibility
It is our responsibility to form an independent opinion, based on our audit, on the financial statements and to report our opinion to you, as a body in accordance with Article 91 of Company Law of Mongolia and for no other purpose. We do not assume responsibility to any other person for the content of this report.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Ulaanbaatar15 March 2007
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KHAN BANK LLC
(FORMERLY KNOWN AS AGRICULTURAL BANK OF MONGOLIA LLC)
Interest and similar income
Interest and similar expenses
Net interest income
Non-interest income
Operating income
Operating expenses
Profit before impairment losses
Impairment losses
Profit before taxation
Taxation
Profit for the year attributable to equity
holders of the Bank
Note
3
4
5
6
7
8
2006
MNT ’000
55,168,640
(22,583,928)
32,584,712
5,348,302
37,933,014
(19,298,900)
18,634,114
(802,487)
17,831,627
(5,841,033)
11,990,594
2005
MNT ’000
36,663,601
(16,950,823)
19,712,778
3,632,277
23,345,055
(13,702,985)
9,642,070
(2,526,131)
7,115,939
(2,467,000)
4,648,939
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
The accompanying notes form an integral part of the financial statements.
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KHAN BANK LLC
(FORMERLY KNOWN AS AGRICULTURAL BANK OF MONGOLIA LLC)
BALANCE SHEET AS AT 31 DECEMBER 2006
ASSETS
Cash and short term funds
Deposits and placements with other banks and financial
institutions
Financial investments
Loans and advances
Other assets
Property, plant and equipment
TOTAL ASSETS
LIABILITIES
Deposits from customers
Deposits and placements of other banks and financial
institutions
Loans from Bank of Mongolia and financial institutions
Subordinated loan
Other liabilities
Tax payable
TOTAL LIABILITIES
EQUITY ATTRIBUTABLE TO EQUITY
HOLDERS OF THE BANK
Ordinary shares
Share premium
Revaluation surplus
Other reserves
Retained profits
TOTAL EQUITY
TOTAL EQUITY AND LIABILITIES
Note
9
10
11
12
13
14
15
16
17
18
19
20
21
22
2006
MNT ’000
13,486,733
40,468,801
28,695,418
242,581,620
1,827,498
17,610,932
344,671,002
291,278,247
4,536,790
10,242,807
2,354,736
3,561,633
195,033
312,169,246
11,619,112
5,023,849
836,722
79,385
14,942,688
32,501,756
344,671,002
2005
MNT ’000
7,338,782
31,455,171
24,303,295
133,488,930
983,527
7,722,769
205,292,474
165,928,004
17,532,612
3,263,125
2,467,925
1,029,790
38,000
190,259,456
5,159,130
1,185,685
638,871
-
8,049,332
15,033,018
205,292,474
The accompanying notes form an integral part of the financial statements.
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KHAN BANK LLC
(FORMERLY KNOWN AS AGRICULTURAL BANK OF MONGOLIA LLC)
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006
At 1 January 2005
Profit for the year
Realisation of revaluation surplus
(Note 21)
At 31 December 2005
Profit for the year
Capitalisation of retained profits
Issue of share capital
(Note 20)
Revaluation of buildings
Realisation of revaluation surplus
(Note 21)
Share-based payments
(Note 22)
At 31 December 2006
The accompanying notes form an integral part of the financial statements.
Ordinary
shares
MNT ’000
5,159,130
-
-
5,159,130
-
5,159,130
1,300,852
-
-
-
11,619,112
Share
premium
MNT ’000
1,185,685
-
-
1,185,685
-
-
3,838,164
-
-
-
5,023,849
Other
reserve
MNT ’000
-
-
-
-
-
-
-
-
-
79,385
79,385
Revaluation
surplus
MNT ’000
721,687
-
(82,816)
638,871
-
-
-
259,743
(61,892)
-
836,722
Retained
profits
MNT ’000
3,317,577
4,648,939
82,816
8,049,332
11,990,594
(5,159,130)
-
-
61,892
-
14,942,688
Total
MNT ’000
10,384,079
4,648,939
-
15,033,018
11,990,594
-
5,139,016
259,743
-
79,385
32,501,756
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KHAN BANK LLC
(FORMERLY KNOWN AS AGRICULTURAL BANK OF MONGOLIA LLC)
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
The accompanying notes form an integral part of the financial statements.
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before taxation
Adjustments for:-
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Share-based payment expense
Property, plant and equipment written off
Net impairment losses for loans
Impairment of other assets
Impairment of financial investments
Loss on disposal of property, plant and equipment
Operating profit before working capital changes
Changes in operating assets:-
Loans and advances
Other assets
Changes in operating liabilities:-
Deposits from customers
Deposits and placements of other
banks and financial institutions
Other liabilities
Cash generated from operations
Income tax paid
Net cash flow generated from operating activities
CASH FLOW FROM INVESTING ACTIVITIES
Net (increase)/decrease in investment securities
Proceeds on disposal of property, plant and equipment
Purchase of property, plant and equipment
Net cash flow (used in)/generated from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares
Net drawdown/(repayment) of loans from Bank of Mongolia
and financial institutions
Net cash flow generated from/(used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents brought forward (Note 23)
Cash and cash equivalents carried forward (Note 23)
2006
MNT ’000
17,831,627
1,432,188
80,433
79,385
67,974
735,612
66,875
-
10,590
20,304,684
(109,828,302)
(910,846)
125,350,243
(12,995,822)
2,418,654
24,338,611
(5,684,000)
18,654,611
(4,392,123)
66,772
(11,286,377)
(15,611,728)
5,139,016
6,979,682
12,118,698
15,161,581
38,793,953
53,955,534
2005
MNT ’000
7,115,939
935,373
-
-
16,542
2,432,972
88,239
4,920
19,865
10,613,850
(55,600,700)
5,278
35,980,918
17,532,601
236,064
8,768,011
(2,440,500)
6,327,511
12,823,611
115,187
(2,501,002)
10,437,796
-
(151,696)
(151,696)
16,613,611
22,180,342
38,793,953
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KHAN BANK LLC(FORMERLY KNOWN AS AGRICULTURAL BANK OF MONGOLIA LLC)
NOTES TO THE FINANCIAL STATEMENTS - 31 DECEMBER 2006 1. CORPORATE INFORMATION
The Bank is principally engaged in banking and financial services pursuant to License No. 6 issued by Bank of Mongolia. There have been no significant changes in the nature of these activities during the year.
The Bank is a limited liability company, incorporated and domiciled in Mongolia. The registered address and the principal place of business of the Bank is Peace Avenue, P.O. Box-185, Ulaanbaatar-51, Mongolia.
On 23 August 2006, the Bank changed its name from Agricultural Bank of Mongolia LLC to Khan Bank LLC.
The holding and ultimate holding companies of the Bank are H.S. Investment Co. Ltd. and H.S. Securities Co. Ltd. respectively, both of which are incorporated in Japan. H.S. Securities Co. Ltd. is listed on the Osaka Securities Exchange.
These financial statements of the Bank for the year ended 31 December 2006 were authorised for issue by the Board of Directors in accordance with a resolution of the directors on 15 March 2007.
2. ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION
These financial statements have been prepared in accordance with International Financial Reporting Standards.
The financial statements have been prepared on the historical cost basis except for the revaluation of certain properties and financial instruments. The financial statements are presented in the Mongolian Tugrug, which is denoted by the symbol MNT, rounded to the nearest thousand, except when otherwise indicated.
