Development Bank of Mongolia LLC - Amazon S3 · 2019-04-30 · Development Bank of Mongolia Consolidated Statement of Financial Position As at 31 December 2018 The accompanying notes

Development Bank of Mongolia LLC

Consolidated Financial Statements together with

Independent Auditors’ Report for the year ended 31 December 2018

Contents GENERAL INFORMATION

MANAGEMENT’S RESPONSIBILITIES STATEMENT

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Financial Position ............................................................................................ 1 Consolidated Statement of Profit or Loss and Other Comprehensive Income ....................................... 2 Consolidated Statement of Changes in Equity ....................................................................................... 3 Consolidated Statement of Cash Flows .................................................................................................. 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE INFORMATION AND OPERATING ENVIRONMENT ................................................ 6 2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND

PRESENTATION .......................................................................................................................... 7 3. SIGNIFICANT ACCOUNTING POLICIES .......................................................................................... 8 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION

UNCERTAINTY ........................................................................................................................... 19 5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING

STANDARDS .............................................................................................................................. 20 6. CASH AND CASH EQUIVALENTS ............................................................................................ 23 7. BANK DEPOSITS ....................................................................................................................... 23 8. DERIVATIVE FINANCIAL INSTRUMENTS ................................................................................ 24 9. AVAILABLE-FOR-SALE INVESTMENTS CARRIED AT FAIR VALUE ...................................... 24 10. HELD-TO-MATURITY INVESTMENTS CARRIED AT AMORTIZED COST .............................. 24 11. LOANS AND ADVANCES INCLUDING LEASE RECEIVABLES ............................................... 25 11.1 REPOSSESSED ASSETS ............................................................................................................ 28 12. OTHER ASSETS ......................................................................................................................... 29 13. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS ........................................................... 30 14. CUSTOMER ACCOUNTS ........................................................................................................... 31 15. OTHER LIABILITIES ................................................................................................................... 31 16. DUE TO OTHER BANKS AND FINANCIAL INSTITUTIONS ..................................................... 32 17. BONDS ........................................................................................................................................ 32 18. BORROWINGS ........................................................................................................................... 33 19. RELATED PARTY TRANSACTIONS ......................................................................................... 35 20. CAPITAL CONTRIBUTIONS....................................................................................................... 38 21. INTEREST INCOME ................................................................................................................... 38 23. FOREIGN EXCHANGE TRANSLATION LOSSES, NET ............................................................ 39 24. ADMINISTRATIVE AND OTHER OPERATING EXPENSES ..................................................... 39 25. INCOME TAX .............................................................................................................................. 40 25. INCOME TAX (CONTINUED) ..................................................................................................... 41 26. DISCONTINUED OPERATION ................................................................................................... 43 27. FINANCIAL RISK MANAGEMENT ............................................................................................. 44 28. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY ........... 64 29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES ...................................................... 65 30. COMMITMENTS AND CONTINGENCIES ................................................................................. 67 31. SEGMENT REPORTING ............................................................................................................ 69 32. SUBSEQUENT EVENTS ............................................................................................................ 69 33. TRANSLATION INTO MONGOLIAN LANGUAGE ..................................................................... 69

Development Bank of Mongolia General Information BOARD OF DIRECTORS INDEPENDENT DIRECTORS TO THE BOARD

Mr. M.BAYARMAGNAI Mr. G.BAYASGALAN Mr. S.MAGNAISUREN Mr. S.NARANTSOGT Mr. B.GANBAT Mr. D.DAVAASANBUU Mr. J.UKHERTAR Ms. J.OYUNCHIMEG

COMPANY SECRETARY Ms. D.KHULAN REGISTERED OFFICE Peace Avenue-19 building, 12th floor,

Sukhbaatar District 1st khoroo, Ulaanbaatar 14210, Mongolia

AUDITORS KPMG Audit LLC

#602, Blue Sky Tower, Peace Avenue 17, 1st khoroo, Sukhbaatar District, Ulaanbaatar 14240. Mongolia

Development Bank of Mongolia Consolidated Statement of Financial Position As at 31 December 2018

The accompanying notes form an integral part of these consolidated financial statements.

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In thousands of Mongolian Tugriks Note 31 December 2018 31 December 2017

Assets Cash and cash equivalents 6 1,126,232,909 703,365,409 Bank deposits 7 262,732,336 492,697,137 Derivative financial instruments 8 81,031,371 354,138 Available-for-sale investments carried at fair value 9 108,840,914 32,206,430 Held-to-maturity investments carried at amortized cost 10 28,394,756 - Loans and advances including lease receivables 11 2,461,825,885 2,427,085,163 Income tax receivable 27,551,759 - Other tax receivables 4,234,082 - Other assets 12 14,713,039 1,296,823 Assets held for sale 5,900,000 - Property and equipment 13 28,063,266 28,164,515 Intangible assets 13 833,253 589,977 Repossessed assets 11.1 71,089,370 - Deferred tax assets 25 40,996,942 58,451,660 Total assets 4,262,439,882 3,744,211,252 Liabilities Customer accounts 14 8,908,045 11,276,829 Derivative financial instruments 8 46,562 - Other liabilities 15 9,023,466 17,134,037 Current income tax payable - 111,800 Other taxes payable 1,240,327 10,100 Deferred revenue - 17,840 Due to other banks and financial institutions 16 516,429,283 729,206,480 Bonds 17 2,121,667,236 808,722,006 Borrowings 18 521,898,797 1,106,702,442 Total liabilities 3,179,213,716 2,673,181,534 Equity Capital contributions 20 1,216,300,341 1,216,300,341 Fair value reserve 20,241,870 12,130,464 Accumulated loss (153,316,045) (157,401,087) Total equity 1,083,226,166 1,071,029,718 Total liabilities and equity 4,262,439,882 3,744,211,252

Development Bank of Mongolia Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2018


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Interest income 21 272,390,486 285,564,428 Interest expense 22 (150,536,065) (167,702,230)

Net interest income 121,854,421 117,862,198 Provision charge for loans and advances 11 (108,688,167) (21,071,361) Net interest income less provision for loans and advances 13,166,254 96,790,837 Fee and commission income 2,300 - Fee and commission expense (292,947) - Dividend income - 1,453,450 Other income 221,296 - Net trading loss (103,319) (514,584) Foreign exchange translation losses, net 23 (59,865,498) (26,154,656) Gains from derivative financial instruments 80,978,948 354,138 Reversal/(increase) of provision for other assets 12 8,134 (17,777) Administrative and other operating expenses 24 (15,619,556) (10,697,953) Profit for the year from continuing operations before tax 18,495,612 61,213,455 Discontinued operation Loss for the year from discontinued operations 26 - (1,780) Profit for the year before tax 18,495,612 61,211,675 Income tax expense 25 (14,410,570) (60,200,802) Profit for the year 4,085,042 1,010,873

Items that may be reclassified subsequently to profit or loss: Fair value change on available-for-sale investments carried at fair value, net of tax 25 8,111,406 (4,045,066) Other comprehensive income/(loss) for the year 8,111,406 (4,045,066) Total comprehensive income/(loss) for the year 12,196,448 (3,034,193)

Development Bank of Mongolia Consolidated Statement of Changes in Equity For the year ended 31 December 2018

The accompanying notes form an integral part of these consolidated financial statements. 3

In thousands of Mongolian Tugriks Note

Capital contributions

Fair value reserve

Accumulated loss Total equity

Balance at 1 January 2017 20 1,095,793,182 16,175,530 (158,411,960) 953,556,752 Total comprehensive income Profit for the year - - 1,010,873 1,010,873 Other comprehensive loss - (4,045,066) - (4,045,066) Total comprehensive (loss)/income - (4,045,066) 1,010,873 (3,034,193) Transactions with owners of the Bank Capital contributions during the year 120,507,159 - - 120,507,159

Balance at 31 December 2017 20 1,216,300,341 12,130,464 (157,401,087) 1,071,029,718 Profit for the year - - 4,085,042 4,085,042 Other comprehensive income - 8,111,406 - 8,111,406 Total comprehensive income - 8,111,406 4,085,042 12,196,448 Balance at 31 December 2018 20 1,216,300,341 20,241,870 (153,316,045) 1,083,226,166

Development Bank of Mongolia Consolidated Statement of Cash Flows For the year ended 31 December 2018


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In thousands of Mongolian Tugriks Note 31 December 2018 31 December 2017 Cash flows from operating activities Profit before tax 18,495,612 61,211,675 Adjustments to: Depreciation and amortization expenses 24 1,240,053 1,113,743 Provision for impairment of loans and advances 11 108,688,167 21,071,361 (Reversal)/ increase in provision for other assets 12 (8,134) 17,777 Unrealized foreign exchange translation losses 30,692,266 17,933,767 Unrealized gains from derivative financial instruments (80,978,948) (354,138) Property and equipment written off 13 - 27 Interest income 21 (272,390,486) (285,564,428) Interest expense 22 150,536,065 167,702,230 Dividend income - (1,453,450) Realized foreign exchange loss from financial activities - (8,820,381) Cash flows from operating activities before changes in operating assets and liabilities (43,725,405) (27,141,817) Net decrease/ (increase) in bank deposits 232,831,788 (471,260,952) Net increase in investment securities available for sale (63,382,078) - Net (increase)/ decrease in investment securities held to maturity (27,496,585) 116,211,691 Net (increase)/ decrease in loans and advances (56,866,710) 472,397,310 Net (increase)/ decrease in other assets (23,328,629) 53,013,325 Net decrease in customer accounts (2,464,812) (11,757,154) Net (decrease)/ increase in due to other banks and financial institutions (228,994,844) 624,430,210 Net decrease in other liabilities (7,530,751) (12,879,851) Net decrease in prepaid income - (8,104,638) Net cash generated from operating activities before tax and interest

(220,958,026) 734,908,124

Income taxes paid (27,850,826) (16,837,293) Interest received 296,586,709 253,875,036 Interest paid (151,299,218) (163,599,796) Net cash (used in)/ generated from operating activities (103,521,361) 808,346,071

Development Bank of Mongolia Consolidated Statement of Cash Flows (Continued) For the year ended 31 December 2018

The accompanying notes form an integral part of these consolidated financial statements. 5


Cash flows from investing activities Expenditure on repossessed assets 11.1 (35,612,091) - Purchase of property and equipment 13 (974,418) (721,591) Purchase of intangible assets 13 (407,662) (182,551) Dividend income received (net of withholding tax) - 1,308,105 Proceeds from sale of property, plant and equipment 13 - 35,288 Net cash (used in)/ generated from investing activities (36,994,171) 439,251

Cash flows from financing activities Proceeds from bonds 1,281,895,000 - Proceeds from borrowings 158,207,064 31,622,014 Proceeds from due to Government - 68,000,000 Repayment of bonds (100,098,241) (770,450,000) Repayment of borrowings (771,854,715) (364,813,291) Repayment of due to Government - (81,200,000) Net cash generated from/ (used in) financing activities 568,149,108 (1,116,841,277) Effect of exchange rate changes on cash and cash equivalents (4,766,076) 249,554 Net decrease in cash and cash equivalents 422,867,500 (307,806,401) Cash and cash equivalents at the beginning of the year 703,365,409 1,011,171,810 Cash and cash equivalents at the end of the year 1,126,232,909 703,365,409

Development Bank of Mongolia Notes to the Consolidated Financial Statements – 31 December 2018 (Expressed in thousands of Mongolian Tugriks unless otherwise stated)

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1. CORPORATE INFORMATION AND OPERATING ENVIRONMENT

The consolidated financial statements incorporate the financial statements of Development Bank of Mongolia (the Bank) and its subsidiaries (together referred to as the Group). The Bank was established on 25 March 2011 pursuant to Resolution No.195 of the Government of Mongolia dated 20 July 2010 and commenced its operations in May 2011. The Government of Mongolia owns 100% of the Bank. The Parliament of Mongolia ratified the Revised Law on Development Bank of Mongolia on 10 February 2017, which has been effective since 1 April 2017. The Revised Law on Development Bank of Mongolia improves corporate governance, increases oversight of lending operations and allows for greater independence. The Bank is regulated under the Revised Law on Development Bank of Mongolia rather than the Central Bank Law and Bank of Mongolia regulations applicable to commercial banks. However, Bank of Mongolia is responsible for monitoring capital adequacy and liquidity requirements. The Board of Directors of the Bank consists of four independent members and five executive members appointed by the Government of Mongolia. Currently, the Board includes direct representation from the State Secretaries of three key line ministries, showing strong support from the Government of Mongolia. At least 60% of the projects financed must promote export-driven programs that enhance Mongolia’s ability to export value-added products, especially in non-mining sectors of the economy.

In order to expand and diversify the overall operations of the Bank, the Bank has established the following wholly owned subsidiaries:

1. DBM Leasing LLC, which provides equipment lease services to local businesses, 2. DBM Asset Management Securities LLC, which aims to establish various investment funds to

support the increase of foreign currency inflow and foreign direct investment; and 3. National Export Insurance LLC. Please refer to Note 26.

The number of employees of the Group is 205 as at 31 December 2018 (31 December 2017: 199). The Group's principal place of business is TDB Building 11th and 12th floor, Peace Avenue 19, Ulaanbaatar 14210, Mongolia. These consolidated financial statements were approved for issue by the Executive management of the Bank on 26 April 2019. Funding Environment of the Bank

Through issuing bonds without a government guarantee, in October 2018 the Bank successfully raised USD 500 million via the issuance of 7.25% Senior Notes due in 2023 which is expected to have a positive impact on the Mongolian economy by increasing the country’s foreign currency inflow, reducing short-term currency outflow and stabilizing the fluctuation in the domestic exchange market. Funding without government guarantees make up to 64% of the total term funding as at 31 December 2018 (31 December 2017: 26%).

An independent financial agency, Moody’s, has established Development Bank of Mongolia’s credit rating as stable B3. Meanwhile Standard & Poor's (S & P) upgraded Development Bank of Mongolia’s current credit rating from "B-" to "В" stable on 9 November 2018.

Management believes the credit rating improvement year-on-year reflects the Bank’s active participated in international financial markets, is managing its foreign relations with investors, and is implementing the Bank’s and the Government of Mongolia's policies.


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2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION

Basis of Preparation and Presentation The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as modified by the Bank of Mongolia (BOM) guidelines as from 1 January 2018, as further explained in Note 2, section Changes in Accounting Policies.

These consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments (derivatives, available-for-sale financial investments) that are measured at fair value. The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non-current) is presented in Note 27. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts without being contingent on a future event and there is an intention to settle on a net basis in all of the following circumstances:

• The normal course of business; • The event of default; • The event of insolvency or bankruptcy of the Group and/or the counterparties.

