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INFORMATION MEMORANDUM

STRICTLY CONFIDENTIAL

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC


(incorporated with limited liability in Mongolia)

US$700,000,000 EURO MEDIUM TERM NOTE PROGRAMME


Under this US$700,000,000 Euro Medium Term Note Programme (the Programme), Trade and Development Bank of
Mongolia LLC (the Bank or the Issuer) may from time to time issue notes (the Notes, which shall include Senior
Notes and Subordinated Notes (each as defined herein)) denominated in any currency agreed between the Bank and the
relevant Dealer (as defined in Subscription and Sale).
Notes may be issued in bearer or registered form (respectively, Bearer Notes and Registered Notes). The maximum
aggregate nominal amount of all Notes from time to time outstanding under the Programme will not exceed
US$700,000,000 (or its equivalent in other currencies calculated as described in the Programme Agreement described
herein), subject to increase as described herein.
The Notes may be issued on a continuing basis to one or more of the Dealers. References in this Information
Memorandum to the relevant Dealer shall, in the case of an issue of Notes being (or intended to be) subscribed for by
more than one Dealer, be to all Dealers agreeing to subscribe for such Notes.
An investment in Notes issued under the Programme involves certain risks. For a discussion of these risks, see
Risk Factors on page 10.
Approval in-principle has been granted for the listing and quotation of Notes that may be issued pursuant to the
Programme and which are agreed at or prior to the time of issue thereof to be so listed on the Singapore Exchange
Securities Trading Limited (the SGX-ST). Permission to list such Notes will be granted when the Notes have been
admitted to the Official List of the SGX-ST. The SGX-ST assumes no responsibility for the correctness of any of the
statements made or opinions expressed or reports contained herein. Admission to the Official List of the SGX-ST and
quotation of any Notes on the SGX-ST should not be taken as an indication of the merits of the Bank, the Programme
or the Notes. Details of the aggregate nominal amount of Notes, interest (if any) payable in respect of such Notes, the
issue price of such Notes and any other terms and conditions not contained herein which are applicable to each Tranche
(as defined under Terms and Conditions of the Notes) of Notes will be set out in a pricing supplement (the Pricing
Supplement) which, with respect to Notes to be listed on the SGX-ST, will be delivered to the SGX-ST on or before
the date of issue of the Notes of such Tranche.
The Programme provides that Notes may be listed and/or admitted to trading, as the case may be, on or by such other
or further stock exchanges, markets and/or competent listing authorities as may be agreed between the Bank and the
relevant Dealer. The Bank may also issue unlisted Notes and/or Notes which are not admitted to trading on any market.
The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended, (the
Securities Act) or any U.S. state securities laws and, unless so registered, may not be offered, sold or delivered within
the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities
Act (Regulation S)), except pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable U.S. state securities laws.
The Bank may agree with any Dealer and the Trustee (as defined herein) that Notes may be issued in a form not
contemplated by the Terms and Conditions of the Notes set out herein, in which event a supplemental Information
Memorandum, if appropriate, will be made available which will describe the effect of such agreement reached in relation
to such Notes.

Joint Programme Arrangers and Dealers


(in alphabetical order)

Co-Manager

16 April 2012

TABLE OF CONTENTS
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of the Programme. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Incorporated by Reference . . . . . . . . . . . . . . . . . . . .
Terms and Conditions of the Notes . . . . . . . . . . . . . . . . . . . . . .
Pro Forma Pricing Supplement. . . . . . . . . . . . . . . . . . . . . . . . . .
Form of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Rates and Exchange Controls . . . . . . . . . . . . . . . . . . .
Capitalisation and Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . .
The Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mongolian Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mongolian Banking Industry . . . . . . . . . . . . . . . . . . . . . . . .
Regulation and Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subscription and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .

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1
5
10
34
35
65
76
79
80
81
82
84
121
125
127
132
136
142
143
149
F-1

The Bank accepts responsibility for the information contained in this Information Memorandum. To the
best of the knowledge and belief of the Bank (having taken all reasonable care to ensure that such is the
case), the information contained in this Information Memorandum is in accordance with the facts and does
not omit anything likely to affect the import of such information. This Information Memorandum should
be read in conjunction with all information deemed to be incorporated herein by reference. See
Information Incorporated by Reference.
The Bank is responsible for the information in the Information Memorandum and the Joint Programme
Arrangers are not responsible for the truth, accuracy or completeness of the information set forth herein.
Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility
or liability is accepted by the Dealers or the Trustee as to the accuracy or completeness of the information
contained or incorporated by reference in this Information Memorandum or any other information provided
by the Bank in connection with the Programme. Neither any Dealer nor the Trustee accepts any liability
in relation to the information contained or incorporated by reference in this Information Memorandum or
any other information provided by the Bank in connection with the Programme.
No person is or has been authorised by the Bank or the Trustee to give any information or to make any
representation not contained in or not consistent with this Information Memorandum or any other
information supplied in connection with the Programme or the Notes and, if given or made, such
information or representation must not be relied upon as having been authorised by the Bank, any of the
Dealers or the Trustee.
Neither this Information Memorandum nor any other information supplied in connection with the
Programme or any Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should
be considered as a recommendation by the Bank, any of the Dealers or the Trustee that any recipient of
this Information Memorandum or any other information supplied in connection with the Programme or any
Notes should purchase any Notes. Each investor contemplating purchasing any Notes should make its own
independent investigation of the financial condition and affairs, and its own appraisal of the
creditworthiness, of the Bank. Neither this Information Memorandum nor any other information supplied
in connection with the Programme or the issue of any Notes constitutes an offer or invitation by or on
behalf of the Bank, any of the Dealers or the Trustee to any person to subscribe for or to purchase any
Notes in any jurisdiction where such offer would be unlawful.

Neither the delivery of this Information Memorandum nor the offering, sale or delivery of any Notes shall
in any circumstances imply that the information contained herein concerning the Bank is correct at any
time subsequent to the date hereof or that any other information supplied in connection with the
Programme is correct as at any time subsequent to the date indicated in the document containing the same.
The Dealers and the Trustee expressly do not undertake to review the financial condition or affairs of the
Bank during the life of the Programme or to advise any investor in the Notes of any information coming
to their attention.
The SGX-ST takes no responsibility for the contents of this Information Memorandum, makes no
representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any
loss howsoever arising from or in reliance upon the whole or any part of the contents of this Information
Memorandum.
The Notes have not been, and will not be, registered under the Securities Act or any U.S. state securities
laws and, unless so registered, may not be offered, sold or delivered within the United States or to, or for
the account or benefit of, U.S. persons (as defined in Regulation S) except pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the Securities Act and applicable U.S.
state securities laws. Each purchaser of the Notes in making its purchase will be required to make or will
be deemed to have made certain acknowledgements, representations and agreements. For a description of
these and certain further restrictions on offers, sales and transfers of the Notes and the distribution of this
Information Memorandum, see Subscription and Sale.
This document is for distribution only to persons who (i) are outside the United Kingdom, (ii) have
professional experience in matters relating to investments, (iii) are persons falling within Article 49(2)(a)
to (d) (high net-worth companies, unincorporated associations etc) of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2005 (as amended), or (iv) are persons to whom an invitation or
inducement to engage in investment activity (within the meaning of section 21 of the Financial Services
and Markets Act 2000 (FSMA) in connection with the issue or sale of any Notes may otherwise lawfully
be communicated or caused to be communicated (all such persons together being referred to as relevant
persons). This document is directed only at relevant persons and must not be acted on or relied on by
persons who are not relevant persons. Any investment or investment activity to which this document relates
is available only to relevant persons and will be engaged in only with relevant persons.
This Information Memorandum does not constitute an offer to sell or the solicitation of an offer to
subscribe for or purchase any Notes in any jurisdiction in which it is unlawful to make an offer or
solicitation to subscribe for or purchase any Notes. The distribution of this Information Memorandum and
the offer or sale of Notes may be restricted by law in certain jurisdictions. None of the Bank, any Dealer
and/or the Trustee represent that this Information Memorandum may be lawfully distributed, or that any
Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any
such jurisdiction, or pursuant to an exemption available thereunder, or assumes any responsibility for
facilitating any such distribution or offering. In particular, no action has been taken by the Bank, any of
the Dealers or the Trustee which would permit a public offering of any Notes or distribution of this
Information Memorandum in any jurisdiction where action for that purpose is required. Accordingly, no
Notes may be offered or sold, directly or indirectly, and neither this Information Memorandum nor any
advertisement or other offering material may be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with any applicable laws and regulations. Persons into whose
possession this Information Memorandum or any Notes may come must inform themselves about, and
observe, any such restrictions on the distribution of this Information Memorandum and the offering and
sale of Notes.
In particular, there are restrictions on the distribution of this Information Memorandum and the offer or
sale of Notes in the United States, the European Economic Area, the United Kingdom, the Russian
Federation, the Hong Kong Special Administrative Region of the Peoples Republic of China (Hong
Kong), the Republic of Singapore (Singapore), Japan, the Republic of Korea (Korea), Mongolia, the
Peoples Republic of China (the PRC), the Republic of the Philippines (the Philippines) and the
Republic of China (Taiwan).

ii

IN CONNECTION WITH THE ISSUE OF ANY TRANCHE OF NOTES, THE DEALER OR


DEALERS (IF ANY) NAMED AS THE STABILISING MANAGER(S) (OR PERSONS ACTING ON
BEHALF OF ANY STABILISING MANAGER(S)) IN THE APPLICABLE PRICING SUPPLEMENT
(THE STABILISING MANAGER) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS
WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER
THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THE BANK CANNOT
ASSURE PROSPECTIVE PURCHASERS THAT THE STABILISING MANAGER(S) (OR
PERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) WILL UNDERTAKE
ANY STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER
THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER
OF THE RELEVANT TRANCHE OF NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY
TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE
DATE OF THE RELEVANT TRANCHE OF NOTES AND 60 DAYS AFTER THE DATE OF THE
ALLOTMENT OF THE RELEVANT TRANCHE OF NOTES. ANY STABILISATION ACTION OR
OVER-ALLOTMENT SHALL BE CONDUCTED BY THE STABILISING MANAGER (OR
PERSONS ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) IN ACCORDANCE
WITH ALL APPLICABLE LAWS AND RULES.
FORWARD-LOOKING STATEMENTS
Certain statements in this Information Memorandum constitute forward-looking statements, including
statements regarding the Banks expectations and projections for future operating performance and
business prospects. The words believe, expect, anticipate, estimate, project, will, aim, will
likely result, will continue, intend, plan, contemplate, seek to, future, objective, goal,
should, will pursue and similar expressions or variations of these expressions identify forward-looking
statements. In addition, all statements other than statements of historical facts included in this Information
Memorandum, including, without limitation, those regarding the Banks financial position and results,
business strategy, plans and objectives of management for future operations, including development plans
and objectives relating to the Banks products and services, are forward-looking statements.
Such forward-looking statements and any other projections contained in this Information Memorandum
(whether made by the Bank or any third party) involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by forward-looking statements. Such
forward-looking statements are based on current beliefs, assumptions, expectations, estimates and
projections regarding the Banks present and future business strategies and the environment in which the
Bank will operate in the future. Among the important factors that could cause some or all of those
assumptions not to occur or cause the Banks actual results, performance or achievements to differ
materially from those in the forward-looking statements include, among other things, the Banks ability to
successfully implement its business strategy, the condition of and changes in the Mongolian, Asian or
global economies, future levels of non-performing loans, the Banks growth and expansion, including
whether the Bank succeeds in its business strategy, changes in interest rates and changes in government
regulation and licensing of its businesses in Mongolia and in other jurisdictions where the Bank may
operate, and competition in the banking and financial services industry. Additional factors that could cause
the Banks actual results, performance or achievements to differ materially include, but are not limited to,
those discussed under Risk Factors.
Any forward-looking statements contained in this Information Memorandum speak only as at the date of
this Information Memorandum. Each of the Bank, the Dealers and the Trustee expressly disclaims any
obligation or undertaking to release, publicly or otherwise, any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Banks expectations with regard thereto or any
change in events, conditions, assumptions or circumstances on which any such statement was based.

iii

CERTAIN DEFINED TERMS AND CONVENTIONS


Unless the context otherwise requires, all references in this document to the Bank and the Issuer refer
to Trade and Development Bank of Mongolia LLC. Unless the context otherwise requires, references to
a particular year are to the Banks financial year ended 31 December of such year.
All references in this document to U.S. dollars and US$ refer to United States dollars, the lawful
currency of the United States of America; MNT, Togrogs and Tugriks refer to Mongolian togrogs,
the lawful currency of Mongolia; Sterling and refer to pounds Sterling, the lawful currency of the
United Kingdom; S$ refers to Singapore dollars, the lawful currency of Singapore; and euro and =C
refer to the currency introduced at the start of the third stage of European economic and monetary union
pursuant to the Treaty establishing the European Community, as amended.
References in this document to Government are to the government of Mongolia. References in this
document to IFRS are to International Financial Reporting Standards.
For convenience only, certain MNT amounts in this Information Memorandum have been translated into
U.S. dollars. Unless otherwise specified, all such conversions were made at the exchange rates based on
Bloombergs official rate between Tugriks and U.S. dollars (the Market Average Exchange Rate) in
effect on 31 December 2011 which was MNT 1,394.50 = US$1.00. Other Tugrik amounts in this
Information Memorandum where translated into U.S. dollars have been converted at the applicable rates
specified. No representation is made that the Tugrik or U.S. dollar amounts referred to herein could have
been or could be converted into U.S. dollars or Tugriks, as the case may be, at any particular rate, or at
all. The Market Average Exchange Rate on 16 April 2012 was MNT 1,307.00 = US$1.00. Any
discrepancies in any table between totals and the sums of the amounts listed are due to rounding. Unless
stated otherwise, all numbers in this document expressed as percentages of GDP refer to nominal GDP.
INDUSTRY AND MARKET DATA
Unless otherwise indicated, all industry and market data with respect to the Mongolian banking and
financial services industries was derived from information compiled and made available by the Bank of
Mongolia or other public sources. Likewise, unless otherwise indicated, all statistical information with
respect to Mongolia and its economy was derived from information compiled and made available by the
National Statistical Office of Mongolia or other public sources. None of the Bank, the Trustee nor any of
the Dealers has verified such information with independent sources or makes any representation as to the
accuracy or completeness of such information. Industry publications and surveys and forecasts generally
state that the information contained therein has been obtained from sources believed by the compiler of
such information to be reliable, but the Bank cannot assure prospective purchasers of Notes that such
information is accurate or complete. While reasonable actions have been taken by the Bank to ensure that
such information has been extracted accurately and in its proper context, the Bank has not independently
verified any of the data from third-party sources or ascertained the underlying economic assumptions
relied upon therein.
ENFORCEABILITY OF FOREIGN JUDGEMENTS IN MONGOLIA
The Bank is a limited liability company organised in Mongolia and substantially all of its assets are located
in Mongolia. In addition, all of the Banks directors and officers are resident in Mongolia. As a result, it
may be difficult for investors (a) to effect service of process upon the Bank or the directors and officers
of the Bank outside Mongolia, (b) to enforce against any of them, in courts of jurisdictions other than
Mongolia, judgements obtained in such courts that are predicated upon the laws of such other jurisdictions
or (c) to enforce a foreign arbitral award against any of them or (d) to enforce against any of them, in
Mongolian courts, judgements obtained in jurisdictions other than Mongolia, including judgements
obtained in connection with the Notes and the Trust Deed in the courts of England and Wales.

iv

The Notes and the Trust Deed are governed by English law (except that Clause 2.7 of the Trust Deed and
Condition 3.2 are governed by Mongolian law) and the Bank has agreed in the Trust Deed that disputes
arising thereunder or in respect of the Notes are subject to arbitration before the London Court of
International Arbitration or, at the election of the Trustee or, as the case may be, a Noteholder, to the
jurisdiction of the English courts. Mongolian courts will not enforce any judgement obtained in a court
established in a country other than Mongolia unless, among other things, there is in effect a treaty between
such country and Mongolia providing for the reciprocal enforcement of judgements and then only in
accordance with the terms of such treaty. There is no such treaty in effect between Mongolia and the United
Kingdom. However, both Mongolia and the United Kingdom are parties to the 1958 New York Convention
on Recognition and Enforcement of Arbitral Awards (the Convention) and, accordingly, an arbitration
award obtained in a state which is party to such Convention, such as the United Kingdom, should be
recognised and enforceable in Mongolia provided the conditions to enforcement set out in the Convention
are met.
Further, in the event of any proceedings being brought in a Mongolian court in respect of a monetary
obligation expressed to be payable in a currency other than the Mongolian Tugriks, enforcement of the
judgment in the courts of Mongolia against any party in Mongolia would be available only in Mongolian
Tugriks and for such purposes all claims or debts would be converted into Mongolian Tugriks.

SUMMARY
This summary may not contain all of the information that may be important to prospective purchasers of
the Notes. This summary is qualified by, and must be read in conjunction with, the more detailed
information and financial statements appearing elsewhere in this Information Memorandum. Investing in
the Notes involves certain risks. The information set forth under Risk Factors should be carefully
considered. Certain statements in this Information Memorandum are forward-looking statements that also
involve risks and uncertainties as described under Forward-Looking Statements.
Overview
Trade and Development Bank of Mongolia LLC is a leading banking and financial services provider in
Mongolia, offering a wide range of domestic corporate and retail banking services, including large
corporate, small and medium-sized enterprise (SME) and retail lending, deposit-taking, trade finance,
remittance, cash management, treasury, foreign exchange, gold bullion and other precious metals trading
and investment banking services. The Bank ranked as the third-largest bank in the country by equity base
with total shareholders equity of MNT 139,414.8 million (US$100.0 million) and by assets with total
assets of MNT 2,090,039.7 million (US$1,498.8 million) as at 31 December 2011, according to the Banks
internal data and the Bank of Mongolia. In addition, the Bank has extensive experience in international
banking transactions, including trade finance, foreign exchange, remittance and syndicated lending
activities in the international market. The Bank has a prominent position in the domestic money markets,
leading Mongolias foreign exchange and gold bullion markets with a market share exceeding 27.8% and
51.0%, respectively, by trading volume as at 31 December 2011, according to the Banks internal data and
the Bank of Mongolia.
As the longest-serving bank in Mongolia, having commenced banking operations in 1990, the Bank acts
as primary lender to many of the countrys leading domestic and foreign corporate credits as well as
foreign representative offices across all major industrial and commercial sectors. Leveraging this
pre-eminent position and its long-standing customer relationships, the Bank has consolidated its
market-leading position in the handling of international trade finance and remittance with access to credit
lines with major international lenders and correspondent banking relationships with over 150 international
financial institutions.
The Banks strong corporate platform and network in the Mongolian banking sector has enabled the Bank
to capitalise on the growth of the Mongolian economy, which has experienced average gross domestic
product (GDP) growth of 8.3% per annum for the period from 2003 through 2011 according to the
International Monetary Fund (the IMF), and the accompanying demand for more comprehensive banking
solutions, through targeted lending to the growing SME sector and increasing numbers of high-end retail
customers, including staff of its corporate customers as well as other high net-worth individuals. Such
efforts have improved the loan portfolio mix amongst the Banks corporate, commercial and retail
segments. In addition, the Banks position in the corporate banking market has facilitated expansion into
complementary business segments such as treasury, foreign exchange, gold bullion and other precious
metals trading and money markets, as well as the Banks investment banking services, as the Mongolian
credit market continues to grow and becomes more sophisticated. The Bank believes these dual factors of
a strengthening Mongolian economy and the Banks business growth initiatives have resulted in the Banks
earnings increasing at a compound annual growth rate of 41.8% for the period from 2003 through 2011.
The Bank believes its diverse product offerings, long-term relationships with its corporate customers and
well-defined expansion strategy have poised it to capitalise on the anticipated growth of the Mongolian
economy.
As a customer-focused financial institution dedicated principally to serving its corporate customer base,
the Bank recognises the need to provide customers with convenient banking locations and personalised
customer service. From its headquarters in the capital city of Ulaanbaatar, the Bank operated a network of
42 branches in Mongolia as at 31 December 2011 including 30 branches located in Ulaanbaatar, one in
Umnugobi province near the Oyu Tolgoi copper project and 11 in industrial cities, such as Erdenet and
Darkhan. The Bank also operates one of the largest automated teller machine (ATM) networks in
Mongolia with 99 ATMs, including 79 in Ulaanbaatar, seven each in Erdenet and Darkhan, and six in other
rural areas. The Bank has a network of approximately 957 merchants and approximately 1,344
point-of-sale terminals.

With a primary focus on corporate lending and deposit-taking, the Banks activities are concentrated in,
and its distribution strategy centres on, Ulaanbaatar, resulting in an emphasis on the quality of its branch
coverage for corporate customers in Mongolia as opposed to the quantity of branches. The Bank believes
its distribution strategy enables the Bank to service its core corporate customer base without losing
efficiencies through unnecessary expansion into rural regions, which are typically less profitable due to
lower business concentration in such regions. To reflect its primary focus on corporate banking, the Bank
plans to extend its branch network in Mongolia by identifying strategic locations with substantial new
business activity from key sectors of the Mongolian economy, particularly the mining sector. The Bank
intends to open 11 additional branches in 2012 with eight branches to be located in Ulaanbaatar and three
branches to be located outside Ulaanbaatar.
Competitive Strengths
The Bank has strong liquidity and as at 31 December 2011, the Banks return on average assets was 2.6%
compared to 3.0%, 1.6% and 2.4% in respect of Khan Bank, Golomt Bank and XacBank, respectively,
according to public filings made by each bank. The Banks return on average equity was 39.8% as at 31
December 2011 compared to 28.8%, 27.0% and 19.3% in respect of Khan Bank, Golomt Bank and
XacBank, respectively, according to public filings made by each bank. The Bank believes it possesses the
following competitive strengths:

Leading corporate lender in Mongolia. The Bank has built a reputation as a leading corporate
banking service provider in Mongolia through its long-established presence and extensive experience
as well as its wide coverage of corporate and international trade-related services. The Bank is the
market leader in corporate lending with a 24.8% market share in 2011 according to the Bank of
Mongolia. The Bank believes corporate customers view the Bank as a reliable counterparty due to
its prudent capital management strategy and position as a leading corporate bank in Mongolia.

Well-positioned to take advantage of anticipated economic growth in Mongolia. The Bank will
continue its focus on corporate lending as well as developing SME and retail lending to take
advantage of growth in Mongolias mining sector and related development. The Bank believes its
diverse product offering, long-term relationships with corporate customers and well-defined
expansion strategy make the Bank well-positioned to capture future growth in the banking sector as
a result of the anticipated growth of the Mongolian economy in coming years.

Reputation as the international face of Mongolia. With over 150 correspondent relationships with
international financial institutions and 38 nostro accounts with major clearing banks around the
world, the Bank offers a wide range of trade finance instruments and services designed to appeal to
both domestic and international clients. The Bank believes it is the most experienced and advanced
participant among Mongolian banks in the international markets, including areas such as
international investment banking, syndicated and non-syndicated lending, trade finance and
remittance. In addition, the Bank diversified its funding sources by accessing the international capital
markets, as the first Mongolian issuer of debt securities in the international capital markets.

Diversified funding sources. The Bank has access to diversified funding sources from both domestic
depositors and foreign financial institutions, providing the Bank with greater financial flexibility as
compared to its domestic competitors, and believes corporate customers regard it as a preferred
deposit-taking institution. In addition, the Bank believes it has a lower cost of funding compared to
most other banks in Mongolia due to its large corporate deposit base, a significant portion of which
comprises current accounts, which typically carry a lower rate of interest as compared to individual
savings accounts.

Well-balanced asset portfolio. The Bank strives to maintain a balanced corporate loan portfolio and
has diversified overall credit exposure amongst the corporate, commercial and retail business
segments, thereby reducing the Banks reliance and concentration in any particular sector. The Bank
actively seeks to gain exposure to sectors that it believes it will contribute significantly to the growth
of Mongolias economy in the future, in particular the mining sector and related development.

Prudent risk management and strong corporate governance. The Bank has centralised organisational
and information systems that provide prompt reporting of operating risks, thereby enhancing the
Banks enterprise risk management and internal controls systems. Similarly, the Bank places great
importance on its implementation of sound corporate governance practices and maintains a system
of internal checks and balances and committees, consistent with international best practices, to

support its corporate governance structure. In response to the global financial crisis and other
macroeconomic factors affecting Mongolia, the Banks management increased its efforts in 2009 and
2010 to improve asset quality through enhancing its procedures for approving new loans and
monitoring and collecting existing loans, particularly for corporate customers in the construction
sector. In 2011, the Bank became the first commercial bank in Mongolia to establish an internal and
independent risk management committee to monitor credit, market and operation risks. The Banks
risk management committee is headed by the Chairman of the Banks Board. The Bank also
appointed an independent director to its Board in 2011. The Banks branch managers periodically
review loan usage, business operations of the Banks borrowers and collateral quality.

Enhanced compliance standards. The Bank, in conjunction with PricewaterhouseCoopers, has


implemented a comprehensive compliance program to update the Banks internal procedures
regarding anti-money laundering and anti-bribery regulations, and training and human resources
development programs. In order to enhance its internal audit procedures, the Bank has also recently
restructured its Internal Audit Department to separate audit functions into two divisions: the General
Audit Unit and the Special Audit Unit.

Experienced management team. The Bank has an experienced management team, including members
of its Representative Governing Board (the Board), that possesses extensive industry experience in
Mongolia and overseas. The Bank appointed one independent director to its Representative
Governing Board in 2011. The management teams ability to provide strategic direction, execute
business initiatives and compete in a highly competitive market is evidenced by the Banks growth
and position in the Mongolian banking sector as well as its prudent response to the global financial
crisis of 2008 and 2009. The average experience of members of its management team and the Board
in the financial services and banking sectors exceeds 20 years, with certain members of the
management and the Board having held senior positions in other leading local and international
financial institutions.

Strategy
The Banks core strategy is to be the nations most profitable financial institution, while maintaining its
leading position as the largest lender to the Mongolian corporate sector and capitalising on its foundation
and reputation in the domestic market to diversify its products and services. The key components of the
Banks strategy to achieve these objectives include:

Consolidating its status as a preferred financial institution for Mongolian corporate customers. The
Bank aims to maintain its leading position in the Mongolian corporate banking sector by continuing
to improve its customer service and the range and quality of its product and service offerings. The
Bank wishes to further broaden its partnerships with international banks and to expand the banking
services it offers outside its core lending activities, including the development of cash management
and depository services and investment banking services, and use its position to cross-sell other
corporate finance products.

Expanding its services to SMEs in a focused manner. Although the Banks historical focus has been
on large corporate customers, it has increased its efforts to solidify its position as the preferred bank
of Mongolian SMEs by offering a range of loans and deposit products designed to meet the growing
demand for more sophisticated financial products in the Mongolian financial services market. With
its strong reputation and expertise in the Mongolian corporate banking sector, the Bank believes it
will be able to replicate and extend the core competencies of its corporate banking operations to the
SME sector.

Maintaining and strengthening its loan portfolio quality. The Bank intends to maintain and
strengthen its financial condition through rigorous monitoring of and, where possible, by improving
the quality of its loan portfolio. The Bank has implemented numerous initiatives in pursuit of this
strategy, including improvements made in the credit due diligence and loan approval process, the
deployment of a systemised credit monitoring and collection process and advanced training for its
account managers, risk analysts and credit officers. The Bank is committed to a strategy of growing
market share in the credit market without compromising its asset quality and, to that end, closely
monitors its non-performing loan to total loan ratio.

Targeting niche segments of the retail market. Drawing on synergies with its corporate and SME
strategies, the Bank targets the growing financial needs of the employees of its corporate and SME

customers by offering personal banking services such as payroll, remittance and savings products. In
addition, the Bank has also focused its marketing and product development efforts on retail services
for high net-worth individuals, who typically generate higher-margin business and represent better
asset quality as compared to the mass-market retail segment. As the Banks retail platform expands,
it expects such increased scale to enhance its ability to target high net-worth retail clients.

Expanding its deposit base. The Bank strives to manage its competitive cost of funding, increase its
operating margins and maintain its ability to leverage its asset base. To this end, the Bank expects
to continue to enlarge its deposit base by competing with other Mongolian banks to obtain
attractively priced deposits denominated in Tugriks and U.S. dollars in the domestic market. As the
Mongolian economy relies heavily on U.S. dollar pricing for certain goods, many local and foreign
corporate and SME customers operating in Mongolia maintain both Tugrik-denominated and U.S.
dollar-denominated deposits as a hedging strategy against inflationary pressures. Moreover, the Bank
believes that its extensive experience in foreign exchange and remittance, together with its
correspondent bank network and reputation for strong financial management, places it in an
advantageous position to attract foreign customers seeking a deposit-taking financial institution in
Mongolia.

Corporate History
The Bank was wholly owned by the Government at the time of its establishment in 1990. In 2002, the Bank
underwent a privatisation process, which resulted in Globull Investment & Development S.C.A.
(Globull), a consortium owned by Banca Commerciale Lugano and Gerald Metals Inc., owning the
majority of the Banks share capital. In January 2005, the Asian Development Bank (ADB) and IFC
subscribed for newly issued shares of the Bank and became the Banks second-largest shareholders
representing 14.5% of the Banks then total issued and outstanding shares. In addition, the ADB and IFC
contributed MNT 9.6 billion to the Banks capital in the form of subordinated debt in 2004. The Banks
minority shareholders, mainly comprised of the Banks employees, were diluted from a 24.0% to a 19.0%
ownership position following a subsequent rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). ADB and IFC exercised their tag-along rights and sold their shares to US Global, making it the
sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by Central
Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest. In February 2012, The Goldman Sachs
Group, Inc. acquired a 4.78% stake in the Bank. As at 31 December 2011, US Global Investment LLC held,
directly and indirectly through Globull, 73.14% of the Banks shares with the remaining shares held by
minority shareholders. See Principal Shareholders. The Bank was named the Development Supporting
Bank of the Year by the Government in 2011.

SUMMARY OF THE PROGRAMME


This summary highlights information contained elsewhere in this Information Memorandum. This
summary is qualified by, and must be read in conjunction with, the more detailed information and financial
statements appearing elsewhere in this Information Memorandum. Words and expressions defined in
Form of the Notes and Terms and Conditions of the Notes shall have the same meanings in this
summary.
Issuer . . . . . . . . . . . . . . . . . . . . .

Trade and Development Bank of Mongolia LLC

Description . . . . . . . . . . . . . . . . .

Euro Medium Term Note Programme

Arrangers . . . . . . . . . . . . . . . . . .

ING Bank N.V., Singapore Branch and Merrill Lynch


International.

Dealers . . . . . . . . . . . . . . . . . . . .

ING Bank N.V., Singapore Branch, Merrill Lynch International,


and any other Dealers appointed in accordance with the
Programme Agreement.

Co-Manager . . . . . . . . . . . . . . . . .

TDB Capital LLC of Mongolia

Risk Factors . . . . . . . . . . . . . . . .

There are certain factors that may affect the Issuers ability to
fulfil its obligations in relation to Notes issued under the
Programme. In addition, there are certain factors which may be
material for prospective purchasers for the purpose of assessing
certain market risks associated with Notes issued under the
Programme. These factors are set out under Risk Factors.