2.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Interest income and expense
Interest income and expense for all interest-bearing financial instruments except those classified as held for trading or designated at fair value are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest rates of the financial assets or financial liabilities to which they relate. Interest income is recognised in the income statement as it accrued, except in the case of impaired loans and advances. Interest on impaired financial assets is recognised at the original effective interest rates of the financial assets applied to the impaired carrying amount.
(b) Fee and commission income
Fees and commission income derived by the Bank relate mainly to pension payment charges, money transfers, application, transaction and other fees. Fees and commission are generally recognised on an accrual basis when service has been provided.
(c) Foreign currencies translation
The financial statements are presented in Mongolian Tugrug, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded at the rates ruling at the date of the transaction. Foreign currency monetary assets and liabilities are translated at the exchange rates ruling at the balance sheet date. All exchange differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange
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rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
(d) Income tax
The Bank provides for current income tax based on its income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purpose, in accordance with the regulations of the Mongolian Government and is measured using the tax rates that have been enacted at the balance sheet date.
Deferred tax is provided for, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts in the financial statements. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised for all deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilised. Deferred tax is not recognised if the temporary difference arises from goodwill or negative goodwill or from the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit.
Deferred tax is measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is recognised in the income statement, except when it arises from a transaction which is recognised directly in equity, in which case the deferred tax is also recognised directly in equity, or when it arises from a business combination that is an acquisition, in which case the deferred tax is included in the resulting goodwill or negative goodwill.
(e) Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents consist of cash and short term funds, deposits and placements with other banks and financial institutions.
(f) Investments and other financial assets
Financial assets within the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets, as appropriate. Financial assets are initially measured at fair value plus, in the case of financial assets not classified at fair value through profit or loss, directly attributable transaction costs. The Bank determines the classification of its financial assets at initial recognition.
All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Bank commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
(i) Financial assets at fair value through profit or loss
Financial assets classified as held for trading are included in the category financial assets at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term.
In addition, a financial instrument, other than one held for trading, is classified in this category if it meets certain criteria and is so designated by management. This designation, once made, is irrevocable in respect of the financial instruments to which it is made. Financial assets so designated, and financial assets classified as held for trading, are recognised initially at fair value, with transaction costs taken directly to the income statement, and are subsequently remeasured at fair value. Gains or losses arising from changes in fair value are recognised in the profit or loss.
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(ii) Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Bank has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. After initial recognition, held-to-maturity financial investments are subsequently measured at amortised costs using the effective interest rate method, less allowance for impairment. The amortisation is included in ‘‘Interest and similar income’’ in the income statement. The losses arising from impairment of such investments are recognised in the income statement under “Impairment losses”.
(iii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money directly to a debtor with no intention of trading the receivable. After initial recognition, such assets are carried at amortised cost using the effective interest method, less allowance for impairment. The amortisation is included in ‘‘Interest and similar income’’ in the income statement. Losses arising from impairment of such investments are recognised in the income statement under ‘‘Impairment losses’’.
(iv) Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition, available-for-sale financial assets are measured at fair value, with fair value changes recognised as a separate component of equity until the asset is derecognised or until the asset is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. Impairment losses on equity instruments previously recognised in the income statement that are no longer required are reversed through reserves, not through the income statement.
(g) Determination of fair value
The fair value of financial assets that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For assets where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument, which is substantially the same; discounted cash flow analysis and option pricing models.
(h) Impairment of financial assets
The Bank assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more loss events that has occurred after the initial recognition of the assets (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in economic conditions that correlate with defaults.
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(h) Impairment of financial assets
The Bank assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more loss events that has occurred after the initial recognition of the assets (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in economic conditions that correlate with defaults.
(i) Loans and advances
For loans and advances carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement. Interest income continues to be accrued based on the original effective interest rate of the asset. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is reduced accordingly. The reduction of an impairment loss under these circumstances is recognised in the income statement in the period in which it occurs.
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of loan product type that considers credit risk characteristics such as purpose of the loan, type of borrowers, collateral type and industry. The Bank adopted the basic approach where the impairment allowances are computed on an average of historical loss experience of each risk grouping over the outstanding balance. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
Prior to 1 January 2006, in accordance with the Guidelines and Regulations issued by Bank of Mongolia, the Bank was required to recognise impairment losses on loans and advances based on prescribed percentages of the loans and advances outstanding balances based on the number of days a loan has been classified as non-performing, and a 1% general allowance on the performing loans and advances outstanding of the Bank. IAS 39 requires such impairment losses to be calculated as the difference between carrying amount of the loans and advances and the present value of the estimated future cash flows discounted at the original effective interest rate. The change in recognising impairment losses under IAS 39 has no impact on the opening balance of retained profits of the prior and current year.
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(ii) Held-to-maturity financial investments
For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced, and the amount of the loss is recognised in the income statement.
If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are credited to the ‘‘Impairment losses on financial investments’’.
(iii) Available-for-sale financial investments
For available-for-sale financial investments, the Bank assesses at each balance sheet date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement - is removed from equity and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are recognised directly in equity.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortised cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of ‘‘Interest and similar income’’. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement.
(i) Property, plant and equipment
All items of property, plant and equipment are initially recorded at cost. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of any replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Subsequent to recognition, property, plant and equipment except for buildings are stated at cost less accumulated depreciation and any accumulated impairment losses.
Buildings are stated at revalued amount, which is the fair value at the date of the revaluation less any accumulated impairment losses. Fair value is determined from market-based evidence by appraisal that is undertaken by professionally qualified valuers. Revaluations are performed at least once in every five years to ensure that the fair value of a revalued asset does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation surplus is credited to the revaluation reserve included in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss to the extent of the decrease previously recognised. A revaluation deficit is first offset against unutilised previously recognised revaluation surplus in respect of the same asset and the balance is thereafter recognised in profit or loss. Upon disposal or retirement of an asset, any revaluation reserve relating to the particular asset is transferred directly to retained earnings. An annual transfer from the asset revaluation reserve to retained earnings is made for the difference between depreciation based on
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the revalued carrying amount of the assets and depreciation based on the assets original costs.
Assets under construction are not depreciated. Depreciation of other property, plant and equipment is provided for on a straight-line basis to write off the cost of each asset to its residual value over the estimated useful life at the following annual rates:
Buildings 40 years Furniture, fixtures and vehicles 10 years Computers 5 years
The residual values, useful life and depreciation method are reviewed at each financial year-end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. The difference between the net disposal proceeds, if any and the net carrying amount is recognised in profit or loss and the unutilised portion of the revaluation surplus on that item is taken directly to retained earnings.
(j) Deposits from customers
Deposits from customers are stated at cost which is the fair value of the consideration to be paid in the future for deposits received.
(k) Impairment of other assets
The Bank assesses at each balance sheet 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 Bank makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair values less costs to sell and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 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.
An assessment is made at each balance sheet date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
(l) Sale and repurchase agreements
Securities sold subject to repurchase agreements (‘repos’) are retained in the financial statements as available-for-sale or held-for-maturity securities, and the counterparty liability is included in amounts due to other financial institutions or as appropriate. Securities purchased under agreement to resell (‘reverse repos’) are recorded as amount due from other financial institutions or as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the life of the repo agreements using the effective yield method.