Positions recognized on a net basis primarily include balances with exchanges, repurchase agreements, clearing houses and brokers. Derivative financial assets and liabilities with master netting arrangements are only presented net when they satisfy the eligibility of netting for all of the above criteria and not just in the event of default. Going Concern The Group’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis.

Functional Currency These consolidated financial statements are presented in Mongolian Tugriks ('MNT'), the currency of the primary economic environment in which the Group operates and the Bank's functional currency. All values are rounded to the nearest thousands, except when otherwise indicated.


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2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION (CONTINUED)

Changes in Accounting Policies Accounting Framework On 1 January 2018 the Group changed its accounting framework from International Financial Reporting Standards to International Financial Reporting Standards as modified by the BOM guidelines. No significant impacts on the comparative information presented as at and for the year ended 31 December 2017, or at the start of the earliest period presented, resulted from this change. The major items modified by the BOM guidelines that are different to IFRS and significantly impact the Bank comprise the following. Details are included in the corresponding notes:

• Deferral of the adoption of IFRS 9 from 2018 to 2020; • Allowance for loan loss reserves, receivables, letters of credit, unused credit commitments,

unfunded syndicated and foreclosed properties; IFRS 15 Revenue from Contracts with Customers (IFRS 15) IFRS 15, published in January 2017, establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces previous revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. IFRS 15 establishes a single and comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle of the standard is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring promised services to a customer. The new standard involves a five-step approach:

Step 1: Identify the contract(s) with customers Step 2: Identify the separate performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to separate performance obligations Step 5: Recognize revenue when (or as) each performance obligation is satisfied

No significant matters were identified from the adoption of IFRS 15 that caused a financial impact between the previous accounting practice and the new requirements.

3. SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank and its subsidiaries. Control is achieved when the Bank: - has power over the investee; - is exposed, or has right, to variable returns from its involvements with the investee; and - has ability to use its power to affect its returns. The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies.


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3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basis of Consolidation (continued) All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortized cost as described below. Fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. The price within the bid-ask spread that is most representative of fair value in the circumstances was used to measure fair value, which management considers is the last trading price on the reporting date. The quoted market price used to value financial assets is the current bid price; the quoted market price for financial liabilities is the current asking price.

Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows:

• Level 1 financial instruments −Those where the inputs used in the valuation are unadjusted quoted prices from active markets for identical assets or liabilities that the Group has access to at the measurement date. The Bank considers markets as active only if there are sufficient trading activities with regards to the volume and liquidity of the identical assets or liabilities and when there are binding and exercisable price quotes available on the balance sheet date.

• Level 2 financial instruments −Those where the inputs that are used for valuation and are significant, are derived from directly or indirectly observable market data available over the entire period of the instrument’s life. Such inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in inactive markets and observable inputs other than quoted prices such as interest rates and yield curves, implied volatilities, and credit spreads. In addition, adjustments may be required for the condition or location of the asset or the extent to which it relates to items that are comparable to the valued instrument. However, if such adjustments are based on unobservable inputs which are significant to the entire measurement, the Group will classify the instruments as Level 3.

• Level 3 financial instruments −Those that include one or more unobservable input that is significant to the measurement as whole

Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.


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Amortized cost. Amortized cost is the amount at which the financial instrument was recognized at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortized discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position.

The effective interest method.

Policy applicable from 1 January 2018 Interest income and expenses are recognised in profit or loss using the effective interest rate (EIR) method. The effective interest rate is the rate that exactly discounts future cash payments or receipts through the expected life of the financial instruments to:

- The gross carrying amount of the financial asset; or - The amortised cost of the financial liability.

When calculating the effective interest rate for financial instruments other than purchased or originated credit-impaired assets, the Bank estimates future cash flows considering all contractual terms of the financial instrument, but not expected credit loss. For purchased or originated credit-impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including expected credit loss. The calculation of the effective interest rate includes transaction costs and fees and points paid or received that are an integral part of the effective interest rate.

Policy applicable before 1 January 2018

The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortized over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate.

Initial recognition of financial instruments. Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets are recorded at the settlement date, i.e. when the entity becomes a party to the contractual provisions of the instrument.


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Derecognition of financial assets. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognizes a collateralised borrowing for the proceeds received.

Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include government investment and Bank of Mongolia’s investment securities with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortized cost.

Bank deposits. Bank deposit are recorded when the Group advances money to counterparty banks with initial maturity of more than three months with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortized cost.

Held-to-maturity investments. Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that are quoted in an active market, which the Group has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the effective interest rate, less any impairment. If the Group were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held-to-maturity financial investments during the following two years.

Available-for-sale investments. AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Available-for-sale investments are carried at fair value. Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when the Group’s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognised in other comprehensive income and accumulated under the heading of fair value reserve. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the fair value reserve is reclassified to profit or loss. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investment. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is reclassified from other comprehensive income to profit or loss for the year.

Impairment losses on equity instruments are not reversed and any subsequent gains are recognised in other comprehensive income. 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 profit or loss, the impairment loss is reversed through profit or loss for the year.


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Derivative financial instruments. The Group enters into various types of transactions that involve derivative financial instruments in the ordinary course of business. Derivative financial instruments primarily include interest rate swaps, cross currency swaps and forward foreign exchange contracts. These financial instruments are recognized at fair value in the statement of the financial position initially and are carried at fair value. Derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year (gains less losses on derivatives). The Group does not apply hedge accounting.

Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if they meet the definition of a derivative (as defined above), their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in profit or loss.

Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and advances to customers are carried at amortized cost using the EIR, less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR.

Impairment of financial assets carried at amortized cost. Impairment losses are recognised in profit or loss for the period when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or Group of financial assets that can be reliably estimated.

The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: - any instalment is overdue and the late payment cannot be attributed to a delay caused by the

settlement systems; - the borrower experiences a significant financial difficulty as evidenced by the borrower’s financial

information that the Group obtains; - the borrower considers bankruptcy or a financial reorganisation; - there is an adverse change in the payment status of the borrower as a result of changes in the national

or local economic conditions that impact the borrower; or - the value of collateral significantly decreases as a result of deteriorating market conditions. For financial assets carried at amortised cost the Group 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 Group determines that no objective evidence of impairment exists for an individually assessed financial asset, 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.


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Impairment of financial assets carried at amortized cost (continued)

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the similar credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors 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.

Impairment losses are recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. 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. Allowances are made against the carrying amount of financial assets that are identified as being impaired, based on regular reviews of outstanding balances. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year and included in the 'charge for provision for loans and advances' financial line items.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the impairment loss account in profit or loss for the year.

Offsetting financial instruments. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

Prepayments. Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are charged to profit or loss as they are consumed in operations or expire with the passage of time.

Property and Equipment. Property and equipment are initially measured at cost. At the end of each reporting period, property and equipment are measured at cost less any subsequent accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset.

Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows: - Buildings and facilities 40 years - IT Equipment 3 years - Furniture and fixture 10 years - Vehicles 10 years

Derecognition of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.


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Intangible Assets. Intangible assets that are acquired by the Group with finite useful lives are initially measured at cost. At the end of each reporting period, items of intangible assets acquired are measured at cost less accumulated amortization and accumulated impairment losses. Cost includes purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates and any directly attributable cost of preparing the intangible asset for its intended use.

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognized in profit or loss as incurred.

Amortization of an intangible asset with a finite useful life is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives are as follows:

- Software and license 10 years

Derecognition of intangible assets. An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

Impairment of tangible and intangible assets. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment or intangible assets. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.

Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortized cost. These are used to settle the loans and advances by the borrower and does not carry any interest.

Sale and repurchase agreements. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognized. The securities are not reclassified in the statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables. The corresponding liability is presented within amounts due to other banks or other borrowed funds. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the effective interest rate.

Bonds and Borrowings. Debt securities representing bonds issued and borrowings are stated at amortized cost. The amortised cost of borrowed funds is calculated using the EIR by taking into account any transaction costs related to the transaction. If the Group purchases its own debt securities in issue or settles its borrowings, they are removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from retirement of debt (derecognition of liability). All borrowing costs are recognised in profit or loss in the period in which they are incurred.

Repossessed assets. Repossessed assets are initially recognised at the lower of their fair values less costs to sell and the amortised cost of the related outstanding loans on the date of the repossession. The related loans and advances together with the related impairment allowances are derecognised from the balance sheet. Expenditure incurred to make the repossessed assets ready for sale is recognised together with the related repossessed assets. Subsequently, repossessed assets are measured at the lower of their cost and fair value less costs to sell.


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Capital contribution. Capital contributions represent injections of capital by the owner of the Bank either in the form of cash contributions, conversion of retained earnings, or other forms of contributions from the owner.

Income tax. Income tax has been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if the consolidated financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses.

Deferred income tax. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the year when the temporary differences will reverse or the tax loss carry forwards will be utilised.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Current and deferred taxes are recognised as income tax benefits or expenses in the income statement except for tax related to the fair value remeasurement of available-for-sale assets, which is charged or credited to OCI. These exceptions are subsequently reclassified from OCI to the income statement together with the respective deferred loss or gain. The Bank also recognises the tax consequences of payments and issuing costs, related to financial instruments that are classified as equity, directly in equity.

Provisions, Contingent Liabilities and Contingent Assets Provisions. Provisions are recognized when the Group has a present obligation, either legal or constructive, as a result of a past event, it is probable that the Group will be required to settle the obligation through an outflow of resources embodying economic benefits, and the amount of the obligation can be estimated reliably. The amount of the provision recognized is the best estimate of the consideration required to settle the present obligation at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation. A provision is measured using the cash flows estimated to settle the present obligation; its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that a transfer of economic benefits will be required to settle the obligation, the provision is reversed.

Contingent liabilities and assets. Contingent liabilities and assets are not recognized because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent liabilities are disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are disclosed only in case if an inflow of economic benefits is probable.


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3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Credit related commitments. From time to time, the Group enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans.

Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition.

At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortized balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. In cases where the fees are charged periodically in respect of an outstanding commitment, they are recognized as revenue on a time proportion basis over the respective commitment period.

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 Group. Short term accumulating compensated absences such as paid annual leave are recognised as a liability when services are rendered by employees that increase their entitlement to future compensated absences in profit or loss, 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. The Group also contributes to a defined contribution pension plan. The contribution paid is recorded as an expense under "Pension fund expense" in proportion to the services rendered by the employees to the Group.

(iii) Long term benefits.

The Group has provided funding to third party banks in order for them to provide its employees with cheaper mortgage and salary loans. The cost of this scheme has been booked as a prepayments and will be expensed through the consolidated statement of profit or loss and other.


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Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at fair value through profit or loss.

When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset’s effective interest rate which was used to measure the impairment loss.

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

Foreign currency transactions. The functional currency of the Bank is the currency of the primary economic environment in which the entity operates. Thus, the Bank's functional currency and presentation currency are the national currency of Mongolia, MNT.

The transactions in currencies other than the entity's functional currency (foreign currency) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise.

At 31 December 2018 the rate of exchange used for translating USD, JPY, EUR and CNY denominated balances were as following:

Currencies 31 December 2018 31 December 2017

USD 2,642.92 2,427.13 JPY 23.94 21.53 EUR 3,028.65 2,897.87 CNY 385.73 371.58


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Principal and agent arrangements. The Group obtains funding designated to advance a specific loan facility to a specific borrower. For such arrangements, the Group considers whether it acts as a principal or an agent of the party providing the funding, by applying the “pass-through” criteria in IAS 39 to the loans which are as follows: a) the Group has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset; b) the Group is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows; and c) the Group has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. If the pass-through criteria are not met, the Group acts as a principal, it recognizes funds disbursed and funds received as assets and liabilities in the consolidated statement of financial position, and related interest income and interest expenses in the consolidated statement of profit or loss and other comprehensive income.

If the pass-through criteria are met, the Group acts as an agent and recognizes the amount of fee received from the related arrangement in the consolidated statement of profit or loss and other comprehensive income. Funds received and funds disbursed do not meet definition of assets and liabilities, and are not recognized in the consolidated statement of financial position.

Related party transactions

A related party transaction is a transfer of resources, services or obligations between the Group and a related party, regardless of whether a price is charged. A person or a close member of that person’s family is related to the Group if that person:

- has control or joint control over the Group or; - has significant influence over the Group or; - is a member of the key management personnel of the Group or of a parent of the Group. An entity is related to the Group if any of the following conditions apply:

- the entity and the Group are members of the same Group which means that each parent, subsidiary and fellow subsidiary is related to the others;

- one entity is an associate or joint venture of the other entity or an associate or joint venture of a member of a group of which the other entity is a member;

- both entities are joint ventures of the same third party; - one entity is a joint venture of a third entity and the other entity is an associate of the third entity; - the entity is a post-employment benefit plan for the benefit of employees of either the Group or an

entity related to the Group; - the entity is controlled or jointly controlled by a person who is a related party as identified above and; - A person that has control or joint control over the reporting entity has significant influence over the

entity or is a member of the key management personnel of the entity or of a parent of the entity.

Due to the nature of the Bank and its role as a policy bank almost all loans and transactions are with related parties. The Group applies the exemption from the disclosure of individually insignificant transactions with government related parties as allowed under IAS 24, paragraph 25.

Presentation of statement of financial position in order of liquidity. The Group does not have a clearly identifiable operating cycle and therefore does not present current and non-current assets and liabilities separately in the consolidated statement of financial position. Instead, assets and liabilities are presented in order of their liquidity. The amounts of financial assets and liabilities expected to be recovered or settled before and after twelve months after the reporting period approximate the amounts disclosed in analysis of the financial assets and liabilities presented for liquidity management purposes in Note 27. In case of non-financial assets and liabilities, management believes that the Notes related to these assets and liabilities, contain sufficient information for the users of these consolidated financial statements with regard to period of their expected recovery or settlement.


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4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The estimates and associated assumptions are based on the historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that period or in the year of the revision and future periods if the revision affects both current and future periods.

Key Sources of Estimation Uncertainty. The following are the key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next twelve months.

Impairment allowances on loans and advances

The Bank has assessed whether impairment indicators exist in case of corporate loans and whether recognition of an impairment provision is needed for customers with impairment indicators, due to delays in repayment by the customer or other factors which are unlikely to be compensated by additional interest. In making this assessment management has considered all available information at the time of the approval of these consolidated financial statements.

Management believes that all customers with impairment indicators, which are likely to lead to substantial delays in loan repayment by the customer, have been identified and that sufficient provision has been recognised in these consolidated financial statements.

The Bank regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss in relation to its corporate loans should be recorded in profit or loss for the year, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in the Bank, or national or local economic conditions that correlate with defaults on assets of the Bank. Management uses estimates based on credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Impairment losses for individually significant loans are based on estimates of discounted future cash flows of the individual loans, taking into account repayments and realisation of any assets held as collateral against the loans.