Certain Restrictions . . . . . . . . . . .

Each issue of Notes denominated in a currency in respect of


which particular laws, guidelines, regulations, restrictions or
reporting requirements apply will only be issued in
circumstances which comply with such laws, guidelines,
regulations, restrictions or reporting requirements from time to
time, including the following restrictions applicable at the date
of this Information Memorandum. See also Subscription and
Sale.
Notes having a maturity of less than one year
Notes having a maturity of less than one year will, if the
proceeds of the issue are accepted in the United Kingdom,
constitute deposits for the purposes of the prohibition on
accepting deposits contained in section 19 of the FSMA unless
they are issued to a limited class of professional investors and
have a denomination of at least 100,000 or its equivalent.

Trustee . . . . . . . . . . . . . . . . . . . .

The Hongkong and Shanghai Banking Corporation Limited

Principal Paying Agent . . . . . . . . .

The Hongkong and Shanghai Banking Corporation Limited

Registrar . . . . . . . . . . . . . . . . . . .

The Hongkong and Shanghai Banking Corporation Limited

Programme Size . . . . . . . . . . . . . .

Up to US$700,000,000 (or its equivalent in other currencies


calculated as described in the Programme Agreement)
outstanding at any time. The Issuer may increase the amount of
the Programme in accordance with the terms of the Programme
Agreement.

Distribution . . . . . . . . . . . . . . . . .

Notes may be distributed by way of private or public placement


and in each case on a syndicated or non-syndicated basis, as
specified in the relevant Pricing Supplement.

Currencies . . . . . . . . . . . . . . . . . .

Subject to any applicable legal or regulatory restrictions, any


currency as may be agreed between the Issuer and the relevant
Dealer.

Redenomination . . . . . . . . . . . . . .

The applicable Pricing Supplement may provide that certain


Notes may be redenominated in euros. The relevant provisions
applicable to any such redenomination are contained in
Condition 5.

Maturities . . . . . . . . . . . . . . . . . .

The Notes will have such maturities as may be agreed between


the Issuer and the relevant Dealer, as specified in the relevant
Pricing Supplement, subject to such minimum or maximum
maturities as may be allowed or required from time to time by
the relevant central bank (or equivalent body) or any laws or
regulations applicable to the Issuer or the relevant Specified
Currency.

Issue Price . . . . . . . . . . . . . . . . . .

Notes may be issued on a fully paid or (in the case of Notes other
than Subordinated Notes) a partly paid basis and at an issue price
which is at par or at a discount to, or premium over, par, as
specified in the relevant Pricing Supplement.

Form of Notes . . . . . . . . . . . . . . .

The Notes will be issued in bearer or registered form, as


specified in the applicable Pricing Supplement and as described
in Form of the Notes. Registered Notes will not be
exchangeable for Bearer Notes and vice versa.

Fixed Rate Notes . . . . . . . . . . . . .

In respect of Notes which are specified in the applicable Pricing


Supplement as being Fixed Rate Notes, fixed interest will be
payable on such date or dates as may be agreed between the
Issuer and the relevant Dealer and on redemption and will be
calculated on the basis of such Day Count Fraction as may be
agreed between the Issuer and the relevant Dealer, as specified
in the relevant Pricing Supplement.

Floating Rate Notes . . . . . . . . . . .

Notes which are specified in the applicable Pricing Supplement


as being Floating Rate Notes will bear interest at a rate
determined:

on the same basis as the floating rate under a notional


interest rate swap transaction in the relevant Specified
Currency governed by an agreement incorporating the
2006 ISDA Definitions (as published by the International
Swaps and Derivatives Association, Inc., and as amended
and updated as at the Issue Date of the first Tranche of the
Notes of the relevant Series);

on the basis of a reference rate appearing on the agreed


screen page of a commercial quotation service; or

on such other basis as may be agreed between the Issuer


and the relevant Dealer,

in each case, as specified in the applicable Pricing Supplement.

The margin (if any) relating to such floating rate will be agreed
between the Issuer and the relevant Dealer for each such Series
of Floating Rate Notes and as specified in the applicable Pricing
Supplement.
Index Linked Notes . . . . . . . . . . .

Other provisions in relation to


Floating Rate Notes and Index
Linked Interest Notes . . . . . . . . . .

In respect of Notes which are specified in the applicable Pricing


Supplement as Index Linked Notes, payments of principal in
respect of Index Linked Redemption Notes or of interest in
respect of Index Linked Interest Notes will be calculated by
reference to such index and/or formula or to changes in the
prices of securities or commodities or to such other factors as the
Issuer and the relevant Dealer may agree, in each case, as
specified in the applicable Pricing Supplement.

Floating Rate Notes and Index Linked Interest Notes may also
have a maximum interest rate, a minimum interest rate or both.
Interest on Floating Rate Notes and Index Linked Interest Notes
in respect of each Interest Period, as agreed prior to issue by the
Issuer and the relevant Dealer, will be payable on such Interest
Payment Dates, and will be calculated on the basis of such Day
Count Fraction, as may be agreed between the Issuer and the
relevant Dealer and as specified in the applicable Pricing
Supplement.

Dual Currency Notes . . . . . . . . . .

Payments (whether in respect of principal or interest and


whether at maturity or otherwise) in respect of Dual Currency
Notes will be made in such currencies, and based on such rates
of exchange, as the Issuer and the relevant Dealer may agree and
as specified in the applicable Pricing Supplement.

Zero Coupon Notes . . . . . . . . . . .

Zero Coupon Notes will be offered and sold at a discount to their


nominal amount and will not bear interest.

Redemption . . . . . . . . . . . . . . . . .

The applicable Pricing Supplement will indicate either that (i)


the relevant Notes cannot be redeemed prior to their stated
maturity date (other than in specified instalments, if applicable,
or for taxation reasons (and in the case of Subordinated Notes,
with the prior approval of the Bank of Mongolia and, if
necessary, any other relevant authority)) or following an Event
of Default (and in the case of Subordinated Notes, with the prior
approval of the Bank of Mongolia and, if necessary, any other
relevant authority) or (ii) such Notes will be redeemable at the
option of the Issuer (and in the case of Subordinated Notes, with
the prior approval of the Bank of Mongolia and, if necessary,
any other relevant authority) and/or the Noteholders upon giving
notice to the Issuer, on a date or dates specified prior to such
stated maturity and at a price or prices and on such other terms
as may be agreed between the Issuer and the relevant Dealer.
The applicable Pricing Supplement may also provide that the
relevant Notes may be redeemable in two or more instalments of
such amounts and on such dates as are indicated in the
applicable Pricing Supplement.

Denomination of Notes . . . . . . . . .

The Notes will be issued in such denominations as may be


agreed between the Issuer and the relevant Dealer and specified
in the applicable Pricing Supplement save that the minimum
denomination of each Note will be such amount as may be
allowed or required from time to time by the relevant central
bank (or equivalent body) or any laws or regulations applicable
to the relevant Specified Currency (See Certain Restrictions
Notes having a maturity of less than one year), and save that the
minimum denomination of any Note (i) admitted to trading on a
regulated market (within the meaning of the Markets in
Financial Instruments Directive (Directive 2004/39/EC)) within
the European Economic Area or (ii) offered to the public in a
Member State of the European Economic Area in circumstances
which require the publication of a prospectus pursuant to
Directive 2003/71/EC (the Prospectus Directive), will be
=C 100,000 (or, if the Notes are denominated in a currency other
than euro, the equivalent amount in such currency).
Notes having a maturity of less than one year may be subject to
restrictions on their denomination and distribution (see Certain
Restrictions Notes having a maturity of less than one year
above).

Taxation . . . . . . . . . . . . . . . . . . .

All payments in respect of the Notes will be made without


deduction for or on account of withholding taxes imposed by any
Tax Jurisdiction, subject to certain exceptions as provided in
Condition 9. In the event that any such withholding or deduction
is required to be made, the Issuer will, save in certain limited
circumstances provided in Condition 9, be required to pay
additional amounts to cover the amounts so deducted.

Negative Pledge . . . . . . . . . . . . . .

The terms of the Senior Notes will contain a negative pledge


provision as further described in Condition 4.

Cross Default . . . . . . . . . . . . . . .

The terms of the Senior Notes will contain a cross-default


provision as further described in Condition 11.1.

Status of the Senior Notes . . . . . .

The Senior Notes will constitute direct, unconditional,


unsubordinated and (subject to the provisions of Condition 4)
unsecured obligations of the Issuer and will rank pari passu
among themselves and (save for certain obligations required to
be preferred by law) equally with all other unsecured and
unsubordinated obligations of the Issuer, from time to time
outstanding.

Status of, Events of Default and


other Terms of, or relating to, the
Subordinated Notes . . . . . . . . . . .

The terms of the Subordinated Notes will be indicated in the


applicable Pricing Supplement. The status of the Subordinated
Notes and events of default applicable to the Subordinated Notes
are set out in Condition 3.2 and Condition 11.2, respectively.
Subordinated Notes do not have the benefit of the negative
pledge provisions described in Condition 4 or the cross-default
provisions described in Condition 11.1.

Limited Right of Acceleration in


respect of Subordinated Notes . . .

If a default is made in the payment of any principal or interest


due on the Subordinated Notes on the due date and, in the case
of interest, such default continues for a period of 10 days, the
Trustee may, at its discretion and without further notice, institute
proceedings against the Issuer to enforce the obligations of the
Issuer under the Subordinated Notes or the Trust Deed but may
take no other action in respect of such default (but without
prejudice to the following provisions).
The Trustee may only accelerate the Subordinated Notes in the
circumstances set out in Condition 11.2(b).

Rating . . . . . . . . . . . . . . . . . . . . .

The rating of the Notes to be issued under the Programme will


be specified in the applicable Pricing Supplement.

Listing . . . . . . . . . . . . . . . . . . . .

Approval-in-principle has been granted for the listing and


quotation of Notes that may be issued pursuant to the
Programme and which are agreed at or prior to the time of issue
thereof to be so listed on the SGX-ST. Permission to list such
Notes will be granted when the Notes have been admitted to the
Official List. The Notes may also be listed on such other or
further stock exchange(s) as may be agreed between the Issuer
and the relevant Dealer in relation to each Series. If the
application to the SGX-ST to list a particular series of Notes is
approved, such Notes listed on the SGX-ST will be traded on the
SGX-ST in a minimum board lot size of S$200,000 (or its
equivalent in another currency).
Notes which are neither listed nor admitted to trading on any
market may also be issued.
The applicable Pricing Supplement will state whether or not the
relevant Notes are to be listed and/or admitted to trading and, if
so, on or by which stock exchanges, markets and/or competent
listing authority(ies).

Governing Law . . . . . . . . . . . . . .

The Notes, the Trust Deed and any non-contractual obligations


arising out of or in connection with the Notes or the Trust Deed
will be governed by, and construed in accordance with, English
law, except that Clause 2.7 of the Trust Deed and Condition 3.2
will be governed by Mongolian law.

Selling Restrictions . . . . . . . . . . .

There are restrictions on the offer, sale and transfer of the Notes
in the United States, the European Economic Area, the United
Kingdom, the Russian Federation, Hong Kong, Singapore,
Japan, Korea, Mongolia, the PRC, the Philippines and Taiwan
and such other restrictions as may be required in connection with
the offering and sale of a particular Tranche of Notes. See
Subscription and Sale.

RISK FACTORS
An investment in the Notes involves certain risks. Prospective purchasers of the Notes should carefully
consider all of the information in this Information Memorandum and, in particular, the risks described
below, prior to making an investment decision with respect to the Notes. The risks described below are not
the only risks that may affect the Bank or the Notes. Prospective purchasers should also note that certain
of the statements set forth below constitute forward-looking statements. In general, investing in the
securities of issuers in emerging market countries, such as Mongolia, involves risks not typically
associated with investing in the securities of issuers in countries with more developed economies and
regulatory regimes.
To the extent the description below relates to the Government or Mongolian macroeconomic data, such
information has been extracted from official Government publications or other third-party sources and has
not been independently verified by the Bank. Prospective purchasers of the Notes should consult their own
financial and legal advisers about risks associated with an investment in such Notes and the suitability of
investing in such Notes in light of their particular circumstances. In particular, Notes where the amount
payable in respect thereof is determined by reference to one or more indices or bases of reference may not
be appropriate investment for investors who are unsophisticated with respect to such transactions.
Risks Relating to the Banks Business
The Banks non-performing assets may increase and the Banks ability to recover all or a substantial
portion of non-performing assets may deteriorate
Any lending activity is exposed to credit risk arising from the risk of default by borrowers. The Banks
total non-performing assets as at 31 December 2011 totalled MNT 28,181.7 million (US$20.2 million), or
2.5% of the Banks total loan portfolio. A number of factors affect the Banks ability to monitor, control
and reduce non-performing loans. Some of these factors, including macroeconomic developments in the
Mongolian economy, movements in global commodity markets, global competition, interest rates and
exchange rates, are not within the Banks control.
Growth of the Mongolian economy in 2011 improved the general creditworthiness of the Banks
borrowers, which improvement the Bank believes contributed to a reduction in the number and size of
defaults. The Banks policy requires security in the form of collateral for all loans, except international
syndicated loans. Historically, the Bank has experienced a recovery rate of approximately 90.7% of
non-performing assets, which recovery rate has typically been achieved by working with borrowers to
obtain repayment through asset sales, liquidation of collateral and legal actions. The Bank cannot assure
prospective purchasers that there will not be a need in future periods to increase provisions for loan losses
as a percentage of non-performing assets or that the percentage of non-performing assets that the Bank will
be able to recover will be similar to the Banks past experience of recoveries of non-performing assets.
The Bank has increased its efforts to tighten its credit appraisal systems and credit risk monitoring and
management systems, and has improved collections on existing non-performing assets. However, the Bank
cannot assure prospective purchasers that such improvements will continue or will continue to result in a
reduction in defaults or that the Bank will continue to be successful in its efforts to reduce its level of
non-performing assets or that the overall quality of its loan portfolio will not deteriorate in the future. If
the Bank is not able to control the absolute levels, as well as the percentage relative to the Banks total
loan portfolio, of non-performing assets, or if there is a significant increase in its restructured loans, its
business, financial condition and results of operations could be materially and adversely affected.
The Bank has significant credit exposure to certain borrowers and industries
As at 31 December 2011, the Bank had significant credit exposure to various industry sectors. As at 31
December 2009, 2010 and 2011, respectively, the Banks largest industry exposures were to mining and
quarrying at MNT 64,554.9 million, MNT 74,974.3 million and MNT 252,935.0 million (US$181.4
million); corporate trading at MNT 54,449.5 million, MNT 72,763.7 million and MNT 190,332.6 million
(US$136.5 million); mortgage loans at MNT 30,728.6 million, MNT 37,433.6 million and MNT 146,144.0
million (US$104.8 million); and manufacturing at MNT 103,251.5 million, MNT 77,532.6 million and
MNT 136,709.9 million (US$98.0 million), which together comprised an aggregate of MNT 726,121.4
million (US$520.7 million), or 63.6% of the Banks total loan portfolio.

10

In 2011, mining and quarrying, corporate trading, mortgage loans, manufacturing and construction each
represented more than 10% of the Banks total loan portfolio. As at 31 December 2011, exposure to the
mining and quarrying sector comprised approximately 22.2% of the Banks total loan portfolio.
The Banks direct credit exposure to the Mongolian mining and quarrying sector was MNT 252,935.0
million (US$181.4 million) as at 31 December 2011, or approximately 22.2% of the Banks total loan
portfolio; however, the Banks corporate customers in other industry sectors may also significantly depend
on the Mongolian mining sector, thereby increasing the Banks overall mining sector exposure. The global
and domestic trends in these industries may have a bearing on the Banks financial position. Any
significant deterioration in the performance of a particular sector, driven by events outside the Banks
control, such as regulatory action or policy announcements by the Government, would adversely impact
the ability of borrowers in that sector to service their debt obligations to the Bank. See Risks relating to
Mongolia Key decisions concerning foreign participation in the countrys mining sector may have an
adverse impact on the Mongolian economy. In addition, if a significant portion of the loans to these
borrowers or sectors were to become non-performing, this could materially and adversely affect the Banks
business, financial condition and results of operations.
The Bank operates in Mongolia, where credit risks and counterparty exposure experienced by banks
may be greater than in more developed countries
The Banks principal business includes commercial lending and, to a lesser extent, consumer lending, to
its Mongolia-based clients and customers. The Bank is subject to the credit risk of its borrowers, who may
not pay interest or repay principal on their loans in a timely fashion or at all. The credit risk of its
borrowers may be higher than in more developed countries primarily due to (i) the perceived greater
uncertainty in the Mongolian regulatory, political, economic and industrial environment, (ii) the foreign
debt of the Government and Mongolian corporates relative to Mongolias GDP, (iii) the volatility of
interest rates and Tugriks to U.S. dollar exchange rates and (iv) difficulties that many of the Banks
borrowers face in adapting to instability in world markets and global technological advances. Higher credit
risk has a material adverse effect on the quality of loan portfolios and exposes Mongolian banks, including
the Bank, to potential losses and risks that may be higher than for banks operating in more developed
countries. Such losses, if material, would have a material adverse effect on the Banks business, financial
condition and results of operations.
Moreover, the Bank has also been expanding its personal loan operations in recent years as part of its new
business strategy. Economic difficulties in Mongolia that have a material adverse effect on Mongolian
consumers could result in reduced growth and deterioration in the credit quality of the Banks personal
loan portfolio. For example, a rise in unemployment or an increase in interest rates in Mongolia could have
a material adverse impact on the ability of borrowers to make timely payments of interest or repayment
of principal on their loans and could increase the likelihood of defaults, while reducing overall demand for
personal loans. In addition, the number of loan accounts may be negatively affected by declines in
household income, public concerns about unemployment or other adverse macroeconomic factors.
Increased competition arising from economic liberalisation in Mongolia, variable industrial growth,
volatile prices of Mongolias exports, the high level of debt in the financing of projects and capital
structures of companies in Mongolia and high interest rates in Mongolia may reduce the profitability of
certain of the Banks customers, thereby increasing the credit risk associated with loans extended by the
Bank to such customers.
The Bank may be unable to obtain sufficient external financing to support its operations or to grow its
business
The Bank requires a substantial amount of cash for its operations, including for the extension of credit to
its customers through its principal corporate lending activities and for the expansion of certain business
segments such as its investment banking activities. To satisfy its liquidity and other funding requirements,
the Bank may need to issue additional equity or debt securities in the Mongolian or international capital
markets or otherwise incur additional borrowings. In addition, as part of its efforts to reduce funding costs
and establish a more stable capital structure, the Bank intends to continue to maintain diverse sources of
funding, which includes the reduction of its reliance on short-term borrowings. The ability of the Bank to
rely on alternative sources of funding will depend on its financial position and the liquidity of the
Mongolian and international capital markets as well as the Governments policies regarding domestic and

11

foreign currency borrowings. The Banks failure to obtain sufficient financing on commercially reasonable
terms or at all could delay or limit its ability to pursue its business expansion and diversification strategies,
which could materially and adversely affect the Banks business, financial condition and results of
operations.
The Banks funding is primarily short-term and depositors may not roll-over deposited funds upon
maturity
A significant portion of the Banks funding needs are satisfied from short-term sources, primarily in the
form of customer deposits. As at 31 December 2011, 63.0% of the Banks deposits were demand and term
deposits with maturities of three months or less and 37.0% of the Banks deposits were term deposits with
maturities of greater than three months. Accordingly, the maturity profile of the Banks assets and
liabilities shows a funding mismatch in the short-term. The negative gap has arisen mainly because the
Banks deposits, which are met through short-term funding sources (primarily in the form of deposits) and
other liabilities are of shorter average maturity than its loans and investments, which have medium or
long-term maturities.
Such deposits may not continue to be a stable source of funding for the Bank. In the event the Bank is
unable to attract or retain sufficient deposits or if a substantial number of the Banks depositors do not
roll-over deposited funds upon maturity, its liquidity position could be adversely affected and the Bank
may be unable to fund its loan growth and may be required to seek alternative sources of short-term or
long-term funding. The Bank cannot assure prospective purchasers as to the availability of such funding
or the terms of such funding. To the extent the Bank is unable to obtain sufficient funding on acceptable
terms or at all, the Banks business, financial condition and results of operations may be materially
adversely affected. In addition, if the amount of the Banks loans were to increase in excess of the increase
in its deposits, the loans to deposits ratio could rise and this could have a material adverse effect on the
Banks liquidity position and hence its ability to make payments under the Notes.
The Banks risk management policies and procedures have been revised and implemented in recent
years and are not fully developed
The Bank is exposed to a variety of risks, including credit risk, market risk, portfolio risk, exchange rate
risk, interest rate risk and operational risk. Although the Bank has established risk management policies
and procedures, many of which have been revised and implemented in recent years (including establishing
a risk management group, developing scoring and grading systems and bifurcating relationship and credit
functions), the effectiveness of the Banks risk management is limited by the quality, amount and
timeliness of available data in Mongolia in relation to factors such as the credit history of proposed
borrowers and the loan exposure borrowers have with other financial institutions. While a new law on
credit information was recently enacted by Parliament setting out rights, limitations and permissible
practices, unlike developed countries, Mongolia does not have a fully operational nationwide credit
information bureau, which may adversely affect the quality and limit the amount of information available
to the Bank regarding the credit profile of its borrowers, especially individuals and small businesses. As
such, the Bank cannot assure prospective purchasers that any of its risk management policies or procedures
will be fully effective. Some methods of managing risk are based upon observed historical market
behaviour. As a result, the Bank may not be able to accurately or in a timely fashion predict future risk
exposures, which could be greater than the historical measures indicated. In addition, the information
generated by different groups within the Bank may be incomplete or obsolete. Management of operational,
legal or regulatory risk requires policies and procedures to properly record and verify a large number of
transactions and events. Other risk management methods depend upon an evaluation of information
regarding markets, customers and other factors. This information may not in all cases be accurate,
complete, up-to-date or properly evaluated. Parts of the Banks risk management framework are new and
many of the risk management policies and procedures, such as portfolio management tools, have not been
tested or are still being developed or enhanced. The Bank cannot assure prospective purchasers that these
policies and procedures will operate in the way that the Bank anticipates and that such policies and
procedures will be adequate to identify and manage risks as intended.
The Bank has developed credit screening standards in response to such inadequacies in the quality of credit
information that are different from, or inferior to, the standards used by its international competitors. As
a result, the Banks ability to assess, monitor and manage risks inherent in its business may not meet the
standards of its counterparts in more developed countries. If the Bank is unable to acquire or develop in

12

the future the technology, expertise and systems available to meet international standards, or if the Banks
standards are not as rigorous as international standards, the Banks ability to manage these risks and on
the Banks business, financial condition and results of operations could be materially and adversely
affected.
The Bank may not be able to successfully implement its product expansion and business diversification
strategies
The Banks business strategy includes expanding the range of its products and services to diversify its
revenue streams as well as increasing its branch network. For example, the Bank has expanded its SME
and retail banking operations, has generated cross-selling opportunities by introducing products combining
elements of corporate financing and consumer financing, and is developing its investment banking
portfolio. Expansion of the Banks business activities to offer new financial products and services as well
as increasing its branch network exposes it to a number of risks and challenges, including, among others,
the following:

new business activities may require greater marketing and compliance costs than the Banks
traditional services;

new business activities may have lower growth or profit potential than the Bank anticipates, and the
Bank cannot assure prospective purchasers that new business activities will become profitable at the
level the Bank forecasts or at all;

the Bank may fail to identify and offer attractive new services in a timely fashion;

the Banks competitors may have substantially greater experience and resources for the new business
activities the Bank wishes to commence, particularly in the SME and retail banking sectors, and the
Bank may not be able to attract customers from its competitors;

the Bank may need to hire or retrain personnel to conduct and supervise new business activities;

the Bank may need to enhance its information technology capabilities to support a broader range of
activities; and

general economic conditions in Mongolia and worldwide, such as rising interest rates or housing
prices, could hinder the Banks expansion into the personal loan and mortgage industries.

New business endeavours may require knowledge and expertise which differ from those used in the current
business operations of the Bank, including different management skills, risk management procedures,
guidelines and systems, credit appraisal, monitoring and recovery systems. The Bank may not be
successful in developing such knowledge and expertise. In addition, managing such growth and expansion
requires significant managerial and operational resources and the number of qualified managerial
personnel in Mongolia may be limited. The Banks inability to implement its product expansion and
business diversification strategies could have a material adverse effect on the Banks business, financial
condition and results of operations.
The shareholders and related parties of the Bank may exercise influence over certain of the Banks
affairs and may have interests which differ from those of the Bank
As at 31 December 2011, US Global Investment LLC (a joint venture owned equally by Central Asia
Mining LLC and Mr. Erdenebileg Doljin) was the Banks largest shareholder, with a 73.14% direct and
indirect shareholding interest. In particular, Mr. Erdenebileg serves as the current Chairman of the Board
and as a member of the Representative Governing Board of Ulaanbaatar City Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest. Accordingly, these shareholders of the
Bank will be able to exert significant influence on the Banks strategic direction, business and operations.
The interests of these shareholders may differ significantly from the interests of the Bank and the Banks
other shareholders and creditors, including the holders of the Notes, and the Bank cannot assure
prospective purchasers that such shareholders will exercise influence over the Bank in a manner that is in
the best interests of the Bank and the Banks other shareholders and creditors or in a manner that will not
conflict with the interests of the Bank and the Banks other shareholders and creditors.

13

The Bank has grown rapidly in a relatively short period and its strategy depends on the continued
growth of the Mongolian economy and its ability to manage its growth
The Bank has grown rapidly in a relatively short period of time primarily due to the growth of the
Mongolian economy and the expansion of its product and service offerings as a result of the increasing
sophistication of the Mongolian banking industry. Its strategy depends on the continued growth of the
Mongolian economy, in particular the mining sector, and its ability to compete effectively in its existing
markets as customer demand for modern banking products and services increases. The Mongolian economy
may not continue to grow at the rate that it has in the recent past and external factors beyond the Banks
control, such as adverse Government regulation or a failure by the Government to develop sufficient
infrastructure necessary to develop the mining sector or otherwise, may inhibit growth in the future.
Moreover, past and future growth place strains on the Banks management and operations. The Banks
ability to manage its growth will be particularly dependent upon the Banks ability to:

attract and retain qualified personnel;

maintain the quality of its operations and its service offerings;

maintain and enhance risk management and its system of internal controls to ensure timely and
accurate reporting; and

expand its operational information systems in order to support our growth.

Slowing growth, the absence of growth or the inability of the Bank to effectively manage its growth could
negatively affect the Banks ability to implement its strategy, which could materially and adversely affect
the Banks business, financial condition and results of operations.
The value of the Banks collateral may be overstated and may decline in the future
A substantial portion of the Banks loans to corporate customers are secured by tangible assets, including
property, plant and equipment. Mortgages secured by land, real estate and mining licences need to be
registered with the state agencies and are the Banks preferred collateral. The real estate collateral value
of land as calculated by the Bank represents the price at which such land can be sold in the shortest term
in an auction and the Bank believes such valuation to be discounted than the market price of such
collateral. The Banks loans to corporate customers also include working capital credit facilities that are
typically secured by a first lien on inventory, receivables and other current assets. In some cases, the Bank
may have taken further security of a first or second lien on fixed assets, a pledge of financial assets such
as marketable securities, corporate guarantees and personal guarantees. A substantial portion of the Banks
loans to retail customers is also secured by the assets financed, predominantly real property and vehicles.
Although in general the Banks loans (excluding its syndicated loans) are over-collateralised, the Bank
cannot assure prospective purchasers that the realised value of the collateral would be adequate to cover
the Banks loans. An economic downturn or an increase in inflation could result in a fall in relevant
collateral values for the Bank. In particular, a downturn in the real estate market may result in the principal
amount of certain loans exceeding the value of the underlying real estate collateral. The Banks collateral
may be over-valued and not accurately reflect its liquidation value, which is the maximum amount the
Bank is likely to recover from a sale of collateral, less expenses of such sale. In addition, some of the
valuations in respect of the collateral may be outdated or may not accurately reflect the value of the
collateral. In certain instances, where there are no purchasers for a particular type of collateral, such
collateral may be worthless. While the Bank assesses the value of its real estate collateral on a yearly basis,
any decline in the value of the collateral securing the Banks loans, including with respect to any future
collateral taken by the Bank, would mean that its loan loss provisions may be inadequate and require an
increase in such provisions. The Bank cannot assure prospective purchasers that the collateral securing any
particular loan will protect the Bank from suffering a partial or complete loss if the loan becomes
non-performing. Any increase in the Banks provisions would adversely affect its capital adequacy ratio
and otherwise adversely affect its business, financial condition and results of operations.
The Bank may experience delays in enforcing its collateral when borrowers default on their obligations
to the Bank
Mongolian banks may not be able to fully recover amounts owed to them through enforcement of collateral
or guarantees, as a result of, among other factors, the legal uncertainties in enforcing such rights, delays
in bankruptcy and foreclosure proceedings, inability to perfect security interests for certain types of

14

collateral, defects in the perfection of certain types of collateral and fraudulent transfers by borrowers.
Bankruptcy laws and enforcement procedures in Mongolia are less developed than those in certain other
countries, and the enforcement process in Mongolia may be comparatively lengthy. As a result, it may take
several years for a bank to enforce and realise the value of collateral underlying non-performing loans, and
a particular loan may be classified as non-performing for several years before collateral can be seized and
liquidated. During such period, the physical condition and market value of the collateral can deteriorate,
particularly where the collateral is in the form of inventory or receivables. In addition, such collateral may
not be adequately insured or insured at all.
In the past, these factors have exposed, and continue to expose, lenders in Mongolia to legal liability while
in possession of collateral. The current difficulty of bringing enforcement actions under the Mongolian
legal system significantly reduces the ability of lenders to realise the value of collateral located in
Mongolia and therefore the effectiveness of taking a secured position on loans to Mongolian borrowers.
The Bank cannot assure prospective purchasers that it will be able to realise the full value, or any value,
of any collateral located in Mongolia in a bankruptcy or foreclosure proceeding or otherwise. In addition,
the Bank may incur significant administrative costs in maintaining and disposing of seized properties. A
failure to recover the expected value of collateral security could expose the Bank to a potential loss. Any
unexpected losses could adversely affect the Banks business, financial condition and results of operations.
The Banks allowances for doubtful accounts may prove inadequate
Non-performing loans of the Bank represented 5.3%, 4.1% and 2.5% of its total loans as at 31 December
2009, 2010 and 2011, respectively. Although the Bank has complied with the minimum allowance
requirements promulgated by the Government and, as a matter of internal policy, has maintained strict
reserve requirements, the Bank cannot assure prospective purchasers that the Bank will not be required to
make significant additional allowances for doubtful accounts in future periods if it experiences higher than
anticipated loan defaults and delinquencies due to increased credit losses resulting from, among other
things, ineffective collection management, discrete events adversely affecting specific customers or
businesses or adverse changes in the economy, which could in turn materially and adversely affect the
Banks business, financial condition and results of operations.
The Bank has contingent liabilities and commitments not stated on its balance sheet
As at 31 December 2011, the Bank had contingent liabilities and commitments of approximately MNT
229,494.9 million (US$164.6 million), on account of the Banks outstanding commitments to extend credit,
including in the form of undrawn portions of approved loans, credit card limits, overdraft facilities,
financial guarantees and letters of credit. These commitments and contingent liabilities have off
balance-sheet credit risk for which provisions are not currently made according to local banking practices
in Mongolia. A singificant portion of the contingent liabilities and commitments will expire without being
advanced in whole or in part. Accordingly, the amounts do not represent expected future cash flows.
Crystallisation of the Banks contingent liabilities would have a material adverse effect on the Banks
business, financial condition and results of operations.
The Bank is exposed to exchange rate risk and interest rate risk
As a financial institution, the Bank is exposed to exchange rate risk. Movements in foreign exchange rates
may materially and adversely impact the Banks borrowers, which may in turn adversely impact the nature
of its exposure to these borrowers. Volatility in foreign exchange rates could materially and adversely
affect the Banks business, financial condition and results of operations. As at 31 December 2011, the Bank
had U.S. dollar and other foreign currency-denominated gross loans of MNT 628,503.1 million (US$450.7
million) and U.S. dollar and other foreign currency-denominated customer deposits of MNT 522,025.0
million (US$374.3 million). In addition, as at 31 December 2011, the Bank had outstanding U.S.
dollar-denominated indebtedness of the equivalent of MNT 391.8 billion (US$281.0 million). Although, as
at 31 December 2011, the Bank had MNT 4,625.6 million (US$3.3 million) of short position in U.S. dollars
to hedge against local currency depreciation, if the Tugrik depreciates significantly at any time when the
Bank has a significant net open borrowing position denominated in foreign currencies, such depreciation
could cause the Bank to suffer losses, reduce its capital adequacy ratio and require the Bank to seek
additional capital or breach capital adequacy regulations set by the Bank of Mongolia. The Bank cannot
assure prospective purchasers that any additional required capital would be available on acceptable terms
or at all.