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(m) Financial guarantees
In the ordinary course of business, the Bank issues financial guarantees, mainly consisting of tender guarantees. Financial guarantees are initially recognised in the financial statements at fair value, in ‘‘Other liabilities’’, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.
Any increase in the liability relating to financial guarantees is taken to the income statement in ‘‘Impairment losses’’. The premium received is recognised in the income statement in ‘‘Non-interest income’’ on a straight line basis over the life of the guarantee.
(n) Employee benefits
(i) Short term benefits
Wages, salaries and other salary related expenses are recognised as an expense in the year in which the associated services are rendered by employees of the Bank. Short term accumulating compensated absences such as paid annual leave are recognised when services are rendered by employees that increase their entitlement to future compensated absences, and short term non-accumulating compensated absences such as sick leave are recognised when absences occur.
(ii) Defined contribution plans
As required by law, companies in Mongolia make contributions to the government pension scheme, Social and Health Fund. Such contributions are recognised as an expense in profit or loss as incurred.
(o) Operating leases
Lease payments for operating leases, where substantially all risk and benefits remain with the lessor, are charged as an expense in the income statement on a straight-line basis over the term of the relevant lease.
(p) Financial instruments
Financial instruments are recognised in the balance sheet when the Bank has become a party to the contractual provisions of the instrument. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies.
Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends and gains and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are recognised directly in equity. Financial instruments are offset when the Bank has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously.
(q) Share-based payment transactions
A corporate shareholder of the Bank who provides management services to the Bank receives part of the remuneration in the form of equity instruments (‘‘equity-settled transactions’’). Certain key management personnel of the Bank are granted share appreciation rights, which can only be settled in cash (‘‘cash settled transactions’’).
(i) Equity-settled transactions
The cost of equity-settled transactions with the corporate shareholder is measured by reference to
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the fair value at the date on which they are granted. The fair value is determined by the Bank using a binomial model, further details of which are given in Note 22.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the service conditions are fulfilled, ending on the date on which the relevant corporate shareholder become fully entitled to the award. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.
When an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.
(ii) Cash-settled transactions
The cost of cash settled transactions is measured initially at fair value at the grant date using a binomial model, further details of which are given in Note 22. This fair value is expensed over the period until vesting with recognition of a corresponding liability. The liability is remeasured at each balance sheet date up to and including the settlement date with changes in fair value recognised in profit or loss.
(r) Equity instruments
Ordinary shares are classified as equity and dividends are recognised in equity in the year in which they are declared.
(s) Financial liabilities
The Bank classifies its financial liabilities in the following categories:
(i) financial liabilities at fair value through profit or loss; and (ii) non-trading liabilities.
Financial liabilities classified at fair value through profit or loss are carried at fair value, with gains and losses from change in fair value recognised through the income statement. Non-trading liabilities are carried at amortised cost using the effective interest method. A financial liability is removed or derecognised from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired.
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2.3 CHANGE IN ACCOUNTING POLICIES
The Bank has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these new and amended standards and interpretations does not have any effect on equity and changes in comparative figures as at 1 January 2006.
* IAS 19 Amendment - Actuarial Gains and Losses, Group Plans and Disclosures* IAS 39 Amendment - Cash Flow Hedge Accounting of Forecast Intragroup Transactions* IAS 39 Amendment - The Fair Value Option* IAS 39 and IFRS 4 Amendment - Financial Guarantee Contracts* IFRS 6 - Exploration for and Evaluation of Mineral Resources* IFRIC 4 - Determining whether an Arrangement contains a Lease. At the date of authorisation of these financial statements, the following Standards, Amendments and Interpretations were in issue but not yet effective:
* IFRS 7 - Financial Instruments: Disclosures * IAS 1 - Amendment - Presentation of Financial Statements * IFRIC 8 - Scope of IFRS 2 * IFRIC 9 - Reassessment of Embedded Derivatives.
The directors anticipate that the adoption of these Standards, Amendments and Interpretations in the financial year ended 31 December 2007 will have no material impact on the financial statements of the Bank. They will give rise to additional disclosures.
2.4 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
In the process of applying the Bank’s accounting policies, management has used its judgments and made estimates in determining the amounts recognised in the financial statements. The most significant use of judgments and estimates are as follows:
Impairment losses on loans and advances
The Bank reviews its problem loans and advances at each reporting date to assess whether an allowance for impairment should be recorded in the income statement. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
In addition to specific allowances against individually significant loans and advances, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default that when originally granted. This takes into consideration factors such as any deterioration in industry risk and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.
3. INTEREST AND SIMILAR INCOME
Loans and advances Deposits and placements with other banks and financial institutions Financial Investments - available-for-sale Financial Investments - held-to-maturity
2006 MNT ’000
52,794,538 859,234
1,395,814 119,054
55,168,640
2005 MNT ’000
33,401,057 499,730
2,637,281 125,533
36,663,601
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4. INTEREST AND SIMILAR EXPENSES
Current account deposits Time and demand deposits Deposits and placements of other banks and financial institutions Subordinated loan
5. NON-INTEREST INCOME
Fee and commission income: Acceptance fees Money transfer fees Pension payment charges Application fees Transaction fees Transfer fees Other fees income Other income: Realised foreign currencies gain Unrealised foreign currencies loss Income from penalties Recovery of collateral previously written off Recovery of bad loans Recovery of other assets previously written off Other operating income
Total non-interest income
6. OPERATING EXPENSES
Advertising Armoured guard and security Business trips Cash collection service Communication Computer expenses Depreciation of property, plant and equipment (Note 14) Entertainment Impairment of property, plant and equipment (Note 14) Insurance expense Legal expenses Loans and collection expenses Maintenance of property, plant and equipment Membership and audit expenses Other operating expenses Staff costs * Rental expenses Stationery
2006 MNT ’000
851,979 21,418,850
165,770 147,329
22,583,928
2006 MNT ’000
1,275,707 715,683 421,874 373,382 544,029 667,937 817,123
4,815,735
585,096 (137,231)
6,164 212
23,707 4,932
49,687 532,567
5,348,302
2006 MNT ’000
923,570 182,159 619,044
97,150 760,453 580,422
1,432,188 150,717
80,433 64,477 35,301
228,492 138,859 207,683 635,182
10,254,776 1,056,049
884,112
2005 MNT ’000
355,463 16,299,890
144,690 150,780
16,950,823
2005 MNT ’000
903,134 633,220 316,463 286,362 361,209 343,128 361,198
3,204,714
361,110 (49,001)
9,472 300
62,014 1,065
42,603 427,563
3,632,277
2005 MNT ’000
592,629 137,584 473,033
84,401 736,419 387,456 935,373 116,387
- 52,462 40,759
206,613 73,113
118,668 469,282
6,929,369 876,440 718,497
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6. OPERATING EXPENSES (CONTD.)
Transportation and fuel supplies Utilities
* Staff costs Salaries Bonus and allowances Contribution to social and health fund Training Share-based payments (Note 22)
7. IMPAIRMENT LOSSES
Loans and advances Other assets Financial investments
8. TAXATION
Current income tax: Based on results for the year The Bank provides for income taxes on the basis of its income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purposes. The income tax rate for profits of the Bank is 15% (2005 : 15%) for the first MNT100 million of taxable income, and 30% (2005 : 30%) on the excess of taxable income over MNT100 million. Interest income on government bonds is not subject to income tax. Allowance for impairment losses for loans and advances is deductible for income tax purposes.