In addition, management considers whether an impairment provision is needed on a collective basis for loans without impairment indicators or loans with no specific impairment provision, given the current operating environment, financial conditions and liquidity of the industries in which customers operate, the level of collateral and its ability to be foreclosed in practice, and the likelihood that projects financed by the Bank would experience delays. Collective assessment includes corporate loans which are expected to be repaid by the customer for which no individual impairment loss is recognised.

A 10% increase or decrease in actual loss experience compared to the loss estimates would result in an increase or decrease in loan impairment losses of MNT 33,901 million (31 December 2017: 10% increase or decrease MNT 21,382 million). Refer to Note 11.

Fair value of financial instruments

The fair value of financial instruments including derivatives is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models.


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4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (CONTINUED)

Fair value of financial instruments (continued)

The inputs to these models are derived from observable market data where possible, but if this is not available, judgment is required to establish the fair values. Judgments and estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), funding value adjustments, correlation and volatility.

The principal financial instruments carried at fair value comprise available-for-sale investments, estimated based on market prices, and derivative financial instruments. A 10% percent increase or decrease in market prices used to value available-for-sale investments would result in an increase or decrease in available-for-sale investments by MNT 10,884 million (31 December 2017: 10% increase or decrease MNT 3,221 million). A 10% increase or decrease in the inputs to the models used for the estimation of the fair value of financial derivatives would result in an increase or decrease in the financial derivatives by MNT 8,098 million (31 December 2017: 10% increase or decrease MNT 35 million).

For further details about determination of fair value please see Note 29.

Deferred income tax asset recognition. Recognised deferred tax assets represent income taxes recoverable through future deductions from taxable profits, and are recorded in the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances taking into account the Bank’s actual profitability during the year. As at 31 December 2018 the Bank recognized net deferred tax assets of MNT 40,997 million (31 December 2017: MNT 58,452 million) (see Note 25) which mostly relate to temporary differences arising from net unrealized foreign exchange translation losses on financial liabilities denominated in foreign currency in accordance with Mongolian tax legislation and from carry forward tax losses. Management has concluded that it will be able to recover its deferred tax assets in the year of repayment of foreign currency denominated financial liabilities (such as bonds and borrowings) and is likely to incur tax at the rate of 25%.

As a result, management believes that net deferred tax assets of MNT 40,997 million, recognized as at 31 December 2018, are fully recoverable. In reaching this conclusion, management considered relevant regulations, nature of its settlement and related tax credits, precedents relevant to this case and other available information at the time of approval of these consolidated financial statements.

Tax system in Mongolia. The Government of Mongolia continues to reform the business and commercial infrastructure in its transition to a market economy. As a result the laws and regulations affecting businesses continue to change rapidly. While the Group believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation, any changes in the law and regulations may create tax risks for the Group.

5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS The following new standards, interpretations and amendments to existing standards have been published and are effective for subsequent annual periods, and the Group has not early adopted them.

IFRS 9 Financial Instruments (IFRS 9)

IFRS 9, published in December 2015, replaces the existing guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment of financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IFRS 9.


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5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED)

IFRS 9 Financial Instruments (IFRS 9) (continued)

Classification – Financial assets

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.

Impairment – Financial assets and contract assets

IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward-looking “expected credit loss” (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis.

The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets. Under IFRS 9, loss allowances will be measured on either of the following bases:

- 12-month ECLs. These are ECLs that result from possible default events within the 12 months after the reporting date; and

- lifetime ECLs. These are ECLs that result from all possible default events over the expected life of a financial instrument.

Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the reporting date.

Classification - Financial liabilities

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under IFRS 9 these fair value changes are generally presented as follows:

- the amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and

- the remaining amount of change in the fair value is presented in profit or loss.

In 2018, the Bank of Mongolia announced that the mandatory adoption of IFRS 9 for banks in Mongolia is deferred until 2020. The Group is currently assessing the potential impact on its financial statements resulting from this delay in the adoption of IFRS 9 and from the expected adoption in 2019. As a result, the Group has not yet assessed the full impact of adopting IFRS 9.


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5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (CONTINUED)

IFRS 16 Leases (IFRS 16)

IFRS 16, published in January 2017, supersedes IAS 17. IFRS 16 eliminates the classification of leases as either operating or finance leases for a lessee. Instead, all leases are treated in a similar way to finance leases under IAS 17. For those leases previously classified as operating leases, the most significant effect of the new requirements will be an increase in lease assets and financial liabilities and a change to the nature of expenses. IFRS 16 does not require a lessee to recognise assets and liabilities for short-term leases and leases of low-value assets. IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The Group is assessing the potential impact on its financial statements resulting from the application of IFRS 16.

IFRS 17 Insurance Contracts (IFRS 17)

IFRS 17, published in May 2018, is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of IFRS 17 is the general model, supplemented by:

- A specific adaptation for contracts with direct participation features (the variable fee approach)

- A simplified approach (the premium allocation approach) mainly for short-duration contracts.

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2021. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. IFRS 17 is not expected to have a significant impact on the Group’s financial statements.

Other standards

The following amended standards and interpretations are not expected to have a significant impact on the Group’s financial statements:

- IFRIC 23 Uncertainty over Tax Treatments.

- Prepayment Features with Negative Compensation (Amendments to IFRS 9).

- Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28).

- Plan Amendment, Curtailment or Settlement (Amendments to IAS 19).

- Annual Improvements to IFRS Standards 2015–2017 Cycle – various standards.

- Amendments to References to Conceptual Framework in IFRS Standards.


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6. CASH AND CASH EQUIVALENTS

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Cash on hand 19,133 30,470 Current accounts with the BOM 1,870,318 21,620,293 Cash at other banks: - Domestic 98,237,573 137,751,928 - Foreign 712,849 159,530 Short term deposits with domestic banks 309,972,909 543,803,188 Investment with less than three month of maturity 530,701,416 - Reverse repurchase agreements 184,718,711 - Total cash and cash equivalents 1,126,232,909 703,365,409

The credit quality of cash and cash equivalents balances may be summarized based on Moody’s ratings or equivalents of Standard and Poor’s and/or Fitch ratings. The credit quality at 31 December 2018 and 31 December 2017 was as follows:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Aa3 482 - A1 321,880 - Baa1 - 102,358 Ba1 390,487 57,172 Bank of Mongolia– B3 rated 717,290,445 - Bank of Mongolia– Caa1 rated - 21,620,293 B3 259,950,919 210,688,226 Caa1 - 129,393,825 Unrated 148,259,563 341,473,065 Total cash and cash equivalents, excluding cash on hand 1,126,213,776 703,334,939

7. BANK DEPOSITS

The Group’s bank deposits represent term deposits whose maturity is greater than three months from the date of placement.

The credit quality of term deposits may be summarised based on Moody’s ratings or equivalents of Standard and Poor’s and/or Fitch ratings. The credit quality at 31 December 2018 and 31 December 2017 was as follows:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 B3 122,695,360 107,761,208 Caa1 - 343,341,862 Unrated 140,036,976 41,594,067

Total bank deposits 262,732,336 492,697,137


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8. DERIVATIVE FINANCIAL INSTRUMENTS

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017

Carrying

value Nominal

USD Carrying

value Nominal

USD USD receivable on settlement 70,926,570 280,000,000 354,138 10,000,000 USD payable on settlement 10,104,801 30,000,000 - - Total derivative financial instruments assets

81,031,371 354,138

Foreign currency non-deliverable forward 46,562 9,000,000 - - Total derivative financial instruments liabilities 46,562 -

The Bank enters into deliverable and non-deliverable financial derivative contracts. The Bank entered into total currency swap agreements of USD 310 million and into a non-deliverable forward of USD 9 million with a remaining duration of 31 days. The Bank holds the derivative financial instruments at fair value until the maturity of the agreements made. 9. AVAILABLE-FOR-SALE INVESTMENTS CARRIED AT FAIR VALUE

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Debt securities Government securities 63,382,078 - Equity securities MIK Holding JSC (listed on the Mongolian Stock Exchange) 45,458,836 32,206,430 Total available-for-sale investments carried at fair value 108,840,914 32,206,430

The Debt securities are Government of Mongolia’s debt issued on the local and international capital markets denominated in a mixture of MNT and USD.

Currency and maturity analysis of Available-for-sale investments is disclosed in Note 27.

10. HELD-TO-MATURITY INVESTMENTS CARRIED AT AMORTIZED COST

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Bank of Mongolia’s securities 28,394,756 -

Total held-to-maturity investments carried at amortized cost 28,394,756 -


25

10. HELD-TO-MATURITY INVESTMENTS CARRIED AT AMORTIZED COST (CONTINUED) Held-to-maturity investment securities are Bank of Mongolia’s securities denominated in MNT with maturity of 3 months to 1 year purchased from the secondary securities markets.

Currency and maturity analysis of Held-to-maturity investments carried at amortized cost is disclosed in Note 27.

11. LOANS AND ADVANCES INCLUDING LEASE RECEIVABLES

Loans and advances consists of the following:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Loans and advances 2,732,555,452 2,607,346,259 Lease receivables 68,284,151 33,557,068 Total loans and advances 2,800,839,603 2,640,903,327 Less: Provision for loan impairment (339,013,718) (213,818,164) Total net amount of loans and advances 2,461,825,885 2,427,085,163

The borrowers principally comprise companies implementing the projects and programs which the Bank directly finances, as well as commercial banks that on-lend the Bank’s loans to corporate borrowers. The Bank generally provides finance to key strategic sectors, such as infrastructure projects, roads, engineering infrastructure, electricity, industry, air transportation, mining and housing construction, based on the Mongolian government’s economic development policy. Under a new law on the Development Bank of Mongolia passed by the Mongolian Parliament in 2017, the Bank is aiming to support medium to long term development programs that support economic growth and diversification of the economy, as well as programs that are value-added, export-oriented and encourage import substitution.

As at 31 December 2018, MNT 482,672 million (31 December 2017: MNT 630,369 million) has been granted to corporate borrowers in the forms of loans and advances to projects and small to medium businesses that produce goods such as leather and cashmere, goods that substitute imports, and export oriented goods which were approved by the Government to support the development of strategic sectors.

These loan agreements were issued through local commercial banks, which are responsible for the principal credit of the loan and, in some cases, interest rate repatriation. The Bank has assessed impairment indicators of related local commercial banks and an impairment provision has been recognized where applicable.

The Group provides lease finance to policy-oriented projects in the agriculture, mining and transportation sectors. The projects should meet the objectives of the Group, which aims to increase social benefits and support strategically efficient sectors.


26

11. LOANS AND ADVANCES INCLUDING LEASE RECEIVABLES (CONTINUED)

Analysis by credit quality of loans outstanding is as follows:


Neither past due nor impaired: - Public sector 506,662,320 756,030,584 - Private sector 1,231,557,079 1,143,150,498

Total neither past due nor impaired 1,738,219,399 1,899,181,082 Past due but not impaired:

- less than 30 days overdue 129,038,306 140,009,894 - more than 30 days but less than 90 days overdue 123,875,082 69,541,693 - more than 90 days but less than 180 days overdue 46,985,155 15,456,000 - more than 180 days but less than 360 days overdue 196,429,796 207,272,224 - over 360 days overdue 277,832,323 109,970,737

Total past due but not impaired 774,160,662 542,250,548 Impaired loans:

- current and impaired - - - less than 360 days overdue - - - over 360 days overdue 288,459,542 199,471,697

Total impaired loans and advances 288,459,542 199,471,697 Less: Provision for loans impairment (339,013,718) (213,818,164) Total net amount of loans and advances 2,461,825,885 2,427,085,163

Some loans that are not past due according to their terms after forbearance have been classified as watch loans but not impaired, which is part of past due but not impaired. For the purpose of the above disclosure they are considered as past due but not impaired.

The Bank considers a loan to be impaired once the proportion of loan impairment provision relative to the gross loan and interest balance exceeds 25%.

As at 31 December 2018 the total amount of the top 5 largest borrowers of the Bank, before impairment, is MNT 1,049,871 million (31 December 2017: MNT 1,171,645 million) or 37.5% of gross loans and advances (31 December 2017: 44.4%). The total carrying amount of these 5 largest borrowers after impairment provision as at 31 December 2018 is MNT 859,250 million (2017: MNT 1,022,811 million) or 35% of net loans and advances (31 December 2017: 42.1%). These top 5 largest borrowers’ loans do not include any on-lending loans through local commercial banks.

On 8 April 2019, the Bank of Mongolia announced the start of liquidation proceedings of Capital Bank LLC, one of the borrowers from the Bank. As a result of this subsequent event, the Bank has recognised a loan impairment provision against the full value of loan and interest receivable from Capital Bank LLC in an amount of MNT 53,613 million as at 31 December 2018 (31 December 2017: loan impairment provision MNT 5,524 million).


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11. LOANS AND ADVANCES INCLUDING LEASE RECEIVABLES (CONTINUED)

Movements in the provision for loan impairment are as follows:

In thousands of Mongolian Tugriks Loans and advances Total Provision for loans and advances impairment at 1 January 2017 192,746,803 192,746,803 Net movement 21,071,361 21,071,361

Increase in provision during the year 88,716,089 88,716,089 Reversal of provision during the year (67,644,728) (67,644,728)

Provision for loans and advances impairment at 31 December 2017 213,818,164 213,818,164 Net movement 125,195,554 125,195,554 Increase in provision during the year 145,212,970 145,212,970 Reversal of provision during the year (36,524,803) (36,524,803) Foreign exchange rate difference during the year 16,507,387 16,507,387

Provision for loans and advances impairment at 31 December 2018 339,013,718 339,013,718

Specific impairment 316,538,627 316,538,627 Collective impairment 22,475,091 22,475,091

The financial effect of collateral is presented by disclosing collateral values separately for (i) those loans where collateral and other credit enhancements are equal to or exceed the carrying value of the loan (“over-collateralised loans”) and (ii) those loans where collateral and other credit enhancements are less than the carrying value of the loan (“under-collateralised loans”).