15

The Bank realises income from the margin, or spread, between interest-bearing assets, such as
investments and loans, and interest paid on interest-bearing liabilities, such as deposits and borrowings.
The performance of Mongolian banks, including the Bank, is subject to fluctuations in market interest rates
as a result of mismatches in the re-pricing of assets and liabilities. These interest rate fluctuations are
neither predictable nor controllable and may have a material adverse impact on the operations and financial
condition of Mongolian banks such as the Bank. In a rising interest rate environment, if the Bank is not
able to pass along its higher interest expenses to customers with loans with the Bank in the form of higher
interest rates for such loans, the Banks profitability would be materially and adversely affected. If such
increased costs are passed along to customers, such increased rates may make loans less attractive to
potential customers and result in a reduction in customer volume and hence the Banks operating revenues
would be materially and adversely affected. In a decreasing interest rate environment, potential
competitors may find it easier to enter the markets in which the Bank operates and to benefit from wider
spreads. As a result, fluctuations in interest rates could have an adverse effect on the Banks margins and
volumes and in turn result in an adverse effect on the Banks business, financial condition and results of
operations.
The Bank relies on certain key personnel
The Banks continued success depends upon the retention of key management executives, who have been
instrumental in its success, and upon its ability to attract and retain other highly capable individuals. The
loss of some of the Banks senior executives, or an inability to attract or retain other key individuals, could
materially and adversely affect the Banks business. In particular, the Banks business could be adversely
affected if the employment of certain key employees who constitute the Banks management team is not
renewed or is discontinued and suitable replacements are not found.
The Banks rate of growth may be limited as competitors compete for such talented and skilled personnel
who are becoming an increasingly scarce resource in Mongolia. The current demand for these talented and
skilled personnel is expected to continue for the foreseeable future as the Mongolian banks develop in line
with the economic development of Mongolia. Further, if the Bank is unable to attract, assimilate and retain
these talented and skilled personnel, it may be on terms that are economically disadvantageous.
The Bank does not carry insurance in respect of the loss of the services of any of the members of its
management. In addition, competition in Mongolia for personnel with relevant expertise is intense due to
the paucity of qualified individuals. Inability to retain its existing senior management and/or attract
additional qualified senior management personnel could have a material adverse effect on the Banks
business, financial condition and results of operations.
The Bank may not detect and prevent fraud or other misconduct committed by the Banks employees or
outsiders on a timely basis or at all
Similar to other financial institutions, the Bank is exposed to the risk of fraud and other misconduct
committed by employees or outsiders. Such fraud and other misconduct may adversely affect banks and
financial institutions more significantly than companies in other industries due to the large amounts of cash
transacted. In April 2006, a former branch manager of the Bank and certain other persons misappropriated
a total of MNT 3,456.8 million (US$2.5 million). A criminal investigation was initiated against the
offenders and MNT 1,378.6 million (US$1.0 million) of the misappropriated funds have been recovered
by the Bank. On 14 December 2007, the court ordered the former branch manager to transfer MNT 2,078.2
million (US$1.5 million) to the Bank by transferring title to certain properties located in central
Ulaanbaatar with the balance of the outstanding amount to be paid in cash. In 2009, the Bank experienced
another occurrence involving the misappropriation of funds by a branch employee and, although such case
involved a small sum, the Bank failed to prevent such fraud. While the Bank has managed to recover most
of the funds misappropriated by its branch manager, a number of weaknesses in the Banks internal
controls may have enabled such fraudulent activity to occur. As at the date of this Information
Memorandum, the Bank is not aware of any further misappropriation of funds by any officer of the Bank,
which might have a material effect on the Banks business operations.
While the Bank has taken various steps to improve internal procedures and prevent fraudulent actions, such
steps may be insufficient to prevent similar occurrences from transpiring in the future. In addition, failure
on the part of any member of the Bank to prevent future fraudulent actions may result in administrative

16

or other regulatory sanctions by the Financial Regulatory Committee of Mongolia (the FRC), formerly
known as the Securities Commission of Mongolia, or Government agencies and may also result in the
suspension or other limits on the Banks banking and other business licences. The Bank cannot assure
prospective purchasers that the Bank will be able to avoid future material incidents of fraud.
The Bank may not be able to respond to rapid technological changes
The Banks future success will depend, in part, on its ability to respond to technological advances and
emerging banking industry standards and practices on a cost-effective and timely basis. The development
and implementation of such technology entails significant technical and business risks. The Bank cannot
assure prospective purchasers that the Bank will successfully implement new technologies effectively or
adapt its transaction-processing systems to customer requirements or emerging industry standards. If the
Bank is unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing
market conditions, customer requirements or technological changes, its business, financial condition and
results of operations may be materially and adversely affected.
The Bank may fail to manage risks associated with its information and technology systems
The Bank is subject to risks relating to its information and technology systems and processes. These risks,
which may arise internally and externally, include malfunctions and failures, human error or misconduct
and other external factors. The Bank relies on internal and external information and technology systems
to generate new business, provide services to customers, administer customer data and manage the Banks
operations. The Bank uses increasingly advanced software, systems and networks to manage and back-up
its customer and accounting data and other aspects of its business. This hardware and software is
vulnerable to damage or interruption by human error, misconduct, malfunction, natural disasters, power
loss, sabotage, computer viruses and similar events or the interruption or loss of support services from
third parties such as Internet service providers, ATM operators and telephone companies. Any disruption,
outage, delay or other difficulty experienced by any of these information and technology systems could
result in delays in the provision or repayment of borrowings or decreased consumer confidence in the
Banks business, or otherwise adversely affect the Banks business, financial condition and results of
operations.
The Bank also seeks to protect its computer systems and network infrastructure from physical break-ins
as well as security breaches and other disruptive problems caused by the Banks increased use of the
Internet. Computer break-ins and power disruptions could affect the security of information stored in and
transmitted through these computer systems and network infrastructure. Because the Banks computer
systems and network infrastructure have only been recently deployed, there are areas in the system that
have not been properly protected from security breaches. Although the Bank employs security systems,
including firewalls and password encryption, designed to minimise the risk of security breaches and
maintains operational procedures to prevent break-ins, damage and failures, the potential for fraud and
securities problems is likely to persist, and the Bank cannot assure prospective purchasers that these
security measures will be adequate or successful. Failure in security measures could have a material
adverse effect on the Bank business, financial condition and results of operations.
The Banks trading and investment banking activities may result in losses
The Bank engages in trading and investment banking activities as well as engaging in commodities and
currency trading activities and other investment banking activities. For 2011, income generated from such
trading and investment banking activities accounted for 25.6% of the Banks total operating income. The
Bank may from time to time maintain long and short positions in different asset categories, from which
it expects to earn revenues based on changes in the relative values of the assets. The Banks trading
positions are inherently volatile as the prices of trading assets are subject to general economic, political
and market conditions that may fluctuate from time to time. To the extent that the relative values of its
trading assets change in a direction, manner or scope that the Bank did not anticipate or against which it
did not hedge, the Bank may realise a loss in those paired positions. For example, in November 2007, the
Bank acquired equity securities in certain foreign financial institutions. The subsequent continued
downturn in the global financial services sector resulted in the Bank recognising a net investment loss of
approximately MNT 3,000.0 million in January 2008 and closing its equities investment activities. The
Bank cannot assure prospective purchasers that it will not experience a similar investment loss in the
future. Risks arising both from the Banks trading and investment strategy and general market volatility,
which is beyond the Banks control, could expose the Bank to potential losses and may materially and
adversely affect the Banks business, financial condition and results of operations.

17

The Banks insurance may not be adequate to cover losses or liabilities that may arise
Consistent with industry practice in Mongolia, the Bank maintains insurance against some, but not all,
operational and natural disasters. In particular, consistent with industry practice, the Bank does not
maintain coverage for business interruption. The Bank cannot assure prospective purchasers that its
insurance will be adequate to cover losses or liabilities that may arise. Also, the Bank cannot predict the
continued availability of insurance at acceptable premium levels. A significant uninsured or underinsured
claim against the Bank or the failure of its insurers to pay claims could materially and adversely affect the
Banks business, financial condition and results of operations.
The Bank may be unable to procure or maintain the necessary licences
All banking operations and various related operations in Mongolia require a general banking licence from
the Bank of Mongolia. The Bank holds such a licence, but it cannot assure prospective purchasers that it
will be able to maintain such licence or obtain a new general banking licence if necessary in the future.
The Banks failure to comply with applicable rules and regulations could result in penalties, loss of
regulatory permits and damage to its business reputation, which could materially and adversely affect its
business, financial condition and results of operations. If the Bank loses its general banking licence, it
would be unable to perform any banking operations.
Risks Relating to the Banking Industry in Mongolia
Mongolia lacks a centralised system for the reporting of credit information
The Mongolian banking system is supported by an elementary centralised credit information system run
by the Bank of Mongolia that provides basic details of a customers credit history, including the loan
amount, disbursement date and whether outstanding loans are current. The system is highly dependent
upon participating banks supplying accurate and timely credit information, which is difficult in the many
areas where bank branches operate with information systems that are run manually or have limited
computer capability. Furthermore, there are no independent credit agencies in Mongolia. This means
verification of borrowings and, more importantly, credit history of credit applicants, in particular
individuals and small businesses, are difficult to obtain. Due to lack of an existing fully developed and
centralised credit bureau and credit agencies, the Bank may be unable to verify information provided by
credit applicants or determine whether other banks have previously extended, or are extending, credit to
such applicants.
As a result, borrowers may be overexposed by virtue of other credit obligations of which the Bank has no
knowledge. The Bank may therefore be exposed to credit risk which it may not be able to accurately assess
and provide for, which could have a material adverse effect on its financial condition and results of
operations. Mongolian banks, with the assistance of IFC, established a private credit bureau in 2009, and
the Law of Mongolia on Credit Information was adopted on 20 November 2011 by the Mongolian
Parliament (the Parliament) and came into force on 1 January 2012. Pursuant to this law, the activity
related to the credit information is subject to licence by Bank of Mongolia. However, the credit bureau that
was established by the commercial banks does not have the relevant licence yet. Enactment of this
legislation is a significant development for the stability of the Mongolian financial sector. Effective
information sharing is essential in the credit market, particularly for the microfinance development of the
country. A number of conditions such as lack of industry practice and IT infrastructure may initially
constrain the formation and sustainability of private credit information agencies in Mongolia.
Subsequently, there can be no assurance that a private credit bureau will be effective once it becomes
operational or that it will become operational in a reasonable time or at all.
The Mongolian banking system is underdeveloped, and the regulations governing banks, including the
Bank, are evolving
Mongolias banking and other financial systems remain in the early stages of development and the standard
and degree of legislation, supervision and transparency of the Mongolian banking sector in some respects,
in particular, with respect to lending criteria, credit quality, loan loss reserves, diversification of exposure
or other requirements, differs or lags behind internationally accepted norms. Deficiencies in the Mongolian
banking sector may result in the banking sector being more susceptible to market downturns or economic
slowdowns. If a banking crisis were to occur, Mongolian banks, including the Bank, could be subject to
severe liquidity constraints due to the limited supply of deposits and the potential withdrawal of foreign

18

funding sources. Certain Mongolian legislation relating to banks and bank accounts can also be subject to
varying interpretations and inconsistent application. The imposition of more stringent regulations or
interpretations as the Mongolian banking sector develops could lead to weakened capital adequacy and the
insolvency of some banks.
The Bank is regulated principally by, and has reporting obligations to, the Bank of Mongolia. The Bank
is also subject to the banking, corporate and other laws in effect in Mongolia from time to time. The
regulatory and legal framework governing the Bank differs in certain material respects from that in effect
in other jurisdictions and may continue to change as the Mongolian economy and commercial and financial
markets evolve. Following the global financial crisis and the collapse of two local commercial banks, Anod
Bank and Zoos Bank, in Mongolia, the Mongolian Banking Law (the Banking Law) and other supporting
regulations were revised in early 2010, tightening policies and regulations governing the banking sector.
More stringent provisions, such as those aimed at reducing risks of abuses on related-party transactions and
conflicts of interest that arise from banks exposure to related parties, as well as greater transparency and
information disclosure, were adopted. Pursuant to this new law, the FRC has the authority to approve
services including finance and investment advisory, trustee, insurance brokerage, underwriting, custodian,
factoring, and other services that banks perform on behalf of their clients.
Additionally, in order to comply with the Banking Law, the Bank of Mongolia and the FRC may have to
revise a number of rules and regulations as well as introduce new rules and regulations. The Law on Bank
of Mongolia is also under review and subject to possible amendments addressing, among other things, the
autonomy and accountability of the Bank of Mongolia. If the Law on Bank of Mongolia is amended or any
additional rules and regulations are introduced the FRC and the Bank of Mongolia, as regulators, may be
unable to implement the changes in a consistent manner and there may be uncertainties in the application
or official interpretation of such laws and regulations. Further, if these and other additional rules or
regulations are introduced, the Bank may incur substantial compliance and monitoring costs. For example,
the current minimum core capital ratio is 6.0%, and the minimum risk weighted capital adequacy ratio is
12.0%. However, the minimum core capital ratio will increase to 7.0% from 30 June 2012 as provided in
the Order No. 726 of the Governor of the Bank of Mongolia dated 14 December 2011, and will further
increase to 8.0% from 31 December 2012 and to 9.0% from 30 June 2013. The minimum risk weighted
capital adequacy ratio will increase to 12.5%, 13.0% and 14.0% from 30 June 2012, 31 December 2012
and 30 June 2013, respectively, in accordance with the foregoing order. In addition, if over the previous
six months a banks assets represent more than 5% of the total assets of the Mongolian banking system then
an additional capital requirement of 0.5% will be imposed as of 30 June 2012; an additional capital
requirement of 1% will be imposed as of 31 December 2012; and an addition capital requirement of 2%
will be imposed as of 30 June 2013. Mongolian banks currently apply Basel I standards, however, the Bank
plans to fully implement Basel II standards within the next two years and expects that certain Basel II
compliant risk models of probability of default and loss given default will be implemented in 2012 in its
internal risk management frame work. Failure to comply with applicable rules and regulations could result
in penalties, loss of regulatory permits and damage to business reputation, which could have a material
adverse effect on the Banks business, financial condition and results of operations.
Guidelines for non-performing loan classifications and provisioning in Mongolia require subjective
determination and may be less stringent than those in other jurisdictions
The Bank of Mongolias regulations with respect to loan classifications and provisioning, in certain
circumstances, may be less stringent than similar regulations applicable to banks operating in other
jurisdictions. These differences may result in the Bank classifying particular loans as non-performing at
a later time, or in a category reflecting a lower degree of risk, than might be expected in other jurisdictions.
As a result, the level of the Banks non-performing loans, and its associated reserves, may be lower than
would be required if the Bank were regulated in another jurisdiction. Further, if the Bank changes its
provisioning policies to coincide with international standards or otherwise, the Banks business and results
of operations may be adversely affected.
In addition, the level of provisions recognised by the Bank for its loan portfolio depends largely on the
Banks evaluation of the credit position of its borrowers. If the Banks evaluation of the quality of its loan
portfolio is inaccurate, the level of the Banks provisions may not be adequate to cover actual losses
resulting from its existing non-performing loan portfolio. The Bank may also have to increase its level of
provisions if there is any deterioration in the overall credit quality of the Banks existing loan portfolio,
including the value of the underlying collateral.

19

Competition in the Mongolian banking industry is intense, and the Banks growth strategy depends in
part on the Banks ability to compete effectively
The Bank is subject to significant levels of competition in all areas of its business from a number of other
Mongolian banks, branches of foreign banks and non-bank finance institutions, including competitors
which, in some geographical areas and areas of business, have a greater market share and greater name
recognition than the Bank. As at 31 December 2011, the Mongolian financial sector comprised of 14
commercial banks, 13 of which were privately owned and one state-owned, 195 licensed non-banking
financial institutions and 162 saving and credit cooperatives.
In the future, the Bank may face increased competition from other financial institutions offering a wider
range of commercial banking services and products than the Bank and that have larger lending limits,
greater financial resources and stronger balance sheets than the Bank. Increased competition may arise
from:

other large Mongolian banking and financial institutions with significant presence in Ulaanbaatar and
large country-wide branch networks;

the inability to open more branches and to provide banking and financial services (as stated in the
Banking Law) if the Bank of Mongolia and FRC do not provide the required approval on the
establishment thereof;

foreign banks, due to, among other things, relaxed standards permitting large foreign banks to open
branch offices or to purchase into smaller banks that have extensive branch networks;

domestic banks entering into strategic alliances with foreign banks with significant financial and
management resources; and

consolidation in the banking sector involving domestic and foreign banks, driven in part by the
gradual removal of foreign ownership restrictions.

The Bank cannot assure prospective purchasers that it will be able to compete effectively in the face of
such increased competition.
The Bank is exposed to the risks of the Mongolian financial system which may in turn be affected by
financial and other difficulties faced by Mongolian financial institutions
As an emerging market economy, the Mongolian financial system faces risks of a nature and magnitude
not typically faced in more developed countries, including the risk of significant withdrawals of deposits
by depositors (deposit runs). The Mongolian financial system has experienced difficulties in its banking
sector in 1994, 1996, 1998 and 2000. In 2000, non-performing loans in the Mongolian banking industry
reached approximately 40.0% of total bank loans. As a result, certain Mongolian financial institutions
experienced difficulties, and some Mongolian banks faced serious financial and liquidity crises. Two major
domestic commercial banks, Anod Bank and Zoos Bank, faced serious difficulties starting in December
2008 and July 2009, respectively. Anod Bank went into receivership in December 2008 and was liquidated
in July 2010. Zoos Bank went into receivership with the Bank of Mongolia in November 2009, the receiver
was appointed in November 2010 for a second term and debt recovery activities are still taking place. Zoos
Bank was spun off by the Government into State Bank and partially recapitalised. Although the Bank did
not suffer from illiquidity and insolvency difficulties during these banking crises, the Bank cannot assure
prospective purchasers that it will not be affected by such difficulties in the future as a result of deposit
runs, non-performing loans or other factors. The problems faced by individual Mongolian financial
institutions and any instability in or difficulties faced by the Mongolian financial system generally could
create a material adverse market perception toward Mongolian financial institutions and banks, which
could in turn materially and adversely affect the Banks business, financial condition and results of
operations.
The term of the current Bank Deposit Guarantee Law expires in 2012
The Bank Deposit Guarantee Law is effective until November 2012. Under such law, the Government fully
guarantees against losses incurred on savings accounts, current accounts, time deposits and interbank
deposit money at commercial banks during the guarantee period, excluding certain types of deposits that
are statutorily excluded for policy reasons. Whilst such law may be replaced by another similar law upon
its expiry and the Government may take ad hoc measures to protect depositors, no assurances can be given

20

that after the expiry of such law that there will not be substantial capital movement out of Mongolia or that
commercial banks, including the Bank, will not be subject to serious liquidity constraints due to the limited
supply of deposits. The European Reconstruction and Development Bank has emphasised that the banking
system of Mongolia needs a proper deposit insurance mechanism replacing the blanket guarantee
introduced by this legislation. While the Bank of Mongolia has submitted to Parliament a draft deposit
insurance law, the Bank cannot assure you that such law will be passed in the form submitted or at all.
Risks Relating to Mongolia
Substantially all of the Banks operations and assets are based in Mongolia
Substantially all of the Banks business operations and assets are based in Mongolia. As a result, the Banks
income, results of operations and the quality and growth of its assets depend, to a large extent, on the
performance of the Mongolian economy. In the past, Mongolia has experienced periods of slow or negative
growth, high inflation and a devaluation of the Mongolian currency.
Prior to the July 2000 parliamentary elections, the Government adopted expansionary fiscal and monetary
policies, which led to the persistence of a substantial fiscal imbalance and a steep rise in the money supply.
The fiscal deficit, at 10.8% of GDP, breached the 8.5% target for 2000 agreed under the Poverty Reduction
and Growth Facility of the IMF. Money supply was growing at an annualised rate of approximately 32.0%
by December 1999, and averaged approximately 35.0% in the first 10 months of 2000, but decreased to
17.6% by December 2000.
The expansionary policy stance adopted by the Government resulted in an increased current account deficit
and build-up of external debt. Large current account deficits persisted from 1977 to 2000, which led to a
rapid accumulation of external debt, which almost doubled from approximately US$532 million in 1996
to approximately US$935 million in 2000, or from 46.0% of GDP to close to 100.0% of GDP. The
declining trend of inflation reversed, rising to 11.6% in 2000 (having fallen from approximately 37.0% in
1997 to approximately 7.6% in 1999).
After the general elections of July 2000, the new Government embarked on a plan of macroeconomic
stabilisation with a budget for the year 2001 aimed at reducing the fiscal deficit from approximately 11.0%
of GDP to 7.4% in 2001. From 2001 to 2005, the fiscal deficit of Mongolia decreased to 2.9% from 10.6%
for the years from 1997 to 2000. In 2005, 2006 and 2007, according to the World Bank, Mongolias state
budget recorded a surplus of 3.2%, 5.3% and 2.2%, respectively, as compared to a deficit of 2.0% in 2004,
partly due to strong commodity prices of gold and copper and rising imports. In the last several years, the
Mongolian economy has shown signs of growth. According to the National Statistical Office of Mongolia,
real GDP was MNT 3,913.7 billion, MNT 4,162.7 billion and MNT 4,881.4 billion in 2009, 2010 and 2011,
respectively, and real industrial production output grew at -3.3%, 10.0% and 9.7% in 2009, 2010 and 2011,
respectively. Real GDP growth was estimated at 16.0% for 2011 according to the World Banks quarterly
economic update published in February 2012.
When the global economic crisis started to unfold in late 2008, the external shock, due primarily to the
collapse of the copper prices, hit Mongolia harder than other copper producing countries because of
Mongolias particular combination of expansive fiscal and monetary policies, a fixed exchange rate and an
overheated financial sector at the time of the copper price collapse. Mongolia experienced a broad based
recovery in late 2009 and the beginning of 2010. Nominal GDP registered a 27.7% increase in 2010 and
a 28.7% increase in 2011. Total foreign exchange reserves reached US$2.5 billion as at 31 December 2011.
Public finances have reached a sound footing and the banking system has stabilised. Mongolias
turnaround stems primarily from the Mongolian authorities policy response to the global economic crisis,
supported by significant resources from the international community, including a loan from the IMF. In
addition, overall global economic recovery, strong demand from the PRC and an increase in copper prices
contributed to Mongolias restored growth. However, the Bank cannot assure you that this turnaround will
continue or be sustained.
Any slowdown in the Mongolian economy, including a significant deterioration of the fiscal budget or the
Tugrik, or an increase in interest rates, or future volatility of global commodity prices could adversely the
Banks borrowers and its contractual counterparties. This, in turn, could adversely affect the Banks
business, the quality of its assets, its financial performance and trading in the Notes.

21

The Banks ability to conduct its business activity in Mongolia is subject to political risk
The Banks ability to efficiently conduct its business activities is subject to changes in government policy
or shifts in political attitudes within Mongolia that are beyond its control. Government policy may change
to discourage foreign investment, nationalisation of mining industries may occur or other government
limitations, restrictions or requirements not currently foreseen may be implemented. There can be no
assurances that the Banks assets will not be subject to nationalisation, requisition or confiscation, whether
legitimate or not, by any authority or body. The provisions under Mongolian law for compensation and
reimbursement of losses to investors under such circumstances may not be effective to restore the value
of the Banks original investment. In addition, Mongolia may experience political instability. Such
instability could have a material adverse effect on economic or social conditions in Mongolia and may
result in outbreaks of civil unrest, terrorist attacks or threats or acts of war in the affected areas, any of
which could materially and adversely affect the Banks business, prospects, financial condition and results
of operations.
Mongolia may experience political and social instability
Prior to 1990, Mongolia was a socialist country and the only functioning political party was the Mongolian
Peoples Revolutionary Party (the MPRP). Since the collapse of communism in 1990, Mongolia has
experienced a process of democratic change, resulting in political and social events that have highlighted
the unpredictable nature of Mongolias evolving political landscape. Such events have resulted in political
instability as well as general social and civil unrest on certain occasions in the past few years. In March
1990, due to extended street protests carried out in public and popular demands for faster reform, the
political bureau of the MPRP resigned. In May 1990, the constitution was amended, which removed the
MPRPs role as the guiding force in the country, legalised opposition parties, created a standing legislative
body and established the office of president.
The MPRP was the ruling party for the first half of the 1990s and was succeeded by the Democratic Party
until it regained control of the Parliament in 2000. Following a political realignment in 2006, when a new
coalition government was formed, the MPRP won the majority of seats in Parliament again in 2008.
However, there were allegations of fraudulent practices in the elections made by the chairman of the
Democratic Party. The Mongolian General Committee of Elections dismissed these allegations and
confirmed that the MPRP had won the majority of seats in Parliament. The election results also triggered
strong protests and riots and the Government declared a state of emergency, which was lifted after four
days. A coalition government was formed by the MPRP and the Democratic Party and in August 2008,
members of the Democratic Party were sworn in as members of Parliament and Mr. Bayar Sanj was sworn
in as the Prime Minister. Mr. Elbegdorj Tsankhia was sworn as the President in June 2009. The MPRP
changed its name to the Mongolian Peoples Party (MPP) in 2010 and thereafter former president of
Mongolia, Mr. Enkhbayar Nambaryn, received judicial permission to re-register the name Mongolian
Peoples Revolutionary Party as a different party than the MPP.
In January 2012, the Democratic party announced its decision to withdraw from the coalition government
formed in 2008 with the MPRP (now known as the MPP). Former president and current leader of the new
MPRP, Mr. Enkhbayar Nambaryn, is currently under the investigation of the Mongolian Independent
Authority Against Corruption (the Anti-Corruption Agency). On 13 April 2012, he was arrested for
allegedly failing to appear before the Anti-Corruption Agency in relation to the investigation into his
activities. Mr. Enkhbayar has denied the allegations and has stated his view that the charges are politically
motivated.
Although Mongolias transition to democracy has been relatively peaceful and there was representation of
various political parties in the Government, tension continues to exist between the political parties.
Consequently, the Bank cannot assure prospective purchasers that events similar to those described above
will not occur in the future and on a wider scale, or that such disturbances will not, directly or indirectly,
have a material adverse effect on the Banks business. Elections have been scheduled in June 2012 to elect
a new Parliament and in May 2013 to elect a new president. Future changes in the Government, the ruling
party, major policy shifts or lack of consensus between the various political groups could lead to political
instability and could also have a material adverse effect on the Banks business. In addition, the possibility
of political instability and uncertainty could adversely affect trading in the Notes and have a significant
adverse impact on the economy of Mongolia, and investors may adopt a more cautious approach towards
Mongolias securities markets or investments in Mongolia in general, and such factors could also adversely
affect trading in the Notes.

22

Legislation in Mongolia may be subject to conflicting interpretations


The Mongolian legal system exhibits several of the qualitative characteristics typically found in a
developing country and many of its laws, particularly with respect to matters of taxation, are still evolving.
The legal framework in Mongolia is, in many instances, based on recent political reforms or newly enacted
legislation, which may not be consistent with long-standing local conventions and customs. Local
institutions and bureaucracies responsible for administrating laws may lack a proper understanding of the
laws or the experience necessary to apply them in a modern business context. Many laws have been
enacted, but in many instances they are neither understood nor enforced and may be applied in an
inconsistent, arbitrary manner, while legal remedies may be uncertain, delayed or unavailable. A
transaction or business structure that would likely be regarded under a more established legal system as
appropriate and relatively straightforward might be regarded in Mongolia as outside the scope of existing
Mongolian law, regulation or legal precedent. As a result, certain business arrangements or structures and
certain tax planning mechanisms may carry significant risks. In particular, when business objectives and
practicalities dictate the use of arrangements and structures that, while not necessarily contrary to settled
Mongolian law, are sufficiently novel within a Mongolian legal context, it is possible that such
arrangements may be invalidated. Uncertainties inherent in the legal system in Mongolia that could limit
the legal protections available to the Bank include: (i) inconsistencies between laws; (ii) limited judicial
and administrative guidance on interpreting Mongolian legislation; (iii) substantial gaps in the regulatory
structure due to delay or absence of implementing regulations; (iv) the lack of established interpretations
of new principles of Mongolian legislation, particularly those relating to business, corporate and securities
laws; (v) a lack of judicial independence from political, social and commercial forces; and (vi) bankruptcy
procedures that are not well developed and are subject to abuse.
The Mongolian judicial system has relatively little experience in enforcing the laws and regulations that
currently exist, leading to a degree of uncertainty as to the outcome of any litigation. It may be difficult
to obtain swift and equitable enforcement, or to obtain enforcement of a judgment by a court of another
jurisdiction. In addition, while legislation has been enacted to protect private property against
expropriation and nationalisation, due to the lack of experience in enforcing these provisions and political
factors, these protections may not be enforced in the event of an attempted expropriation or nationalisation.
Expropriation or nationalisation of any of the Banks assets, or portions thereof, potentially without
adequate compensation, could materially and adversely affect the Banks business, prospects, financial
condition and results of operations.
Weaknesses relating to the Mongolian legal system and Mongolian legislation create an uncertain
environment for investment and business activity
The legal system in Mongolia is at an early stage of development and has various uncertainties that could
limit the full legal protections that may be available to Noteholders in more developed countries. The
following risks relating to the Mongolian legal system create uncertainties, many of which rarely exist in
countries with more developed market economies:

inconsistencies among, or uncertainties in the application or official interpretation of, laws, decrees,
orders and regulations, and regional and local rules and regulations, as a result of limited judicial
guidance, lack of stare decisis or established precedents and other factors;

limited judicial guidance on interpreting Mongolian legislation;

gaps in the regulatory structure due to delay in, or absence of, implementing regulations;

the lack of experience of judges and courts in interpreting new principles of Mongolian legislation,
particularly those relating to securities laws;

a relatively high degree of discretion on the part of governmental authorities; and

bankruptcy procedures that are not well developed and are subject to abuse.