A reconciliation of income tax expense applicable to profit before taxation at the statutory income tax rate to income tax expense at the effective income tax rate of the Bank for the year ended 31 December is as follows:
Profit before taxation Tax at statutory tax rate of 30% (2005 : 30%) Effect of income subject to lower tax rate Effect of income not subject to tax Effect of expenses not allowable for tax purposes Tax expense for the year
Deferred tax is not provided for in the current and previous financial years as there are no temporary differences.
Management believes that the Bank is in substantial compliance with the tax laws affecting its operations.
2006 MNT ’000
583,244 384,589
19,298,900
5,360,543 3,140,666 1,217,218
454,542 81,807
10,254,776
2006 MNT ’000
735,612 66,875
- 802,487
2006 MNT ’000
5,841,033
2006 MNT ’000
17,831,627
5,349,488 (15,000) (27,456) 534,001
5,841,033
2005
MNT ’000
438,692 315,808
13,702,985
4,013,703 1,940,013
662,860 312,793
- 6,929,369
2005 MNT ’000
2,432,972 88,239
4,920 2,526,131
2005 MNT ’000
2,467,000
2005 MNT ’000
7,115,939
2,134,500 (15,000) (26,590) 374,090
2,467,000
1�
9. CASH AND SHORT TERM FUNDS
Cash and short term funds represented by:Local currencyForeign currenciesCash in transit
10. DEPOSITS AND PLACEMENTS WITH OTHER BANKS AND FINANCIAL INSTITUTIONS
Deposit and current accounts with Bank of MongoliaPlacements with other banks and financial institutions
Deposit and current accounts with Bank of Mongolia are maintained in accordance with Bank of Mongolia’s requirements. The balances maintained with Bank of Mongolia are determined at set percentages based on 15 days average cash balances.
Placements with other banks and financial institutions represent local and foreign currencies current accounts maintained with foreign and local financial institutions and short term deposits with local financial institutions.
Other information on financial risks of deposits and placements with other banks and financial institutions are disclosed in Note 24.
11. FINANCIAL INVESTMENTS
Held-to-maturity:Quoted government bonds, at amortised cost
Quoted corporation bonds, at amortised costAllowance for impairment losses
Available-for-sale:Bank of Mongolia treasury bills, at fair value
Bank of Mongolia treasury bills are interest bearing short term bills with maturities of less than three months, and are issued at a discount. Government bonds are issued by the Ministry of Finance and Economy with maturities ranging from 275 days - 288 days.
Bank of Mongolia treasury bills amounting to MNT6,000 million was pledged to Ministry of Finance and Economy as security for short term loan granted, as disclosed in Note 17.
Other information on financial risks of financial investments are disclosed in Note 24.
2006 MNT ’000
10,014,047 3,470,589
2,097 13,486,733
2006 MNT ’000
33,176,013 7,292,788
40,468,801
2006 MNT ’000
1,748,920
- --
26,946,498
28,695,418
2005 MNT ’000
5,672,398 1,662,367
4,017 7,338,782
2005 MNT ’000
13,236,828 18,218,343 31,455,171
2005 MNT ’000
-
491,980 (4,920)487,060
23,816,235
24,303,295
1�
12. LOANS AND ADVANCES
Term loans Staff loans Accrued interest receivables Gross loans and advances Allowance for impairment losses - specific - collective Net loans and advances Loans and advances analysed by their economic purposes are as follows: Small and medium enterprises Personal Agricultural Mortgage Staff Accrued interest receivables Allowance for impairment losses Net loans and advances
Movements in past due loans (‘‘PDLs’’) are as follows: Balance at beginning of year Additions during the year Recoveries/regularised during the year Gross balance at end of year Less: Allowance for impairment losses - specific Net balance at year end Movements in non-performing loans (‘‘NPLs’’) are as follows:
Balance at beginning of year NPLs during the year - gross Recoveries/regularised during the year Amount written off Gross balance at end of year Less: Allowance for impairment losses - specific Net balance at year end Gross NPLs as a percentage of gross total loans Net NPL’s as a percentage of net total loans
2006 MNT ’000
235,218,686 3,767,836 8,682,708
247,669,230
(4,675,724) (411,886)
242,581,620
2006 MNT ’000
102,094,297 47,639,652 64,882,823 20,601,914
3,767,836 238,986,522
8,682,708 (5,087,610) 242,581,620
2006 MNT ’000
(166,508) 10,084,326
(7,795,645) 2,455,189 (122,759)
2,332,430
2006 MNT ’000
3,888,862 6,486,829
(4,643,143) (654,110) 5,078,438
(4,552,965)
525,473
2.1%
0.2%
2005 MNT ’000
132,031,512 2,324,171 4,139,354
138,495,037
(3,703,104) (1,303,003) 133,488,930
2005 MNT ’000
61,766,853 27,771,318 33,503,511
8,989,830 2,324,171
134,355,683 4,139,354
(5,006,107) 133,488,930
2005 MNT ’000
831,397 7,236,900
(7,901,789) (166,508)
(8,324)
(158,184)
2005 MNT ’000
2,773,154 3,442,511
(2,135,218) (191,585) 3,888,862
(3,694,780)
194,082
2.8%
0.1%
�0
Movements in the allowance for impairment losses are as follows:
Specific Impairment Balance at beginning of year Impairment made during the year Impairment written off Balance at end of year
Collective Impairment Balance at beginning of year Impairment made during the year Impairment written back Balance at end of year
Other information on financial risks of loans and advances are disclosed in Note 24.
The allowance for impairment losses is considered adequate by management based upon their formal reviews and analysis of existing credits using knowledge of prevailing and anticipated economic conditions.