The financial effect of collateral consists of the following:

31 December 2018 31 December 2017

In thousands of Mongolian Tugriks

Carrying value of the loans and

advances Value of collateral

Carrying value of the loans and

advances Value of collateral

Over-collateralized loans 1,309,056,718 2,262,941,580 1,634,138,726 2,365,979,207 Under-collateralized loans 1,152,769,167 1,013,647,068 792,946,437 665,722,769 Total net amount of loans and advances 2,461,825,885 3,276,588,648 2,427,085,163 3,031,701,976

The gross amounts of renegotiated financial loans consist of the following:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Total renegotiated loans and advances 1,360,971,058 1,369,289,333


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11. LOANS AND ADVANCES INCLUDING LEASE RECEIVABLES (CONTINUED) An analysis of the economic sector risk concentrations within the loan portfolio before impairment provision is as follows:


Amount % Amount %

- Manufacturing 1,138,538,051 41% 816,341,386 31% - Construction 687,936,007 25% 670,885,261 25% - Financial and insurance activities 482,672,235 17% 630,368,548 24% - Mining and quarrying 231,841,151 8% 377,459,600 14% - Electricity, gas, steam 138,328,551 5% 77,434,210 3% - Transportation and storage 42,087,783 2% 28,059,725 1% - Agriculture, forestry and fishing 40,676,512 1% 22,634,210 1% - Other 38,759,313 1% 17,720,387 1% Total loans and advances before impairment 2,800,839,603 100% 2,640,903,327 100%

11.1 REPOSSESSED ASSETS

In accordance with the “Rental Housing Program” and resolution 81 of 2018 passed by the Government of Mongolia, the Bank entered into four way agreements with the State Housing Corporation (“SHC”), to which the Bank advanced funds in 2013, the Ministry of Construction and Urban Development and various construction companies. The scope of this agreement is to complete unfinished building projects that were previously owned by, and continue to be managed by, the SHC and place them into use. The construction project, which includes 29 unfinished buildings, was transferred to the Bank in June 2018. Additional financing to complete the construction of the buildings of up to MNT 54,539 million was approved by the Board of Directors of the Bank in 2018, out of which MNT 35,612 million was disbursed in 2018. The total carrying value of the repossessed collateral is 71,089 million as at 31 December 2018. The Bank intends to recover the money invested in completion of the construction of these assets from the Government of Mongolia, probably in a form of government securities. Currently, the Bank is discussing the method of this reimbursement with the Ministry of Construction.


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12. OTHER ASSETS

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Prepaid employee benefits 487,376 539,133 Other receivables 8,975,979 107,686 Interbank settlements 4,892,905 - Other prepayments 334,701 644,946 Supply materials 32,095 22,835 Total other assets 14,723,056 1,314,600 Less: Provision for other receivables (10,017) (17,777) Total other assets 14,713,039 1,296,823

Prepaid employee benefits The Bank offers its employees reduced rates on mortgage loans. The Bank has arranged this benefit by providing other commercial banks with interest free funding for a period of 15-20 years. Management has concluded that the interest rate for these deposits to local commercial banks is below market interest rates, hence it was valued on the initial transaction date at MNT 776 million and is being amortised over 15 years.

Other receivables The Bank enters into deliverable and non-deliverable financial derivative contracts to hedge market risks. As at 31 December 2018, USD 3 million (MNT 7.9 billion) of other receivables relates to collateral provided for swap agreements.

Movements in the provisions for other receivables are as follows:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Opening balance 17,777 - Increase during the year 1,366 17,777 Reversal during the year (9,500) - Foreign exchange rate difference 374 Closing balance 10,017 17,777


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13. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS

Movements in the carrying amounts of the Group’s property and equipment and intangible assets are as follows:

In thousands of Mongolian Tugriks Buildings and

facilities Equipment Furniture

and fixtures Vehicles Total property and

equipment

Computer software and

license Total Cost at 1 January 2017 27,731,006 424,571 379,288 984,525 29,519,390 1,015,950 30,535,340 Accumulated depreciation/ amortization (462,183) (192,744) (97,986) (278,158) (1,031,071) (504,861) (1,535,932) Carrying amount at 1 January 2017 27,268,823 231,827 281,302 706,367 28,488,319 511,089 28,999,408 Additions - 328,538 267,028 126,025 721,591 182,551 904,142 Depreciation/ amortization charge (693,230) (172,817) (45,933) (98,100) (1,010,080) (103,663) (1,113,743) Disposals at cost - (159,331) (34,865) - (194,196) - (194,196) Accumulated depreciation of disposals - 157,169 1,712 - 158,881 - 158,881 Carrying amount at 31 December 2017 26,575,593 385,386 469,244 734,292 28,164,515 589,977 28,754,492 Cost at 31 December 2017 27,731,006 593,778 611,451 1,110,550 30,046,785 1,198,501 31,245,286 Accumulated depreciation/ amortization (1,155,413) (208,392) (142,207) (376,258) (1,882,270) (608,524) (2,490,794) Carrying amount at 31 December 2017 26,575,593 385,386 469,244 734,292 28,164,515 589,977 28,754,492 Additions - 424,543 91,662 458,213 974,418 407,662 1,382,080 Depreciation/ amortization charge (691,394) (194,753) (65,613) (123,907) (1,075,667) (164,386) (1,240,053) Disposals at cost - (42,258) - - (42,258) - (42,258) Accumulated depreciation of disposals - 42,258 - - 42,258 - 42,258 Carrying amount at 31 December 2018 25,884,199 615,176 495,293 1,068,598 28,063,266 833,253 28,896,519 Cost at 31 December 2018 27,731,006 976,063 703,113 1,568,763 30,978,945 1,606,163 32,585,108 Accumulated depreciation/ amortization (1,846,807) (360,887) (207,820) (500,165) (2,915,679) (772,910) (3,688,589) Carrying amount at 31 December 2018 25,884,199 615,176 495,293 1,068,598 28,063,266 833,253 28,896,519


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14. CUSTOMER ACCOUNTS

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Customer accounts 8,908,045 11,276,829 Total customer accounts 8,908,045 11,276,829

These customer accounts are primarily used for disbursements and repayments of the loans issued to borrowers of the Bank.

No interest is paid on these customer current accounts. As at 31 December 2018 customer current accounts consist of 56 accounts (31 December 2017: 28 accounts).

Economic sector risk concentrations within the customer accounts are as follows:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 - Power plants and utilities 5,380,830 8,364,997 - Manufacturing 2,729,450 1,507,688 - Railways 345,967 1,364,900 - Mining and quarrying 225,058 1,611 - Finance and insurance 211,847 - - Agriculture, forestry and fishing 13,015 - - Construction 993 9,124 - Transportation and storage 885 28,509 Total customer accounts 8,908,045 11,276,829

15. OTHER LIABILITIES

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Other financial liabilities Payables to acquire assets for leasing 5,900,000 - Warranty deposit 1,485,996 16,908,877 Interbank settlements 12,548 9,674 Other 1,551,538 174,578 Other non-financial liabilities 73,384 40,908 Total other liabilities 9,023,466 17,134,037

The Payables to acquire assets for leasing arise from the Group’s leasing operations and comprise payables for purchased trucks of MNT 5.9 billion in order to lease them to the Group’s leasing customers.

Warranty deposit refers to warranties where loans had been transferred to the Government of Mongolia. These deposits would be refunded to the borrower when the contractual performance under the contracts are fulfilled by them.


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16. DUE TO OTHER BANKS AND FINANCIAL INSTITUTIONS

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Short-term placements from other banks 414,587,066 556,579,954 Short-term placements from financial institutions 101,842,217 172,626,526

Total due to other banks and financial institutions 516,429,283 729,206,480

The deposits due to other banks and financial institutions consist of term deposits with maturities up to one year, and the interest expense ranges from 3% to 7% (2017: 3% to 7%)

17. BONDS Bonds comprise:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Guaranteed by the Government of Mongolia: JPY 30 million 1.52% Notes due in 2023 656,637,109 573,359,182 Unguaranteed: USD 500 million 7.25% Senior Notes due in 2023 1,316,729,401 - Bonds issued to local commercial banks 148,300,726 235,362,824 Total issued bonds 2,121,667,236 808,722,006

In October 2018, the Group issued USD 500 million 7.25% Senior Notes due in 2023, without a government guarantee for the first time. Proceeds from these five-year bonds bearing a coupon of 7.25% are being used to refinance the Group’s existing short-dated and floating debt with the objective to manage assets and liability mismatches by lowering the cost of funding and extending the maturity profile of existing indebtedness.

In January 2014, the Group issued JPY 30 million 1.52% Notes due in 2023 to the Japanese bond market. The notes are unconditionally and irrevocably guaranteed by the Government of Mongolia and Japan Bank for International Cooperation (“JBIC”) with a maturity of 10 years. In connection with the JPY 30 million Notes due in 2023, the Group paid a guarantee fee of JPY 5.7 billion to JBIC.

In 2016, the Group issued bonds of MNT 235.3 billion to local commercial banks through private placements. The bonds bear fixed interest rates with different maturities. The effective interest rate is 4%.

Bond issuance costs are amortized over the period of the notes. Please refer to Note 27 - liquidity disclosures for a breakdown of the bonds between current and non-current amounts.


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18. BORROWINGS

Borrowings comprise:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Borrowings from foreign banks and financial institutions: Guaranteed by Government of Mongolia: China Development Bank 290,141,377 332,624,731 Syndicated Loan Facility - 505,476,984 VTB Bank (632,846) (2,752,008) Unguaranteed: Vnescheconombank 118,985,798 56,360,587 International Investment Bank 91,949,167 52,530,798 Commerzbank 12,019,780 19,140,321 Cargill FSI Inc. - 140,079,480 Borrowings from Government of Mongolia Ministries 9,435,521 3,241,549 Total borrowings 521,898,797 1,106,702,442

Guaranteed by Government of Mongolia: China Development Bank. The Group entered into a loan agreement with China Development Bank in 2014 for a total amount of USD 162 million for a period of eight years to finance projects in the highway, electricity and urban infrastructure sectors in Mongolia. The loan bears a fixed interest rate of 6%.

Syndicated Loan Facility. In 2014, the Group entered into a syndicated facility agreement led by Credit Suisse AG. The investing parties of the syndicated loan include Credit Suisse AG, the Export-Import Bank of China, Sumitomo Mitsui Banking Corporation (SMBC) and The Export-Import Bank of the Republic of China. The loan facility was in the aggregate amount of USD 300 million for a period of three and five years with a floating interest rate based on a margin plus 6 month LIBOR rate for three tranches. This loan was fully prepaid in November 2018 prior to maturity.

VTB bank. The Group established a credit line facility an amount up to USD 300 million with 36 months maturity from April 2016 with JSC VTB Bank in order to counterbalance foreign currency outflows needed for financing petroleum imports from the Russian Federation. The loan bears a floating interest rate of USD Libor 3M+5.75%. Within the agreement, the Group obtained the first tranche of USD 65.4 million in June 2016 which was fully repaid in December 2016. The facility fees are amortised over the facility period of 36 months, and since there is no draw down and the facility fees expense continues to be amortised, the balance is negative.

Unguaranteed:

Vnesheconombank. The Group entered into a bilateral loan agreement with the Russian State Corporation “Bank for Development and Foreign Economic Affairs (Vnesheconombank)” in June 2015 for a total amount of USD 20 million for a period of eight years with a fixed rate of 6.04% to refinance funds used for the expansion of Combined Heat and Power Plant 4 (CHP4). In October 2017, the Group obtained its second credit facility from Vnesheconombank in an amount of USD 9.9 million with a period of five years in order to refinance the purchase of agricultural equipment. The Group entered into four further bilateral loan agreements with Vnesheconombank in October 2018, with interest rates of 6.04%, 1.05%, 5.19%, and 0.64% for periods of 8 and 5.5 years. The purpose of these loans is to refinance funds used for the expansion of Combined Heating and Power Plant No4 (CHP4) and to refinance funds used for purchasing agricultural equipment.


34

18. BORROWINGS (CONTINUED)

International Investment Bank. The Group entered into a bilateral facility agreement with the International Investment Bank in 2015 for a total amount of EUR 20 million for a period of seven years to finance projects of social and economic importance including thermal power plant expansion and construction development. The loan bears a floating interest rate of 5.5%+6M Euribor. This loan was fully repaid in November 2018 prior to maturity in order to lower the Bank’s cost of funding and its exposure to future interest risk. In February 2018, the Group acquired a second credit facility from International Investment Bank for a total amount of EUR 30 million with a duration of seven years in order to refinance projects and programs funded by the Bank.

Commerzbank. The Group entered into a bilateral agreement with Commerzbank in a total amount of EUR 13.1 million with a 5.5 years maturity period on 11 April 2014, in order to finance the construction of a housing production factory. The loan bears a floating interest rate of 1.9%. As this funding is used for issuing loans to a particular project, based on the terms of the Agreement with Commerzbank Aktiengesellschaft, it represents the principal market, see Note 4. The related loan is included in loans and advances to customers, refer to Note 11.

Cargill FSI Inc. The Group entered into a loan agreement with Cargill FSI Inc. in 2016 for the purpose of financing development projects in a total amount of USD 75 million with a maturity of two years and a fixed interest rate of 9.5% in April 2016. This loan was fully repaid in 2018.

Government of Mongolia Ministries. Under arrangements with the Ministry of Finance and Ministry of Road and Transport Development, DBM Leasing LLC entered into a MNT 11,610 million on-lending leasing agreement on 15 December 2017 to expand leasing operations to support interstate and intercity public transportation services. The loan bears a fixed interest rate of 2.25%. DBM Leasing LLC used the funds received to purchase buses for further finance leases to its customers. DBM Leasing LLC keeps the title to the assets under leasing until full repayment of the finance lease liabilities by its customers.

Loan covenants. The International Investment Bank and Vnesheconombank borrowing agreements contain various financial covenants related to the financial statements and other information of the Group. They are as follows: • Credit ratings by international credit rating agencies • Capital adequacy ratio • Liquidity ratio • Non-performing loans ratio The required threshold of the non-performing loans ratio under the borrowing agreements with International Investment Bank and Vnesheconombank was not met as at 31 December 2018. Under the borrowing agreements, based on the level of non-compliance one of the lenders may impose penalty interest at a rate of 50% of the existing interest rate, starting from the date of breaching the ratio until the date it is rectified, and the other lender may claim an event of default of the borrowing.


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18.1 RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES

The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities. Movements in external funding liabilities during the year ended 31 December 2018 are as follows:


1 January 2018

Financing cash flows Non-cash transactions

(ii) Exchange difference

Other changes (i)

31 December 2018 Inflow Outflow

Bonds 808,722,006 1,281,895,000 (100,098,241) - 111,865,000 19,283,471 2,121,667,236 Borrowings 1,106,702,442 158,207,064 (771,854,715) - 31,516,534 (2,672,528) 521,898,797

Movements in external funding liabilities during the year ended 31 December 2017 are as follows: In thousands of Mongolian Tugriks

1 January 2017

Financing cash flows Non-cash transactions

(ii) Exchange difference

Other changes (i)

31 December 2017 Inflow Outflow

Due to Government 13,225,315 68,000,000 (81,200,000) - - (25,315) - Bonds 2,254,883,385 - (770,450,000) (659,325,254) (3,952,147) (12,433,978) 808,722,006 Borrowings 1,464,860,474 31,622,014 (364,813,291) - (25,680,467) 713,712 1,106,702,442

(i) Other changes include movements in interest accrued (ii) The non-cash transactions represent amounts settled with the Government of Mongolia through exchange of

investments and other assets.