In general, the Mongolian judicial system is relatively inexperienced in enforcing the laws and regulations
that currently exist, leading to a degree of uncertainty as to the outcome of any litigation. The Mongolian
judicial system may also favour Mongolian parties over foreign companies and individuals. Further, it may
be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgement by a court
of another jurisdiction. The introduction of new Mongolian laws and regulations and the application or

23

interpretation of existing ones may be subject to policy changes reflecting domestic political or social
changes. As the Mongolian legal system continues to develop, the Bank cannot assure prospective
purchasers that changes in such legislation or application or interpretation thereof will not have a material
adverse effect on the Banks business, financial condition, results of operations and future prospects.
In addition, while legislation has been enacted to protect private property against expropriation and
nationalisation, due to the lack of experience in enforcing these provisions and political factors, these
protections may not be enforced in the event of an attempted expropriation or nationalisation.
Expropriation or nationalisation of any of the Banks businesses, its assets or portions thereof, potentially
without adequate compensation, could have a material adverse effect on the Banks business and prospects
and on the trading price of the Notes.
The Mongolian economy depends heavily on agriculture and commodities for growth, which are cyclical
in nature, and is particularly vulnerable to fluctuations in commodity prices
The Mongolian economy depends heavily on certain market sectors, particularly gold, copper and coal
mining and agriculture, including herding livestock. According to the National Statistical Office of
Mongolia, agriculture and mining accounted for 20.2% of Mongolias GDP for 2011. Prices for agricultural
products and commodities such as gold and copper are based upon or affected by global prices for such
products, which tend to be cyclical in nature. The markets for such products are sensitive to changes in
industry capacity and output levels and changes in the world and Asian economies (including the
imposition of tariffs and/or anti-dumping measures by the United States, the European Union, countries in
Southeast Asia or by other principal export markets), all of which can have a significant impact on selling
prices. As such, the Mongolian economy is affected by both worldwide and regional levels of demand for
these products, along with price competition. Moreover, weak economic conditions or changes in
consumer preferences, whether in the world, Asia generally or Mongolia specifically, may reduce demand
and put pressure on margins. To the extent that the Mongolian economy is affected by such price
fluctuations, the Banks business, financial condition, results of operations, cash flows and prospects may
be adversely affected.
Key decisions concerning foreign participation in the countrys mining sector may have an adverse
impact on the Mongolian economy
The Banks corporate lending business, and the Mongolian economy generally, depend heavily on
commercial activity associated with the Mongolian mining industry. The development of mining laws and
regulations in Mongolia is at a nascent stage and is influenced by the interests of political parties, mining
interests, domestic financial interests as well as the need to maintain the Mongolian mining industry as a
commercially attractive destination for foreign investment.
Laws governing Mongolias mining industry, including provisions pertaining to Government participation
in or control of certain projects as well as the royalties and other taxes payable by the mining industry, have
historically been subject to periodic substantive revision by the Mongolian Parliament. For example, the
Government imposed a windfall profits tax on mining reserves prior to repeal and debate regarding
changes to basic royalty rate to replace lost tax revenue. In the event any future revisions to this legal
regime adversely impact foreign direct investment in Mongolia, and its mining industry in particular, the
Mongolian economy and, in turn, the Banks business, financial condition and results of operations could
be materially adversely affected.
The Mongolian economy is heavily dependent on its export trade and, in particular, relies on the PRC
as its main export market. Any decrease in the level of demand in the PRC for exports from Mongolia
will affect the Mongolian economy
The Mongolian economy relies heavily on its export trade and produces and exports large amounts of metal
products, coal and agriculture. Since its transition to a market economy in the 1990s, the PRC has emerged
as an important trading partner of Mongolia, mainly due to its geographic proximity. According to the
National Statistical Office of Mongolia, the PRC accounted for over 92.1% of Mongolias total exports in
2011. Mining products such as copper, coal and other metals represent the majority share of Mongolian
exports to the PRC. As the Mongolian economy is heavily dependent on its export trade, trade relationships
with other countries can influence Mongolian economic conditions and, in particular, any decrease in the
level of demand for its exports for any reason whatsoever would likely affect Mongolias GDP and
economy, which could in turn affect the Banks business and results of operations. Mongolia experienced
a trade deficit of US$612.6 million in 2008 due to collapsing commodity prices, notably copper and a steep

24

drop in external demand. Likewise, when the PRC economy stabilised, Mongolias export activities
tracked movements in the PRC economy and rapidly recovered. Total exports in 2011 were US$4,780.4
million an increase of 153.5% since 2009. If Mongolias trade deficits increase or become unmanageable,
the Mongolian economy, and therefore, the Banks business, future financial performance and trading in
the Notes may be adversely affected.
Currently, exports to China are transported by road and railway. The Government plans to connect the
mineral deposits along the southern perimeter of Mongolia to PRC markets by railway, construction for
which is expected to commence in 2012. Any delays in the construction of the railway link to China could
adversely affect Mongolias export volumes.
A decline in Mongolias foreign exchange reserves affect liquidity and interest rates in the Mongolian
economy
As the global economic crisis deepened in 2008 and 2009, the Mongolian currency weakened significantly
due to currency flight, which was accelerated initially by the Bank of Mongolias attempts to defend the
currency and maintain its de facto currency peg to the U.S. dollar. In the course of implementing such
policies, the Bank of Mongolia used approximately US$500 million of its foreign currency reserves
between July 2008 and February 2009 while the Mongolian currency depreciated by approximately 38%
between the end of October 2008 and mid-March 2009. The Bank of Mongolia took subsequent measures,
including the implementation of a flexible exchange rate regime that limited intervention and opportunistic
building of reserves. Intervention was transparently conducted through a bi-weekly foreign exchange
auctioning mechanism supported by a 4% increase in the policy interest rate, which measures were
effective in calming markets and attracting capital back to Mongolia. The foreign exchange market has
since stabilised and total foreign exchange reserves reached an all-time high of US$2.5 billion as at 31
December 2011. A sharp decline in these reserves could result in reduced liquidity and higher interest rates
in the Mongolian economy. Reduced liquidity or an increase in interest rates in the economy following a
decline in foreign exchange reserves could adversely affect the Banks business, its future financial
performance and trading in the Notes.
Emerging markets such as Mongolia are subject to greater risks than more developed markets, and are
particularly vulnerable to fluctuations in the global economy
The Mongolian market and the Mongolian economy are influenced by economic and market conditions in
other countries. Moreover, financial turmoil in any emerging market country tends to adversely affect
prices in capital markets of all emerging market countries, including Mongolia, as investors move their
money to more stable, developed markets. As has happened in the past, financial problems or an increase
in the perceived risks associated with investing in emerging economies could dampen foreign investment
in Mongolia and adversely affect the Mongolian economy. A loss of investor confidence in the financial
systems of other emerging markets may cause volatility in Mongolian financial markets and indirectly, in
the Mongolian economy in general. Any worldwide financial instability could also have a negative impact
on the Mongolian economy. This in turn could negatively impact the Mongolian economy, including the
movement of exchange rates and interest rates in Mongolia. In addition, during such times, companies that
operate in emerging markets can face severe liquidity constraints as foreign funding sources are
withdrawn. Thus, even if the Mongolian economy remains relatively stable, financial turmoil in any
emerging market country could seriously disrupt the Banks business, as well as adversely affect trading
in the Notes. Mongolias inflation rate is also higher than some of the more developed economies. A further
increase in Mongolias inflation rate could materially and adversely impact the Banks business, financial
condition and results of operations.
Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate
the significance of the risks involved in, and are familiar with, investing in emerging markets. Investors
should also note that emerging markets such as Mongolia are subject to rapid change and that the
information set out in this Information Memorandum may become outdated relatively quickly.
Unlawful, selective or arbitrary Government action could occur in Mongolia
Governmental authorities have a relatively high degree of discretion in Mongolia and at times appear to
act selectively or arbitrarily, without due process, and in a manner that is contrary to law or influenced by
political or commercial considerations. The Banks assets and customers are predominantly located in
Mongolia. The Government has traditionally exercised and continues to exercise a dominant influence over
many aspects of the Mongolian economy. Its economic policies have had and could continue to have a

25

significant effect on Mongolian companies and financial institutions, including the Bank, and on market
conditions and prices of Mongolian securities, including the Notes. The Government may also, in certain
circumstances, interfere with the performance of contracts. Unlawful, selective or arbitrary governmental
actions have reportedly included suspension or withdrawal of licences, sudden and unexpected tax audits,
criminal prosecutions and civil actions. Government entities also appear to have used common defects in
matters surrounding securities issuances and registration as pretexts for court claims and other demands
to invalidate the issuances or registrations or to void transactions, seemingly for economic and political
purposes. In such an environment, competitors of the Bank may receive preferential treatment from the
Government and governmental authorities, potentially giving them a competitive advantage. Unlawful,
selective or arbitrary Government action, if directed at the Banks operations, could have a material
adverse effect on the Banks business, results of operations and prospects and on the trading price of the
Notes.
Corporate governance and disclosure standards in Mongolia may differ from those in more developed
countries and there may be less company information available in the Mongolian securities markets
than securities markets in more developed countries
While a principal objective of Mongolian securities laws is to promote full and fair disclosure of material
corporate information, there may be less publicly available information about Mongolian companies, such
as the Bank, than is regularly made available by companies in certain other countries. Furthermore,
although the Bank complies with the requirements of the Bank of Mongolia with respect to corporate
governance standards, these standards may differ from those applicable in other jurisdictions.
There may also be differences between the level of regulation and monitoring of the Mongolian securities
markets and the activities of investors, brokers and other participants and that of the markets in more
developed countries. The FRC is responsible for monitoring and regulating the Mongolian securities
markets, and creating a proper regulatory and supervisory environment for capital market transactions. The
FRC has issued regulations and guidelines on disclosure requirements and other matters regarding
securities traded in Mongolia. However, the FRC regulations only cover securities traded in Mongolia, and
as securities laws, including those relating to corporate governance, disclosure and reporting requirements,
anti-fraud safeguards, insider trading restrictions and fiduciary duties have only been adopted recently and
have limited histories of interpretation and enforcement, it is often unclear whether or how regulations,
decisions and letters issued by various regulatory authorities apply to the Bank. As a result, the Bank may
be subject to fines or other enforcement measures despite its best efforts at compliance. Any or all of these
factors may adversely affect the Banks ability to conduct securities-related transactions, including the
issue and sale of the Notes.
The recent turmoil and upheaval in the global financial markets and the resulting overall slowdown in
the global economy and in particular in Mongolia could materially and adversely affect the Banks
financial condition and results of operations
Since July 2007, significant adverse developments in the U.S. sub-prime mortgage sector have created
significant disruption and volatility in global financial markets. The ensuing contraction of liquidity,
diminished credit availability, deterioration in asset values, increase in bankruptcies, rising unemployment
rates and declining confidence of consumption and business caused an overall slowdown in the global
economy. Beginning in the second half of 2008 up to mid-2009, the worlds largest economies, including
the United States, Europe and Japan, were widely considered to be in the midst of significant economic
recessions, and major emerging economies such as the PRC and India also faced substantial slowdown in
their economic growth.
Mongolia was severely affected by the global economic slowdown although it experienced a turnaround
in late 2009 and a broad-based recovery in 2010 that continued in 2011. However, future uncertainties in
the global economies may lead to an economic slowdown in Mongolia and may adversely affect the Banks
financial condition and results of operation in many ways, including, the increased regulation and
supervision of the financial services industry in response to the financial crisis, which may restrict its
business flexibility and increase its compliance costs. In addition, the uncertainty surrounding the recent
European sovereign debt crisis may negatively affect the Mongolian economy. The Bank cannot assure you
that if an economic downturn occurs, that there would not result in a decline in customer demand for its
products and services as well as a corresponding increase in personal, SME and micro business
bankruptcies, which could have a material and adverse affect on its businesses, results of operations and
financial condition.

26

A severe or prolonged downturn in the global economy could materially and adversely affect the business,
results of operations and financial condition of the Bank. Recent global market and economic conditions
have been challenging with tight credit conditions and recession in most major economies. Continued
concerns about the systemic impact of potential long-term and widespread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have
contributed to increased market volatility and diminished expectations for economic growth around the
world. The economic outlook has negatively affected business and consumer confidence and contributed
to significant levels of volatility. Continued turbulence in the international markets and prolonged declines
in consumer spending, as well as any slowdown of economic growth globally may continue to have an
adverse impact on the Mongolian economy and its industry sectors, which may in turn adversely affect the
business, results of operations and financial condition of the Bank.
Destabilising events in other parts of the world could interrupt the Banks business
Events related to the terrorist attacks in the United States that took place on 11 September 2001, recent
developments in the Middle East, including the war in Iraq, higher oil and food prices, natural disasters,
the general weakness of the global economy and the outbreak of epidemic diseases in Asia and other parts
of the world have increased the uncertainty of global economic prospects in general. The Bank cannot
assure prospective purchasers that further terrorist acts or other destabilising events will not occur in the
future. In addition, although such acts and events have not targeted or directly affected Mongolia, the
Banks assets or those of the Banks customers, the Bank cannot assure prospective purchasers that they
will not do so in the future. The Banks current insurance policies do not cover terrorist attacks or other
such destabilising events. Any terrorist attack, natural disaster or other such event including damage to the
Banks infrastructure or that of the Banks customers, could cause interruption to parts of the Banks
business and materially and adversely affect the Banks business, financial condition, results of operations,
cash flows and prospects.
The Bank faces risks related to health epidemics and other outbreaks of contagious diseases
The Banks business could be adversely affected by the outbreaks of severe acute respiratory syndrome
(SARS) or other contagious diseases. There have been reports of outbreaks of a highly pathogenic avian
flu, caused by the H5N1 virus, in certain regions of Asia and Europe since 2003. While there have been
no reported cases of avian flu in Mongolia, there have been reports on the occurrences of avian flu or other
deadly infectious diseases in various parts of the PRC, including a few confirmed cases of human infection.
An outbreak of avian flu in the human population of the PRC could result in a widespread health crisis that
has the potential to spread to Mongolia and could adversely affect the economies and financial markets of
many countries, particularly in Asia. Additionally, any recurrence of SARS, a highly contagious form of
atypical pneumonia, similar to the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan,
Singapore, Vietnam and certain other countries, would also have similar adverse effects. As a significant
portion of Mongolias economy relies on trade with the PRC and as many of the Banks customers have
business interests in the PRC, these outbreaks of contagious diseases, and other adverse public health
developments in the PRC, could have a material adverse effect on the Banks business, financial condition
and results of operations. The Bank has not adopted any written preventive measures or contingency plans
to combat any future outbreak any epidemic or outbreak of disease.
Risks Relating to the Notes
Non-enforcement of foreign judgements may limit the ability of Noteholders to recover damages from
the Bank through court proceedings
The Bank is a limited liability company organised in Mongolia and substantially all of its assets are located
in Mongolia. In addition, all of its directors and officers are resident in Mongolia. As a result, it may be
difficult for investors (a) to effect service of process, including judgements, on the Bank or the directors
and officers of the Bank outside Mongolia, (b) to enforce against any of them, in courts of jurisdictions
other than Mongolia, judgements obtained in such courts that are predicated upon the laws of such other
jurisdictions, (c) to enforce a foreign arbitral award against the Bank or (d) to enforce against any of them,
in Mongolian courts, judgements obtained in jurisdictions other than Mongolia, including judgements
obtained in connection with the Notes and the Trust Deed in the courts of England and Wales.
The Notes and the Trust Deed are governed by English law (except that Clause 2.7 of the Trust Deed and
Condition 3.2 are governed by Mongolian law) and the Bank has agreed in the Trust Deed that disputes
arising thereunder or in respect of the Notes are subject to arbitration before the London Court of

27

International Arbitration or, at the election of the Trustee or, in certain circumstances, a Noteholder, to the
juridiction of the English courts. The Bank has been advised by its Mongolian legal advisers that
Mongolian courts will not enforce judgements of non-Mongolian courts unless, among other things, there
is in effect a treaty between such country and Mongolia providing for the reciprocal enforcement of
judgements and then only in accordance with the terms of such treaty. There is no such treaty in effect
between Mongolia and the United Kingdom. As a result, holders of the Notes may be required to pursue
claims against the Bank or its directors and officers in Mongolian courts. Although Mongolian courts may
enter judgements based on choice of law of jurisdictions other than Mongolia, in view of the lack of
experience of the Mongolian courts with foreign law, the results of such judgements may be unsatisfactory
to support the legitimate claims of litigants. The Bank cannot assure prospective purchasers that the claims
or remedies available under Mongolian law will be the same, or as extensive, as those available in other
jurisdictions.
However, both Mongolia and the United Kingdom are parties to the Convention and, accordingly, an
arbitration award obtained in a state which is party to the Convention, such as the United Kingdom, should
be recognised and enforceable in Mongolia, provided that the conditions to enforcement set out in the
Convention are met.
The Notes may have limited liquidity
The Notes when issued will constitute a new issue of securities for which there will be no existing trading
market. Although the Dealers may make a market in the Notes, they are not obligated to do so, and any
market-making activity with respect to the Notes, if commenced, may be discontinued at any time without
notice. The Bank cannot assure holders of the Notes that a trading market for the Notes will develop or
be maintained. If such a market were to develop, it is not possible to predict the price at which Notes will
trade in such market or whether such market will be liquid or illiquid. The Bank may, but is not obliged
to, list or admit to trading Notes on a stock exchange or market. If the Notes are not listed or admitted to
trading on any stock exchange or market, pricing information for the Notes may be more difficult to obtain
and the liquidity of the Notes may be adversely affected. If the Bank does list or admit to trading an issue
of Notes, it cannot assure holders of the Notes that at a later date, the Notes will not be delisted or that
trading on such stock exchange or market will not be suspended. The Bank cannot assure prospective
purchasers that a market for the Notes will develop in the future. If such a market were to develop, the
Notes could trade at prices that may be higher or lower than the offering price depending on many factors,
including, among others:

the complexity and volatility of the bases of reference applicable to the Notes;

the method of calculating amounts payable, or other consideration, if any, in respect of the Notes;

the time remaining to the redemption of the Notes;

the number of Notes outstanding;

the settlement features of the Notes;

the amount of other securities linked to the bases of reference applicable to the Notes;

prevailing interest rates;

the Banks financial condition, performance and prospects;

the rate of exchange between Tugriks and the Specified Currency in which the relevant Notes are
issued;

political and economic developments in Mongolia; and

the market conditions for similar securities.

Holders of the Notes may not be able to sell such Notes readily or at prices that will enable them to realise
their anticipated yield. No investor should purchase Notes unless such investor understands and is able to
bear the risk that such Notes may not be readily saleable, that the value of such Notes will fluctuate over
time, that such fluctuations may be significant and that such investor may lose all or a substantial portion
of the purchase price of the Notes.

28

Certain provisions in the Trust Deed define the limits of a Noteholders rights under the Notes
The Trust Deed contains provisions for calling meetings of Noteholders to consider matters affecting their
interests generally. These provisions permit defined majorities to bind all Noteholders of a relevant Series
including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in
a manner contrary to the majority.
The conditions of the Notes also provide that the Trustee may in certain circumstances, without the consent
of Noteholders (i) agree to modifications, or to the waiver or authorisation of any breach or proposed
breach, of the provisions of Notes or (ii) determine without the consent of the Noteholders that an Event
of Default or a potential Event of Default shall not be treated as such or (iii) agree to the substitution of
another company as principal debtor under any Notes in place of the Issuer, in each case in the
circumstances described in Condition 16 of the Notes.
If, in connection with the exercise of its powers, trusts, authorities or discretions, the Trustee is of the
opinion that the interests of the Noteholders would be materially prejudiced thereby, the Trustee shall not
exercise such power, trust, authority or discretion without the approval of such Noteholders in accordance
with the Trust Deed. The Trust Deed provides the Trustee to take action on behalf of the Noteholders in
certain circumstances, but only if the Trustee is indemnified and/or secured to its satisfaction.
Investors in the Notes may be exposed and subject to exchange rate risks and exchange controls
The Issuer or, as the case may be, the Bank will pay principal and interest on the Notes in the Specified
Currency (as defined in the Conditions). This presents certain risks relating to currency conversions if an
investors financial activities are denominated principally in a currency or currency unit (the Investors
Currency) other than the Specified Currency. These include the risk that exchange rates may significantly
change (including changes due to devaluation of the Specified Currency or revaluation of the Investors
Currency) and the risk that authorities with jurisdiction over the Investors Currency may impose or
modify exchange controls. An appreciation in the value of the Investors Currency relative to the Specified
Currency would decrease (i) the Investors Currency-equivalent yield on the Notes, (ii) the Investors
Currency-equivalent value of the principal payable on the Notes and (iii) the Investors Currencyequivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that
could adversely affect an applicable exchange rate. As a result, investors may receive less interest or
principal than expected, or no interest or principal.
Credit ratings may not reflect all risks relating to an investment in the Notes
One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may
not reflect the potential impact of all risks related to structure, market, additional factors discussed above,
and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy,
sell or hold securities and may be revised or withdrawn by the rating agency at any time.
Subordinated Notes are subordinated and have only limited rights of acceleration
Subordinated Notes will be subordinated obligations of the Bank. Payments on Subordinated Notes will
be subordinated in right of payment upon the winding-up or liquidation of the Bank to the claims of all
other creditors of the Bank, except claims of holders of subordinated indebtedness which rank equally with
or junior to the Subordinated Notes. As a consequence of these subordination provisions, in the event of
a winding-up or liquidation of the Banks operations, the holders of Subordinated Notes may recover
proportionately less than the holders of the Banks deposit liabilities or the holders of its other
unsubordinated liabilities, including Senior Notes. As at 31 December 2011, a majority of the Banks
outstanding liabilities (including deposits, borrowings, call money, guarantees and acceptances,
outstanding debt securities issued and other liabilities, but excluding provisions) would rank senior to
Subordinated Notes.
Only events relating to the Banks winding-up, liquidation or reorganisation, or revocation of the Banks
banking licence issued by the Bank of Mongolia will permit a holder (or the Trustee on its behalf) of a
Subordinated Note to accelerate payment of such Subordinated Notes. See Condition 11.2. In such event,
the only actions the holder (or the Trustee on its behalf) may take in Mongolia against the Bank are certain
actions to cause, or make a claim in, the Banks liquidation or reorganisation. Furthermore, if the Banks
indebtedness were to be accelerated, its assets may be insufficient to repay in full borrowings under all
such indebtedness, including the Notes.

29

Subordinated Notes may not qualify as Tier II Capital


The Bank cannot assure prospective purchasers that Subordinated Notes will continue to qualify as Tier
II capital under the Prudential Ratio Regulation of the Bank of Mongolia, pursuant to which certain
preferred stock, revaluation funds, social development funds and other subordinated debt which cannot be
repaid prior to maturity without the consent of the Bank of Mongolia may be treated as Tier II capital. The
failure of Subordinated Notes to qualify as Tier II capital for any reason (including changes in law,
regulations or interpretations of the Bank of Mongolia or other Government authorities) would adversely
affect the Banks capital adequacy ratio.
Payments under the Subordinated Notes will require prior approval of the Bank of Mongolia or may be
subject to compliance with applicable regulatory requirements
Payments of the principal of and/or interest on Subordinated Notes in certain situations described in the
Terms and Conditions of the Notes, including redemption of the Subordinated Notes prior to or upon
maturity and acceleration pursuant to Condition 11.2(b), will be subject to the prior approval of the Bank
of Mongolia as required by and in compliance with the Prudential Ratio Regulations and other applicable
regulations of the Bank of Mongolia, and may be subject to compliance with other applicable regulatory
requirements. Acceleration of payments in respect of Subordinated Notes pursuant to Condition 11.2(b)
will also be subject to the prior approval of the liquidation commission or liquidator as required. The Bank
cannot assure prospective purchasers that it will be able to obtain necessary regulatory approvals in a
timely manner or at all, which may cause the Bank to be unable to make payments of principal and interest
on Subordinated Notes in certain situations.
Modification and waiver
The Conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters
affecting their interests generally. These provisions permit defined majorities to bind all Noteholders
including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in
a manner contrary to the majority.
European Monetary Union
If the United Kingdom joins the European Monetary Union prior to the maturity of the Notes, there is no
assurance that this would not adversely affect investors in the Notes. It is possible that prior to the maturity
of the Notes the United Kingdom may become a participating Member State and that the euro may become
the lawful currency of the United Kingdom. In that event (i) all amounts payable in respect of any Notes
denominated in sterling may become payable in euro; (ii) the law may allow or require such Notes to be
re-denominated into euro and additional measures to be taken in respect of such Notes; and (iii) there may
no longer be available published or displayed rates for deposits in sterling used to determine the rates of
interest on such Notes or changes in the way those rates are calculated, quoted and published or displayed.
The introduction or the euro could also be accompanied by a volatile interest rate environment, which
could adversely affect investors in the Notes.
EU Savings Directive
Under EC Council Directive 2003/48/EC (the Directive) on the taxation of savings income, Member
States are required to provide to the tax authorities of another Member State details of payments of interest
(or similar income) paid by a person within its jurisdiction to an individual resident in that other Member
State or to certain limited types of entities established in that other Member State. However, for a
transitional period, Luxembourg and Austria are instead required (unless during that period they elect
otherwise) to operate a withholding system in relation to such payments (the end of such transitional period
being dependent upon the conclusion of certain other agreements relating to information exchange with
certain other countries). A number of non-EU countries and territories including Switzerland, have adopted
similar measures (a withholding system in the case of Switzerland).
The European Commission has proposed certain amendments to the Directive which may, if implemented,
amend or broaden the scope of the requirements described above.

30

If a payment were to be made or collected through a Member State which has opted for a withholding
system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer
nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any
Notes as a result of the imposition of such withholding tax. The Bank is required to maintain a Paying
Agent in a Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
Change of law
The Conditions of the Notes are based on English law (except for Condition 3.2, which is governed by
Mongolian law) in effect as at the date of this Information Memorandum. No assurance can be given as
to the impact of any possible judicial decision or change to English law or administrative practice after the
date of this Information Memorandum.
Notes where denominations involve integral multiples: definitive Notes
In relation to any issue of Notes which have denominations consisting of a minimum specified
denomination plus one or more higher integral multiples of another smaller amount, it is possible that such
Notes may be traded in amounts that are not integral multiples of such minimum specified denomination.
In such a case a holder who, as a result of trading such amounts, holds an amount which is less than the
minimum specified denomination in his account with the relevant clearing system at the relevant time may
not receive a definitive Note in bearer form in respect of such holding (should such Notes be printed) and
would need to purchase a principal amount of Notes such that its holding amounts to a specified
denomination.
If definitive Notes are issued, holders should be aware that definitive Notes which have a denomination
that is not an integral multiple of the minimum specified denomination may be illiquid and difficult to
trade.
Reliance on Euroclear and Clearstream, Luxembourg procedures
Notes issued under the Programme will be represented on issue by one or more Global Notes that may be
deposited with a common depositary for Euroclear and Clearstream, Luxembourg or (each as defined under
Form of the Notes). Except in the circumstances described in each Global Note, investors will not be
entitled to receive Notes in definitive form. Each of Euroclear and Clearstream, Luxembourg and their
respective direct and indirect participants will maintain records of the beneficial interests in each Global
Note held through it. While the Notes are represented by a Global Note, investors will be able to trade their
beneficial interests only through the relevant clearing systems and their respective participants.
While the Notes are represented by Global Notes, the Bank will discharge its payment obligation under the
Notes by making payments through the relevant clearing systems. A holder of a beneficial interest in a
Global Note must rely on the procedures of the relevant clearing system and its participants to receive
payments under the Notes. The Bank has no responsibility or liability for the records relating to, or
payments made in respect of, beneficial interests in any Global Note.
Holders of beneficial interests in a Global Note will not have a direct right to vote in respect of the Notes
so represented. Instead, such holders will be permitted to act only to the extent that they are enabled by
the relevant clearing system and its participants to appoint appropriate proxies.
The secondary market generally
Notes may have no established trading market when issued, and one may never develop. If a market does
develop, it may not be very liquid. Therefore, investors may not be able to sell their Notes easily or at
prices that will provide them with a yield comparable to similar investments that have a developed
secondary market. This is particularly the case for Notes that are especially sensitive to interest rate,
currency or market risks, are designed for specific investment objectives or strategies or have been
structured to meet the investment requirements of limited categories of investors. These types of Notes
generally would have a more limited secondary market and more price volatility than conventional debt
securities. Illiquidity may have a severely adverse effect on the market value of Notes.

31

Risks related to the structure of a particular issue of Notes


A wide range of Notes may be issued under the Programme. A number of these Notes may have features
which contain particular risks for potential investors. Set out below is a description of the most common
of such features:
Notes subject to optional redemption by the Issuer
An optional redemption feature of Notes is likely to limit their market value. During any period when the
Bank may elect to redeem Notes, the market value of those Notes generally will not rise substantially
above the price at which they can be redeemed. This also may be true prior to any redemption period. The
Bank may be expected to redeem Notes when its cost of borrowing is lower than the interest rate on the
Notes. At those times, an investor generally would not be able to reinvest the redemption proceeds at an
effective interest rate as high as the interest rate on the Notes being redeemed and may only be able to do
so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other
investments available at that time.
Index linked Notes and dual currency Notes
With respect to an investment in Notes indexed to one or more interest rates, currencies or other indices
or formulas, significant risks exist that are not associated with a conventional fixed rate or floating rate
debt security. The Bank may issue Notes with principal or interest determined by reference to an index or
formula, to changes in the prices of securities or commodities, to movements in currency exchange rates
or other factors (each, a Relevant Factor). In addition, the Bank may issue Notes with principal or
interest payable in one or more currencies that may be different from the currency in which the Notes are
denominated. Potential investors should be aware that:

the market price of such Notes may be very volatile;

they may receive no interest;

payment of principal or interest may occur at a different time or in a different currency than expected;

they may lose all or a substantial portion of their principal;

a Relevant Factor may be subject to significant fluctuations that may not correlate with changes in
interest rates, currencies or other indices;

if a Relevant Factor is applied to Notes in conjunction with a multiplier greater than one or contains
some other leverage factor, the effect of changes in the Relevant Factor on principal or interest
payable is likely to be magnified; and

the timing of changes in a Relevant Factor may affect the actual yield to investors, even if the average
level is consistent with their expectations.