13. OTHER ASSETS
Other assets Less: Allowance for impairment Consumables and other inventories Prepaid expenses Others
2006 MNT ’000
3,703,104
1,626,729 (654,109) 4,675,724
1,303,003
172,247 (1,063,364)
411,886
2006 MNT ’000
481,830 (459,605)
22,225 1,274,551
465,646 65,076
1,827,498
2005 MNT ’000
1,990,022
1,904,669 (191,587) 3,703,104
774,700 528,303
- 1,303,003
2005 MNT ’000
593,616 (526,147)
67,469 644,924 262,999
8,135 983,527
�1
14. PROPERTY, PLANT AND EQUIPMENT
31 December 2006
At Cost/Valuation At 1 January 2006 Additions Revaluation surplus Transfers Disposals Write-offs At 31 December 2006
Representing: At cost At valuation
Accumulated Depreciation and Impairment Losses At 1 January 2006 Charge for the year (Note 6) Impairment losses for the year (Note 6) Revaluation surplus Transfers Disposals Write-offs At 31 December 2006
Analysed as: Accumulated depreciation Accumulated impairment losses
Net Book Value At 31 December 2006 At cost At valuation
31 December 2005
At Cost/Valuation At 1 January 2005 Additions Transfers Disposals Write-offs At 31 December 2005
Representing: At cost At valuation
Buildings MNT ’000
6,089,486 6,189,318
73,548 571,492
(74,621) (4,224)
12,844,999
6,163,563
6,681,436 12,844,999
2,927,407 142,670
80,433 (186,195)
(3,143) (67,718)
(279) 2,893,175
2,812,742 80,433
2,893,175
6,155,871 3,795,953 9,951,824
5,318,116 399,959 485,731
(114,320) -
6,089,486
1,679,261 4,410,225 6,089,486
Furniture, fixtures and
vehicles MNT ’000
2,943,270 1,369,183
- (7,042)
(125,170) (130,390) 4,049,851
4,049,851 -
4,049,851
736,730 445,928
-
- 12,638
(58,973) (84,293)1,052,030
1,052,030 -
1,052,030
2,997,821
- 2,997,821
2,052,789 1,018,605
- (88,895)
(39,229) 2,943,270
2,943,270-
2,943,270
Computers MNT ’000
3,308,378
3,207,765 -
183,147 (20,715) (98,501)
6,580,074
6,580,074 -
6,580,074
1,337,897 843,590
- -
(9,495) (16,453) (80,569)
2,074,970
2,074,970 -
2,074,970
4,505,104
- 4,505,104
2,692,230 698,769
- (6,602)
(76,019) 3,308,378
3,308,378
- 3,308,378
Capital
work-in- progress
MNT ’000
383,669 520,111
- (747,597)
- -
156,183
156,183
- 156,183
- -
- - -
- - -
-
- -
156,183
- 156,183
485,731 383,669
(485,731) - -
383,669
383,669 -
383,669
Total MNT ’000
12,724,803
11,286,377 73,548
- (220,506) (233,115)
23,631,107
16,949,671 6,681,436
23,631,107
5,002,034 1,432,188
80,433 (186,195)
- (143,144) (165,141) 6,020,175
5,939,742 80,433
6,020,175
13,814,979 3,795,953
17,610,932
10,548,866 2,501,002
- (209,817) (115,248)
12,724,803
8,314,578 4,410,225
12,724,803
��
Accumulated Depreciation At 1 January 2005 Charge for the year (Note 6) Disposals Write-offs At 31 December 2005
Net Book Value At 31 December 2005 At cost At valuation
Details of the latest independent professional valuations of buildings at 30 September 2006 are as follows: Valuation Amount Basis of Date of Valuation Description of Property Valuer MNT’000 Valuation
30 September 2006 Head office and branches buildings Dalaivan Audit LLC 3,813,799 Market value
Had the revalued buildings been carried at historical cost, the net book value of the buildings that would have been included in the financial statements of the Bank as at 31 December 2006 would have been MNT3,040 million (2005 : MNT891 million).
15. DEPOSITS FROM CUSTOMERS
Current account depositsDemand account depositsTime depositsGovernment depositsCertificate depositsOther deposits
Other information on financial risks of deposits from customers are disclosed in Note 24.
16. DEPOSITS AND PLACEMENTS OF OTHER BANKS AND FINANCIAL INSTITUTIONS
Foreign currency current accounts and time depositsLocal currency current accounts and time deposits
Foreign currency and local currency current accounts and time deposits are placed by local commercial banks. Other information on financial risks of deposits and placements of other banks and financial institutions are disclosed in Note 24
2,837,493
117,451 (27,537)
- 2,927,407
1,637,390 1,524,689 3,162,079
512,654297,287
(43,447)(29,764)
736,730
2,206,540-
2,206,540
889,985 520,635 (3,781)
(68,942) 1,337,897
1,970,481 -
1,970,481
- - - - -
383,669 -
383,669
4,240,132 935,373
(74,765) (98,706)
5,002,034
6,198,080 1,524,689 7,722,769
14. PROPERTY, PLANT AND EQUIPMENT (CONTD.)
31 December 2005
Buildings MNT ’000
Furniture, fixtures and
vehicles MNT ’000
Computers MNT ’000
Capital
work-in- progress
MNT ’000
Total MNT ’000
2006 MNT ’000
47,526,848 67,032,242
147,312,452 14,248,912 13,182,810
1,974,983 291,278,247
2006 MNT ’000
6,453 4,530,337 4,536,790
2005 MNT ’000
29,242,673 26,493,895 92,196,802
7,821,327 7,960,000 2,213,307
165,928,004
2005 MNT ’000
4,893,567 12,639,045 17,532,612
��
17. LOANS FROM BANK OF MONGOLIA AND FINANCIAL INSTITUTIONS
Secured: Loan from Ministry of Finance and Economy Unsecured: Loans from Bank of MongoliaTerm Loan I Term Loan II Term Loan III Agricultural Sector Development Project Loan Loan from International Development AssociationMicro Finance Development Fund Loan from Labour Service Welfare DepartmentLabour Support Fund
Loan from The Ministry of Finance and Economy
The USD5,000,000 loan from The Ministry of Finance and Economy was obtained on 21 December 2006. The loan bears interest at 6.6% per annum. Both interest and principal have been paid in full on 24 January 2007. The loan is secured by Bank of Mongolia treasury bills as disclosed in Note 11.
Loans from Bank of Mongolia(i) Term Loan I
The USD100,000 loan was obtained in the year 2002 and bears service fee at 1% (2005 : 1%) per annum. The prin-cipal repayments on this loan commenced in December 2003, and the loan will be fully repaid in December 2007, with principal repayable in 5 equal annual instalments. The loan was obtained to finance the purchase of computer equipment.
(ii) Term Loan II
The USD50,000 loan was obtained in the year 2002 and bears service fee at 1% (2005 : 1%) per annum. The prin-cipal repayments on this loan commenced in December 2003, and the loan will be fully repaid in December 2007, with principal repayable in 5 equal annual instalments. The loan was obtained to finance the cost of additional work performed on the BANCS software implemented by the Bank.
(iii) Term Loan III
The USD137,694 loan was obtained in the year 2002 and principal is repayable in 30 equal annual instalments com-mencing December 2002 and the final repayment in December 2031. The loan bears service fee at 1% per annum but will only commence in year 2007. The loan was for the Bank’s portion of the BANCS software purchased.
(iv) Agricultural Sector Development Project Loan
The Bank obtained this loan in Mongolian Tugrug from the Bank of Mongolia. The purpose of this loan is to sup-port lending to small and medium enterprises in the agricultural sector. The loan bears interest at 5.5% (2005 : 5.5%) per annum, payable on a monthly basis commencing 17 February 2004. The loan is due and payable in full one year after the loan has been disbursed to the borrowers.
2006 MNT ’000
5,825,000
23,300 11,650
133,678 2,714,812 2,883,440
634,367
900,000
10,242,807
2005 MNT ’000
-
48,840 24,420
145,708 2,344,336 2,563,304
699,821
-
3,263,125
��
Loan from International Development Association
The purpose of this loan is to improve the living standard of inhabitants in rural areas. The Bank in turn disburses the loan to borrowers from 7 aimags; Tuv, Dornod, Uvs, Bayan-Ulgii, Bayankhongor, Uvur Khangai and Zavkhan. The loan bears interest rate at 8% (2005 : 5% - 8%) per annum, payable on a monthly basis with principal repayment commencing on March 2005 and final repayment due in March 2009 in accordance with the repayment schedule.
Loan from Labour Service Welfare Department
The Bank obtained this loan in Mongolian Tugrug from the Labour Welfare Service Department. The purpose of this loan is to encourage employment opportunities. The Bank in turn disburses the loan to borrowers from 5 aimags; Zavkhan, Gobi Altai, Sukhbaatar, Umnugobi and Arkhangai. The loan bears interest at 0.8% per annum, payable on a quarterly basis with principal repayment commencing October 2006 and final payment due in December 2007 in accordance with the agreement.