19. RELATED PARTY TRANSACTIONS Transactions with related parties are assessed in accordance with IAS 24 “Related Party Disclosures”. As discussed in Note 1, the Group is 100% owned by the Government of Mongolia and its main operation is financing of projects within Mongolia. Accordingly, the Group enters into transactions with related parties as a result of its ownership by the Government of Mongolia’s ownership. According to IAS 24 “Related Party Disclosures” other related parties of the Group comprise national companies and other organizations controlled, jointly controlled or under significant influence of the Government of Mongolia.

Given the nature of its operations, the Group has significant volume of transactions with the Government of Mongolia and other related parties, including guarantees received from the Government. Information about the operating environment of the Group is disclosed in Note 1. Management’s judgments in determining the level of loan impairment provision are disclosed in Note 4. Detailed information about related party transactions is outlined below.

Assets and Transactions with Related Parties The Group has disclosed the balances and transactions with the following related parties:

1) Government of Mongolia (which includes organizations, such as the Ministry of Finance and other Ministries, of which management is appointed by the central government);

2) Entities controlled by the Government of Mongolia, which include state organizations (i.e. corporate entities), a local commercial bank (State Bank LLC) and the Central bank and regulator, the Bank of Mongolia; these entities represent entities under common control in relation to the Group;

3) Other related party Mongolian Mortgage Corporation LLC (MIK, which is an entity over which Government of Mongolia has significant influence). The Group’s balance to MIK relates to its available-for-sale investments carried at fair value.


36

19. RELATED PARTY TRANSACTIONS (CONTINUED) An analysis of the Group’s assets and liabilities (excluding loans and advances) held by related parties and transactions with related parties is disclosed as follows:


31 December 2018

Year ended 31 December

2018 31 December

2017


2017

Statement of Financial Position

Statement of Comprehensive

Income



Income Current account with Bank of Mongolia (Note 6) 1,870,318 - 21,620,293 - Current account with State Bank (Note 6) 2,088,427 1,012,377 6,591,723 656,674 Time deposits with State bank (Note 7) 7,019,137 3,582,529 105,149,006 3,829,915 Current account with State Bank for employee benefits 850,000 37,018 850,000 33,500 Reverse repo with State Bank (Note 6) 149,729,256 6,023,722 - - Derivative with Bank of Mongolia 70,916,562 70,916,562 - - Short term investments from Government of Mongolia - - - 34,746,661 Available-for-sale investments carried at fair value (Note 9) - Government securities 63,382,078 1,785,553 - - Available-for-sale investments carried at fair value (Note 9) - MIK Holding JSC 45,458,836 9,939,305 32,206,430 1,453,450 Held-to-maturity investments carried at amortized cost (Note 10) - Bank of Mongolia’s securities 28,394,756 21,024,632 - - Customer accounts of the State organizations (Note 14) (7,394,716) - (11,117,426) - Time deposits from State Bank (Note 16) - (716,266) (34,404,800) - Bonds issued in local market to Bank of Mongolia (Note 17) (60,637,808) (2,400,000) - - Bonds issued in local market to State Bank (Note 17) (7,760,816) (308,640) (7,760,816) (308,640) Borrowings from Government Ministries (Note 18) (9,435,521) (174,561) (3,241,549) (1,549)

Liabilities and expenses are shown in brackets.


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19. RELATED PARTY TRANSACTIONS (CONTINUED) Loans and advances to Related Parties An analysis of the Group’s loans and advances to related parties is disclosed as follows. All entities listed below, except for the Ministries, represent entities under common control with the Group, as they are controlled by the Government of Mongolia.

31 December

2018


2018 31 December

2017


2017




Income



Income

To be repaid by the State budget: - - - 58,568 - The Ministries - - - 58,568 To be repaid by borrowers: 783,930,348 51,802,564 1,042,473,915 82,856,535 - State Housing Corporation SOE 277,832,323 18,948,149 285,327,207 20,754,930 - Erdenes MGL LLC 172,889,685 10,338,086 172,889,685 10,338,086 - Fourth Power Station SOSC 64,816,130 1,726,032 15,897,866 1,229,086 - State Bank 55,640,666 3,852,617 70,753,312 4,689,376 - Mongol Refinery SOCS 55,224,218 2,068,421 - - - Tavan Tolgoi Power Plant 39,911,009 2,274,532 36,652,342 2,244,511 - Agriculture Support Fund 35,178,509 1,663,429 21,386,950 537,690 - Egiin Gol Power Plant 31,313,816 2,460,539 24,457,397 1,378,306 - SME Development Fund 24,436,857 2,025,009 49,007,526 3,966,277 - MIAT Airlines JSC 22,109,957 1,460,985 24,960,997 1,808,557 - National Police Agency 1,372,061 25,465 - - - Civil Aviation Authority of Mongolia 1,112,029 49,482 - - - Ministry of Defence 732,970 22,370 - - - Ulaanbaatar City Government 460,674 12,685 - - - Independent Authority against

Corruption in Mongolia 447,244 20,066 - - - General Prosecutor’s Office of

Mongolia 229,997 8,147 - - - Eastern Energy System JSCo 222,203 10,518 269,556 359 - Erdenes Tavantolgoi JSC - 4,596,307 336,817,197 35,469,659 - Baganuur JSC - 239,725 4,053,880 433,875 - Central geological laboratory of

Mongolia - - - 5,823 Total loans and advances to related parties 783,930,348 51,802,564 1,042,473,915 82,856,535

The remuneration and employee benefits paid to the key management (i.e. executive management team and members of the Board) for the year ended 31 December 2018 and 31 December 2017 amounted to MNT 621 million and MNT 642 million, respectively.

Guarantees Received The Government of Mongolia provides guarantees for various liabilities of the Group, refer to Note 11. Borrowings of the Group of MNT 946,145,640 thousand as at 31 December 2018 (31 December 2017: MNT 1,408,708,889 thousand) including part of the bonds and facilities from international financial institutions are guaranteed by the Government of Mongolia. Please refer to Notes 17 and 18 for further details.

Loan Commitments As at 31 December 2018, the Group has MNT 212,302 million (31 December 2017: nil) of loan commitments to related parties.


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20. CAPITAL CONTRIBUTIONS The Group's capital contributions consist of contributions from the Government of Mongolia as specified in the Law on Development Bank of Mongolia. The Bank’s authorized capital is equal to its capital contributions as disclosed below:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Authorized: Capital contributions 1,216,300.341 1,216,300,341 Paid: at 1 January, 1,216,300,341 1,095,793,182 Contributions during the year - 120,507,159 Total capital contributions 1,216,300,341 1,216,300,341

In March 2017, the Group transferred Government bonds including accrued interest and other assets with an aggregate total carrying amount of MNT 1,346,543 million to the Government of Mongolia in exchange for settlement of the Group's Senior Guarantee notes in an amount of MNT 1,467,050 million by the Government of Mongolia. The excess consideration represented a contribution in the owner's capacity and hence was classified as a capital contribution.

21. INTEREST INCOME

In thousands of Mongolian Tugriks Year ended

31 December 2018 Year ended

31 December 2017 Loans and advances 193,926,834 202,127,271 Bank deposits 55,653,467 47,645,436 Held-to-maturity investments carried at amortized cost 21,024,632 - Available-for-sale investments carried at fair value 1,785,553 34,911,180 Due from Government of Mongolia - 880,541

Total interest income 272,390,486 285,564,428

22. INTEREST EXPENSE



31 December 2017 Borrowings from foreign banks and foreign institutions 62,652,624 92,134,203 Due to other banks and financial institutions 39,332,468 23,514,293 Bonds issued on the Japanese capital market 21,172,772 19,486,002 International bonds 7.25% due in 2023 18,562,887 17,184,756 Bonds issued to local commercial banks 8,640,753 9,337,016 Borrowings from Government ministries 174,561 1,549 Due to Government of Mongolia - 6,044,411

Total interest expense 150,536,065 167,702,230


39

23. FOREIGN EXCHANGE TRANSLATION LOSSES, NET The exchange differences charged/ credited to the statement of profit or loss are as follows:



31 December 2017 Realized foreign exchange translation losses, net (29,173,232) (8,220,889) Unrealized foreign exchange translation losses, net (30,692,266) (17,933,767)

Total foreign exchange net losses (59,865,498) (26,154,656)

The Group holds assets and liabilities denominated in foreign currencies which are subject to exchange rate fluctuation of the foreign currencies against the Mongolian Tugrik. The Group implements mixed strategies to mitigate these market based risks.

24. ADMINISTRATIVE AND OTHER OPERATING EXPENSES

The following is an analysis of the Group’s administrative and other operating expenses for the year from continuing operations.

In thousands of Mongolian Tugriks Note Year ended


31 December 2017

Employee costs and benefits 7,766,758 5,970,805 Professional services 2,333,411 1,221,626 Depreciation and amortization 13 1,240,053 1,113,743 Business travel and events 811,923 295,737 Advertising 735,780 586,407 Fines 658,536 - Loan collection related costs 403,470 - Communication and stationeries 290,385 234,974 Other taxes 277,415 276,261 Utilities, security and maintenance 276,055 216,248 Training costs 227,401 155,812 Rental costs 200,585 52,100 IT and software 196,426 184,816 Fuel and transportation expenses 128,663 98,177 Insurance costs 15,855 16,003 Property and equipment write off - 27 Others 56,840 275,217

Total operating expenses from continuing operations 15,619,556 10,697,953

Included in employee costs and benefits is contributions to the state pension fund of MNT 697,318 thousand for the year ended 31 December 2018 (31 December 2017: MNT 445,033 thousand).


40

25. INCOME TAX The Group provides for income taxes on the basis of profit 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 Group is 10 percent for the first MNT 3 billion of taxable profit, and 25 percent on the excess of taxable income over MNT 3 billion in accordance with Mongolian tax legislation.

Components of income tax expense charged to profit or loss for continuing operations are as follows:



31 December 2017 Current income tax expense 268,954 190,919 Deferred tax expense 14,141,616 58,012,053 Tax of prior year - 1,997,830

Income tax expense for the year

14,410,570 60,200,802

A reconciliation between the expected and the actual taxation charge is provided below:



31 December 2017 Profit before tax 18,495,612 61,211,675 Theoretical tax charge at statutory rate 4,623,903 15,302,919 Tax effect of items which are not deductible or assessable for taxation purposes: - Profit subject to lower tax rate (450,000) (450,000) - Expenses not deductible for tax purposes 1,004,419 446,731 - Income which is exempt from taxation (723,998) (8,095,367) - Income tax withheld at different tax rate - 45,574 - Current-year losses for which no deferred tax asset is recognised

9,942,105 50,953,115

- Tax under special tax rate 260,267 - - Adjustment to current tax of prior year - 1,997,830 - Effect of progressive tax rates in subsidiaries (246,126) - Income tax expense for the year 14,410,570 60,200,802

Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases.

Deferred tax assets (liabilities) are recognized for deductible or taxable timing differences resulting from the revaluation of foreign currency denominated monetary assets and liabilities, differing depreciation and amortisation rates between the tax authorities and the Group, fair value gains and losses on available-for-sale investments and derivatives, and impairment provision on performing loans (Note 4).

According to Mongolian Corporate Income Tax Law, a 10% tax rate is applied for taxable profits up to MNT 3 billion and 25% for taxable profits in excess of MNT 3 billion.

The Government of Mongolia continues to reform the business and commercial infrastructure in its transition to a market economy. As a result the laws and regulations affecting businesses continue to change rapidly.


41

25. INCOME TAX (CONTINUED) These changes are sometimes characterized by poor drafting, varying interpretations and inconsistent application by the tax authorities. In particular, taxes are subject to review and investigation by a number of authorities who are enabled by law to impose fines and penalties. While the Bank believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation and status at the period-end, the above facts may create tax risks for the Bank which are not possible to quantify at this stage.

Components of deferred tax assets and liabilities as at 31 December 2018 are as follows:

In thousands of Mongolian Tugriks 1 January 2018

Recognized in profit or loss

Charged to other comprehensive

income 31 December

2018 Deferred tax (liabilities)/ assets in relation to:

Bank deposits (78,868) (3,530,932) - (3,609,800)

Derivative financial instruments - (20,244,737) - (20,244,737)

Available-for-sale investments carried at fair value (4,043,488) (430,965) (3,313,102) (7,787,555)

Loans and advances (81,042,400) (3,220,435) - (84,262,835)

Provision for impairment on performing loans and advances 8,351,495 (414,437) - 7,937,058

Intangible assets (76,861) 170,549 - 93,688

Other assets (1,113) (468) - (1,581)

Customer accounts 723,094 (581,573) - 141,521

Other liabilities (436) 473,443 - 473,007

Due to other banks and financial institutions 951,341 6,490,225 - 7,441,566

Bonds 39,750,000 27,966,250 - 67,716,250

Borrowings 60,260,506 (35,557,472) - 24,703,034

Tax losses 33,658,390 14,738,936 - 48,397,326 Deferred tax asset 58,451,660 (14,141,616) (3,313,102) 40,996,942

Deductible temporary difference for which no deferred tax assets have been recognized shown below:



31 December 2017 Carry forward tax losses 142,250,533 102,482,113 Deferred tax asset deducted 142,250,533 102,482,113

In 2018, the Bank incurred a tax loss of MNT 96,473 million (2017: MNT 542,658 million). Management has determined that the recoverability of MNT 142,250,533 million from this total loss for 2018 is uncertain as it is not probable that future taxable profit of such amount will be available against which the Bank can use the benefits.