In general, the earlier the change in the Relevant Factor, the greater the effect on yield. The Bank has no
control over a number of matters, including economic, financial and political events, that are important in
determining the existence, magnitude and longevity of such risks and their results.
Partly-paid Notes
The Bank may issue Notes where the issue price is payable in more than one instalment. Failure to pay
any subsequent instalment could result in an investor losing all of its investment.
Fixed/floating rate Notes
Fixed/floating rate notes may bear interest at a rate that the Bank may elect to convert from a fixed rate
to a floating rate, or from a floating rate to a fixed rate. The Banks ability to convert the interest rate will
affect the secondary market and the market value of the Notes since it may be expected to convert the rate
when it is likely to produce a lower overall cost of borrowing. If the Bank converts the Notes from a fixed
rate to a floating rate, the spread on the fixed/floating rate Notes may be less favourable than then
prevailing spreads on comparable floating rate notes tied to the same reference rate. In addition, the new
floating rate at any time may be lower than the rates on other Notes. If the Bank converts from a floating
rate to a fixed rate, the fixed rate may be lower than then prevailing rates on the Notes.

32

Notes issued at a substantial discount or premium


The market values of securities issued at a substantial discount or premium from their principal amount
tend to fluctuate more in relation to general changes in interest rates than do prices for conventional
interest-bearing securities. Generally, the longer the remaining term of the securities, the greater the price
volatility as compared to conventional interest-bearing securities with comparable maturities.
Exchange rate risks and exchange controls
The Bank will pay principal and interest on the Notes in the Specified Currency. This presents certain risks
relating to currency conversions if an investors financial activities are denominated principally in
Investors Currency other than the Specified Currency. These include the risk that exchange rates may
significantly change (including changes due to devaluation of the Specified Currency or revaluation of the
Investors Currency) and the risk that authorities with jurisdiction over the Investors Currency may
impose or modify exchange controls. An appreciation in the value of the Investors Currency relative to
the Specified Currency would decrease (i) the Investors Currency equivalent yield on the Notes, (ii) the
Investors Currency equivalent value of the principal payable on the Notes and (iii) the Investors Currency
equivalent market value of the Notes. Government and monetary authorities may impose (as some have
done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result,
investors may receive less interest or principal than expected, or no interest or principal at all.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to legal investment laws and regulations, or
review or regulation by certain authorities. Each potential investor should consult its legal advisers to
determine whether and to what extent (i) Notes are legal investments for it, (ii) Notes can be used as
collateral for various types of borrowing and (iii) other restrictions apply to its purchase or pledge of any
Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine
the appropriate treatment of Notes under any applicable risk-based capital or similar rules.

33

INFORMATION INCORPORATED BY REFERENCE


The following documents shall be deemed to be incorporated in, and to form part of, this Information
Memorandum:
(1)

the publicly available audited consolidated annual financial statements and the interim financial
statements (if any) of the Bank for the most recent financial period (see General Information for
a description of such financial statements published by the Bank); and

(2)

all amendments and supplements to this Information Memorandum prepared and circulated by the
Bank from time to time,

save that any statement contained herein or in a document which is deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for the purpose of this Information Memorandum to
the extent that a statement contained in any such subsequent document which is deemed to be incorporated
by reference herein modifies or supersedes such earlier statement (whether expressly, by implication or
otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Information Memorandum.
The Bank will provide, without charge, to each person to whom a copy of this Information Memorandum
has been delivered, upon the request of such person, a copy of any or all of the documents deemed to be
incorporated herein by reference unless such documents have been modified or superseded as specified
above. Requests for such documents should be directed to the Bank at the address set out at the end of this
Information Memorandum. In addition, such documents will be available to holders of Notes from the
principal office of The Hongkong and Shanghai Banking Corporation Limited as principal paying agent
(the Principal Paying Agent) at Level 30, HSBC Main Building, 1 Queens Road Central, Hong Kong.
In connection with the listing of the Notes on the SGX-ST, and for so long as any Note remains outstanding
and listed on such exchange, in the event of any material change in the condition of the Bank which is not
reflected in this Information Memorandum, the Bank will prepare a supplement to this Information
Memorandum or publish a new Information Memorandum for use in connection with any subsequent issue
of the Notes to be listed on the SGX-ST.
In addition, if the terms of the Programme are modified or amended in a manner which would make this
Information Memorandum, as so modified or amended, inaccurate or misleading, the Bank will prepare a
new Information Memorandum.

34

TERMS AND CONDITIONS OF THE NOTES


The following are the Terms and Conditions of the Notes which will be incorporated by reference into each
Global Note (as defined below) and each definitive Note, in the latter case only if permitted by the relevant
stock exchange or other relevant authority (if any) and agreed by the Issuer and the relevant Dealer at the
time of issue but, if not so permitted and agreed, such definitive Note will have endorsed thereon or
attached thereto such Terms and Conditions. The applicable Pricing Supplement in relation to any Tranche
of Notes may specify other terms and conditions which shall, to the extent so specified or to the extent
inconsistent with the following Terms and Conditions, replace or modify the following Terms and
Conditions for the purpose of such Notes. The applicable Pricing Supplement (or the relevant provisions
thereof) will be endorsed upon, or attached to, each Global Note and definitive Note. Reference should be
made to Pro Forma Pricing Supplement for a description of the content of Pricing Supplement which
will specify which of such terms are to apply in relation to the relevant Notes.
This Note is one of a Series (as defined below) of Notes issued by Trade and Development Bank of
Mongolia LLC (state registration number 2635534) (the Issuer) and constituted by a trust deed dated 5
January 2007 as supplemented by a first supplemental trust deed dated 4 June 2008, a second supplemental
trust deed dated 9 October 2010 and a third supplemental trust deed dated 16 April 2012 (as further
amended and/or supplemented and/or restated from time to time, the Trust Deed) made between the
Issuer and The Hongkong and Shanghai Banking Corporation Limited (the Trustee, which expression
shall include any successor as Trustee).
References herein to the Notes shall be references to the Notes of this Series and shall mean:
(a)

in relation to any Notes represented by a global Note (a Global Note), units of each Specified
Denomination in the Specified Currency;

(b)

any Global Note in bearer form (Bearer Global Note);

(c)

any Global Note in registered form (Registered Global Note);

(d)

any definitive Notes in bearer form (Definitive Bearer Notes, and together with Bearer Global
Notes, the Bearer Notes) issued in exchange for a Bearer Global Note; and

(e)

any definitive Notes in registered form (Definitive Registered Notes, and together with Registered
Global Notes, the Registered Notes) (whether or not issued in exchange for a Registered Global
Note).

The Notes, the Receipts (as defined below) and the Coupons (as defined below) have the benefit of an
agency agreement dated 5 January 2007 as supplemented by a first supplemental agency agreement dated
9 October 2010 (such agency agreement as further amended and/or supplemented and/or restated from time
to time, the Agency Agreement) and made between the Issuer, the Trustee, The Hongkong and Shanghai
Banking Corporation Limited as principal paying agent (the Principal Paying Agent, which expression
shall include any successor principal paying agent (as defined below) and any additional paying agents
appointed in accordance with the Agency Agreement (the Paying Agents, which expression shall include
any successor paying agents) and The Hongkong and Shanghai Banking Corporation Limited as registrar
(the Registrar, which expression shall include any successor registrar, and together with the Principal
Paying Agent, the Transfer Agents, which expression shall include any successor transfer agent).
Interest bearing Definitive Bearer Notes have interest coupons (Coupons) and, if indicated in the
applicable Pricing Supplement, talons for further Coupons (Talons) attached on issue. Any reference
herein to Coupons or coupons shall, unless the context otherwise requires, be deemed to include a
reference to Talons or talons. Definitive Bearer Notes repayable in instalments have receipts (Receipts)
for the payment of the instalments of principal (other than the final instalment) attached on issue.
Definitive Registered Notes and Global Notes do not have Receipts, Coupons or Talons attached on issue.
The Pricing Supplement for this Note (or the relevant provisions thereof) is attached to or endorsed on this
Note and supplements these Terms and Conditions (the Conditions) and may specify other terms and
conditions which shall, to the extent so specified or to the extent inconsistent with the Conditions, replace
or modify the Conditions for the purposes of this Note. References to the applicable Pricing Supplement
are to the Pricing Supplement (or the relevant provisions thereof) attached to or endorsed on this Note.

35

The Trustee acts for the benefit of (in the case of Bearer Notes) the holders for the time being of the Notes
and (in the case of Registered Notes) the persons in whose name the Notes are registered for the time being
(the Noteholders, which expression shall, in relation to any Notes represented by a Global Note, be
construed as provided in Condition 1 below), the holders of the Receipts (the Receiptholders) and the
holders of the Coupons (the Couponholders, which expression shall, unless the context otherwise
requires, include the holders of the Talons), in each case in accordance with the provisions of the Trust
Deed.
As used herein, Tranche means Notes which are identical in all respects (including as to listing and
admission to trading) and Series means a Tranche of Notes together with any further Tranche or Tranches
of Notes which are (a) expressed to be consolidated and form a single series with such Tranche of Notes
and (b) identical in all respects (including as to listing and admission to trading) except for their respective
Issue Dates, Interest Commencement Dates and/or Issue Prices.
Copies of the Trust Deed and the Agency Agreement are available for inspection during normal business
hours at the principal office for the time being of the Trustee, which as at 16 April 2012 is located at Level
30, HSBC Main Building, 1 Queens Road Central, Hong Kong and at the specified office of each of the
Paying Agents, the Registrar and the Transfer Agents (such Agents and the Registrar being together
referred to as the Agents). Copies of the applicable Pricing Supplement in respect of any unlisted Notes
will only be obtainable by a Noteholder holding one or more such Notes and such Noteholder must produce
evidence satisfactory to the Issuer and the Trustee or, as the case may be, and the relevant Paying Agent
as to its holding of such Notes and identity. The Noteholders, the Receiptholders and the Couponholders
are deemed to have notice of, and are entitled to the benefit of, and are bound by all the provisions of the
Trust Deed, the Agency Agreement and the applicable Pricing Supplement which are applicable to them.
The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the
Trust Deed and the Agency Agreement.
Words and expressions defined in the Trust Deed, the Agency Agreement or used in the applicable Pricing
Supplement shall have the same meanings where used in these Conditions unless the context otherwise
requires or unless otherwise stated and provided that, in the event of inconsistency between the Trust Deed
and the Agency Agreement, the Trust Deed will prevail and, in the event of inconsistency between the Trust
Deed or the Agency Agreement and the applicable Pricing Supplement, the applicable Pricing Supplement
will prevail.
1.

FORM, DENOMINATION AND TITLE


The Notes will be issued either in bearer form or in registered form as specified in the applicable
Pricing Supplement, in the Specified Currency and the Specified Denomination(s). Notes of one
Specified Denomination may not be exchanged for Notes of another Specified Denomination and
Bearer Notes or interests in Bearer Notes may not be exchanged for Registered Notes or interests in
Registered Notes and vice versa. Definitive Notes will be serially numbered.
Bearer Global Notes will be deposited on or prior to the relevant Issue Date with a common
depositary for Euroclear Bank SA/NV (Euroclear) and Clearstream Banking, socit anonyme
(Clearstream, Luxembourg).
Registered Global Notes will be registered in the name of a nominee for, and deposited on or prior
to the relevant Issue Date with, a common depository for Euroclear and Clearstream, Luxembourg.
The Registrar is authorised on behalf of the Issuer to register Registered Notes for each series of
Notes in a register and the Transfer Agent is authorised on behalf of the Issuer to effect transfers of
any Definitive Registered Notes. The Issuer may appoint alternative registrars and transfer agents
pursuant to the Agency Agreement and as specified in the applicable Pricing Supplement; provided,
however, that for so long as any Definitive Registered Notes is listed on Singapore Exchange
Securities Trading Limited (the SGX-ST) and the rules of the SGX-ST so require, the Issuer will
appoint and maintain a Transfer Agent in Singapore.
This Note may be a Fixed Rate Note, a Floating Rate Note, a Zero Coupon Note, an Index Linked
Interest Note, a Dual Currency Interest Note or a combination of any of the foregoing, depending
upon the Interest Basis shown in the applicable Pricing Supplement.

36

This Note may be an Index Linked Redemption Note, an Instalment Note, a Dual Currency
Redemption Note, a Partly Paid Note or a combination of any of the foregoing, depending upon the
Redemption/ Payment Basis shown in the applicable Pricing Supplement.
Definitive Bearer Notes are issued with Coupons and (if applicable) Receipts and Talons attached,
unless they are Zero Coupon Notes in which case references to Coupons and Couponholders in these
Conditions are not applicable.
Subject as set out below, title to the Bearer Notes, Receipts and Coupons will pass by delivery and
title to the Registered Notes will pass upon registration in the register in accordance with the
provisions of the Agency Agreement. The Issuer, the Paying Agents and the Trustee may (except as
otherwise required by law) deem and treat the bearer of any Bearer Note, Receipt or Coupon (whether
or not overdue and notwithstanding any notice of ownership or writing thereon or notice of any
previous loss or theft thereof) and the person in whose name any Registered Note is registered as the
absolute owner thereof for all purposes but, in the case of any Global Note, without prejudice to the
provisions set out in the next succeeding paragraph.
For so long as any of the Notes is represented by a Global Note, each person who is for the time being
shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular
nominal amount of such Notes (in which regard any certificate or other document issued by Euroclear
or Clearstream, Luxembourg as to the nominal amount of such Notes standing to the account of any
person shall be conclusive and binding for all purposes save in the case of manifest error) shall be
treated by the Issuer, the Paying Agents and the Trustee as the holder of such nominal amount of such
Notes for all purposes other than with respect to the payment of principal or interest on such nominal
amount of such Notes, for which purpose the bearer of the relevant Bearer Global Note or the
registered holder of the relevant Registered Global Note shall be treated by the Issuer, any Paying
Agent and the Trustee as the holder of such nominal amount of such Notes in accordance with and
subject to the terms of the relevant Global Note and the expressions Noteholder and holder of
Notes and related expressions shall be construed accordingly. In determining whether a particular
person is entitled to a particular nominal amount of notes as aforesaid, the Trustee may rely on such
evidence and/or information and/or certification as it shall, in its absolute discretion, think fit and,
if it does so rely, such evidence and/or information and/or certification shall, in the absence of
manifest error, be conclusive and binding on all concerned.
Notes which are represented by a Global Note will be transferable only in accordance with the rules
and procedures for the time being of Euroclear and Clearstream, Luxembourg, as the case may be.
References to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be
deemed to include a reference to any additional or alternative clearing system specified in the
applicable Pricing Supplement or as may otherwise be approved by the Issuer, the Principal Paying
Agent and the Trustee.
2.

TRANSFERS OF REGISTERED NOTES

2.1

Transfers of interests in Registered Global Notes


Transfers of beneficial interests in Registered Global Notes will be effected by Euroclear or
Clearstream, Luxembourg, as the case may be, and, in turn, by other participants and, if appropriate,
indirect participants in such clearing systems acting on behalf of beneficial transferors and
transferees of such interests. Transfers of a Registered Global Note registered in the name of a
nominee for Euroclear or Clearstream, Luxembourg shall be limited to transfers of such Registered
Global Note, in whole but not in part, to another nominee of Euroclear or Clearstream, Luxembourg
or to a successor of Euroclear or Clearstream, Luxembourg or such successors nominee.

2.2

Transfers of Definitive Registered Notes


Subject as provided in Condition 2.5 below, upon the terms and subject to the conditions set forth
in the Trust Deed and the Agency Agreement, a Definitive Registered Note may be transferred in
whole or in part (in the Specified Denomination set out in the applicable Pricing Supplement). In
order to effect any such transfer (i) the holder or holders must (A) surrender the relevant Definitive
Registered Note for registration of the transfer of such Definitive Registered Note (or the relevant
part of such Definitive Registered Note) at the specified office of the Registrar or any Transfer Agent,

37

with the form of transfer thereon duly executed by the holder or holders thereof or his or their
attorney or attorneys duly authorised in writing and (B) complete and deposit such other
certifications as may be required by the Registrar or, as the case may be, the relevant Transfer Agent
and (ii) the Registrar or, as the case may be, the relevant Transfer Agent must, after due and careful
enquiry, be satisfied with the documents of title and the identity of the person making the request.
Any such transfer will be subject to such reasonable regulations as the Issuer and the Registrar may
from time to time prescribe (the initial such regulations being set out in Schedule 3 to the Agency
Agreement). Subject as provided above, the Registrar or, as the case may be, the relevant Transfer
Agent will, within three business days (being for this purpose a day on which banks are open for
business in the city where the specified office of the Registrar or, as the case may be, the relevant
Transfer Agent is located) of the request (or such longer period as may be required to comply with
any applicable fiscal or other laws or regulations), authenticate and deliver, or procure the
authentication and delivery of, at its specified office to the transferee or (at the risk of the transferee)
send by uninsured mail, to such address as the transferee may request, a new Definitive Registered
Note of a like aggregate nominal amount to the Definitive Registered Note (or the relevant part of
the Definitive Registered Note) transferred. In the case of the transfer of part only of a Definitive
Registered Note, a new Definitive Registered Note in respect of the balance of the Definitive
Registered Note not transferred will be so authenticated and delivered or (at the risk of the transferor)
sent to the transferor.
2.3

Registration of transfer upon partial redemption


In the event of a partial redemption of Notes under Condition 8, the Issuer shall not be required to
register the transfer of any Registered Note, or part of a Registered Note, called for partial
redemption.

2.4

Costs of registration
Noteholders will not be required to bear the costs and expenses of effecting any registration of
transfer as provided above, except for any costs or expenses of delivery other than by regular
uninsured mail and except that the Issuer may require the payment of a sum sufficient to cover any
stamp duty, tax or other governmental charge that may be imposed in relation to the registration.

2.5

Exchanges and transfers of Registered Notes generally


Holders of Definitive Registered Notes may exchange such Notes for interests in a Registered Global
Note of the same type at any time.

3.

STATUS

3.1

Status of the Senior Notes


Notes, the status of which is specified in the applicable Pricing Supplement as Senior (the Senior
Notes), and any relative Receipts and Coupons constitute direct, unconditional, unsubordinated and
(subject to the provisions of Condition 4.1) unsecured obligations of the Issuer and rank pari passu
among themselves and (save for certain obligations required to be preferred by law) equally with all
other unsecured obligations (other than subordinated obligations, if any) of the Issuer, from time to
time outstanding.

3.2

Status of the Subordinated Notes


This Condition 3.2 applies only to Notes the status of which is specified in the applicable Pricing
Supplement as Subordinated (the Subordinated Notes) and shall, to the extent applicable, be
governed by Mongolian law. It is intended that Subordinated Notes shall constitute Tier 2 capital of
the Issuer in accordance with the Prudential Ratio Regulations and other applicable regulations of the
Bank of Mongolia in force at the time of issue of such Subordinated Notes. Any redemption of such
Subordinated Notes prior to the Maturity Date will be subject to the prior approval of the Bank of
Mongolia and, if necessary, any other relevant authority at the relevant time. On the Maturity Date,
the Issuer shall not redeem the Subordinated Notes if it is insolvent at the time or payment thereof
will render it insolvent.

38

(a)

Subordination
Subordinated Notes and any relative Receipts and Coupons constitute unsecured and
subordinated obligations of the Issuer ranking pari passu without any preference among
themselves and, in the event of the winding up or liquidation of the Issuer, the claims of the
holders of Subordinated Notes and any relative Receipts and Coupons pursuant thereto will be
subordinated in right of payment to the claims of all other creditors (other than claims of
holders of subordinated indebtedness ranking equal to or lower than the claims of the holders
of Subordinated Notes and any relative Receipts and Coupons, if any) of the Issuer in the
manner and to the extent provided in the Trust Deed. The claims of holders of Subordinated
Notes and any relative Receipts and Coupons shall in the event of the winding up or liquidation
of the Issuer rank senior to the claims of holders of any subordinated liabilities which by their
terms rank, in right of payment, junior to the Notes and all classes of equity securities of the
Issuer, including holders of preference shares, if any.

(b)

Set-off
Claims in respect of Subordinated Notes and any relative Receipts and Coupons may not be
set-off, or be the subject of a counterclaim, by the holder against or in respect of any obligations
of the holder to the Issuer or to any other persons and the holder of any Subordinated Note or
relative Receipt or Coupon shall, by virtue of being the holder of such Subordinated Note or
relative Receipt or Coupon, be deemed to have waived all such rights of set-off.

4.

NEGATIVE PLEDGE
If this Note is specified in the applicable Pricing Supplement as being a Senior Note, so long as any
of such Senior Notes remains outstanding (as defined in the Trust Deed), the Issuer will not, and will
procure that none of its Subsidiaries will, create or have outstanding any mortgage, charge, lien,
pledge or other security interest (each a Security Interest) upon, or with respect to, any part of the
present or future business, undertaking, assets or revenues (including any uncalled capital) of the
Issuer or any Subsidiary to secure any Relevant Indebtedness (as defined below), unless the Issuer,
in the case of the creation of a Security Interest, before or at the same time and, in any other case,
promptly, takes any and all action necessary to ensure that:
(a)

all amounts payable by it under such Senior Notes and the Trust Deed (in respect of such Senior
Notes) are secured by such Security Interest equally and rateably with the Relevant
Indebtedness; or

(b)

such other Security Interest or other arrangement (whether or not it includes the granting of a
Security Interest) is provided either (i) as the Trustee in its absolute discretion deems to be not
materially less beneficial to the interests of the holders of such Senior Notes or (ii) as is
approved by an Extraordinary Resolution (as defined in the Trust Deed) of the holders of such
Senior Notes.

For the purposes of these Conditions:


Relevant Indebtedness means (a) any present or future indebtedness (whether being principal,
premium, interest or other amounts) for or in respect of any notes, bonds, debentures, debenture
stock, loan stock or other securities which (1) by their terms are payable in a currency other than
Tugriks and (2) are for the time being, or are intended to be, or are capable of being, quoted, listed
or ordinarily dealt in on any stock exchange, over-the-counter or other securities market, and (b) any
guarantee or indemnity in respect of any such indebtedness.
Subsidiary means any company (a) in which the Issuer holds a majority of the voting rights, (b)
of which the Issuer is a member and has the right to appoint or remove a majority of the board of
directors or (c) of which the Issuer is a member and controls a majority of the voting rights, and
includes any company which is a subsidiary of a Subsidiary.

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5.

REDENOMINATION

5.1

Redenomination
Where redenomination is specified in the applicable Pricing Supplement as being applicable, the
Issuer may, without the consent of the Noteholders, the Receiptholders and the Couponholders, but
after prior consultation with the Trustee, on giving prior notice to the Principal Paying Agent,
Euroclear and Clearstream, Luxembourg and at least 30 days prior notice to the Noteholders in
accordance with Condition 15, elect that, with effect from the Redenomination Date specified in the
notice, the Notes shall be redenominated in euro.
The election will have effect as follows:
(a)

the Notes and the Receipts shall be deemed to be redenominated in euro in the denomination
of euro 0.01 with a nominal amount for each Note and Receipt equal to the nominal amount of
that Note or Receipt in the Specified Currency, converted into euro at the Established Rate,
provided that, if the Issuer determines, with the agreement of the Principal Paying Agent and
the Trustee, that the then market practice in respect of the redenomination in euro of
internationally offered securities is different from the provisions specified above, such
provisions shall be deemed to be amended so as to comply with such market practice and the
Issuer shall promptly notify the Noteholders, the stock exchange (if any) on which the Notes
may be listed and the Paying Agents of such deemed amendments;

(b)

save to the extent that an Exchange Notice has been given in accordance with paragraph (d)
below, the amount of interest due in respect of the Notes will be calculated by reference to the
aggregate nominal amount of Notes presented (or, as the case may be, in respect of which
Coupons are presented) for payment by the relevant holder and the amount of such payment
shall be rounded down to the nearest euro 0.01;

(c)

if definitive Notes are required to be issued after the Redenomination Date, they shall be issued
at the expense of the Issuer in the denominations of euro 1,000, euro 10,000, euro 100,000 and
(but only to the extent of any remaining amounts less than euro 1,000 or such smaller
denominations as the Principal Paying Agent and the Trustee may approve) euro 0.01 and such
other denominations as the Principal Paying Agent shall determine and notify to the
Noteholders;

(d)

if issued prior to the Redenomination Date, all unmatured Coupons denominated in the
Specified Currency (whether or not attached to the Notes) will become void with effect from
the date on which the Issuer gives notice (the Exchange Notice) that replacement
euro-denominated Notes, Receipts and Coupons are available for exchange (provided that such
securities are so available) and no payments will be made in respect of them. The payment
obligations contained in any Notes and Receipts so issued will also become void on that date
although those Notes and Receipts will continue to constitute valid exchange obligations of the
Issuer. New euro-denominated Notes, Receipts and Coupons will be issued in exchange for
Notes, Receipts and Coupons denominated in the Specified Currency in such manner as the
Principal Paying Agent may specify and as shall be notified to the Noteholders in the Exchange
Notice. No Exchange Notice may be given less than 15 days prior to any date for payment of
principal or interest on the Notes;

(e)

after the Redenomination Date, all payments in respect of the Notes, the Receipts and the
Coupons, other than payments of interest in respect of periods commencing before the
Redenomination Date, will be made solely in euro as though references in the Notes to the
Specified Currency were to euro. Payments will be made in euro by credit or transfer to a euro
account (or any other account to which euro may be credited or transferred) specified by the
payee;

(f)

if the Notes are Fixed Rate Notes and interest for any period ending on or after the
Redenomination Date is required to be calculated for a period ending other than on an Interest
Payment Date, it will be calculated:
(i)

in the case of the Notes represented by a Global Note, by applying the Rate of Interest to
the aggregate outstanding nominal amount of the Notes represented by such Global Note;
and

40

(ii)

in the case of Definitive Bearer Notes or Definitive Registered Notes, by applying the
Rate of Interest to the Calculation Amount;

and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding
the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such
sub-unit being rounded upwards or otherwise in accordance with applicable market convention.
Where the Specified Denomination of a Fixed Rate Note is a multiple of the Calculation
Amount, the amount of interest payable in respect of such Fixed Rate Note shall be the product
of the Calculation Amount (determined in the manner provided above) and the amount by which
the Calculation Amount is multiplied to reach the Specified Denomination, without any further
rounding; and
(g)

5.2

if the Notes are Floating Rate Notes, the applicable Pricing Supplement will specify any
relevant changes to the provisions relating to interest.

Definitions
In these Conditions, the following expressions have the following meanings:
Established Rate means the rate for the conversion of the Specified Currency (including
compliance with rules relating to roundings in accordance with applicable European Community
regulations) into euro established by the Council of the European Union pursuant to Article 123 of
the Treaty;
euro means the currency introduced at the start of the third stage of European economic and
monetary union pursuant to the Treaty;
Redenomination Date means (in the case of interest bearing Notes) any date for payment of interest
under the Notes or (in the case of Zero Coupon Notes) any date, in each case specified by the Issuer
in the notice given to the Noteholders pursuant to Condition 5.1 above and which falls on or after
the date on which the country of the Specified Currency first participates in the third stage of
European economic and monetary union; and
Treaty means the Treaty establishing the European Community, as amended.

6.

INTEREST

6.1

Interest on Fixed Rate Notes


Each Fixed Rate Note bears interest on its outstanding nominal amount (or, if it is a Partly Paid Note,
the amount paid up) from (and including) the Interest Commencement Date at the rate(s) per annum
equal to the Rate(s) of Interest. Interest will be payable in arrear on the Interest Payment Date(s) in
each year up to (and including) the Maturity Date.
Except as provided in the applicable Pricing Supplement, the amount of interest payable on each
Interest Payment Date in respect of the Fixed Interest Period ending on (but excluding) such date will
amount to the Fixed Coupon Amount. If (i) the first anniversary of the Interest Commencement Date
is not a Interest Payment Date, or (ii) the Maturity Date is not a Interest Payment Date, the interest
from (and including) the preceding Interest Payment Date (or the Interest Commencement Date, as
the case may be) to (but excluding) the next following Interest Payment Date (or the Maturity Date,
as the case may be) will amount to the Broken Amount, as specified in the applicable Pricing
Supplement.
As used in these Conditions, Fixed Interest Period means the period from (and including) an
Interest Payment Date (or the Interest Commencement Date) to (but excluding) the next (or first)
Interest Payment Date.

41

Except in the case of Notes where an applicable Fixed Coupon Amount or Broken Amount is
specified in the applicable Pricing Supplement, interest shall be calculated by applying the Rate of
Interest to:
(i)

in the case of Fixed Rate Notes which are represented by a Global Note, the aggregate nominal
amount of the Fixed Rate Notes represented by such Global Note (or, if they are Partly Paid
Notes, the aggregate amount paid up); or

(ii)

in the case of Fixed Rate Notes in definitive form, the Calculation Amount;

and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the
resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit
being rounded upwards or otherwise in accordance with applicable market convention. Where the
Specified Denomination of a Fixed Rate Note is a multiple of the Calculation Amount, the amount
of interest payable in respect of such Fixed Rate Note shall be the product of the Calculation Amount
(determined in the manner provided above) and the amount by which the Calculation Amount is
multiplied to reach the Specified Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in accordance with
this Condition 6.1:
(a)

if Actual/Actual (ICMA) is specified in the applicable Pricing Supplement:


(i)

in the case of Notes where the number of days in the relevant period from (and including)
the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to
(but excluding) the relevant payment date (the Accrual Period) is equal to or shorter
than the Determination Period during which the Accrual Period ends, the number of days
in such Accrual Period divided by the product of (I) the number of days in such
Determination Period and (II) the number of Determination Dates (as specified in the
applicable Pricing Supplement) that would occur in one calendar year; or

(ii)

in the case of Notes where the Accrual Period is longer than the Determination Period
during which the Accrual Period ends, the sum of:
(A) the number of days in such Accrual Period falling in the Determination Period in
which the Accrual Period begins divided by the product of (x) the number of days
in such Determination Period and (y) the number of Determination Dates that would
occur in one calendar year; and
(B)

(b)

the number of days in such Accrual Period falling in the next Determination Period
divided by the product of (x) the number of days in such Determination Period and
(y) the number of Determination Dates that would occur in one calendar year; and

if 30/360 is specified in the applicable Pricing Supplement, the number of days in the period
from (and including) the most recent Interest Payment Date (or, if none, the Interest
Commencement Date) to (but excluding) the relevant payment date (such number of days being
calculated on the basis of a year of 360 days with 12 30-day months) divided by 360.

In these Conditions:
Determination Period means each period from (and including) a Determination Date to (but
excluding) the next Determination Date (including, where either the Interest Commencement Date or
the final Interest Payment Date is not a Determination Date, the period commencing on the first
Determination Date prior to, and ending on the first Determination Date falling after, such date); and

42

sub-unit means, with respect to any currency other than euro, the lowest amount of such currency
that is available as legal tender in the country of such currency and, with respect to euro, one cent.
6.2

Interest on Floating Rate Notes and Index Linked Interest Notes


(a)

Interest Payment Dates


Each Floating Rate Note and Index Linked Interest Note bears interest on its outstanding
nominal amount (or, if it is a Partly Paid Note, the amount paid up) from (and including) the
Interest Commencement Date and such interest will be payable in arrear on either:
(i)

the Specified Interest Payment Date(s) in each year specified in the applicable Pricing
Supplement; or

(ii)

if no Specified Interest Payment Date(s) is/are specified in the applicable Pricing


Supplement, each date (each such date, together with each Specified Interest Payment
Date, an Interest Payment Date) which falls the number of months or other period
specified as the Specified Period in the applicable Pricing Supplement after the preceding
Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest
Commencement Date.