The Bank has not had any defaults of principal, interest or other breaches with respect to liabilities during the period.
Other information on financial risks of loans from Bank of Mongolia and financial institutions are disclosed in Note 24.
18. SUBORDINATED LOAN
Loan from H.S. Investment Co. Ltd
The Bank obtained this USD 2 million subordinated loan in 2003 from the holding company to fund its ongoing business operations. The subordinated loan bears interest at 6.25% (2005 : 6.25%) per annum. Interest is payable on a quarterly basis beginning 31 October 2003. The subordinated loan will be payable in full on 31 July 2008. Other information on financial risks of subordinated loan are disclosed in Note 24.
19. OTHER LIABILITIES
PayablesDelay on clearing settlementOther payables
20. ORDINARY SHARES Number of Ordinary Shares Amount
At 1 JanuaryCapitalisation of retained profitsIssued during the yearAt 31 December
On 6 March 2006, the shareholders approved an amendment to the Bank’s Charter for the increase in the par value of the authorised ordinary shares of the Bank from MNT1,000 per share to MNT2,000 per share to increase the Bank’s statutory fund in accordance with new regulatory requirements of the Bank of Mongolia. Subsequent to this increase, retained profits amounting to MNT5,159,130 thousand were capitalised as paid up ordinary shares of the Bank.
2006 MNT ’000
2,354,736
2006 MNT ’000
1 1,370,309 2,165,187
26,137 3,561,633
2006 MNT ’000
5,159,130 5,159,130 1,300,852
11,619,112
2005 MNT ’000
2,467,925
2005 MNT ’000
730,705 286,709
12,376 1,029,790
2005 MNT ’000
5,159,130 - -
5,159,130
2006
5,159,130
- 650,426
5,809,556
2005
5,159,130
- -
5,159,130
��
During the financial year, the Bank issued 650,426 new ordinary shares of MNT2,000 each at an issue price of MNT7,901 per share for cash, for additional working capital purposes. The share premium arising amounted to MNT3,838,164 thousand; this amount was credited to the share premium account. The new ordinary shares rank pari passu in all respects with the existing ordinary shares of the Bank.
Share option scheme
The Bank has a share option scheme under which options to subscribe for the Bank’s shares have been granted to a corporate shareholder, Development Alternatives, Inc. (‘‘DAI’’) as disclosed in Note 22.
21. REVALUATION SURPLUS
Revaluation surplus arises from the revaluations of the Bank’s buildings carried out by independent valuers in 2001 and 2006.
22. SHARE-BASED PAYMENTS
The expenses recognised for services received during the year are shown in the following table:
Expenses arising from equity-settled share-based payment transactionsExpenses arising from cash-settled share-based payment transactionsTotal expense arising from share-based payment transactions
The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during 2006.
Options for DAI
The Bank granted 40,000 share options each in May 2005 and April 2006 to DAI under the renewed management contract signed in 2004. The exercise price of the options are MNT2,013 and MNT2,914 respectively, which are equal to the net assets per share on the last day of the financial year with respect to which the options are granted. The options vest immediately on the date of grant and expire on 1 May 2015 and 10 April 2016, respectively. The fair value of the options granted is estimated as at the date of grant using a binomial model, taking into consideration the terms and conditions upon which the options were granted. Under terms of the management contract, DAI is entitled to 40,000 share options for the year 2006 to be awarded during 2007.
Share Appreciation Rights
On 7 December 2006, certain key management personnel of the Bank are granted 30,000 share appreciation rights (‘‘SARs’’), which can only be settled in cash. The issued price of the SAR is MNT3,680 and the exercise price is based on the net assets value, diluted for any options issued, at the exercise date. The exercise price of a SAR shall be the book value under IFRS of one ordinary share of the Bank in Mongolian Tugrug as of the last day of the financial quarter preceding the exercise date. These SARs will vest over five years, with 20% of the SARs vesting at the end of each year from the date of grant. The contractual life of the SARs is ten years and expiring on 6 December 2016. The fair value of SARs is measured at the grant date using a binomial option pricing model taking into account the terms and conditions upon which the instrument is granted. The services received and a liability for those services are recognised over the expected vesting period. Until the liability is settled, it is remeasured at each reporting date with changes in fair value recognised in profit or loss.
The carrying amount of the liability relating to the SARs at 31 December 2006 is MNT 2,422 thousand. No SARs have vested at 31 December 2006. If all 30,000 SARs were vested as of 31 December 2006, the intrinsic value as of that date would be MNT55,156 thousand based on net assets value of shares, fully diluted for the options.
2006 MNT ’000
79,385
2,422 81,807
2005 MNT ’000
-
- -
��
Movements in the year
The number and weighted average exercise price (‘‘WAEP’’) of, and movements in, share options during the year are: 2006
Outstanding at the beginning of the yearGranted during the yearOutstanding at the end of the year
The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 9 years.
The following table lists the inputs to the model used for the two plans for the year ended 31 December 2006.
2006
Dividend yield (%)Expected volatility (%)Risk-free interest rate (%)Expected life of option (years)Weighted average share price (MNT)
The expected life of the option is based on historical data and is not necessary indicative of exercise pattern that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.
23. CASH AND CASH EQUIVALENTS
Cash and short term fundsDeposits and placements with other banks and financial institutions
24. FINANCIAL RISK MANAGEMENT POLICIES
Management of risk is fundamental to the banking business and is an essential element of the Bank’s operations. The main risks inherent to the Bank’s operations are those related to credit exposures, liquidity and market movements in interest rates and foreign exchange rates. A description of the Bank’s risk management policies in relation to those risks are as follows:
Credit risk
The Bank is exposed to credit risk which is the risk that the Bank’s customers, clients or counterparties will be unable or unwilling to pay interest, principal, or otherwise fulfil their contractual obligations under loan agreements, other credit facilities, or in respect of other financial instruments. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers. Such risks are monitored on a regular basis and subject to regular review. The Bank’s Credit Committee among others is responsible for oversight of the credit approval and monitoring process.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collaterals.
The Bank has not entered into other related commitments such as standby letter of credit.
No.
40,00040,00080,000
DAI-
11.00%7.00%
4.5 2,795
2006 MNT ’000
13,486,733 40,468,801
53,955,534
WAEPMNT
2,0132,914
SAR -
11.00%7.00%
5.0 5,528
2005 MNT ’000
7,338,782 31,455,171
38,793,953
��
Apart from deposits and placements with other bank and financial institutions amounting to MNT2.2 billion (2005 : MNT3.3 billion), all banking assets and liabilities were geographically concentrated in Mongolia.
Currency risk
The Bank is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank’s management sets limits on the level of exposure by currencies (primarily USD) and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December.