42

25. INCOME TAXES (CONTINUED)

Components of deferred tax assets and liabilities as at 31 December 2017 are as follows:

In thousands of Mongolian Tugriks 1 January 2017

Recognized in profit or loss

Credited to other comprehensive

income 31 December

2017 Deferred tax (liabilities)/ assets in relation to: Bank deposits (3,920,484) 3,841,616 - (78,868)

Loans and advances (126,454,848) 45,412,448 - (81,042,400)

Provision for impairment on performing loans and advances 7,704,784 646,711 - 8,351,495

Intangible assets (97,823) 20,962 - (76,861)

Other assets - (1,113) - (1,113)

Customer accounts 1,571,790 (848,696) - 723,094

Other liabilities 59,298 (59,734) - (436)

Due to other banks and financial institutions 1,695,808 (744,467) - 951,341

Bonds 153,849,253 (114,099,253) - 39,750,000

Borrowings 86,099,423 (25,838,917) - 60,260,506

Available-for-sale investments carried at fair value (5,391,843) - 1,348,355 (4,043,488)

Tax losses - 33,658,390 - 33,658,390 Deferred tax asset 115,115,358 (58,012,053) 1,348,355 58,451,660

Current and deferred tax effects relating to each component of other comprehensive income are as follows:



Before tax Deferred

tax expense Net of tax Before tax Deferred

tax benefit Net of tax

Available-for-sale investments carried at fair value: - Gains / (losses)

arising during the year 11,424,508 (3,312,102) 8,111,406 (5,393,421) 1,348,355 (4,045,066)

Other comprehensive income 11,424,508 (3,312,102) 8,111,406 (5,393,421) 1,348,355 (4,045,066)


43

26. DISCONTINUED OPERATION In 2016, the Bank established National Export Insurance LLC, which is a 100% subsidiary and the Bank made capital contributions amounting to MNT 4.96 billion. In 2017, the Board of the Bank decided to liquidate National Export Insurance LLC. As at 31 December 2018, National Export Insurance LLC has not yet been liquidated. Profit and loss from discontinued operation



31 December 2017 Administrative and other operating expenses - (1,780) Loss before tax - (1,780) Loss for the year from discontinued operation - (1,780)

Cash flow from discontinued operation



31 December 2017 Cash flows from operating activities Loss before tax - (1,780) Cash flows from operating activities before changes in operating assets and liabilities - (1,780) Net increase in other assets - 8,024 Net cash generated from operating activities before tax and interest - 6,244 Income taxes paid - (6,244) Net cash used in operating activities - - Net cash used in investing activities - - Net cash used in financing activities - - Net increase in cash and cash equivalents - - Cash and cash equivalents at the beginning of the year - - Cash and cash equivalents at the end of the year - -


44

27. FINANCIAL RISK MANAGEMENT

Introduction and overview The Bank has exposure to the following risks:

• Credit risk • Market risk • Liquidity risk

This note presents information about the Bank’s exposure to each of the above risks, its risk management policies, regulations and operations for measuring, managing and monitoring the risks. Risk management policy The Bank’s risk management policy aims to identify, analyse, mitigate and monitor the risks that Bank may face by identifying ways to manage risks and implementing an effective way of continuous improvement of risk management. Risk Management Governance The Board of Directors is responsible for approving the overall risk management policy, strategy, setting and monitoring of risk limits and prudential ratios. The risk policy and strategy, including all significant risk policies, are approved and continuously reviewed by the Board of Directors. The Executive Management of the Bank is responsible for making sure that the Bank operates within the established risk parameters set, following the risk management policies and regulations and developing effective risk management framework. The Risk Evaluation and Management Department of the Bank, along with Internal audit unit and Supervision and monitoring division of the Bank are jointly responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. Credit, market, liquidity and operational risks of portfolio and transactional levels are discussed and monitored by Credit Management Committee, Asset and Liability Management Committee, and Risk Management Committee. Along with the three committees above, Executive Management Committee is responsible for conducting the Bank's daily operations by producing proposals, opinions and recommendations to support operational decision making of Chief Executive Officer. Credit Management Committee is assigned with the responsibilities of organizing the financing of prospective projects and operations, ensuring that the Bank’s debtor-creditor relations attain set standards and principles, moderating the potential risks that may occur during financing procedures. The Credit Management Committee is also responsible for issuing professional opinions and making recommendations to the Bank’s Chief Executive Officer regarding financing decisions in accordance with the regulations approved by the Board of the Bank. Policies and procedures are set up for the management of credit exposures, including limits on portfolio concentration and review by the Bank’s Credit Management Committee, which actively monitors the Bank’s credit risk. The Credit Management Committee was established to monitor and evaluate credit risk and to review and maintain collateral guidelines for the Bank’s loan products. Additionally, the Credit Management Committee executes the Bank’s credit policy and related regulations and guidelines such as approval and completion of credit, proposes changes to credit conditions, administers the Bank’s credit agreements, and maintains an efficient credit portfolio and overall regulation in accordance with the Bank’s Charter.


45

27. FINANCIAL RISK MANAGEMENT (CONTINUED)

Asset and Liability Management Committee (‘ALCO’) is established to manage asset and liability management operations and to develop, monitor and propose amendments to the Bank’s asset and liability policies. The ALCO’s duties include managing short-term and long-term liquidity, assessing balance sheet structure with a view to maximizing net interest profit and ensuring compliance with the requirements of the Revised Law on Development Bank of Mongolia. The ALCO monitors the Bank’s liquidity gaps on a daily basis, conducts stress tests and evaluates the structure of Bank’s assets and liabilities and proposes any necessary amendments on a monthly basis. ALCO meetings must be held at least once every month as well as ten days before the end of each quarter and when required to assess Bank’s financial performance and review any audit reports prepared. Effective liquidity management is for the ALCO to be able, even under adverse conditions, to meet Bank’s contractual and regulatory financial obligations. Liquidity risk management is centralized under Bank’s ALCO and the Asset and Liability Management Department provides liquidity analysis reports in a regular basis.

Risk Management Committee is established to define measures and strategies to identify potential risks. The Risk Committee is responsible for evaluating Bank’s risk tolerance limits, operational policy and internal regulations and guidelines. Also, the Risk Management Committee regularly provides reports on implemented measures and strategy plans to settle any identified risks. The Risk Management Committee establishes opinions on following:

- Monitor/ control the Bank operating within the risk parameters/ limits, discuss new risk parameters if the parameters comply with the current policies and laws related to Law on Development Bank of Mongolia;

- Determine, review and discuss the risk parameters and prudential ratios of the Bank and it’s reports in order to reduce risks;

- Determine the risk appetite and the level of acceptance of loss which is included in the Banks business plan;

- Discuss the policies and procedures of the Bank’s risk management operation; - Define potential risks, and determine the Bank’s risk management strategies; - Evaluate and report level of the Bank’s risk management outcomes and accomplishments,

discuss about optimal risk management framework; - Establish or renew risk limits, methods and review its performance; - Discuss about independent, internal auditing and Government, Bank of Mongolia reports; - Discuss the risk level of the Bank’s products and services, risk coverage, profitability measures,

monitoring of the risk management; - Discuss financial reporting risk, IT risk, information confidentiality and information distribution

within the organization; - Discuss about banking fiscal security risks and monitor how to react to unexpected actions

influenced by other external factors; - Discuss and monitor a financial contingency plan, review the contingency plan annually; - Discuss and make decisions for other operational risks which are not accounted by any of the

existing policies and procedures such as anti-terrorism and anti- money laundering, human factor risks;

- Risk management planning and report reviewing, make proposal for future planning; - Monitor the implementation of decisions made by Risk Evaluation and Management Committee

on a quarterly basis; - Other risk management related matters.


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk Credit risk refers to the risk that emerges when lenders or any other customers are unable to fulfil their obligations to the Bank or when their collateral funds and properties fail to meet the conditions of the loan contract.

The Bank assigns the Credit Management Committee with the responsibilities of organizing the finances of prospective projects and operations, to ensure that debtor-creditor relations within the Bank attain set standards and principles, to moderate the potential risks that may occur during funding and investment procedures, and the duty of coordinating day to day loans and financial matters. The Bank also works towards certifying amendments upon its credit strategies and the guidelines of operation of both the Credit Management Committee and the allocation of loans within reported periods.

Under the law on the Development Bank of Mongolia and the internal rules set out by the Development Bank of Mongolia, the Chief Executive Officer of the Bank has the capacity to fund and authorize loans, warranties and letters of credit below the value of 0.6% of the Bank’s equity. As for instruments which exceed 0.6% of the Bank’s equity, decisions regarding the financing and warranties of these projects are made by the Board of Directors. Furthermore, the Chief Executive Officer is obliged to base his decisions regarding the funding of projects, and amendments to their finances and subsequent implementation, on the Credit Management Committee’s professional opinions and recommendations.

With the amendment of the law on the Development Bank of Mongolia in 2017 the Bank has a higher level of autonomy in making financing decisions regarding strategically high value projects, which have economic and financial importance. According to the new amendment, the Bank determines project financing activity strategy, top financeable sector and requirements for project financing.

Clause 8.2 of the law on the Development Bank of Mongolia states “Over 60% of the total financing of the Bank, which includes authorizing loans warranties and letters of credit of projects, shall be devoted to export-driven projects”. In accordance with the policies of loan management this enactment has been effective since April 2017.

“A regulation on Setting and Monitoring Prudential ratios of the Development Bank of Mongolia” issued in 2017 by the Bank of Mongolia guides the Bank in monitoring the value of its loans to substantive lenders in addition to requiring a balanced status of the warranties of lenders and their floating assets compared to loan sizes within their total funding. The risk function sets credit related policies and procedures, challenges credit risk limits and sets credit risk appetite, and monitors credit risk exposures. It performs the ongoing monitoring of the design and operation of controls, as well as providing advice and guidance.

The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. Loans are classified into the following three groups: neither past due nor impaired, past due but not impaired and impaired loans.

The Bank monitors the credit quality of loans primarily based on classification of loans according to the policy set out by the Bank of Mongolia on asset classification. In accordance with this regulation, the Bank is required to determine the quality of loans and advances based on their loan value grading factors and the quality is classified into three types as noted above, the disclosure of which is in Note 11.

For credit risk of off-balance sheet financial instruments, the Bank uses the same credit policies in assuming conditional obligations as it does for on balance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures.


47

27. FINANCIAL RISK MANAGEMENT (CONTINUED) Collateral risk The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters and the maximum loan amount shall not exceed the discounted collateral value which includes discount for market risk, time to sell and cost to sell. The loan to collateral ratio shall not exceed 100%.The main types of collateral obtained are as follows:

1. Guarantees issued from the Government, reputable insurance companies, banks and investment bank and commercial banks with the overall ratings of B2 – B3 or above;

2. Fixed assets: land, buildings, factories etc; 3. Movable properties: vehicles and equipment etc; 4. Special property rights: mineral licenses, project execution rights etc., 5. Time deposits, securities/ bond and stocks; and 6. Assets and revenues generated as a result of performance by borrowers and project contractors; 7. Others.

Under an amendment to the main responsibilities of departments made by the Chief Executive Officer of the Bank in the second half of 2018, the Risk Evaluation and Management Department started carrying out additional activities such as valuations of collaterals, requests for additional collateral in accordance with the underlying agreements, monitoring the value of collateral and securing the maintenance of documents relating to these collaterals.

Estimates of fair value of collateral are based on the fair value of collateral determined at the time of the borrowing and also updated at facility reviews. When a loan is identified as impaired, the corresponding fair value of collateral of that loan is updated by reference to market values such as recent transaction prices of properties.


48

27. FINANCIAL RISK MANAGEMENT (CONTINUED) Finance Lease Risk Financial lease risk is the risk that a lessee cannot fulfil its contractual obligations on time under the contractual terms.

The Group has developed financial leasing policies and procedures that include policies and procedures over the following:

- Procedures for reviewing and approving lease applications; - Approaches to lease assessments; - Approaches to evaluations of collateral; - Lease documentation requirements; - Ongoing monitoring of leased items and other financial exposures; - Prepayments for the leased items; - Other limitations and areas.

According to the Group’s Financial Leasing policy, the Leasing Committee has the authority to approve financing in a total amount up to 25% of the DBM Leasing LLC’s equity. Under the Financial Leasing policy, requests above 25% of DBM Leasing LLC’s equity need to be approved at DBM Leasing LLC’s shareholder’s meeting.

Leasing applications are approved through structured analysis focused on a lessee’s business prospects, its capability to repay the finance, bankability, and current financial performance. Before submission to the Leasing Committee, the Risk, Asset and Liability Management Department reviews the leasing applications and analyses engineering and treasury reports, and assesses the potential risks. The Leasing Committee makes an approval decision based on the leasing appraisal and engineering, treasury, risk and legal reports. Where deemed necessary, additional collateral is required prior to the approval.

The Leasing Committee is responsible for managing these financial leasing operations, including quality and concentration limits in the funding portfolio, the prudential ratios, and management of potential risks which may occur in the financing.

Analysis of credit risk by sector

Analysis of credit risk by sector of loans and advances outstanding at 31 December 2018 and 31 December 2017 are as follows:


49

27. FINANCIAL RISK MANAGEMENT (CONTINUED)


Neither past due, nor impaired: - Manufacturing 655,128,399 448,356,442 - Financial and insurance activities 429,058,690 574,278,763 - Construction 205,597,222 364,236,928 - Mining and quarrying - Electricity, gas, steam

188,985,204 366,460,417 137,926,276 77,434,210

- Transportation and storage 42,087,783 28,059,725 - Agriculture, forestry and fishing 40,676,512 22,634,210 - Other 38,759,313 17,720,387

Total neither past due nor impaired 1,738,219,399 1,899,181,082

Past due but not impaired: Less than 30 days overdue - Manufacturing 129,038,306 - - Construction - 139,163,327 - Financial and insurance activities - 846,567 30 to 90 days overdue - Manufacturing 86,111,557 65,159,264 - Construction 30,913,169 - - Mining and quarrying 6,850,356 4,382,429 90 to 180 days overdue: - Manufacturing 44,582,967 - - Mining and quarrying 2,402,188 - - Financial and insurance activities - 15,456,000 180 to 360 days overdue - Construction 173,593,293 167,485,006 - Mining and quarrying 22,434,228 - - Electricity, gas, steam and air conditioning supply 402,275 - - Financial and insurance activities - 39,787,218 Over 360 days overdue - Construction 277,832,323 - - Manufacturing - 109,970,737

Total past due but not impaired 774,160,662 542,250,548 Individually determined to be Impaired: Over 360 days overdue: - Manufacturing 223,676,822 192,854,943 - Financial and insurance activities 53,613,545 - Mining and quarrying 11,169,175 6,616,754

Total impaired loans 288,459,542 199,471,697

Less: Provision for loans and advances impairment (339,013,718) (213,818,164)

Total net amount of loans and advances 2,461,825,885 2,427,085,163


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) An analysis of concentrations of credit risk at the reporting date is shown on Note 11. The main prudential ratios and limitations set for the Bank as of 31 December 2018 are as follows:

1. The total loans and advances portfolio should not exceed the amount equal to 30 times the Bank’s equity.

2. The total amount of loans, guarantees, and credit equivalent assets given to the largest borrowers and its related parties should not exceed 80% of the total amount of loans, guarantees, and credit equivalent assets.

3. Under the “Regulation on estimating, providing, reporting and monitoring limits on the Bank's operation”, the Bank of Mongolia defines the largest borrowers as those with loans, other debt instruments, securities, guarantees and any other credit lines in aggregate exceeding 5% of the Bank’s net equity. The total amount of loans given to a single borrower and its related parties should not exceed 8 times the Bank’s equity.