Such interest will be payable in respect of each Interest Period. In these Conditions, Interest
Period means the period from (and including) an Interest Payment Date (or the Interest
Commencement Date) to (but excluding) the next (or first) Interest Payment Date).
If a Business Day Convention is specified in the applicable Pricing Supplement and (x) if there
is no numerically corresponding day in the calendar month in which an Interest Payment Date
should occur or (y) if any Interest Payment Date would otherwise fall on a day which is not a
Business Day, then, if the Business Day Convention specified is:
(A) in any case where Specified Periods are specified in accordance with Condition 6.2(a)(ii)
above, the Floating Rate Convention, such Interest Payment Date (a) in the case of (x)
above, shall be the last day that is a Business Day in the relevant month and the provisions
of (ii) below shall apply mutatis mutandis or (b) in the case of (y) above, shall be
postponed to the next day which is a Business Day unless it would thereby fall into the
next calendar month, in which event (i) such Interest Payment Date shall be brought
forward to the immediately preceding Business Day and (ii) each subsequent Interest
Payment Date shall be the last Business Day in the month which falls the Specified Period
after the preceding applicable Interest Payment Date occurred; or
(B)

the Following Business Day Convention, such Interest Payment Date shall be postponed
to the next day which is a Business Day; or

(C)

the Modified Following Business Day Convention, such Interest Payment Date shall be
postponed to the next day which is a Business Day unless it would thereby fall into the
next calendar month, in which event such Interest Payment Date shall be brought forward
to the immediately preceding Business Day; or

(D) the Preceding Business Day Convention, such Interest Payment Date shall be brought
forward to the immediately preceding Business Day.
In these Conditions, Business Day means a day which is both:
(a)

a day (other than a Saturday or a Sunday) on which commercial banks and foreign
exchange markets settle payments and are open for general business (including dealing in
foreign exchange and foreign currency deposits) in Hong Kong and any Additional
Business Centre specified in the applicable Pricing Supplement; and

43

(b)

either (i) in relation to any sum payable in a Specified Currency other than euro, a day
on which commercial banks and foreign exchange markets settle payments and are open
for general business (including dealing in foreign exchange and foreign currency
deposits) in the principal financial centre of the country of the relevant Specified
Currency (if other than any Additional Business Centre and which if the Specified
Currency is Australian dollars or New Zealand dollars shall be Sydney or Auckland,
respectively) or (ii) in relation to any sum payable in euro, a TARGET Day;

TARGET Day means (i) until such time as TARGET is permanently closed down and ceases
operations, any day on which both TARGET and TARGET2 are open for the settlement of
payments in euro and (ii) following such time as TARGET is permanently closed down and
ceases operations, any day on which TARGET2 is open for the settlement of payments in euro;
TARGET means the Trans-European Automated Real-time Gross Settlement Express
Transfer payment system which utilises interlinked national real time gross settlement systems
and the European Central Banks payment mechanism and which began operations on 4 January
1999; and
TARGET2 means the Trans-European Automated Real-time Gross Settlement Express
Transfer payment system which utilises a single shared platform and which was launched on 19
November 2007 or any successor thereto.
(c)

Rate of Interest
The Rate of Interest payable from time to time in respect of Floating Rate Notes and Index
Linked Interest Notes will be determined in the manner specified in the applicable Pricing
Supplement.
(i)

ISDA Determination for Floating Rate Notes


Where ISDA Determination is specified in the applicable Pricing Supplement as the
manner in which the Rate of Interest is to be determined, the Rate of Interest for each
Interest Period will be the relevant ISDA Rate plus or minus (as indicated in the
applicable Pricing Supplement) the Margin (if any). For the purposes of this subparagraph
(i), ISDA Rate for an Interest Period means a rate equal to the Floating Rate that would
be determined by the Principal Paying Agent under an interest rate swap transaction if the
Principal Paying Agent were acting as Calculation Agent for that swap transaction under
the terms of an agreement incorporating the 2006 ISDA Definitions, as published by the
International Swaps and Derivatives Association, Inc. and as amended and updated as at
the Issue Date of the first Tranche of the Notes (the ISDA Definitions) and under which:
(A) the Floating Rate Option is as specified in the applicable Pricing Supplement;
(B)

the Designated Maturity is a period specified in the applicable Pricing Supplement;


and

(C)

the relevant Reset Date is either (a) if the applicable Floating Rate Option is based
on the London interbank offered rate (LIBOR) or on the Euro-zone interbank
offered rate (EURIBOR), the first day of that Interest Period or (b) in any other
case, as specified in the applicable Pricing Supplement.

For the purposes of this subparagraph (i), Floating Rate, Calculation Agent, Floating
Rate Option, Designated Maturity and Reset Date have the meanings given to those
terms in the ISDA Definitions.
Unless otherwise stated in the applicable Pricing Supplement, the Minimum Rate of
Interest shall be deemed to be zero.

44

(ii)

Screen Rate Determination for Floating Rate Notes


Where Screen Rate Determination is specified in the applicable Pricing Supplement as the
manner in which the Rate of Interest is to be determined, the Rate of Interest for each
Interest Period will, subject as provided below, be either:
(A) the offered quotation; or
(B)

the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005
being rounded upwards) of the offered quotations,

(expressed as a percentage rate per annum) for the Reference Rate which appears or
appear, as the case may be, on the Relevant Screen Page as at 11.00 a.m. (London time,
in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the Interest
Determination Date in question plus or minus (as indicated in the applicable Pricing
Supplement) the Margin (if any), all as determined by the Principal Paying Agent. If five
or more of such offered quotations are available on the Relevant Screen Page, the highest
(or, if there is more than one such highest quotation, one only of such quotations) and the
lowest (or, if there is more than one such lowest quotation, one only of such quotations)
shall be disregarded by the Principal Paying Agent for the purpose of determining the
arithmetic mean (rounded as provided above) of such offered quotations.
The Agency Agreement contains provisions for determining the Rate of Interest in the
event that the Relevant Screen Page is not available or if, in the case of (A) above, no such
offered quotation appears or, in the case of (B) above, fewer than three such offered
quotations appear, in each case as at the time specified in the preceding paragraph.
If the Reference Rate from time to time in respect of Floating Rate Notes is specified in
the applicable Pricing Supplement as being other than LIBOR or EURIBOR, the Rate of
Interest in respect of such Notes will be determined as provided in the applicable Pricing
Supplement.
(d)

Minimum Rate of Interest and/or Maximum Rate of Interest


If the applicable Pricing Supplement specifies a Minimum Rate of Interest for any Interest
Period, then, in the event that the Rate of Interest in respect of such Interest Period determined
in accordance with the provisions of paragraph (b) above is less than such Minimum Rate of
Interest, the Rate of Interest for such Interest Period shall be such Minimum Rate of Interest.
If the applicable Pricing Supplement specifies a Maximum Rate of Interest for any Interest
Period, then, in the event that the Rate of Interest in respect of such Interest Period determined
in accordance with the provisions of paragraph (b) above is greater than such Maximum Rate
of Interest, the Rate of Interest for such Interest Period shall be such Maximum Rate of Interest.

(e)

Determination of Rate of Interest and calculation of Interest Amounts


The Principal Paying Agent, in the case of Floating Rate Notes, and the Calculation Agent, in
the case of Index Linked Interest Notes, will at or as soon as practicable after each time at
which the Rate of Interest is to be determined, determine the Rate of Interest for the relevant
Interest Period. In the case of Index Linked Interest Notes, the Calculation Agent will notify the
Principal Paying Agent of the Rate of Interest for the relevant Interest Period as soon as
practicable after calculating the same.
The Principal Paying Agent, in the case of Floating Rate Notes, and the Calculation Agent, in
the case of Index Linked Interest Notes, will calculate the amount of interest (the Interest
Amount) payable for the relevant Interest Period by applying the Rate of Interest to:
(A) in the case of Floating Rate Notes or Index Linked Interest Notes which are represented
by a Global Note, the aggregate outstanding nominal amount of the Notes represented by
such Global Note (or, if they are Partly Paid Notes, the aggregate amount paid up); or

45

(B)

in the case of Floating Rate Notes or Index Linked Interest Notes in definitive form, the
Calculation Amount;

and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding
the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such
sub-unit being rounded upwards or otherwise in accordance with applicable market convention.
Where the Specified Denomination of a Floating Rate Note or an Index Linked Interest Note
is a multiple of the Calculation Amount, the Interest Amount payable in respect of such Note
shall be the product of the Calculation Amount (determined in the manner provided above) and
the amount by which the Calculation Amount is multiplied to reach the Specified
Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in
accordance with this Condition 6.2:
(i)

if Actual/Actual (ISDA) or Actual/Actual is specified in the applicable Pricing


Supplement, the actual number of days in the Interest Period divided by 365 (or, if any
portion of that Interest Period falls in a leap year, the sum of (I) the actual number of days
in that portion of the Interest Period falling in a leap year divided by 366 and (II) the
actual number of days in that portion of the Interest Period falling in a non-leap year
divided by 365);

(ii)

if Actual/365 (Fixed) is specified in the applicable Pricing Supplement, the actual


number of days in the Interest Period divided by 365;

(iii) if Actual/365 (Sterling) is specified in the applicable Pricing Supplement, the actual
number of days in the Interest Period divided by 365 or, in the case of an Interest Payment
Date falling in a leap year, 366;
(iv) if Actual/360 is specified in the applicable Pricing Supplement, the actual number of
days in the Interest Period divided by 360;
(v)

if 30/360, 360/360 or Bond Basis is specified in the applicable Pricing Supplement,


the number of days in the Interest Period divided by 360, calculated on a formula basis
as follows:
Day Count Fraction

[360 x (Y2 - Y 1)] + [30 x (M2 - M 1)] + (D2 - D 1)


360

where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless such
number is 31, in which case D1 will be 30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless such number would be 31 and D1 is greater than 29,
in which case D2 will be 30;

46

(vi) if 30E/360 or Eurobond Basis is specified in the applicable Pricing Supplement, the
number of days in the Interest Period divided by 360, calculated on a formula basis as
follows:
Day Count Fraction

[360 x (Y2 - Y 1)] + [30 x (M2 - M 1)] + (D2 - D 1)


360

where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless such
number would be 31, in which case D1 will be 30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless such number would be 31, in which case D2 will
be 30;
(vii) if 30E/360 (ISDA) is specified in the applicable Final Terms, the number of days in the
Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction

[360 x (Y2 - Y 1)] + [30 x (M2 - M 1)] + (D2 - D 1)


360

where:
Y 1 is the year, expressed as a number, in which the first day of the Interest Period falls;
Y 2 is the year, expressed as a number, in which the day immediately following the last
day of the Interest Period falls;
M 1 is the calendar month, expressed as a number, in which the first day of the Interest
Period falls;
M 2 is the calendar month, expressed as a number, in which the day immediately
following the last day of the Interest Period falls;
D 1 is the first calendar day, expressed as a number, of the Interest Period, unless (i) that
day is the last day of February or (ii) such number would be 31, in which case D1 will be
30; and
D 2 is the calendar day, expressed as a number, immediately following the last day
included in the Interest Period, unless (i) that day is the last day of February but not the
Maturity Date or (ii) such number would be 31, in which case D2 will be 30.
(f)

Notification of Rate of Interest and Interest Amounts


The Principal Paying Agent or, as the case may be, the Calculation Agent will cause the Rate
of Interest and each Interest Amount for each Interest Period and the relevant Interest Payment
Date to be notified to the Issuer, the Trustee and any stock exchange on which the relevant
Floating Rate Notes or Index Linked Interest Notes are for the time being listed and notice
thereof to be published in accordance with Condition 15 as soon as possible after their
determination but in no event later than the fourth London Business Day thereafter. Each

47

Interest Amount and Interest Payment Date so notified may subsequently be amended (or
appropriate alternative arrangements made by way of adjustment) without prior notice in the
event of an extension or shortening of the Interest Period. Any such amendment will be
promptly notified to each stock exchange on which the relevant Floating Rate Notes or Index
Linked Interest Notes are for the time being listed and to the Noteholders in accordance with
Condition 15. For the purposes of this paragraph, the expression London Business Day means
a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are
open for general business in London.
(g)

Determination or Calculation by Trustee


If for any reason at any relevant time the Principal Paying Agent or, as the case may be, the
Calculation Agent defaults in its obligation to determine the Rate of Interest or the Principal
Paying Agent defaults in its obligation to calculate any Interest Amount in accordance with
subparagraph (b)(i) or subparagraph (b)(ii) above or as otherwise specified in the applicable
Pricing Supplement, as the case may be, and in each case in accordance with paragraph (d)
above, the Trustee shall determine the Rate of Interest (other than the Rate of Interest in respect
of Index Linked Interest Notes) at such rate as, in its absolute discretion (having such regard
as it shall think fit to the foregoing provisions of this Condition, but subject always to any
Minimum Rate of Interest or Maximum Rate of Interest specified in the applicable Pricing
Supplement), it shall deem fair and reasonable in all the circumstances or, as the case may be,
the Trustee shall calculate the Interest Amount(s) in such manner as it shall deem fair and
reasonable in all the circumstances and each such determination or calculation shall be deemed
to have been made by the Principal Paying Agent or the Calculation Agent, as applicable.

(h)

Certificates to be final
All certificates, communications, opinions, determinations, calculations, quotations and
decisions given, expressed, made or obtained for the purposes of the provisions of this
Condition 6.2, whether by the Principal Paying Agent or, if applicable, the Calculation Agent
or, if applicable, the Trustee, shall (in the absence of wilful default or manifest error) be binding
on the Issuer, the Trustee, the Principal Paying Agent, the Calculation Agent (if applicable), the
other Paying Agents and all Noteholders, Receiptholders and Couponholders and (in the
absence of wilful default and bad faith) no liability to the Issuer, the Noteholders, the
Receiptholders or the Couponholders shall attach to the Principal Paying Agent, if applicable,
the Calculation Agent or the Trustee in connection with the exercise or non-exercise by it of its
powers, duties and discretions pursuant to such provisions.

6.3

Interest on Dual Currency Interest Notes


The rate or amount of interest payable in respect of Dual Currency Interest Notes shall be determined
in the manner specified in the applicable Pricing Supplement.

6.4

Interest on Partly Paid Notes


In the case of Partly Paid Notes (other than Partly Paid Notes which are Zero Coupon Notes), interest
will accrue as aforesaid on the paid-up nominal amount of such Notes and otherwise as specified in
the applicable Pricing Supplement.

6.5

Accrual of interest
Each Note (or in the case of the redemption of part only of a Note, that part only of such Note) will
cease to bear interest (if any) from the date for its redemption unless, upon due presentation thereof,
payment of principal is improperly withheld or refused. In such event, interest will continue to accrue
as provided in the Trust Deed.

48

7.

PAYMENTS

7.1

Method of payment
Subject as provided below:
(a)

payments in a Specified Currency other than euro will be made by credit or transfer to an
account in the relevant Specified Currency (which, in the case of a payment in Japanese yen to
a non-resident of Japan, shall be a non-resident account) maintained by the payee with a bank
in the principal financial centre of the country of such Specified Currency (which, if the
Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney or Auckland,
respectively); and

(b)

payments in euro will be made by credit or transfer to a euro account (or any other account to
which euro may be credited or transferred) specified by the payee.

Payments will be subject in all cases to any fiscal or other laws and regulations applicable thereto
in the place of payment, but without prejudice to the provisions of Condition 9.
7.2

Presentation of Definitive Bearer Notes, Receipts and Coupons


Payments of principal in respect of Definitive Bearer Notes will (subject as provided below) be made
in the manner provided in Condition 7.1 above against presentation and surrender (or, in the case of
part payment of any sum due, endorsement) of Definitive Bearer Notes, and payments of interest in
respect of Definitive Bearer Notes will (subject as provided below) be made as aforesaid only against
presentation and surrender (or, in the case of part payment of any sum due, endorsement) of Coupons,
in each case at the specified office of any Paying Agent outside the United States (which expression,
as used herein, means the United States of America (including the States and the District of
Columbia, its territories, its possessions and other areas subject to its jurisdiction)).
Payments of instalments of principal (if any) in respect of Definitive Bearer Notes, other than the
final instalment, will (subject as provided below) be made in the manner provided in Condition 7.1
above against presentation and surrender (or, in the case of part payment of any sum due,
endorsement) of the relevant Receipt in accordance with the preceding paragraph. Payment of the
final instalment will be made in the manner provided in Condition 7.1 above only against
presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the
relevant Bearer Note in accordance with the preceding paragraph. Each Receipt must be presented
for payment of the relevant instalment together with the Definitive Bearer Note to which it
appertains. Receipts presented without the Definitive Bearer Note to which they appertain do not
constitute valid obligations of the Issuer. Upon the date on which any Definitive Bearer Note
becomes due and repayable, unmatured Receipts (if any) relating thereto (whether or not attached)
shall become void and no payment shall be made in respect thereof.
Fixed Rate Notes which are Definitive Bearer Notes (other than Dual Currency Notes, Index Linked
Notes or Long Maturity Notes (as defined below)) should be presented for payment together with all
unmatured Coupons appertaining thereto (which expression shall for this purpose include Coupons
falling to be issued on exchange of matured Talons), failing which the amount of any missing
unmatured Coupon (or, in the case of payment not being made in full, the same proportion of the
amount of such missing unmatured Coupon as the sum so paid bears to the sum due) will be deducted
from the sum due for payment. Each amount of principal so deducted will be paid in the manner
mentioned above against surrender of the relative missing Coupon at any time before the expiry of
10 years after the Relevant Date (as defined in Condition 9) in respect of such principal (whether or
not such Coupon would otherwise have become void under Condition 10) or, if later, five years from
the date on which such Coupon would otherwise have become due, but in no event thereafter.
Upon any Fixed Rate Note which is a Definitive Bearer Note becoming due and repayable prior to
its Maturity Date, all unmatured Talons (if any) appertaining thereto will become void and no further
Coupons will be issued in respect thereof.

49

Upon the date on which any Floating Rate Note, Dual Currency Note, Index Linked Note or Long
Maturity Note which is a Definitive Bearer Note becomes due and repayable, unmatured Coupons
and Talons (if any) relating thereto (whether or not attached) shall become void and no payment or,
as the case may be, exchange for further Coupons shall be made in respect thereof. A Long Maturity
Note is a Fixed Rate Note (other than a Fixed Rate Note which on issue had a Talon attached) whose
nominal amount on issue is less than the aggregate interest payable thereon provided that such Note
shall cease to be a Long Maturity Note on the Interest Payment Date on which the aggregate amount
of interest remaining to be paid after that date is less than the nominal amount of such Note.
If the due date for redemption of any Definitive Bearer Note is not an Interest Payment Date, interest
(if any) accrued in respect of such Note from (and including) the preceding Interest Payment Date
or, as the case may be, the Interest Commencement Date shall be payable only against surrender of
the relevant Definitive Bearer Note.
7.3

Payments in respect of Bearer Global Notes


Payments of principal and interest (if any) in respect of Notes represented by any Bearer Global Note
will (subject as provided below) be made in the manner specified above in relation to Definitive
Bearer Notes and otherwise in the manner specified in the relevant Bearer Global Note against
presentation or surrender, as the case may be, of such Bearer Global Note at the specified office of
any Paying Agent outside the United States. A record of each payment made against presentation or
surrender of any Bearer Global Note, distinguishing between any payment of principal and any
payment of interest, will be made on such Bearer Global Note by the Paying Agent to which it was
presented and such record shall be prima facie evidence that the payment in question has been made.

7.4

Payments in respect of Registered Notes


Payments of principal (other than instalments of principal prior to the final instalment) in respect of
each Registered Note (whether or not in global form) will be made against presentation and surrender
(or, in the case of part payment of any sum due, endorsement) of the Registered Note at the specified
office of the Registrar or any of the Paying Agents. Such payments will be made by transfer to the
Designated Account (as defined below) of the holder (or the first named of joint holders) of the
Registered Note appearing in the register of holders of the Registered Notes maintained by the
Registrar (the Register) (i) where in global form, at the close of the business day (being for this
purpose a day on which Euroclear and Clearstream, Luxembourg are open for business) before the
relevant due date, and (ii) where in definitive form, at the close of business on the third business day
(being for this purpose a day on which banks are open for business in the city where the specified
office of the Registrar is located) before the relevant due date. For these purposes, Designated
Account means the account (which, in the case of a payment in Japanese yen to a non-resident of
Japan, shall be a non-resident account) maintained by a holder with a Designated Bank and identified
as such in the Register and Designated Bank means (in the case of payment in a Specified Currency
other than euro) a bank in the principal financial centre of the country of such Specified Currency
(which, if the Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney or
Auckland, respectively) and (in the case of a payment in euro) any bank which processes payments
in euro.
Payments of interest and payments of instalments of principal (other than the final instalment) in
respect of each Registered Note (whether or not in global form) will be made in the Specified
Currency by transfer to the Designated Account of the holder (or the first named of joint holders) of
the Registered Note appearing in the Register (i) where in global form, at the close of the business
day (being for this purpose a day on which Euroclear and Clearstream, Luxembourg are open for
business) before the relevant due date, and (ii) where in definitive form, at the close of business on
the fifteenth day (whether or not such fifteenth day is a business day) before the relevant due date
(the Record Date) at his address shown in the Register on the Record Date and at his risk. Payment
of the interest due in respect of each Registered Note on redemption and the final instalment of
principal will be made in the same manner as payment of the principal amount of such Registered
Note.
No commissions or expenses shall be charged to such holders by the Registrar in respect of any
payments of principal or interest in respect of the Registered Notes.

50

None of the Issuer, the Trustee or the Agents will have any responsibility or liability for any aspect
of the records relating to, or payments made on account of, beneficial ownership interests in the
Registered Global Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
7.5

General provisions applicable to payments


The holder of a Global Note shall be the only person entitled to receive payments in respect of Notes
represented by such Global Note and the Issuer will be discharged by payment to, or to the order of,
the holder of such Global Note in respect of each amount so paid. Each of the persons shown in the
records of Euroclear or Clearstream, Luxembourg as the beneficial holder of a particular nominal
amount of Notes represented by such Global Note must look solely to Euroclear or Clearstream,
Luxembourg, as the case may be, for his share of each payment so made by the Issuer to, or to the
order of, the holder of such Global Note.
Notwithstanding the foregoing provisions of this Condition, if any amount of principal and/or interest
in respect of Bearer Notes is payable in U.S. dollars, such U.S. dollar payments of principal and/or
interest in respect of such Notes will be made at the specified office of a Paying Agent in the United
States if:

7.6

(a)

the Issuer has appointed Paying Agents with specified offices outside the United States with the
reasonable expectation that such Paying Agents would be able to make payment in U.S. dollars
at such specified offices outside the United States of the full amount of principal and interest
on the Bearer Notes in the manner provided above when due;

(b)

payment of the full amount of such principal and interest at all such specified offices outside
the United States is illegal or effectively precluded by exchange controls or other similar
restrictions on the full payment or receipt of principal and interest in U.S. dollars; and

(c)

such payment is then permitted under United States law without involving, in the opinion of the
Issuer, adverse tax consequences to the Issuer.

Payment Day
If the date for payment of any amount in respect of any Note, Receipt or Coupon is not a Payment
Day, the holder thereof shall not be entitled to payment until the next following Payment Day in the
relevant place and shall not be entitled to further interest or other payment in respect of such delay.
For these purposes, Payment Day means any day which (subject to Condition 10) is:
(a)

(b)

7.7

a day on which commercial banks and foreign exchange markets settle payments and are open
for general business (including dealing in foreign exchange and foreign currency deposits) in:
(i)

in the case of Notes in definitive form only, the relevant place of presentation;

(ii)

each Additional Financial Centre specified in the applicable Pricing Supplement; and

either (A) in relation to any sum payable in a Specified Currency other than euro, a day on
which commercial banks and foreign exchange markets settle payments and are open for
general business (including dealing in foreign exchange and foreign currency deposits) in the
principal financial centre of the country of the relevant Specified Currency (if other than the
place of presentation and any Additional Financial Centre and which if the Specified Currency
is Australian dollars or New Zealand dollars shall be Sydney or Auckland, respectively) or (B)
in relation to any sum payable in euro, a TARGET Day.

Interpretation of principal and interest


Any reference in these Conditions to principal in respect of the Notes shall be deemed to include, as
applicable:
(a)

any additional amounts which may be payable with respect to principal under Condition 9 or
under any undertaking or covenant given in addition thereto, or in substitution therefor,
pursuant to the Trust Deed;

51

(b)

the Final Redemption Amount of the Notes;

(c)

the Early Redemption Amount of the Notes;

(d)

the Optional Redemption Amount(s) (if any) of the Notes;

(e)

in relation to Notes redeemable in instalments, the Instalment Amounts;

(f)

in relation to Zero Coupon Notes, the Amortised Face Amount (as defined in Condition 8.6);
and

(g)

any premium and any other amounts (other than interest) which may be payable by the Issuer
under or in respect of the Notes.

Any reference in the Conditions to interest in respect of the Notes shall be deemed to include, as
applicable, any additional amounts which may be payable with respect to interest under Condition
9 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant
to the Trust Deed.
8.

REDEMPTION AND PURCHASE


The Issuer shall not redeem the principal of any Subordinated Note or purchase and cancel any
Subordinated Note unless the Issuer is solvent at the time of payment and immediately thereafter.
Further, any redemption prior to the Maturity Date will require the prior approval of the Bank of
Mongolia (as required by and in compliance with the Prudential Ratio Regulations and other
applicable regulations of the Bank of Mongolia) and, if necessary, any other relevant authority. For
the avoidance of doubt, all payments made in respect of Subordinated Notes under this Condition 8
shall be subject to applicable laws and regulations of Mongolia and such further interpretations,
amendments and clarifications as may be stipulated by the Bank of Mongolia from time to time.
Any optional redemption of the Subordinated Notes is subject to compliance with the Prudential
Ratio Regulations and other applicable laws and regulatory requirements, including the prior
approval of the Bank of Mongolia and, if necessary, any other relevant authority. The Bank of
Mongolia, while considering the request of the Issuer or, as the case may be, the holders of
Subordinated Notes to so redeem the Subordinated Notes, may also take into consideration, amongst
other things, the Issuers capital adequacy position both at the time of the proposed redemption and
thereafter.

8.1

Redemption at maturity
Unless previously redeemed or purchased and cancelled as specified below, each Note (including
each Index Linked Redemption Note and Dual Currency Redemption Note) will be redeemed by the
Issuer at its Final Redemption Amount specified in, or determined in the manner specified in, the
applicable Pricing Supplement in the relevant Specified Currency on the Maturity Date.

8.2

Redemption for tax reasons


The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time prior
to the applicable Maturity Date (if this Note is not a Floating Rate Note, an Index Linked Interest
Note or a Dual Currency Interest Note) or on any Interest Payment Date (if this Note is a Floating
Rate Note, an Index Linked Interest Note or a Dual Currency Interest Note), on giving not less than
30 nor more than 60 days notice to the Trustee and the Principal Paying Agent and, in accordance
with Condition 15, the Noteholders (which notice shall be irrevocable), if the Issuer satisfies the
Trustee immediately before the giving of such notice that:
(a)

on the occasion of the next payment due under the Notes, either the Issuer has or will become
obliged to pay additional amounts as provided or referred to in Condition 9 as a result of any
change in, or amendment to, the laws or treaties (including any regulations or rulings
promulgated thereunder) of a Tax Jurisdiction (as defined in Condition 9) or any change in the
application or official interpretation of such laws or treaties (including any regulations or
rulings promulgated thereunder), which change or amendment becomes effective on or after the
date on which agreement is reached to issue the first Tranche of the Notes; and

52

(b)

such obligation cannot be avoided by the Issuer taking reasonable measures available to it,

provided that (1) in the case of Subordinated Notes, the prior approval of the Bank of Mongolia and,
if necessary, any other relevant authority shall have been obtained and (2) no such notice of
redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would
be obliged to pay such additional amounts were a payment in respect of the Notes then due; and
provided further that where any such additional amounts due in accordance with Condition 9 result
from a change in, or amendment to, the laws or treaties (including any regulations or rulings
promulgated thereunder) of a Tax Jurisdiction, this Condition 8.2 will only have effect to permit
Notes to be redeemed in the event that the rate of withholding or deduction required by such law or
treaty is in excess of 20% (or such other rate as may be specified in the applicable Pricing
Supplement as the withholding tax rate in effect on the date of the relevant Subscription Agreement
or, if there is no Subscription Agreement, the date of the applicable Pricing Supplement).
Prior to the publication of any notice of redemption pursuant to this Condition, the Issuer shall
deliver to the Trustee a certificate signed by two duly authorised officers of the Issuer stating that
the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the
conditions precedent to the right of the Issuer so to redeem have occurred, and an opinion of
independent legal advisers of recognised standing to the effect that the Issuer has or will become
obliged to pay such additional amounts as a result of such change or amendment and the Trustee shall
be entitled to accept such certificate and opinion as sufficient evidence of the satisfaction of the
conditions precedent set out above, in which event it shall be conclusive and binding on the
Noteholders, the Receiptholders and the Couponholders.
Notes redeemed pursuant to this Condition 8.2 will be redeemed at their Early Redemption Amount
referred to in Condition 8.6 below together (if appropriate) with interest accrued to (but excluding)
the date of redemption.
As of the date of this Information Memorandum, payments of premium and interest on the Notes are
subject to a 10.0% Mongolian withholding tax in respect of which the Issuer will pay additional
amounts so that after deduction or withholding of such tax, Noteholders will receive the amounts of
premium and interest which would otherwise have been receivable in the absence of such deduction
or withholding. The Issuer will account directly to the Mongolian authorities with respect to such
withholding tax. See Taxation Mongolian Taxation. Noteholders are advised to consult local tax
counsel with regard to the tax consequences of the payment of premium and interest subject to
withholding and the payment of additional amounts on the Notes.
8.3

Redemption at the option of the Issuer (Issuer Call)


If Issuer Call is specified in the applicable Pricing Supplement as being applicable, the Issuer may
(1) in the case of Subordinated Notes, (i) only upon the expiry of five years from the date of issuance
and (ii) having obtained the prior approval of the Bank of Mongolia and, if necessary, any other
relevant authority and (2) in the case of any Notes, having given the following notices (which notices
shall be irrevocable and shall specify the date fixed for redemption):
(a)

not less than 15 nor more than 30 days notice to the Noteholders in accordance with Condition
15; and

(b)

not less than 15 days before the giving of the notice referred to in (a) above, notice to the
Trustee and to the Principal Paying Agent and, in the case of a redemption of Registered Notes,
the Registrar,

redeem all or some only of the Notes then outstanding on any Optional Redemption Date and at the
Optional Redemption Amount(s) specified in, or determined in the manner specified in, the
applicable Pricing Supplement together, if appropriate, with interest accrued to (but excluding) the
relevant Optional Redemption Date. Any such redemption must be of a nominal amount not less than
the Minimum Redemption Amount and not more than the Maximum Redemption Amount, in each
case as may be specified in the applicable Pricing Supplement. In the case of a partial redemption
of Notes, the Notes to be redeemed (Redeemed Notes) will be selected individually by lot, in the
case of Redeemed Notes represented by definitive Notes, and in accordance with the rules of
Euroclear and/or Clearstream, Luxembourg, in the case of Redeemed Notes represented by a Global
Note, not more than 30 days prior to the date fixed for redemption (such date of selection being

53

hereinafter called the Selection Date). In the case of Redeemed Notes represented by definitive
Notes, a list of the serial numbers of such Redeemed Notes will be published in accordance with
Condition 15 not less than 15 days prior to the date fixed for redemption. The aggregate nominal
amount of Redeemed Notes represented by definitive Notes shall bear the same proportion to the
aggregate nominal amount of all Redeemed Notes as the aggregate nominal amount of definitive
Notes outstanding bears to the aggregate nominal amount of the Notes outstanding, in each case on
the Selection Date, provided that such first mentioned nominal amount shall, if necessary, be rounded
downwards to the nearest integral multiple of the Specified Denomination, and the aggregate nominal
amount of Redeemed Notes represented by a Global Note shall be equal to the balance of the
Redeemed Notes. No exchange of the relevant Global Note will be permitted during the period from
(and including) the Selection Date to (and including) the date fixed for redemption pursuant to this
Condition 8.3 and notice to that effect shall be given by the Issuer to the Noteholders in accordance
with Condition 15 at least five days prior to the Selection Date.
8.4

Redemption of the Notes at the option of the Noteholders (Investor Put)


If Investor Put is specified in the applicable Pricing Supplement as being applicable, upon the holder
of any Note giving to the Issuer in accordance with Condition 15 not less than 15 nor more than 30
days notice, the Issuer will, upon the expiry of such notice, redeem, subject to, and in accordance
with, the terms specified in the applicable Pricing Supplement, such Note on the Optional
Redemption Date and at the Optional Redemption Amount together, if appropriate, with interest
accrued to (but excluding) the Optional Redemption Date. Registered Notes may be redeemed under
this Condition 8.4 in any multiple of their lowest Specified Denomination.