Foreign CurrenciesConcentrations of assets, liabilities and off balance sheet items
As at 31 December 2006
AssetsCash and short term fundsDeposits and placements with other banks and financial institutions Financial investmentsLoans and advancesOther assets
LiabilitiesDeposits from customersDeposits and placements of other banks and financial institutionsLoans from Bank of Mongolia and financial institutionsSubordinated loanOther liabilitiesTax payable
Net position
Capital commitments
Off balance sheet items
As at 31 December 2005
AssetsCash and short term fundsDeposits and placements with other banks and financial institutions Financial investmentsLoans and advancesOther assets
Others(MNT million)
866
2,712 - - -
3,578
2,424
7
- - - -
2,431
1,147
3
-
480
715 ---
1,195
Total(MNT million)
13,487
40,469 28,695
242,582 1,827
327,060
291,278
4,537
10,243 2,355 3,562
195 312,170
14,890
1,322
10,716
7,339
31,455 24,303
133,489 984
197,570
LocalCurrency
(MNT million)
10,014
18,968 28,695
218,843 1,666
278,186
254,208
4,530
4,249 -
3,346 195
266,528
11,658
1,168
10,716
5,672
8,580 24,303
129,851 959
169,365
USD
(MNT million)
2,607
18,789 -
23,739 161
45,296
34,646
-
5,994 2,355
216 -
43,211
2,085
151
-
1,187
22,160 -
3,638 25
27,010
��
Currency risk (contd.)
Foreign CurrenciesConcentrations of assets, liabilities and off balance sheet items
LiabilitiesDeposits from customersDeposits and placements of other banks and financial institutionsLoans from Bank of Mongolia and financial institutionsSubordinated loanOther liabilitiesTax payable
Net position
Capital commitments
Off balance sheet items
Liquidity risk
The Bank is exposed to liquidity risk which is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. The Bank’s Assets and Liabilities Committee sets limits on the minimum proportion of maturing funds available to cover such cash outflows and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The following table analyses assets and liabilities of the Bank into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date.
The contractual maturities of banking assets and liabilities for the year ended 31 December 2006 are as follows (MNT million):
AssetsCash and short term fundsDeposits and placements with other banks and financial institutions Financial investmentsLoans and advancesOther assets
LiabilitiesDeposits from customersDeposits and placements of other banks and financial institutionsLoans from Bank of Mongolia and financial institutionsSubordinated loanOther liabilitiesTax payable
Others(MNT million)
885
-
- - - -
885
310
-
-
Total(MNT million)
165,928
17,533
3,263 2,468 1,030
38 190,260
7,310
971
9,818
LocalCurrency
(MNT million)
146,321
12,639
3,044 -
820 38
162,862
6,503
248
9,522
USD
(MNT million)
18,722
4,894
219 2,468
210 -
26,513
497
723
296
Less than 3 months
13,487
40,469 28,695 86,882
1,827 171,360
164,975
3,037
6,510 25
3,562 195
178,304
3 to 6 months
-
- -
53,878 -
53,878
90,408
1,500
21 - - -
91,929
6 months to 1 year
-
- -
59,416 -
59,416
35,098
-
1,290 - - -
36,388
1 to 5 years
-
- -
40,985 -
40,985
797
-
2,173 2,330
- -
5,300
Over 5 years
-
- -
1,421 -
1,421
-
-
249 - - -
249
Total
13,487
40,469 28,695
242,582 1,827
327,060
291,278
4,537
10,243 2,355 3,562
195 312,170
��
Currency risk (contd.) Net liquidity gap
Accumulated gap
The contractual maturities of banking assets and liabilities for the year ended 31 December 2005 are as follows (MNT million):
AssetsCash and short term fundsDeposits and placements with other banks and financial institutions Financial investmentsLoans and advancesOther assets
LiabilitiesDeposits from customersDeposits and placements of other banks and financial institutionsLoans from Bank of Mongolia and financial institutionsSubordinated loanOther liabilitiesTax payable
Net liquidity gap
Accumulated gap
Interest rate risk
The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest rate risk is measured by the extent to which changes in market interest rates impact margins and net income. To the extent the term structure of interest bearing assets differs from that of liabilities, net interest income will increase or decrease as a result of movements in interest rates. The Bank’s expected repricing and maturity dates do not differ significantly from the contract dates, which are disclosed in the liquidity risk table above.
Interest rate risk is managed by increasing or decreasing positions within limits specified by the Bank’s management. These limits restrict the potential effect of movements in interest rates on interest margin and on the value of interest sensitive assets and liabilities.
The Bank’s interest rate policy is reviewed and approved by the Bank’s Assets and Liabilities Management Committee. The Bank’s effective interest rates per annum in 2006 and 2005 for monetary financial instruments not carried at fair values through profit or loss are as follows:
(38,051)
(44,995)
3 to 6 months
-
13,998 -
32,030 -
46,028
18,443
5,600
199 - - -
24,242
21,786
(6,416)
23,028
(21,967)
6 months to 1 year
-
- 487
28,910 -
29,397
25,549
-
153 - - -
25,702
3,695
(2,721)
35,685
13,718
1 to 5 ears
-
- -
14,352 -
14,352
-
-
2,632 2,442
- -
5,074
9,278
6,557
1,172
14,890
Over 5years
-
- -
898 -
898
-
-
145 - - -
145
753
7,310
14,890
Total
7,339
31,455 24,303
133,489 984
197,570
165,928
17,533
3,263 2,468 1,030
38 190,260
7,310
(6,944)
(6,944)
Less than 3 months
7,339
17,457 23,816 57,299
984 106,895
121,936
11,933
134 26
1,030 38
135,097
(28,202)
(28,202)
�0
Interest rate risk (contd.) 2006 2005
Interest earning assets
Deposits and placements with other banks and financial institutions - Bank of Mongolia - Local fin-ancial institutions - Foreign financial institutionsBank of Mongolia Treasury billsCorporation bondsGovernment bondsLoans and advances
Interest bearing liabilities
Demand deposits from customersTime deposits from customersGovernment depositsDeposits and placements of other banks and financial institutionsLoans from Bank of MongoliaLoan from financial institutionsSubordinated loan
25. RELATED PARTY DISCLOSURES
The Bank is controlled by H.S. Investment Co. Ltd. (incorporated in Japan). The ultimate parent of the group is H.S. Securities Co. Ltd. (incorporated in Japan). The Bank is managed by Development Alternative Inc. (‘‘DAI’’), a shareholder, pursuant to the management contract signed in year 2003 and renewed in year 2004 and again in 2006 for four years.
A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. These transactions were carried out on commercial terms and at market rates. The volumes of related party transactions, outstanding balances as at the year end, and related expenses for the year are listed below.
(a) Interest paid on subordinated loan - H.S. Investment Co. Ltd. (b) Compensations of key management personnel
- Salaries - Bonus and allowances - Contribution to social and health fund - Share-based payments
(c) Management fees paid to certain corporate shareholders Share-based payment to a corporate shareholder
MNT
0.0%0.0 % - 12.0%
- 1.98% - 9.48%
19.2% -
15.0% - 42.0%
0.0% - 10.0%6.0% - 18.0%0.0% - 7.2%
0.0% - 9.0%5.5%
5.0% - 8.0% -
2006 MNT ’000
147,329
326,848 252,414 110,059
2,422 691,743
1,021,051 79,385
1,100,436
Foreigncurrencies
0.0% - 3.5%
0.0% - 10.0% 0.0%
- - -
2.76% - 27.6%
0.8% - 1.8%3.0% - 3.5%0.0% - 3.5%
0.0% - 6.5%1.0%
- 6.25%
2005 MNT ’000
150,780
211,251 38,575 47,467
- 297,293
1,023,300 -
1,023,300
MNT
0.0%0.0 % - 8.0%
- 4.83% - 6.93%
- 6.50% - 6.95%15.0% - 36.0%
0.0% - 10.0%6.0% - 18.0%0.0% - 7.2%
6.0% - 18.0%5.5%
0.8% - 8.0% -
Foreigncurrencies
0.0% - 3.5%0.0 % - 7.0%
0.0% - - -
2.16% - 27.6%
1.8% - 3.6%3.0% - 6.6%1.8% - 6.6%
0.0%1.0%6.6%
6.25%
�1
(d) Loans to key management personnel Repayable - within one year - one year to five years - over five years
The loans to key management personnel bear interest rates ranging from 4.8% - 12.0% (2005 : 4.8% - 18.0%) per annum. The interest income earned from key management personnel for the financial year amounted to MNT65,099 thousand (2005 : MNT22,757 thousand).