№ Criteria Requirements 31 December 2018 31 December 2017

1 Total loan/ Equity ≤30x 2.27 2.27

2

Largest borrowers / Loans + Guarantees+ Credit equivalent assets/ ≤80% 9.2% 19.5%

3 Single borrower/ Equity ≤8x 0.24 0.48

Commitments risks

The Bank offers guarantees and letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties and with a specified conditions stated in the Contract of letter of credit, payments should repaid by the customer. The Bank regards guarantees and letters of credit as carrying same credit risk exposures as loans. In other words, when issuing guarantees or letters of credit, the Bank follows the same originating, analysing, collateral evaluation, reviewing, monitoring, and approval processes as loans.

Liquidity risk

Liquidity risk is defined by the Group as the risk that its liquid assets would be at an insufficient level to meet its obligations to its lenders.

The Group's approach to managing liquidity is to ensure, as practicable as possible, that the Group has sufficient amount of liquid assets to meet its liabilities when they are due in both normal and stressed conditions, without incurring unexpected losses or risking damage to the Group. The Group manages its liquidity in each currency and in aggregated amount as well.

The Asset and Liability Management Department (ALMD) is responsible for monitoring and controlling liquidity risk based on potential liquidity risks and liquidity risk analysis and reports on a daily basis. According to the “Regulation on Setting and Monitoring Prudential Ratios of Development Bank of Mongolia” which was issued by the Bank of Mongolia, the Bank should meet requirements on liquidity coverage ratio and net stable funding ratio, as set out below. The Bank has met all limits set by the Bank of Mongolia and the Board of the Bank.

The liquidity plan and maturity gap report is made by the Group for all major currencies as well as in aggregate amount using the cash flow approach.


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (Continued) The key measure used by the Group and the Bank for managing short term liquidity risk is the ratio of net liquid assets to total funding. For this purpose net liquid assets includes cash and cash equivalents, current accounts and deposits placed with the Bank of Mongolia and commercial banks, less clearing delays. Details of the ratio of net liquid assets to total funding at the reporting date were as follows:


Net Liquid Assets 3.5 1.5 Liquidity coverage ratio


Liquid assets: Cash on hand (Note 6) 19,133 30,470

Current accounts at Bank of Mongolia (Note 6) 1,870,318 21,620,293

Cash at other banks (Note 6) 98,950,422 137,911,458

Short term deposits with domestic banks (Note 6) 309,972,909 543,803,188

Securities (Government and Bank of Mongolia) (Note 6) 530,701,416 -

Reverse repurchase agreements (Note 6) 184,718,711 -

Bank deposits (Note 7) 262,732,336 492,697,137 Total liquid assets 1,388,965,245 1,196,062,546 Cash outflow in next 30 days:

Current accounts and demand deposits outflow 8,908,045 11,276,829

Deposits outflow 55,483,489 206,237,079

Funding repayments 3,373,206 300,822

Commitments 514,965,815 92,015,672

Other payments 1,041,532 17,894,779 Total cash outflow in next 30 days 583,772,087 327,725,181 Liquidity ratio 237.9% 365.0% Required liquidity ratio 100.0% 100.0%


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Net stable funding ratio Analysis of Net stable funding ratio outstanding at 31 December 2018 is as follows:

Indicators Weight Balance Weighted

Funding: Customer accounts 50% 8,908,045 4,454,023

Due to other banks and financial institutions 50% 516,429,283 258,214,642

Equity 100% 1,083,226,166 1,083,226,166

Bonds > 1 year 100% 2,080,030,580 2,080,030,580

Borrowings > 1 year 100% 415,085,425 415,085,425 Total funding 3,841,010,836 Funding requirements:

Cash and cash equivalents <1 year 0% 1,126,232,909 -

Bank deposits >= 1 year 0% - - Available-for-sale investments carried at fair value >= 1 year 5% 57,569,421

2,878,471

Loans and advances < 1 year 50% 1,198,890,100 599,445,050

Loans and advances >= 1 year 100% 1,262,935,785 1,262,935,785

Commitments and contingencies 5% 736,657,004 36,832,850

Assets other than previous assets 100% 616,811,667 616,811,667 Total funding requirements 2,518,903,823 Total funding/ Total funding requirements 152.5% Requirement 80.0%


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Net Stable Funding Ratio (Continued)

Analysis of Net stable funding ratio outstanding at 31 December 2017 is as follows:

Indicators Weight Balance Weighted

Funding: Customer accounts 50% 11,276,829 5,638,415

Due to other banks and financial institutions 100% 729,206,480

729,206,480

Equity 100% 1,071,029,718 1,071,029,718

Bonds > 1 year 100% 858,183,578 858,183,578

Borrowings > 1 year 100% 737,039,174 737,039,174 Total funding 3,401,097,365 Funding requirements:

Cash and cash equivalents <1 year 0% 703,365,409 -

Bank deposits >= 1 year 0% 492,697,137 -

Loans and advances < 1 year 50% 627,395,037 313,697,519

Loans and advances >= 1 year 100% 1,799,690,126 1,799,690,126

Commitments and contingencies 5% 294,767,335 14,738,367

Assets other than previous assets 100% 121,063,543 121,063,543 Total funding requirements 2,249,189,555 Total funding/ Total funding requirements 151.2% Requirement 80.0%

Contractual maturities

The table below shows the financial assets and liabilities at 31 December 2018 and 31 December 2017 by their remaining contractual maturity. The amounts of liabilities and assets disclosed in the maturity table are the contractual undiscounted cash flows, gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows. The Group places short term deposits in commercial banks and these term deposits are flexible to call back which has comparatively less liquidity risk.

With regards to market risk management, stronger emphasis has been put on managing the liquidity risk and interest rate volatility. Liquidity stress testing has been conducted on a regular basis and presented to the Asset and Liability Committee (ALCO). Movements of the interest rate spread are discussed and analysed during ALCO meetings.


54

27. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (Continued) These analyses are performed across all business units and all loans and deposit products. The following table provides an analysis of the financial assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual periods to maturity:

As at 31 December 2018

In thousands of Mongolian Tugriks Less than three

months Three to six

months Six months to one

year One year to five

years Over five years Total

Financial assets Cash and cash equivalents 1,185,961,123 - - - - 1,185,961,123 Bank deposits 66,834,585 70,536,041 137,550,648 - - 274,921,274 Derivative financial instruments 121,741 - - 80,909,630 - 81,031,371 Available-for-sale investments carried at fair value 45,458,836 - 5,483,705 47,765,033 28,749,278 127,456,852 Held-to-maturity investments carried at amortized cost - 15,011,327 15,008,087

-

- 30,019,414

Loans and advances 617,633,186 116,127,421 712,159,472 1,458,920,281 337,302,722 3,242,143,082 Total financial assets 1,916,009,471 201,674,789 870,201,912 1,587,594,944 366,052,000 4,941,533,116 Financial liabilities Customer accounts (8,908,045) - - - - (8,908,045) Derivative financial instruments (46,562) - - - - (46,562) Commitments not yet paid (43,982,735) (192,779,074) (136,562,598) (141,641,408) - (514,965,815) Due to other banks and financial institutions (415,432,483) (84,917,414) (22,411,962) - - (522,761,859) Bonds (14,050,871) (63,707,744) (55,850,560) (2,602,858,453) - (2,736,467,628) Borrowings (151,820,310) (11,554,325) (67,481,438) (345,115,677) (40,079,579) (616,051,329) Other liabilities (8,950,082) - - - - (8,950,082) Total financial liabilities (643,191,088) (352,958,557) (282,306,558) (3,089,615,538) (40,079,579) (4,408,151,320) Net financial assets/ (liabilities) 1,272,818,383 (151,283,768) 587,895,354 (1,502,020,594) 325,972,421 533,381,796 Total cumulative amount 1,272,818,383 1,121,534,615 1,709,429,969 207,409,375 533,381,796 533,381,796


55

27. FINANCIAL RISK MANAGEMENT (CONTINUED) Liquidity risk (Continued)


In thousands of Mongolian Tugriks Less than

three months Three to six

months Six months to one

year One year to

five years Over five

years Total Financial assets Cash and cash equivalents 703,365,409 - - - - 703,365,409 Bank deposits 308,308,298 138,308,701 47,777,043 - - 494,394,042 Derivative financial instruments 354,138 - - - - 354,138 Available-for-sale investment carried at fair value 32,206,430 - - - - 32,206,430 Loans and advances 467,620,142 254,263,504 466,574,122 1,907,646,005 72,328,322 3,168,432,095 Total financial assets 1,511,854,417 392,572,205 514,351,165 1,907,646,005 72,328,322 4,398,752,114 Financial liabilities Customer accounts (11,276,829) - - - - (11,276,829) Loan commitments not yet paid (92,015,672) - - - - (92,015,672) Due to other banks and financial institutions (540,845,564) (174,967,280) (20,582,062) - - (736,394,906)

Bonds (2,726,054) (6,844,781) (96,541,129) (202,465,898) (655,717,680) (964,295,542) Borrowings (154,926,140) (151,197,497) (161,851,680) (731,169,888) (9,110,835) (1,208,256,040) Other liabilities (17,093,129) - - - - (17,093,129) Total financial liabilities (818,883,388) (333,009,558) (278,974,871) (933,635,786) (664,828,515) (3,029,332,118) Net financial assets/ (liabilities) 692,971,029 59,562,647 235,376,294 974,010,219 (592,500,193) 1,369,419,996 Total cumulative amount 692,971,029 752,533,676 987,909,970 1,961,920,189 1,369,419,996 1,369,419,996


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risks Market risk is that the risks that arise from market price volatility, such as interest rate and foreign exchange rates which affect the Group's income or the value of its holdings of financial instruments or takes the negative distress. The aim of the Group’s market risk management is to manage and control market risk exposures within acceptable levels, while optimizing the returns on risk. Management of interest rate risk: 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 of interest income will increase or decrease as a result of movements in interest rates. The Group manages the interest rate risk through monitoring interest rate gaps. Financial assets and financial liabilities presented as insensitive to interest rate mostly relate to accrued interest and interest receivable and payable on interest bearing assets and liabilities. For the purposes of financial risk management, the Group separately monitors amounts of assets and liabilities (i.e. amounts which generate interest at nominal contractual interest rates), and accrued interest and interest receivables and payables separately, which do not generate interest, based on nominal contractual interest rates.


57

27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risks (Continued) A summary of the Group's interest rate gap position on its financial assets and liabilities are as follows:


In thousands of Mongolian Tugriks Non-interest

sensitive Less than three

months Three to six

months Six months to

one year One year to five

years Over five years Total Financial assets Cash and cash equivalents 101,172,883 1,025,060,026 - - - - 1,126,232,909 Bank deposits 3,231,204 65,147,775 69,024,557 125,328,800 - - 262,732,336 Derivative financial instruments - 121,741 - - 80,909,630 - 81,031,371 Available-for-sale investments carried at fair value 46,461,045 - - 4,810,448 37,728,160

19,841,261

108,840,914

Held-to-maturity investments carried at amortized cost - - 14,229,301 14,165,455 - -

28,394,756

Loans and advances 203,799,525 535,991,242 146,427,494 312,671,839 959,478,949 303,456,836 2,461,825,885 Total financial assets 354,664,657 1,626,320,784 229,681,352 456,976,542 1,078,116,739 323,298,097 4,069,058,171 Financial liabilities Customer accounts (8,908,045) - - - - - (8,908,045) Derivative financial instruments - (46,562) - - - - (46,562) Other liabilities (8,950,082) - - - - - (8,950,082) Due to other banks and financial institutions (5,609,712) (407,217,107) (82,459,104) (21,143,360) - - (516,429,283) Bonds (20,171,656) (11,320,000) (10,145,000) - (2,080,030,580) - (2,121,667,236) Borrowings (5,425,825) (131,001,992) (8,639,121) (52,605,934) (287,527,730) (36,698,195) (521,898,797)

Total financial liabilities (49,065,320) (549,585,661) (101,243,225) (73,749,294) (2,367,558,310) (36,698,195) (3,177,900,005) Net financial assets/ (liabilities) 305,599,337 1,076,735,123 128,438,127 383,227,248 (1,289,441,571) 286,599,902 891,158,166 Total cumulative amount 305,599,337 1,382,334,460 1,510,772,587 1,893,999,835 604,558,264 891,158,166 891,158,166


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risks (Continued)


In thousands of Mongolian Tugriks Non-interest

sensitive Less than

three months Three to six

months Six months to one year

One to five years

Over five years Total

Financial assets Cash and cash equivalents 23,899,753 679,465,656 - - - - 703,365,409 Bank deposits 19,573,448 308,670,763 119,239,926 45,213,000 - - 492,697,137 Derivative financial instruments - 354,138 - - - - 354,138 Available-for-sale investment carried at fair value 32,206,430 - - - - - 32,206,430 Loans and advances 4,755,069 204,795,743 131,835,157 286,009,068 1,629,791,934 169,898,192 2,427,085,163 Total financial assets 80,434,700 1,193,286,300 251,075,083 331,222,068 1,629,791,934 169,898,192 3,655,708,277 Financial liabilities Customer accounts (11,276,829) - - - - - (11,276,829) Other financial liabilities (17,093,129) - - - - - (17,093,129) Due to other banks and financial institutions (16,586,549) (525,730,921) (167,471,970) (19,417,040) - - (729,206,480) Bonds (2,152,618) - - (98,280,388) (135,145,000) (573,144,000) (808,722,006) Borrowings (11,927,577) (129,783,140) (143,403,709) (136,657,743) (673,852,051) (11,078,222) (1,106,702,442) Total financial liabilities (59,036,702) (655,514,061) (310,875,679) (254,355,171) (808,997,051) (584,222,222) (2,673,000,886) Net financial assets/ (liabilities) 21,397,998 537,772,239 (59,800,596) 76,866,897 820,794,883 (414,324,030) 982,707,391 Total cumulative amount 21,397,998 559,170,237 499,369,641 576,236,538 1,397,031,421 982,707,391 982,707,391


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risks (Continued) The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group's financial assets and liabilities to various standard and non-standard interest rate scenarios. If interest rates had been 100.0 basis points higher or lower, which represents management's assessment of the reasonably possible change in interest rates and all other variables were held constant, the Group’s profit or loss before tax would have resulted as follows:

Sensitivity of projected net interest income 100 bp increase 100 bp decrease At 31 December 2018 5,855,588 (5,855,588) At 31 December 2017 9,613,094 (9,613,094)

Foreign currency exchange rate risk: The Group is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Asset and Liability Management Department is responsible for monitoring the Group’s exchange risk and minimising its exposure. The Group assesses the impact of foreign currency exchange rate fluctuations on the Group’s liquidity and profitability. Based on the impact assessment, appropriate measures are taken to effectively mitigate the foreign currency exchange rate risk. The Bank has entered into several SWAP agreements as at the 31 December 2018.