8.5

Put Notices
To exercise the right to require redemption or purchase of any Note pursuant to Condition 8.4, the
holder of a Note must, if such Note is in definitive form and held outside Euroclear and Clearstream,
Luxembourg, deliver, to the specified office of any Paying Agent (in the case of Bearer Notes) or the
Registrar (in the case of Registered Notes) at any time during normal business hours of such Paying
Agent or, as the case may be, the Registrar falling within the notice period, a duly completed and
signed notice of exercise in the form (for the time being current) obtainable from any specified office
of any Paying Agent or, as the case may be, the Registrar (a Put Notice) and in which the holder
must specify a bank account to which payment is to be made under this Condition and, in the case
of Registered Notes, the nominal amount thereof to be redeemed or purchased and, if less than the
full nominal amount of the Registered Notes so surrendered is to be redeemed or purchased, an
address to which a new Registered Note in respect of the balance of such nominal amount is to be
sent subject to and in accordance with the provisions of Condition 2.2. If the Note is in definitive
form, the Put Notice must be accompanied by the relevant Note or evidence satisfactory to the Paying
Agent concerned that such Note will, following delivery of the Put Notice, be held to its order or
under its control. If the Note is represented by a Global Note and held through Euroclear or
Clearstream, Luxembourg, in order to exercise the right to require redemption or purchase of the
relevant Note, the holder of the relevant Note must, within the relevant notice period, give notice to
the Principal Paying Agent of such exercise in accordance with the standard procedures of Euroclear
and Clearstream, Luxembourg (which may include notice being given on such holder s instruction
by Euroclear or Clearstream, Luxembourg or any common depositary for Euroclear or Clearstream,
Luxembourg to the Principal Paying Agent by electronic means) in a form acceptable to Euroclear
and Clearstream, Luxembourg at such time and, at the same time the holder of such Global Note shall
present or procure the presentation of the relevant Global Note to the Principal Paying Agent for
notation accordingly.
Any Put Notice or other notice given in accordance with the standard procedures of Euroclear and
Clearstream, Luxembourg by a holder of any Note pursuant to Condition 8.5 shall be irrevocable
except where, prior to the due date for redemption or purchase, an Event of Default has occurred and
the Trustee has declared the Senior Notes or, as the case may be, the Subordinated Notes to be due
and repayable pursuant to Condition 11, in which event such holder, at its option, may elect by notice
to the Issuer to withdraw the notice given pursuant to Condition 8.5.

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8.6

Early Redemption Amounts


For the purpose of Condition 8.2 above and Condition 11, each Note will be redeemed at its Early
Redemption Amount calculated as follows:
(a)

in the case of a Note with a Final Redemption Amount equal to the Issue Price, at the Final
Redemption Amount thereof;

(b)

in the case of a Note (other than a Zero Coupon Note but including an Instalment Note and a
Partly Paid Note) with a Final Redemption Amount which is or may be less or greater than the
Issue Price or which is payable in a Specified Currency other than that in which the Note is
denominated, at the amount specified in, or determined in the manner specified in, the
applicable Pricing Supplement or, if no such amount or manner is so specified in the applicable
Pricing Supplement, at its nominal amount; or

(c)

in the case of a Zero Coupon Note, at an amount (the Amortised Face Amount) calculated in
accordance with the following formula:
Early Redemption Amount = RP X (1 + AY)(y)
where:
RP means the Reference Price;
AY means the Accrual Yield expressed as a decimal; and
y is a fraction the numerator of which is equal to the number of days (calculated on the basis
of a 360-day year consisting of 12 months of 30 days each) from (and including) the Issue Date
of the first Tranche of the Notes to (but excluding) the date fixed for redemption or (as the case
may be) the date upon which such Note becomes due and repayable and the denominator of
which is 360,
or on such other calculation basis as may be specified in the applicable Pricing Supplement.

8.7

Instalments
Instalment Notes will be redeemed in the Instalment Amounts and on the Instalment Dates. In the
case of early redemption, the Early Redemption Amount will be determined pursuant to Condition
8.6.

8.8

Partly Paid Notes


Partly Paid Notes will be redeemed, whether at maturity, early redemption or otherwise, in
accordance with the provisions of this Condition and the applicable Pricing Supplement.

8.9

Purchases
The Issuer or any Subsidiary of the Issuer may at any time purchase Senior Notes and, subject to
obtaining the prior approval of the Bank of Mongolia and, if necessary, any other relevant authority,
Subordinated Notes (provided that, in the case of definitive Notes, all unmatured Receipts, Coupons
and Talons appertaining thereto are purchased therewith) at any price in the open market or
otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any
Paying Agent and/or the Registrar for cancellation.

8.10 Cancellation
All Notes which are redeemed pursuant to Condition 8.4 will forthwith be cancelled (together with
all unmatured Receipts, Coupons and Talons attached thereto or surrendered therewith at the time of
redemption or purchase, as the case may be). All Notes so cancelled and any Notes purchased and
cancelled pursuant to Condition 8.9 above (together with all unmatured Receipts, Coupons and
Talons cancelled therewith) shall be forwarded to the Principal Paying Agent and cannot be reissued
or resold.

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8.11 Late payment on Zero Coupon Notes


If the amount payable in respect of any Zero Coupon Note upon redemption of such Zero Coupon
Note pursuant to Condition 8.1, 8.2, 8.3 or 8.4 above or upon its becoming due and repayable as
provided in Condition 11 is improperly withheld or refused, the amount due and repayable in respect
of such Zero Coupon Note shall be the amount calculated as provided in Condition 8.6(c) above as
though the references therein to the date fixed for the redemption or the date upon which such Zero
Coupon Note becomes due and payable were replaced by references to the date which is the earlier
of:
(a)

the date on which all amounts due in respect of such Zero Coupon Note have been paid; and

(b)

five days after the date on which the full amount of the moneys payable in respect of such Zero
Coupon Notes has been received by the Principal Paying Agent, the Registrar or the Trustee and
notice to that effect has been given to the Noteholders in accordance with Condition 15.

9.

TAXATION

9.1

All payments of principal and interest in respect of the Notes, Receipts and Coupons by the Issuer
will be made without withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf
of any Tax Jurisdiction unless such withholding or deduction is required by law. In such event, the
Issuer will pay such additional amounts as may be necessary in order that the net amounts received
by the holders of the Notes, Receipts or Coupons after such withholding or deduction shall equal the
respective amounts of principal and interest which would otherwise have been receivable in respect
of the Notes, Receipts or Coupons, as the case may be, in the absence of such withholding or
deduction; except that no such additional amounts shall be payable with respect to any Note, Receipt
or Coupon:
(a)

presented for payment in Mongolia; or

(b)

presented for payment by or on behalf of a holder who is liable for such taxes or duties in
respect of such Note, Receipt or Coupon by reason of his having some connection with a Tax
Jurisdiction other than the mere holding of such Note, Receipt or Coupon; or

(c)

presented for payment more than 30 days after the Relevant Date (as defined below) except to
the extent that the holder thereof would have been entitled to additional amounts on presenting
the same for payment on such thirtieth day assuming that day to have been a Payment Day (as
defined in Condition 7.5); or

(d)

where such withholding or deduction is imposed on a payment to an individual and is required


to be made pursuant to European Council Directive 2003/48/EC or any law implementing or
complying with, or introduced in order to conform to, such Directive; or

(e)

presented for payment by or on behalf of a holder who would have been able to avoid such
withholding or deduction by presenting the relevant Note, Receipt or Coupon to another Paying
Agent in a Member State of the European Union.

As used herein:
(i)

Tax Jurisdiction means Mongolia or any political subdivision or any authority thereof or
therein having power to tax and any other jurisdiction or any political subdivision or any
authority thereof or therein having power to tax to which it (other than through the Paying
Agents) becomes subject in respect of payments made by it on the Notes, the Receipts or the
Coupons; and

(ii)

the Relevant Date means the date on which such payment first becomes due, except that, if
the full amount of the moneys payable has not been duly received by the Trustee, the Principal
Paying Agent or the Registrar, as the case may be, on or prior to such due date, it means the
date on which, the full amount of such moneys having been so received, notice to that effect
is duly given to the Noteholders in accordance with Condition 15.

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9.2

The Issuer will also (i) make such withholding or deduction and (ii) remit the full amount deducted
or withheld to the relevant authority in accordance with applicable law.

10.

PRESCRIPTION
The Notes (whether in bearer or registered form), Receipts and Coupons will become void unless
presented for payment within a period of 10 years (in the case of principal) and five years (in the case
of interest) after the Relevant Date (as defined in Condition 9) therefor.
There shall not be included in any Coupon sheet issued on exchange of a Talon any Coupon the claim
for payment in respect of which would be void pursuant to this Condition or Condition 7.2 or any
Talon which would be void pursuant to Condition 7.2.

11.

EVENTS OF DEFAULT AND ENFORCEMENT

11.1 Events of Default relating to Senior Notes


If this Note is specified in the applicable Pricing Supplement as being a Senior Note, the Trustee at
its discretion may, and if so requested in writing by the holders of at least one-quarter in nominal
amount of the Senior Notes then outstanding or if so directed by an Extraordinary Resolution of the
holders of the relevant Senior Notes shall (subject in each case to being indemnified and/or secured
to its satisfaction) (but in the case of the happening of any of the events described in paragraphs (c),
(e) (other than the winding up or dissolution of the Issuer), and (f) to (l) inclusive below, only if the
Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially
prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Senior
Note is, and each Senior Note shall thereupon immediately become, due and repayable at its Early
Redemption Amount together with accrued interest as provided in the Trust Deed if any of the
following events (each an Event of Default) shall occur and be continuing:
(a)

if the Issuer shall fail to pay or cause to be paid any principal of any such Senior Note when
due; or

(b)

if the Issuer shall fail to pay or cause to be paid any interest on any such Senior Note when due,
and such failure shall continue for 10 Business Days after written notice thereof by the Trustee
has been delivered to the Issuer; or

(c)

if the Issuer fails to perform or observe any of its obligations under these Conditions or the
Trust Deed (other than any such default referred to in (a) and (b) above) and (except in any case
where, in the opinion of the Trustee, the failure is incapable of remedy when no such
continuation or notice as is hereinafter mentioned will be required) the failure continues for the
period of 30 days (or such longer period as the Trustee may permit) next following the service
by the Trustee on the Issuer of notice requiring the same to be remedied; or

(d)

if (i) any present or future Indebtedness for Borrowed Money (as defined below) of the Issuer
or any of its Subsidiaries becomes capable of being declared due and repayable prematurely by
reason of an event of default (however described); or (ii) the Issuer or any of its Subsidiaries
fails to make any payment in respect of any Indebtedness for Borrowed Money on the due date
for payment or (iii) any security given by the Issuer or any of its Subsidiaries for any
Indebtedness for Borrowed Money becomes enforceable provided that no event described in
this subparagraph (d) shall constitute an Event of Default unless the Indebtedness for Borrowed
Money or other relative liability due and unpaid, either alone or when aggregated (without
duplication) with other amounts of Indebtedness for Borrowed Money and/or other liabilities
due and unpaid relative to all (if any) other events specified in (i) through (iii) above, amount
to at least US$5,000,000 or its equivalent in other currencies (on the basis of the middle spot
rate for the relevant currency against the U.S. dollar as quoted by an independent bank of
international repute in London on the day on which the calculation falls to be made); or

(e)

if any order is made by a court of competent jurisdiction or a resolution is passed for the
winding up or dissolution of the Issuer or any of its Subsidiaries, save for the purposes of
reorganisation on terms previously approved by an Extraordinary Resolution of the holders of
such Senior Notes; or

57

(f)

if the Issuer or any of its Subsidiaries ceases or threatens to cease to carry on the whole or a
substantial part of its business, save for the purposes of reorganisation on terms previously
approved by an Extraordinary Resolution of the holders of such Senior Notes, or the Issuer or
any of its Subsidiaries stops or threatens to stop or suspend payment of, or is unable to, or
admits inability to, pay, its debts (or any class of its debts) as they fall due, or is deemed unable
to pay its debts pursuant to or for the purposes of any applicable law, or is adjudicated or found
bankrupt or insolvent; or

(g)

if the Issuer or any of its Subsidiaries (or their respective directors or shareholders) initiates or
consents to judicial proceedings relating to itself under any applicable liquidation, insolvency,
composition, reorganisation or other similar laws or makes a conveyance or assignment for the
benefit of, or enters into any composition or other arrangement with, its creditors generally (or
any class of its creditors) or any meeting is convened to consider a proposal for an arrangement
or composition with its creditors generally (or any class of its creditors);

(h)

if a moratorium is agreed or declared by the Issuer or any of its Subsidiaries in respect of any
Indebtedness for Borrowed Money (including any obligation arising under any guarantee) of
the Issuer or any of its Subsidiaries; or

(i)

if it is or will become unlawful for the Issuer to perform or comply with any one or more of
its obligations under any of such Senior Notes or the Trust Deed; or

(j)

if any governmental authority or agency condemns, seizes, compulsorily purchases or


expropriates all or any material part of the assets or shares of the Issuer or any of its
Subsidiaries without fair compensation, unless, and for so long as, the Trustee is satisfied that
such compulsory purchase or expropriation is being contested in good faith and by appropriate
proceedings; or

(k)

if the Issuer or any of its Subsidiaries is or becomes entitled or subject to, or is declared by law
or otherwise to be protected by immunity (sovereign or otherwise) and Condition 20.3 is held
to be invalid or unenforceable; or

(l)

if (i) proceedings are initiated against the Issuer or any of its Subsidiaries under any applicable
liquidation, insolvency, composition, reorganisation or other similar laws or an application is
made (or documents filed with a court) for the appointment of an administrative or other
receiver, manager, administrator or other similar official, or an administrative or other receiver,
manager, administrator or other similar official is appointed, in relation to the Issuer or any of
its Subsidiaries or, as the case may be, in relation to the whole or any part of the undertaking
or assets of any of them or an encumbrancer takes possession of the whole or any part of the
undertaking or assets of any of them, or a distress, execution, attachment, sequestration or other
process is levied, enforced upon, sued out or put in force against the whole or any part of the
undertaking or assets of any of them, and (ii) in any such case (other than the appointment of
an administrator or an administrative receiver appointed following presentation of a petition for
an administration order) unless initiated by the relevant company, is not discharged within 14
days; or

(m) if any event occurs, which, under the laws of Mongolia has or may have, in the Trustees
opinion, an analogous effect to any of the events referred to in subparagraphs (f) to (h) inclusive
or (j).
11.2 Events of Default relating to Subordinated Notes
(a)

If this Note is specified in the applicable Pricing Supplement as being a Subordinated Note,
subject to the provisions of Condition 3.2, if default is made in the payment of any principal
or interest due on such Subordinated Notes or any of them on the due date and, in the case of
interest, such default continues for a period of 10 days, the Trustee may, at its discretion and
without further notice, institute proceedings for the winding up or liquidation of the Issuer to
enforce the obligations of the Issuer under the Subordinated Notes or the Trust Deed but may
take no further action in respect of such default (but without prejudice to paragraph (b) below)
and provided that it shall not be bound to take any such proceedings or any other action in
relation to the Trust Deed, the Notes, the Receipts or the Coupons unless (i) it shall have been

58

so directed by an Extraordinary Resolution of the holders of such Subordinated Notes or so


requested in writing by the holders of at least one-quarter in nominal amount of such
Subordinated Notes then outstanding and (ii) it shall have been indemnified and/or secured to
its satisfaction.
(b)

If any decision, order or approval is made for the winding up or liquidation, or in the event of
the revocation of the Issuer s banking licence No. 08, issued by the Bank of Mongolia in
accordance with Article 23 of the Banking Law of Mongolia and the Bank of Mongolia
Regulation on licensing of the bank and its units, as renewed or supplemented from time to
time, or the reorganisation of the Issuer, save for the purposes of reorganisation on terms
previously approved in writing by the Trustee or by an Extraordinary Resolution of the holders
of such Subordinated Notes, the Trustee may, and if so requested in writing by the holders of
at least one-quarter in nominal amount of the Subordinated Notes then outstanding or if so
directed by an Extraordinary Resolution of the holders of such Subordinated Notes, shall
(subject to being indemnified to its satisfaction) give notice to the Issuer that such Subordinated
Notes are, and they shall, subject to the prior approval of the Bank of Mongolia and, if
necessary, any other relevant authority having been obtained, thereupon immediately become,
due or repayable at the amount provided in, or calculated in accordance with, Condition 8.6,
together with accrued interest as provided in the Trust Deed.

(c)

Each of the events or circumstances referred to in Condition 11.2(a) and (b) shall constitute an
Event of Default in relation to the Subordinated Notes.

11.3 Enforcement
The Trustee may at any time, at its discretion and without notice, take such proceedings against the
Issuer as it may think fit to enforce the provisions of the Trust Deed, or any of the Notes and/or any
related Receipts and Coupons, but it shall not be bound to take any such proceedings or any other
action in relation to the Trust Deed, the Notes and/or any related Receipts or Coupons unless (i) it
shall have been so directed by an Extraordinary Resolution of the holders of the relevant Notes or
so requested in writing by the holders of at least one-quarter in nominal amount of such Notes then
outstanding and (ii) it shall have been indemnified and/or secured to its satisfaction.
No Noteholder, Receiptholder or Couponholder shall be entitled to proceed directly against the Issuer
unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and
the failure shall be continuing.
11.4 Definition
For the purposes of the Conditions, Indebtedness for Borrowed Money means (a) any indebtedness
(whether being principal, premium, interest or other amounts) for or in respect of any notes, bonds,
debentures, debenture stock, loan stock or other securities or any borrowed money or any liability
under or in respect of any acceptance or acceptance credit and (b) to the extent not included in (a),
any guarantee and/or indemnity in respect of any such indebtedness.
12.

REPLACEMENT OF NOTES, RECEIPTS, COUPONS AND TALONS


Should any Note, Receipt, Coupon or Talon be lost, stolen, mutilated, defaced or destroyed, it may
be replaced at the specified office of the Principal Paying Agent (in the case of Bearer Notes,
Receipts or Coupons) or the Registrar (in the case of Registered Notes) upon payment by the claimant
of such costs and expenses as may be incurred in connection therewith and on such terms as to
evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes, Receipts,
Coupons or Talons must be surrendered before replacements will be issued.

59

13.

AGENTS
The names of the initial Agents and their initial specified offices are set out below.
The Issuer is entitled, with the prior written approval of the Trustee, to vary or terminate the
appointment of any Agent and/or appoint additional or other Agents and/or approve any change in
the specified office through which any Agent acts, provided that:
(a)

there will at all times be a Principal Paying Agent and a Registrar;

(b)

so long as the Notes are listed on any stock exchange or admitted to trading by any other
relevant authority or entity, there will at all times be a Paying Agent (in the case of Bearer
Notes) and a Transfer Agent (in the case of Registered Notes) with a specified office in such
place as may be required by the rules and regulations of the relevant stock exchange or other
relevant authority or entity;

(c)

the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of
the European Union that is not obliged to withhold or deduct tax pursuant to European Council
Directive 2003/48/EC or any law implementing or complying with, or introduced in order to
conform to, such Directive; and

(d)

so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require,
the Issuer will appoint and maintain a paying agent and transfer agent in Singapore in the event
that such Notes are represented by Notes in definitive form.

In addition, the Issuer shall, with the prior written approval of the Trustee, promptly appoint a Paying
Agent having a specified office in New York City in the circumstances described in Condition 7.5.
Any variation, termination, appointment or change shall only take effect (other than in the case of
insolvency, when it shall be of immediate effect) after not less than 30 nor more than 45 days prior
notice thereof shall have been given to the Noteholders in accordance with Condition 15.
In acting under the Agency Agreement, the Agents act solely as agents of the Issuer and, in certain
circumstances specified therein, of the Trustee and do not assume any obligation to, or relationship
of agency or trust with, any Noteholders, Receiptholders or Couponholders. The Agency Agreement
contains provisions permitting any entity into which any Agent is merged or converted or with which
it is consolidated or to which it transfers all or substantially all of its assets to become the successor
agent.
14.

EXCHANGE OF TALONS
On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet
matures, the Talon (if any) forming part of such Coupon sheet may be surrendered at the specified
office of the Principal Paying Agent or any other Paying Agent in exchange for a further Coupon
sheet including (if such further Coupon sheet does not include Coupons to (and including) the final
date for the payment of interest due in respect of the Note to which it appertains) a further Talon,
subject to the provisions of Condition 10.

15.

NOTICES
All notices regarding the Bearer Notes will be deemed to be validly given if published in a leading
English language daily newspaper of general circulation in Singapore. It is expected that such
publication will be made in the Business Times. The Issuer shall also ensure that notices are duly
published in a manner which complies with the rules of any stock exchange or other relevant
authority on or by which the Bearer Notes are for the time being listed or by which they have been
admitted to trading. Any such notice will be deemed to have been given on the date of the first
publication or, where required to be published in more than one newspaper, on the latest of the date(s)
of the first publication in all required newspapers. If publication as provided above is not practicable,
a notice will be given in such other manner, and will be deemed to have been given on such date,
as the Trustee shall approve.

60

All notices regarding the Registered Notes will be deemed to be validly given if sent by first class
mail or (if posted to an address overseas) by airmail to the holders (or the first named of joint holders)
at their respective addresses recorded in the Register and will be deemed to have been given on the
fourth day after mailing and, in addition, for so long as any Registered Notes are listed or have been
admitted to trading on or by any stock exchange (or other relevant authority) and the rules of that
stock exchange (or other relevant authority) so require, such notice will be published in a daily
newspaper of general circulation in the place or places required by those rules.
Until such time as any definitive Notes are issued, there may, so long as any Global Notes
representing the Notes are held in their entirety on behalf of Euroclear and/or Clearstream,
Luxembourg, be substituted for such publication in such newspaper(s) the delivery of the relevant
notice to Euroclear and/or Clearstream, Luxembourg for communication by them to the holders of the
Notes and, in addition, for so long as any Notes are listed or have been admitted to trading on or by
any stock exchange (or other relevant authority) and the rules of that stock exchange (or other
relevant authority) so require, such notice will be published in a daily newspaper of general
circulation in the place or places required by those rules. Any such notice shall be deemed to have
been given to the holders of the Notes on the seventh day after the day on which the said notice was
given to Euroclear and/or Clearstream, Luxembourg.
Notices to be given by any Noteholder shall be in writing and given by lodging the same, together
(in the case of any Note in definitive form) with the relative Note or Notes, with the Principal Paying
Agent (in the case of Bearer Notes) or the Registrar (in the case of Registered Notes). Whilst any of
the Notes are represented by a Global Note, such notice may be given by any holder of a Note to the
Principal Paying Agent or the Registrar through Euroclear and/or Clearstream, Luxembourg, as the
case may be, in such manner as the Principal Paying Agent, the Registrar and Euroclear and/or
Clearstream, Luxembourg, as the case may be, may approve for this purpose.
16.

MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER AND SUBSTITUTION


The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter
affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of
the Notes, the Receipts, the Coupons or any of the provisions of the Trust Deed. Such a meeting may
be convened by the Issuer or the Trustee and shall be convened by the Issuer if required in writing
by Noteholders holding not less than 10 per cent. in nominal amount of the Notes for the time being
remaining outstanding. The quorum at any such meeting for passing an Extraordinary Resolution is
one or more persons holding or representing not less than 50% in nominal amount of the Notes for
the time being outstanding, or at any adjourned meeting one or more persons being or representing
Noteholders whatever the nominal amount of the Notes so held or represented, except that at any
meeting the business of which includes the modification of certain provisions of the Notes, the
Receipts or the Coupons or the Trust Deed (including modifying the date of maturity of the Notes
or any date for payment of interest thereon, reducing or cancelling the amount of principal or the rate
of interest payable in respect of the Notes or altering the currency of payment of the Notes, the
Receipts or the Coupons), the quorum shall be one or more persons holding or representing not less
than two-thirds in nominal amount of the Notes for the time being outstanding, or at any adjourned
such meeting one or more persons holding or representing not less than one-third in nominal amount
of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of
the Noteholders shall be binding on all the Noteholders, whether or not they are present at the
meeting, and on all Receiptholders and Couponholders.
The Trust Deed provides for a resolution, with or without notice, in writing signed by or on behalf
of the holder or holders of not less than 90% of the principal amount of the Notes for the time being
outstanding to be as effective and binding as if it were an Extraordinary Resolution duly passed at
a meeting of the Noteholders.
The Trustee may agree, without the consent of the Noteholders, Receiptholders or Couponholders, to
any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of
the provisions of the Notes or the Trust Deed, or determine, without any such consent as aforesaid,
that any Event of Default or potential Event of Default shall not be treated as such, where, in any

61

such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the
Noteholders so to do or may agree, without any such consent as aforesaid, to any modification which
is of a formal, minor or technical nature or to correct a manifest error or an error which, in the
opinion of the Trustee, is proven.
In connection with the exercise by it of any of its trusts, powers, authorities and discretions
(including, without limitation, any modification, waiver, authorisation, determination or
substitution), the Trustee shall have regard to the general interests of the Noteholders as a class (but
shall not have regard to any interests arising from circumstances particular to individual Noteholders,
Receiptholders or Couponholders whatever their number) and, in particular but without limitation,
shall not have regard to the consequences of any such exercise for individual Noteholders,
Receiptholders or Couponholders (whatever their number) resulting from their being for any purpose
domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular
territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall
any Noteholder, Receiptholder or Couponholder be entitled to claim, from the Issuer the Trustee or
any other person any indemnification or payment in respect of any tax consequences of any such
exercise upon individual Noteholders, Receiptholders or Couponholders except to the extent already
provided for in Condition 9 and/or any undertaking or covenant given in addition to, or in
substitution for, Condition 9 pursuant to the Trust Deed.
The Trustee may, without the consent of the Noteholders, Receiptholders or Couponholders, agree
with the Issuer, to the substitution in place of the Issuer (or of any previous substitute under this
Condition) as the principal debtor under the Notes, the Receipts, the Coupons and the Trust Deed of
another company, being a Subsidiary of the Issuer, subject to (a) the Trustee being satisfied that the
interests of the Noteholders will not be materially prejudiced by the substitution and (b) certain other
conditions set out in the Trust Deed being complied with.
Any such modification, waiver, authorisation, determination or substitution shall be binding on the
Noteholders, the Receiptholders and the Couponholders and any such modification or substitution
shall be notified to the Noteholders in accordance with Condition 15 as soon as practicable thereafter.
17.

INDEMNIFICATION OF THE TRUSTEE AND TRUSTEE CONTRACTING WITH THE


ISSUER
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from
responsibility, including provisions relieving it from taking action unless indemnified and/or secured
to its satisfaction.
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to
enter into business transactions with the Issuer and/or any of its Subsidiaries and to act as trustee for
the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of
its Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its
duties under or in relation to any such transactions or, as the case may be, any such trusteeship
without regard to the interests of, or consequences for, the Noteholders, Receiptholders or
Couponholders and (c) to retain and not be liable to account for any profit made or any other amount
or benefit received thereby or in connection therewith.

18.

FURTHER ISSUES
The Issuer shall be at liberty from time to time without the consent of the Noteholders, the
Receiptholders or the Couponholders to create and issue further notes having terms and conditions
the same as the Notes or the same in all respects save for the issue date and the amount and date of
the first payment of interest thereon and so that the same shall be consolidated and form a single
Series with the outstanding Notes.

62

19.

CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999


No person shall have any right to enforce any term or condition of this Note under the Contracts
(Rights of Third Parties) Act 1999, but this does not affect any right or remedy of any person which
exists or is available apart from that Act.

20.

GOVERNING LAW AND DISPUTE RESOLUTION

20.1 Governing law


The Trust Deed, the Agency Agreement, the Notes, the Receipts, the Coupons and any
non-contractual obligations arising out of or in connection with the Trust Deed, the Agency
Agreement, the Notes, the Receipts and the Coupons are governed by, and shall be construed in
accordance with, English law except that, in the case of Subordinated Notes, Condition 3.2 is
governed by, and shall be construed in accordance with, Mongolian law.
20.2 Arbitration
The Issuer has, in the Trust Deed, irrevocably agreed for the benefit of the Trustee and the
Noteholders that any dispute, claim, difference or controversy arising out of, relating to or having any
connection with each of the Trust Deed and the Notes, including any dispute as to the existence,
validity, interpretation, performance, breach or termination or the consequences of the nullity thereof
and any dispute relating to any non-contractual obligations arising out of or in connection therewith
(a Dispute), shall be referred to and finally resolved by arbitration before the London Court of
International Arbitration (the LCIA) under the LCIA Arbitration Rules.
20.3 Option to litigate and the jurisdiction of English courts
The Trustee and the Noteholders may by notice in writing to the Issuer require that all Disputes or
a specific Dispute be litigated (Elected Disputes). In addition, a Noteholder exercising its right to
proceed directly against the Issuer in accordance with Clause 8.2 of the Trust Deed may by notice
in writing to the Issuer require that a specific Dispute between it and the Issuer shall, as between it
and the Issuer, be litigated. The English courts shall have exclusive jurisdiction to settle the Elected
Disputes and the Issuer submits to the exclusive jurisdiction of the English courts. The Issuer has,
in the Trust Deed, waived any objection to the courts of England on the grounds that they are an
inconvenient or inappropriate forum. The Trustee and any Noteholder exercising its right to proceed
directly against the Issuer in accordance with Clause 8.2 of the Trust Deed may take any suit, action
or proceeding (together referred to as Proceedings) arising out of or in connection with any Dispute
or Disputes (including any Proceedings relating to any non-contractual obligations arising out of, or
in connection with, any Dispute or Disputes) against the Issuer in any other court of competent
jurisdiction and concurrent Proceedings in any number of jurisdictions.
20.4 Appointment of process agent
The Issuer has appointed Hill Dickinson Services (London) Ltd. of Irongate House, Dukes Place,
London, EC3A 7HX as its agent for service of process in respect of any Proceedings before the
English courts in relation to any Dispute, and has undertaken, in the event of Hill Dickinson Services
(London) Ltd. ceasing so to act or ceasing to have an address in England, to appoint another person
approved by the Trustee as its agent for service of process in England in respect of any such
Proceedings. Nothing herein shall affect the right to serve proceedings in any other manner permitted
by law.