(e) Loan to a company in which Tavan Bogd, a corporate shareholder, had substantial interest The loan was secured, bore interest of 13.2% per annum and was repaid within one year. The interest income received from the loan amounted to MNT28,044 thousand (2005 : MNT53,833 thousand).
(f) Deposit from a Director
The deposit in MNT from a Director bears interest rate of 14.4% (2005 : 14.4%) per annum. The interest paid to the director amounted to MNT3,556 thousand (2005 : MNT714 thousand).
26. CAPITAL ADEQUACY
Bank of Mongolia requires commercial banks to maintain a core capital adequacy ratio of 5% and a risk weighted capital ratio of 10%, calculated on the basis of total equity and total assets as adjusted for their risk. The capital adequacy ratios of the Bank as at 31 December are as follows:
Core capital ratio Risk weighted capital ratio
Tier I capital Statutory fund Other reserves Share premium Retained profits Total Tier I capital Tier II capital Revaluation surplus Subordinated loan Total capital /capital base
2006 MNT ’000
772,349
10,524
31,742 730,083 772,349
2006 MNT ’000
-
2006 MNT ’000
230,000
2006 MNT ’000
11.87%13.06%
2006 MNT ’000
11,619,112 79,385
5,023,849 14,942,688 31,665,034
836,722 2,330,000
34,831,756
2005 MNT ’000
574,745
75,237
249,937 249,571 574,745
2005 MNT ’000
476,344
2005 MNT ’000
10,641
2005 MNT ’000
9.74%11.83%
2005 MNT ’000
5,159,130 -
1,185,685 8,049,332
14,394,147
638,871 2,442,000
17,475,018
��
26. CAPITAL ADEQUACY (CONTD.) Breakdown of risk weighted assets in the various categories of risk weights are as follows:
2006 2005 MNT ’000 MNT ’000
%0102050100Total
27. CAPITAL COMMITMENTS
Approved and contracted for: Property, plant and equipment Approved but not contracted for: Property, plant and equipment
28. OFF BALANCE SHEET ITEMS
Ministry of Food and Agriculture LoansSolar Energy Loans from Ministry of EnergyAlimentary aid loanOther off balance sheet items
a. Ministry of Food and Agriculture Loans
On 7 May 2001, the Bank entered into a Banking Service Agreement with the Ministry of Food and Agriculture (‘‘MFA’’). Under this agreement, the Bank is responsible for the distribution of the loans to the borrowers selected by the MFA, for the monitoring of the borrowers’ compliance with loan agreements, and providing the MFA with timely information on the status of these loans. The Bank, acting on behalf of MFA, has outstanding loans extended to agricultural companies amounting to MNT1.47 billion (2005 : MNT1.55 billion).
No new loans were disbursed since December 2002. No commission and service charge was earned in 2006 (2005 : MNT 12.9 million).
b. Solar Energy Loan
On 21 October 2003, the Bank had entered into a Solar Energy Loan Agreement with the Ministry of Energy (formerly known as Ministry of Infrastructure). Under this agreement, the Bank is responsible for the distribution of the loans to the borrowers selected by the Bank, for the monitoring of the borrowers’ compliance with loan agreements and providing the Ministry of Energy with timely information on the status of these loans. The Bank, acting on behalf of Ministry of Energy, has outstanding solar energy loans to herders and farmers amounting to
Assets
44,391,845 -
18,180,796 -
144,125,891 206,698,532
RiskWeighted
- -
3,636,159 -
144,125,891 147,762,050
Assets
75,358,165 -
7,350,805 -
265,255,205 347,964,175
RiskWeighted
- -
1,470,161 -
265,255,205 266,725,366
2006 MNT ’000
153,572
1,168,339
1,321,911
2006 MNT ’000
1,471,673 98,741
230,231 8,914,970
10,715,615
2005MNT ’000
481,240
489,873
971,113
2005 MNT ’000
1,547,762 122,947
87,705 8,059,479 9,817,893
��
MNT99 million (2005 : MNT123 million).
The Bank earns an application fee of MNT4,000 per loan disbursed for the administrative service of this loan. No new loan (2005 : MNT59 million) was disbursed during the year.
c. Alimentary Aid Loan
On 22 August 2003, the Bank entered into a Loan Disbursement and Banking Service Agreement with the French Alimentary Aid Fund (‘‘FAAF’’). Under this agreement, the Bank is responsible for the examination and disbursement of the loans to the borrowers recommended by the FAAF, and the monitoring of the borrowers’ compliance with loan agreements. The Bank, acting on behalf of FAAF, has outstanding alimentary aid loans to farmers amounting to MNT230.2 million (2005 : MNT87.7 million) as at year end.
The Bank earns a commission of 3% (2005 : 2%) on the amount of loans issued. New loans amounting to MNT260.9 million were disbursed during the year (2005 : MNT107.3 million). The commission earned for the year amounted to MNT7.8 million (2005 : MNT2.1 million).
d. Other off Balance Sheet Items
At 31 December 2006, other off balance sheet items consisted mainly of loans of MNT5.0 billion (2005 : MNT4.3 billion) (inclusive of interest), receivables of MNT1.2 billion (2005 : MNT1.1 billion) and collateral assets obtained from customers amounting to MNT145 million (2005 : MNT147 million) that were written off in prior years.
Also included as other off balance sheet items are ‘‘Inherited’’ and ‘‘Directed’’ loans amounting to MNT1.2 billion along with accrued interest of MNT1.1 billion (2005 : MNT1.2 billion plus accrued interest of MNT1.1 billion).
e. Guarantees and Letters of Credit
The Bank has no guarantees and letters of credit outstanding as of 31 December 2006 (2005 : Nil).
29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
Financial instruments comprise financial assets and financial liabilities. The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Where quoted market prices are not available, the fair values are measured at discounted rates commensurate with the quality and duration of the asset or liability.
A considerable portion of the financial instruments as at 31 December 2006 and 2005 are short term in nature with maturities of less than one year. Based on fair value assessments as indicated above, the estimated fair values of those financial assets and financial liabilities, both short and long term as at the balance sheet date, approximate their carrying amounts as shown in the balance sheet except for the followings:
Carrying Values Fair Values
Loans from Bank of MongoliaTerm Loan ITerm Loan IITerm Loan III
30. MONGOLIAN TRANSLATION These financial statements are also prepared in the Mongolian language. In the event of discrepancies or contradictions between the English version and the Mongolian version, the English version will prevail.
2006 MNT ’000
22,305 11,152 79,624
113,081
2005 MNT ’000
45,662 22,831 84,041
152,534
2006
MNT ’000
23,300 11,650
133,678 168,628
2005 MNT ’000
48,840 24,420
145,708 218,968