In accordance with the Regulation on Setting and Monitoring Prudential Ratios to Development Bank of Mongolia, in September 2017, the Board of Directors of the Bank has set the limit on both a single foreign currency to total capital, and total foreign currency open positions to total capital, at 50 percent.

Market price risk: 1% of the assets is invested in equity shares and classified under available for sale investments. Any increase / decrease in the price of the equity shares will have direct impact on the profitability of the Group, however the management of the Bank does not consider the impact is material. Hence no sensitivity analysis is presented.

The table below summarizes the Group’s exposure to foreign currency exchange rate risk at 31 December 2018:


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (Continued)


As at 31 December 2018 MNT USD EUR JPY CNY RUB Total

Assets Cash and cash equivalents 1,011,741,442 82,790,994 961,605 30,736,905 1,954 9 1,126,232,909 Bank deposits 87,754,225 523,930 - 174,454,181 - - 262,732,336 Derivative financial instruments - 81,031,371 - - - - 81,031,371 Available-for-sale investments carried at fair value 50,396,210 58,444,704 - - - - 108,840,914 Held-to-maturity investments carried at amortized cost 28,394,756 - - - - - 28,394,756 Loans and advances 917,153,884 1,139,070,870 198,838,339 206,762,792 - - 2,461,825,885 Other assets 71,614 13,701,889 92,296 3,085 - - 13,868,884 Derivative commitments - 740,017,600 - 113,575,669 - - 853,593,269 Total monetary financial assets 2,095,512,131 2,115,581,358 199,892,240 525,532,632 1,954 9 4,936,520,324 Liabilities Customer accounts (1,385,147) (7,329,691) (11,539) (181,474) (194) - (8,908,045) Derivative financial instruments - (46,562) - - - - (46,562) Other liabilities (8,605,803) (271,721) (72,558) - - - (8,950,082) Due to other banks and financial institutions - (485,949,555) (30,479,728) - - - (516,429,283) Bonds (86,498,566) (1,316,729,401) - (718,439,269) - - (2,121,667,236) Borrowings (6,990,464) (347,627,753) (167,280,580) - - - (521,898,797) Derivative commitments - (169,156,018) - - - - (169,156,018) Total monetary financial liabilities (103,479,980) (2,327,110,701) (197,844,405) (718,620,743) (194) - (3,347,056,023)

Net balance sheet position 1,992,032,151 (211,529,343) 2,047,835 (193,088,111) 1,760 9 1,589,464,301 Net position ratio - - - - - - 37.4%


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) Market risk (Continued)

In thousands of Mongolian Tugriks As at 31 December 2017

MNT USD EUR JPY CNY RUB Total

Assets Cash and cash equivalents 464,911,207 94,497,491 15,441,009 128,513,783 1,910 9 703,365,409 Bank deposit 264,808,500 608,234 11,844,746 215,435,657 - - 492,697,137 Derivative financial instruments - 354,138 - - - - 354,138 Other assets 66,197 - 41,489 - - - 107,686

Loans and advances 756,474,863 1,524,470,459 44,570,583 101,569,258 - - 2,427,085,163

Available-for-sale investments carried at fair value 32,206,430 - - - - - 32,206,430 Total monetary financial assets 1,518,467,197 1,619,930,322 71,897,827 445,518,698 1,910 9 3,655,815,963

Liabilities Customer accounts (46,824) (11,199,106) (89) (30,624) (186) - (11,276,829) Other financial liabilities (17,074,848) (18,281) - - - - (17,093,129) Due to other banks and financial institutions - (729,206,480) - - - - (729,206,480) Bonds (162,606,824) - - (646,115,182) - - (808,722,006) Borrowings 5,450,428 (1,040,119,142) (72,033,728) - - - (1,106,702,442)

Total monetary financial liabilities (174,278,068) (1,780,543,009) (72,033,817) (646,145,806) (186) - (2,673,000,886)

Net balance sheet position 1,344,189,129 (160,612,687) (135,990) (200,627,108) 1,724 9 982,815,077 Net position ratio - - - - - - 33.7%


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27. FINANCIAL RISK MANAGEMENT (CONTINUED) The following table presents sensitivities of profit or loss to reasonably possible changes in currency exchange rates applied at the end of the reporting period to the functional currency of the Group, with all other variables held constant.

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 US Dollar strengthening by 15% (2017:15%) (23,797,051) (18,068,927) US Dollar weakening by 15% (2017:15%) 23,797,051 18,068,927 Euro strengthening by 15% (2017:15%) 230,381 (15,299) Euro weakening by 15% (2017:15%) (230,381) 15,299 Yen strengthening by 10% (2017:10%) (14,481,608) (15,047,033) Yen weakening by 10% (2017:10%) 14,481,608 15,047,033 CNY strengthening by 10% (2017:10%) 132 129 CNY weakening by 10% (2017:10%) (132) (129) RUB strengthening by 10% (2017:10%) 1 1 RUB weakening by 10% (2017:10%) (1) (1)

Capital Management Consistent with the Law on Development Bank of Mongolia, the Bank of Mongolia has approved the “Regulation on Setting and Monitoring Prudential ratios to Development Bank of Mongolia”, which sets requirements for the capital adequacy ratio. The Bank meets the capital adequacy requirement set out in this law. The method of capital adequacy ratio calculation is modified from the Basel regulatory frameworks in order to accommodate features of the domestic market.


63

27. FINANCIAL RISK MANAGEMENT (CONTINUED) The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the Group. The impact of the level of capital on shareholders’ return is also considered and the Group recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The ratios of the Group’s capital adequacy were as follows:

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Tier I capital: Share capital 1,216,300,341 1,216,300,341 Accumulated loss (153,316,045) (157,401,087) Available-for-sale investments carried at fair value-MIK

Holding JSC (34,094,127) (24,154,823) Total tier I capital 1,028,890,169 1,034,744,431 Tier II capital:

Fair value reserve for investment securities available-for-sale 20,241,870 12,130,464

Available-for-sale investments carried at fair value (11,364,709) (8,051,607)

Total tier II capital 8,877,161 4,078,857

Total regulatory capital/ Capital base 1,037,767,330 1,038,823,288 Risk weighted capital ratio 32.0% 33.6%


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28. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY The Group weights all assets at 0% if the counterparty is the Government. The following table provides a reconciliation of financial assets with measurement categories at 31 December 2018:


Held-to-maturity financial

assets

Available for sale financial

assets

Financial assets at fair

value through profit or loss

Loans and advances Total

Financial assets: Cash and cash equivalents - - - 1,126,232,909 1,126,232,909

Bank deposits - - - 262,732,336 262,732,336

Derivative financial instruments - - 81,031,371 - 81,031,371 Available-for-sale investments carried at fair value - 108,840,914 - - 108,840,914 Held-to-maturity investments carried at amortized cost 28,394,756 - - - 28,394,756 Loans and advances - - - 2,461,825,885 2,461,825,885 Total financial assets 28,394,756 108,840,914 81,031,371 3,850,791,130 4,069,058,171

All of the Group’s financial liabilities except for its derivatives were carried at amortized cost as at 31 December 2018.

The following table provides a reconciliation of financial assets with measurement categories at 31 December 2017:


Available for sale financial

assets

Financial assets at fair value

through profit or loss

Loans and advances Total

Financial assets: Cash and cash equivalents - - 703,365,409 703,365,409 Bank deposits - - 492,697,137 492,697,137 Derivatives financial instruments - 354,138 - 354,138 Loans and advances to customer: - - 2,427,085,163 2,427,085,163 Available-for-sale investments carried at fair value 32,206,430 - - 32,206,430 Total financial assets 32,206,430 354,138 3,623,147,709 3,655,708,277


65

29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value and fair value hierarchy Fair value measurements are analysed by level in the fair value hierarchy as follows:

(i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities,

(ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and

(iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorizing financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety.

The Group's financial instruments comprise cash on hand and in bank, deposits, loans and advances, borrowings (including promissory notes) and other liabilities at amortised cost. The management considers that the carrying amounts of financial assets and liabilities recognized in the financial statements approximate their fair value except for the Group’s bonds carried at amortised cost detailed below.

a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. The level in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows:

31 December 2018 31 December 2017 In thousands of Mongolian Tugriks Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Assets at fair value Financial assets Derivative financial instruments - - 81,031,371 81,031,371 - 354,138 - 354,138 Available-for-sale investments carried at fair value 108,840,914 - - 108,840,914 32,206,430 - - 32,206,430

Total assets recurring fair value measurements 108,840,914 - 81,031,371 189,872,285 32,206,430 354,138 - 32,560,568


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29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) b) Assets and liabilities not measured at fair value but for which fair value is disclosed

The Group carries its available-for-sale investments and derivative financial instruments at fair values. All other assets and liabilities are carried at amortized cost. The Group determines fair values for those financial instruments carried at amortized cost as follows:

(i) Financial assets and liabilities for which fair value approximates carrying amount For financial assets and financial liabilities that are liquid or have short term maturity of less than one year, carrying amounts approximate their respective fair value.

(ii) Fixed rate financial instruments

The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Thus, market interest rates when they were first recognized are compared to the current market rates offered for the comparable financial instruments available in Mongolia. In case there were no significant changes in market rates, carrying amounts approximate fair value of the instrument.

The Group’s long term bonds mainly comprise the JPY 30 billion 1.52% Notes due in 2023 and USD 500 million Senior Notes due in 2023. These bond prices are taken from the OTC prices as at 31 December 2018. Fair values of other borrowings approximate their carrying values as at 31 December 2018, as there were no substantial changes in interest rates since inception and/or related liabilities (as in the case of issued promissory notes) represent principal market and thus their interest rates are not sensitive to the overall changes of interest rates in the Mongolian banking sector. Related loans financed from these borrowings and issued promissory notes represent principal market and their fair values (included in loans and advances) approximate carrying values as of 31 December 2018, as there were no substantial changes in interest rates since inception and/or related interest rates are not sensitive to the overall changes of interest rates in the Mongolian banking sector.


67

29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Fair values of financial instruments as at 31 December 2018 carried at amortized cost are as follows. This does not include the fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value:

In thousands of Mongolian Tugriks Carrying Amount Fair Value Liabilities: Bonds 2,121,667,236 2,132,672,348 Borrowings 521,898,797 518,611,113

Fair values of financial instruments as at 31 December 2017 carried at amortized cost are as follows:

30. COMMITMENTS AND CONTINGENCIES

In thousands of Mongolian Tugriks 31 December 2018 31 December 2017 Guarantees issued 221,691,189 202,751,663 Undrawn loan commitments 514,965,815 92,015,672 Total commitments and contingencies 736,657,004 294,767,335

The Group’s management believes that fair value of guarantees and loan commitments not yet paid is not material as of 31 December 2018 and 31 December 2017.

Guarantees issued The Bank has provided a guarantee to the Export-Import Bank of China on behalf of “New Yarmag Housing Projects LLC” equal to USD 84.0 million (equivalent to MNT 221.7 billion) in September 2012. To date, the Export-Import Bank of China has not yet provided any financing.

Contingencies Management believes that its interpretation of the relevant legislation is appropriate and the Group’s positions related to tax and other legislation will be sustained. Management believes that tax and legal risks are remote at present. The management performs regular re-assessment of tax risks and its position may change in the future as a result of the change in conditions that cannot be anticipated with sufficient certainty at present. As of 31 December 2018, management has assessed that recognition of a provision for uncertain tax positions is not necessary.

In thousands of Mongolian Tugriks Carrying Amount Fair Value Liabilities: Bonds 808,722,006 910,580,225 Borrowings 1,106,702,442 1,118,622,744


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30. COMMITMENTS AND CONTINGENCIES (CONTINUED) Finance leases Reconciliation between the total gross investment for financial lease receivables at the reporting date and the present value of minimum lease payments is as follows:

In thousands of Mongolian Tugriks Year ended 31 December 2018

Year ended 31 December 2017

Gross investment for financial lease receivables Less than one year 13,961,656 6,949,117 Between one and five years 68,753,986 34,220,834

82,715,642 41,169,951 Interest (14,939,385) (7,610,854) Present value of minimum lease payments receivables

67,776,257

33,559,097 Present value of minimum lease payments receivables

Less than one year 11,440,022 521,280 Between one and five years 56,336,235 33,037,817 Total present value of minimum lease payments 67,776,257 33,559,097


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31. SEGMENT REPORTING The Group is a development finance institution dedicated to the economic and social progress of Mongolia. The Group’s products and services are similar and are structured and distributed in a largely uniform manner across borrowers. Based on the evaluation of the Group’s operations, management has determined that the Group has only one reportable segment since the Group does not manage its operations by allocating resources based on a determination of the contribution to net income from individual borrowers. The Group’s revenue is received solely from entities in Mongolia. All non-current assets of the Group are located within Mongolia.

A split of the Group’s revenue by products/ services is shown below:



31 December 2017

Interest income on loans from: 193,926,834 202,127,271 - State budget - 58,568 - Corporates 193,926,834 202,068,703 Interest income from commercial banks: 55,653,467 47,645,436 - Deposits 51,778,681 46,053,999 - Current accounts 3,874,786 1,591,437 Interest income from short term investments: 22,810,185 34,911,180 - State budget 1,785,553 34,911,180 - Bank of Mongolia 21,024,632 - Grant income paid by: - 880,541 - State budget - 880,541 Gain less losses from trading in foreign currency: (103,319) (514,553) - With Government of Mongolia, commercial banks

and corporates (103,319) (514,553) Gains from derivative financial instruments: 80,978,948 354,138 - Bank of Mongolia 70,916,561 354,138 - Domestic banks 69,318 - - Foreign financial institutions 9,993,069 -

Total income generated from the Government and Government controlled entities amounts to MNT 79,120 million in the year ended 31 December 2018 (year ended 31 December 2017: 74,953 million).

32. SUBSEQUENT EVENTS On 8 April 2019, the Bank of Mongolia announced the start of liquidation proceedings of Capital Bank LLC, one of the borrowers from the Group. As a result of this subsequent event, the Group has recognised a loan impairment provision against the full value of loan and interest receivable from Capital Bank LLC in an amount of MNT 53,613 million as at 31 December 2018 (31 December 2017: loan impairment provision MNT 5,524 million). 33. TRANSLATION INTO MONGOLIAN LANGUAGE These consolidated financial statements have been prepared in both English and Mongolian. In case of differences between the versions, the report in English will prevail.

Documents

Development Bank of Mongolia LLC - Amazon S3 · 2019-04-30 · Development Bank of Mongolia Consolidated Statement of Financial Position As at 31 December 2018 The accompanying notes