63

20.5 Waiver of immunity


The Issuer has in the Trust Deed agreed to irrevocably and unconditionally (i) waive and has agreed
not to claim any sovereign or other immunity from the jurisdiction of the English courts or the courts
of any other jurisdiction in relation to any Dispute to be resolved in accordance with the terms of the
Trust Deed (including to the extent that such immunity may be attributed to it), and has agreed to
ensure that no such claim is made on its behalf; (ii) waive and agree not to claim any sovereign or
other immunity from the jurisdiction of the English courts or the courts of any other jurisdiction in
relation to the recognition or enforcement of any judgment or court order or arbitral award of or by
the English courts or the courts of any other jurisdiction whether before or after final judgment or
arbitral award and has agreed to ensure that no such claim is made on its behalf; and (iii) consent
to the enforcement of any order or judgment or award made or given generally in respect of any
Proceedings, Dispute or arbitration in accordance with the terms of the Trust Deed and to the giving
of any relief or the issue of any process in connection with such Proceedings or arbitration, including
without limitation, (a) relief by way of interim or final injunction or order for specific performance
or recovery of any property; (b) attachment of its assets; and (c) the making, enforcement or
execution against any property, revenues or other assets whatsoever (irrespective of its use or
intended use) and has waived and agreed not to claim any sovereign or other immunity from the
jurisdiction of the English courts or the courts of any other jurisdiction in relation to any order, relief
or judgment made or given in connection with any Proceeding or arbitration (including to the extent
that such immunity may be attributed to it), and has agreed to ensure that no such claim is made on
its behalf.

64

PRO FORMA PRICING SUPPLEMENT


Set out below is the form of Pricing Supplement which will be completed for each Tranche of Notes issued
under the Programme.
[Date]
Trade and Development Bank of Mongolia LLC
Issue of [Aggregate Nominal Amount of Tranche] [Title of Notes]
under the US$700,000,000
Euro Medium Term Note Programme
This document constitutes the Pricing Supplement relating to the issue of Notes described herein.
Capitalised terms used but not otherwise defined herein shall have the respective meanings ascribed to
them in the Conditions set forth in the Information Memorandum dated 16 April 2012 [and the
supplemental Information Memorandum dated []]. This Pricing Supplement contains the final terms of
the Notes and must be read in conjunction with such Information Memorandum [(as so supplemented)].
Full information regarding the Issuer and the offer of the Notes is only available on the basis of the
combination of this Pricing Supplement and the Information Memorandum [(as so supplemented)].
[The following alternative language applies if the first tranche of an issue which is being increased was
issued under an Information Memorandum with an earlier date.
Capitalised terms used but not otherwise defined herein shall have the respective meanings ascribed to
them in the Conditions (the Conditions) set forth in the Information Memorandum dated [original date].
This Pricing Supplement contains the final terms of the Notes and must be read in conjunction with the
Information Memorandum dated [current date] [and the supplemental Information Memorandum dated
[]], save in respect of the Conditions which are extracted from the Information Memorandum dated
[original date] and which are attached hereto.]
[Include whichever of the following apply or specify as Not Applicable (N/A). Note that the numbering
should remain as set out below, even if Not Applicable is indicated for individual paragraphs or
subparagraphs. Italics denote directions for completing the Pricing Supplement.]
[If the Notes have a maturity of less than one year from the date of their issue, the minimum denomination
may need to be 100,000 or its equivalent in any other currency.]
1.

Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and Development Bank of Mongolia LLC

2.

(a)

Series Number . . . . . . . . . . . . . . . . . . []

(b)

Tranche Number . . . . . . . . . . . . . . . . .

[]
(If fungible with an existing Series, details of that
Series, including the date on which the Notes
become fungible and the Aggregate Nominal
Amount of the Series)

3.

Specified Currency or Currencies (in the


case of Dual Currency Notes) . . . . . . . . . . . []

4.

Aggregate Nominal Amount . . . . . . . . . . . . []

5.

(a)

[Series . . . . . . . . . . . . . . . . . . . . . . . . []]

(b)

[Tranche . . . . . . . . . . . . . . . . . . . . . .

(a)

Issue Price . . . . . . . . . . . . . . . . . . . . . []% of the Aggregate Nominal Amount [plus


accrued interest from [insert date] (in the case of
fungible issues only, if applicable)

(b)

[Net Proceeds . . . . . . . . . . . . . . . . . . [] (Required only for listed issues)]

65

[]]

6.

(a)

Specified Denominations . . . . . . . . . . []
(Notes (including Notes denominated in Sterling) in
respect of which the issue proceeds are to be
accepted by the Issuer in the United Kingdom or
whose issue otherwise constitutes a contravention
of section 19 of the FSMA and which have a
maturity of less than one year must have a minimum
redemption value of 100,000 (or its equivalent in
other currencies).)

(in the case of Registered Notes, this means


the minimum integral amount in which
transfers can be made)

(N.B. Following the entry into force of the 2010 PD


Amending Directive on 31 December 2010, Notes to
be admitted to trading on a regulated market within
the European Economic Area with a maturity date
which will fall after the implementation date of the
2010 PD Amending Directive in the relevant
European Economic Area Member State (which is
due to be no later than 1 July 2012) must have a
minimum denomination of EUR 100,000 (or
equivalent) in order to benefit from Transparency
Directive exemptions in respect of wholesale
securities. Similarly, Notes issued after the
implementation of the 2010 PD Amending Directive
in a Member State must have a minimum
denomination of EUR 100,000 (or equivalent) in
order to benefit from the wholesale exemption set
out in Article 3.2(d) of the Prospectus Directive in
that Member State.)
(N.B. If Bearer Notes are being issued with
specified denominations expressed to be =
C 100,000
or its equivalent and in multiples of a lower
principal amount (for example =
C 1,000), insert the
following language: =
C 100,000 and integral
multiples of =
C 1,000 in excess thereof up to and
including =
C 199,000. No Notes in definitive
form will be issued with a denomination above
=
C 199,000.)
(N.B. If an issue of Notes is (i) NOT admitted to
trading on a regulated market in the European
Economic Area; and (ii) only offered in the
European Economic Area in circumstances where a
prospectus is not required to be published under the
Prospectus Directive, the =
C 100,000 minimum
denomination is not required.)
(b)

Calculation Amount . . . . . . . . . . . . . . []
(If there is only one Specified Denomination, insert
the Specified Denomination. If there is more than
one Specified Denomination, insert the highest
common factor. Note: There must be a common
factor in the case of two or more Specified
Denominations.)

66

7.

(a)

Issue Date . . . . . . . . . . . . . . . . . . . . . []

(b)

Interest Commencement Date . . . . . . . [(specify other)/Issue Date/Not Applicable]


(N.B. An Interest Commencement Date will not be
relevant for certain Notes, for example Zero
Coupon Notes.)

8.

Maturity Date . . . . . . . . . . . . . . . . . . . . . . [Fixed rate specify date/Floating rate - Interest


Payment Date falling in or nearest to [specify
month and year]]
(NB: Subordinated Notes shall have a minimum
maturity of five years)

9.

Interest Basis . . . . . . . . . . . . . . . . . . . . . . . [[] per cent. Fixed Rate] [[LIBOR/EURIBOR] +/[]% Floating Rate] [Zero Coupon] [Index Linked
Interest] [Dual Currency Interest]
[specify other]
(further particulars specified below)

10.

Redemption/Payment Basis . . . . . . . . . . . . . [Redemption at par] [Index Linked Redemption]


[Dual Currency Redemption] [Partly Paid]
[Instalment] [specify other]

11.

Change of Interest Basis or


Redemption/Payment Basis . . . . . . . . . . . . . [Not Applicable/Applicable][Specify details of any
provision for change of Notes into another Interest
Basis or Redemption/Payment Basis]
(N.B. In respect of Subordinated Notes, a step-up in
interest basis may occur only once during the tenor
of the relevant Subordinated Notes and must be
within any limits set by the Bank of Mongolia.)

12.

Put/Call Options . . . . . . . . . . . . . . . . . . . . . [Investor Put]


(N.B. In respect of Subordinated Notes, the details
of any Investor Put will be stated under item 31)
[Issuer Call]
(NB: Limits on the exercise of any Issuer Call in
connection with Subordinated Notes may need to be
confirmed with the Bank of Mongolia.)
[(further particulars specified below)]

13.

(a)

Status of the Notes . . . . . . . . . . . . . . . [Senior/Subordinated]


(NB: If Subordinated, include applicable
provisions in respect of Subordinated Notes.)

(b)

Date of [Board] approval for


issuance of Notes obtained . . . . . . . . . [] [and [], respectively]/[None required]
(N.B. Only relevant where Board (or similar)
authorisation is required for the particular tranche
of Notes)

67

(c)

Date of regulatory approval/consent for


issuance of Notes obtained . . . . . . . . . []/[None required]
(N.B. Only relevant where regulatory (or similar)
approval or consent is required for the particular
tranche of Notes)

14.

Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . [Singapore/(specify other)/None]


(N.B. Consider disclosure requirements under the
Prospectus Directive applicable to securities
admitted to a regulated market in the European
Economic Area)

15.

Method of distribution . . . . . . . . . . . . . . . . [Syndicated/Non-syndicated]

PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE


16.

Fixed Rate Note Provisions . . . . . . . . . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)
(a)

Rate(s) of Interest . . . . . . . . . . . . . . . []% per annum [payable [annually/semi-annually/


quarterly/(specify other)] in arrear]
(If payable other than annually, consider amending
Condition 6)

(b)

Interest Payment Date(s) . . . . . . . . . . . [[] in each year up to and including the Maturity
Date]/[specify other]
(N.B. This will need to be amended in the case of
long or short coupons)

(c)

Fixed Coupon Amount(s) . . . . . . . . . . [[] per Calculation Amount]

(d)

Broken Amount(s) . . . . . . . . . . . . . . . [] per Calculation Amount, payable on the Interest


Payment Date falling [in/on] []

(e)

Day Count Fraction . . . . . . . . . . . . . . [30/360]


[Actual/Actual (ICMA)]
[specify other]

(f)

Determination Date(s) . . . . . . . . . . . . . [] in each year


[Insert regular interest payment dates, ignoring
issue date or maturity date in the case of a long or
short first or last coupon N.B. Only relevant where
Day Count Fraction is Actual/Actual (ICMA)]

(g)

Other terms relating to the method of


calculating interest for Fixed Rate
Notes . . . . . . . . . . . . . . . . . . . . . . . . . [Not Applicable/give details]

(h)

Additional Business Centre(s) . . . . . . . []

68

17.

Floating Rate Note Provisions . . . . . . . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)
(a)

Specified Period(s)/Specified Interest


Payment Dates . . . . . . . . . . . . . . . . . . []

(b)

Business Day Convention . . . . . . . . . . [Floating Rate Convention/Following Business Day


Convention/Modified Following Business Day
Convention/Preceding Business Day Convention/
[(specify other)]]

(c)

Additional Business Centre(s) . . . . . . . []

(d)

Manner in which the Rate of Interest


and Interest Amount is to be
determined . . . . . . . . . . . . . . . . . . . . . [Screen Rate Determination/ISDA Determination/
(specify other)]

(e)

Party responsible for calculating the


Rate of Interest and Interest Amount
(if not the Principal Paying Agent) . . . []

(f)

Screen Rate Determination

Reference Rate . . . . . . . . . . . . . .

[]
(Either LIBOR, EURIBOR or other, although
additional information is required if other
-including fallback provisions in the Agency
Agreement)

Interest Determination Date(s) . . . []


(Second London business day prior to the start of
each Interest Period if LIBOR (other than Sterling
or Euro LIBOR), first day of each Interest Period if
Sterling LIBOR and the second day which is also a
TARGET Day prior to the start of each Interest
Period if EURIBOR or Euro LIBOR)

Relevant Screen Page . . . . . . . . . []


(In the case of EURIBOR, if not Reuters
EURIBOR01 ensure it is a page which shows a
composite rate or amend the fallback provisions
appropriately)

(g)

ISDA Determination

Floating Rate Option . . . . . . . . . []

Designated Maturity . . . . . . . . . . []

Reset Date . . . . . . . . . . . . . . . . . []

(h)

Margin(s) . . . . . . . . . . . . . . . . . . . . . . [+/-] [] per cent. per annum

(i)

Minimum Rate of Interest . . . . . . . . . . [] per cent. per annum

(j)

Maximum Rate of Interest . . . . . . . . . [] per cent. per annum

69

(k)

Day Count Fraction . . . . . . . . . . . . . . [Actual/Actual (ISDA) or Actual/Actual]


[Actual/365 (Fixed)]
[Actual/365(Sterling)]
[Actual/360] [30/360 or 360/360 or Bond Basis]
[30E/360 or Eurobond Basis]
[30E/360 (ISDA)]
(See Condition 6 for alternatives)

(l)

18.

Fall back provisions, rounding


provisions and any other terms relating
to the method of calculating interest on
Floating Rate Notes, if different from
those set out in the Conditions . . . . . . []

Zero Coupon Note Provisions . . . . . . . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)

19.

(a)

Accrual Yield . . . . . . . . . . . . . . . . . . . [] per cent. per annum

(b)

Reference Price . . . . . . . . . . . . . . . . . []

(c)

Any other formula/basis of


determining amount payable . . . . . . . . []

(d)

Day Count Fraction in relation to


Early Redemption Amounts and
late payment . . . . . . . . . . . . . . . . . . . [Conditions 8.6(c) and 8.11 apply/(specify other)]
(Consider applicable day count fraction if not U.S.
dollar-denominated)

Index Linked Interest Note Provisions . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)
(a)

Index/Formula . . . . . . . . . . . . . . . . . . [Give or annex details]

(b)

Party responsible for calculating the


Rate of Interest and Interest Amount
(if not the Principal Paying Agent) . . . []

(c)

Provisions for determining coupon


where calculation by reference to Index
and/or Formula is impossible or
impracticable . . . . . . . . . . . . . . . . . . . [Need to include a description of market disruption
or settlement disruption events and adjustment
provisions]

(d)

Specified Period(s)/Specified Interest


Payment Dates . . . . . . . . . . . . . . . . . . []

(e)

Business Day Convention . . . . . . . . . . [Floating Rate Convention/Following Business Day


Convention/Modified Following Business Day
Convention/Preceding Business Day Convention/
(specify other)]

70

(f)

Additional Business Centre(s) . . . . . . . []

(g)

Minimum Rate of Interest . . . . . . . . . . [] per cent. per annum

(h)

Maximum Rate of Interest . . . . . . . . . [] per cent. per annum

(i)

Day Count Fraction . . . . . . . . . . . . . . [Actual/Actual (ISDA) or Actual/Actual]


[Actual/365 (Fixed)]
[Actual/365(Sterling)]
[Actual/360] [30/360 or 360/360 or Bond Basis]
[30E/360 or Eurobond Basis] [30E/360 (ISDA)]
(See Condition 6 for alternatives)

20.

Dual Currency Interest Note Provisions . . . . [Applicable/Not Applicable] (If not applicable,
delete the remaining subparagraphs of this
paragraph)
(a)

Rate of Exchange/method of
calculating Rate of Exchange . . . . . . .

[Give or annex details]

(b)

Party, if any, responsible for


calculating the interest due (if not
the Principal Paying Agent) . . . . . . . . []

(c)

Provisions applicable where calculation


by reference to Rate of Exchange is
impossible or impracticable . . . . . . . . . [Need to include a description of market disruption
or settlement disruption events and adjustment
provisions]

(d)

Person at whose option any Specified


Currency(ies) is/are payable . . . . . . . . []

PROVISIONS RELATING TO REDEMPTION


21.

Issuer Call . . . . . . . . . . . . . . . . . . . . . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)
(a)

Optional Redemption Date(s) . . . . . . . []

(b)

Optional Redemption Amount and


method, if any, of calculation of such
amount(s) . . . . . . . . . . . . . . . . . . . . . [] per Calculation Amount/(specify other)/see
Appendix]

(c)

If redeemable in part:
(i)

Minimum Redemption Amount . . . []

(ii)

Maximum Redemption
Amount . . . . . . . . . . . . . . . . . . .

71

[]

(d)

Notice period (if other than as set out


in the Conditions) . . . . . . . . . . . . . . . []
(N.B. If setting notice periods which are different to
those provided in the Conditions, the Issuer is
advised to consider the practicalities of distribution
of information through intermediaries, for example,
clearing systems and custodians, as well as any
other notice requirements which may apply, for
example, as between the Issuer and the Principal
Paying Agent or Trustee)

22.

Investor Put . . . . . . . . . . . . . . . . . . . . . . . . [Applicable/Not Applicable]


(If not applicable, delete the remaining subparagraphs
of this paragraph)
(a)

Optional Redemption Date(s) . . . . . . . []

(b)

Optional Redemption Amount and


method, if any, of calculation of such
amount(s) . . . . . . . . . . . . . . . . . . . . . [] per Calculation Amount/(specify other)/see
Appendix]

(c)

Notice period (if other than as set out


in the Conditions) . . . . . . . . . . . . . . . []
(N.B. If setting notice periods which are different to
those provided in the Conditions, the Issuer is
advised to consider the practicalities of distribution
of information through intermediaries, for example,
clearing systems and custodians, as well as any
other notice requirements which may apply, for
example, as between the Issuer and the Principal
Paying Agent or Trustee)

23.

Final Redemption Amount . . . . . . . . . . . . . [] per Calculation Amount/(specify other)/see


Appendix]

24.

Early Redemption Amount payable on


redemption for taxation reasons or on event
of default and/or the method of calculating
the same (if required or if different from
that set out in Condition 8.6) . . . . . . . . . . . [] per Calculation Amount/(specify other)/see
Appendix]

GENERAL PROVISIONS APPLICABLE TO THE NOTES


25.

Form of Notes . . . . . . . . . . . . . . . . . . . . . . [Bearer


Notes:
Temporary
Global
Note
exchangeable for a Permanent Global Note which is
exchangeable for Definitive Notes [on 60 days
notice given at any time/only upon an Exchange
Event]]
[Temporary Global Note exchangeable for
Definitive Notes on and after the Exchange Date]
[Permanent Global Note exchangeable for
Definitive Notes [on 60 days notice given at any
time/only upon an Exchange Event]]
[Registered Notes: Registered Global Note ([]
nominal amount)]

72

(Ensure that this is consistent with the language in


the Form of the Notes section in the Information
Memorandum and the Notes themselves. N.B. The
exchange upon notice/at any time options should
not be expressed to be applicable if the Specified
Denomination of the Notes in item 6 includes
language substantially to the following effect:
=
C 100,000 and integral multiples of =
C 1,000 in
excess thereof up to and including =
C 199,000.
Furthermore,
such
Specified
Denomination
construction is not permitted in relation to any
issue of Notes which is to be represented on issue by
a Temporary Global Note exchangeable for
Definitive Notes.)
26.

Additional Financial Centre(s) or


other special provisions relating to
Payment Days . . . . . . . . . . . . . . . . . . . . . . [Not Applicable/give details]
(Note that this item relates to the place of payment
and not Interest Period end dates to which items
16(h), 17(c) and 19(f) relate)

27.

Talons for future Coupons or Receipts to be


attached to definitive Notes in bearer form
(and dates on which such Talons mature) . . . [Yes/No. If yes, give details]

28.

Details relating to Partly Paid Notes: amount


of each payment comprising the Issue Price
and date on which each payment is to be
made and consequences of failure to pay,
including any right of the Issuer to
forfeit the Notes and interest due on
[Not Applicable/give details] (N.B. a new form of
late payment . . . . . . . . . . . . . . . . . . . . . . . . Temporary Global Note and/or Permanent Global
Note may be required for issues of Partly Paid
Notes)

29.

Details relating to Instalment Notes: . . . . . . [Applicable/Not Applicable]

30.

(a)

Instalment Amount(s) . . . . . . . . . . . . . [give details]

(b)

Instalment Date(s) . . . . . . . . . . . . . . . [give details]

Redenomination . . . . . . . . . . . . . . . . . . . . . Redenomination [not] applicable


(If Redenomination is applicable, specify the
applicable Day Count Fraction and any provisions
necessary to deal with floating rate interest
calculation (including alternative reference rates))

31.

Other terms and conditions . . . . . . . . . . . . . [Not Applicable/give details]

DISTRIBUTION
32.

33.
34.

(a)

If syndicated, names of Dealers . . . . . [Not Applicable/give names]

(b)

Stabilising Manager(s) (if any) . . . . . . [Not Applicable/give name(s)]

If non-syndicated, name of Relevant


Dealer . . . . . . . . . . . . . . . . . . . . . . . . . . .

[]

Whether TEFRA D or TEFRA C rules


applicable or TEFRA rules not applicable . . . [TEFRA D applicable/TEFRA C applicable/TEFRA
not applicable]

73

35.

U.S. Selling Restrictions . . . . . . . . . . . . . . . [Reg S Category 1 or 2]

36.

Additional selling restrictions . . . . . . . . . . . [Not Applicable/give details]

OPERATIONAL INFORMATION
37.

ISIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . []

38.

Common Code . . . . . . . . . . . . . . . . . . . . . . []

39.

Any clearing system(s) other than Euroclear


and Clearstream, Luxembourg and the
relevant identification number(s) . . . . . . . . . [Not Applicable/give name(s) and number(s)]

40.

Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . Delivery [against/free of] payment

41.

In the case of Registered Notes only, the


common nominee of Euroclear and
Clearstream, Luxembourg, or such other
clearing system(s) as may be applicable, in
whose name the Registered Global Note is
registered . . . . . . . . . . . . . . . . . . . . . . . . . . [Not Applicable/[[]]

42.

Any additional Agents appointed in respect


of the Notes . . . . . . . . . . . . . . . . . . . . . . . . [Not Applicable/[[]]

GENERAL
43.

Alternative use of proceeds . . . . . . . . . . . . . [Not Applicable/(Specify other)]


(If reasons for the offer differ from that specified in
Use of Proceeds in the Information Memorandum,
will need to include those reasons here)

[LISTING AND ADMISSION TO TRADING APPLICATION


This Pricing Supplement comprises the final terms required to list and have admitted to trading the issue
of Notes described herein pursuant to the US$700,000,000 Euro Medium Term Note Programme of Trade
and Development Bank of Mongolia LLC.]
[STABILISING
[In connection with this issue of Notes, [insert name of Stabilising Manager] (the Stabilising Manager)
(or any person acting on behalf of the Stabilising Manager) may over-allot Notes [(provided that, in the
case of any tranche of Notes to be admitted to trading on a regulated market (within the meaning of the
Markets in Financial Instruments Directive (Directive 2004/39/EC)) in the European Economic Area, the
aggregate principal amount of Notes allotted does not exceed 105% of the aggregate principal amount of
the relevant tranche of Notes)] or effect transactions with a view to supporting the market price of the
Notes at a level higher than that which might otherwise prevail. However, the Bank cannot assure
prospective purchasers that the Stabilising Manager (or persons acting on behalf of the Stabilising
Manager) will undertake any stabilisation action. Any stabilisation action may begin on or after the date
on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be
ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and
60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment shall be
conducted by the Stabilising Manager (or persons acting on behalf of the Stabilising Manager) in
accordance with all applicable laws and rules.]

74

RESPONSIBILITY
The Issuer accepts responsibility for the information contained in this Pricing Supplement which, when
read together with the Information Memorandum [and the supplemental Information Memorandum]
referred to above, contains all information that is material in the context of the issue of the Notes.
Signed on behalf of the Trade and Development Bank of Mongolia LLC:

By:
Duly authorised

75

FORM OF THE NOTES


Unless otherwise defined herein, words and expressions defined in Terms and Conditions of the Notes
shall have the same meanings in this section.
The Notes of each Series will be in either bearer form, with or without interest coupons attached, or
registered form.
Bearer Notes
Each Tranche of Bearer Notes will be in bearer form and will be initially issued in the form of a temporary
bearer global note without interest coupons attached (a Temporary Bearer Global Note) or, if so specified
in the applicable Pricing Supplement, a permanent bearer global note without interest coupons attached (a
Permanent Bearer Global Note and, together with the Temporary Bearer Global Note, Bearer Global
Notes) which, in either case, will be delivered on or prior to the original issue date of such Notes to a
common depositary (the Common Depositary) for Euroclear Bank SA/NV (Euroclear) and
Clearstream Banking, socit anonyme (Clearstream, Luxembourg). Whilst any Bearer Note is
represented by a Temporary Bearer Global Note, payments of principal, interest (if any) and any other
amount payable in respect of the Notes due prior to the Exchange Date (as defined below) will be made
against presentation of the Temporary Bearer Global Note only to the extent that certification (in a form
to be provided) to the effect that the beneficial owners of interests in such Bearer Note are not U.S. persons
or persons who have purchased for resale to any U.S. person, as required by U.S. Treasury regulations, has
been received by Euroclear and/or Clearstream, Luxembourg, and Euroclear and/or Clearstream,
Luxembourg, as applicable, has given a like certification (based on the certifications it has received) to the
Principal Paying Agent.
On and after the date (the Exchange Date) which is 40 days after a Temporary Bearer Global Note is
issued, interests in such Temporary Bearer Global Note will be exchangeable (free of charge) upon a
request as described therein either for (a) interests in a Permanent Bearer Global Note of the same Series
or (b) for Definitive Bearer Notes of the same Series with, where applicable, receipts, interest coupons and
talons attached (as indicated in the applicable Pricing Supplement and subject, in the case of Definitive
Bearer Notes, to such notice period as may be specified in the applicable Pricing Supplement), in each case
against certification of beneficial ownership as described above unless such certification has already been
given, provided that purchasers in the United States and certain U.S. persons will not be entitled to receive
Definitive Bearer Notes. The holder of a Temporary Bearer Global Note will not be entitled to collect any
payment of interest, principal or other amount due on or after the Exchange Date unless, upon due
certification, exchange of the Temporary Bearer Global Note for an interest in a Permanent Bearer Global
Note or for Definitive Bearer Notes is improperly withheld or refused.
Payments of principal, interest (if any) or any other amounts in relation to any Bearer Notes which are
represented by a Permanent Bearer Global Note will be made through Euroclear and/or Clearstream,
Luxembourg against presentation or surrender (as the case may be) of the relevant Permanent Bearer
Global Note without any requirement for certification.
To the extent specified in the applicable Pricing Supplement, a Permanent Bearer Global Note will be
exchangeable (free of charge), in whole but not in part, for Definitive Bearer Notes with, where applicable,
receipts, interest coupons and talons attached upon either (a) not less than 60 days written notice from
Euroclear and/or Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such
Permanent Bearer Global Note) to the Principal Paying Agent as described therein or (b) only upon the
occurrence of an Exchange Event. For these purposes, Exchange Event means that the Issuer has been
notified that both Euroclear and Clearstream, Luxembourg have been closed for business for a continuous
period of 14 days (other than by reason of holiday, statutory or otherwise) or have announced an intention
permanently to cease business or have in fact done so and no successor clearing system satisfactory to the
Trustee is available. The Issuer will promptly give notice to Noteholders in accordance with Condition 15
if an Exchange Event occurs. In the event of the occurrence of an Exchange Event, Euroclear and/or
Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such Permanent Bearer
Global Note) or the Trustee may give notice to the Principal Paying Agent requesting exchange. Any such
exchange shall occur not later than 45 days after the date of receipt of the first relevant notice by the
Principal Paying Agent.

76

For so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Issuer
will appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered
for payment or redemption, in the event that a Bearer Global Note is exchanged for Definitive Bearer Notes
in the circumstances set out above. In addition, in the event that a Bearer Global Note is exchanged for
Definitive Bearer Notes in the circumstances set out above, announcement of such exchange will be made
by or on behalf of the Issuer through the SGX-ST and such announcement will include all material
information with respect to the delivery of the Definitive Bearer Notes, including details of the paying
agent in Singapore.
The following legend will appear on all Bearer Notes which have an original maturity of more than 365
days and on all receipts and interest coupons relating to such Notes:
ANY UNITED STATES PERSON (AS DEFINED IN THE INTERNAL REVENUE CODE OF THE UNITED
STATES) WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED
STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND
1287(a) OF THE INTERNAL REVENUE CODE.
The sections of the Internal Revenue Code referred to in such legend provide that United States holders,
with certain exceptions, will not be entitled to deduct any loss on Bearer Notes, receipts or interest coupons
and will not be entitled to capital gains treatment of any gain on any sale, disposition, redemption or
payment of principal in respect of such Notes, receipts or interest coupons.
Notes which are represented by a Bearer Global Note will only be transferable in accordance with the rules
and procedures for the time being of Euroclear or Clearstream, Luxembourg, as the case may be.
Registered Notes
The Registered Notes of each Tranche offered and sold in reliance on Regulation S, which will be sold to
non-U.S. persons outside the United States, will initially be represented by a global note in registered form
(a Registered Global Note). Prior to expiry of the distribution compliance period (as defined in
Regulation S) applicable to each Tranche of Notes, beneficial interests in a Registered Global Note may
not be offered or sold to, or for the account or benefit of, a U.S. person save as otherwise provided in
Condition 2 and may not be held otherwise than through Euroclear or Clearstream, Luxembourg and such
Registered Global Note will bear a legend regarding such restrictions on transfer.
Registered Global Notes will be deposited with a common depositary for, and registered in the name of
a common nominee of, Euroclear and Clearstream, Luxembourg, as specified in the applicable Pricing
Supplement. Persons holding beneficial interests in Registered Global Notes will be entitled or required,
as the case may be, under the circumstances described below, to receive physical delivery of definitive
Notes in fully registered form.
Payments of principal, interest and any other amount in respect of the Registered Global Notes will, in the
absence of provision to the contrary, be made to the person shown on the Register (as defined in Condition
7.4) as the registered holder of the Registered Global Notes. None of the Issuer, the Trustee, any Agent
or the Registrar will have any responsibility or liability for any aspect of the records relating to or
payments or deliveries made on account of beneficial ownership interests in the Registered Global Notes
or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Payments of principal, interest or any other amount in respect of the Definitive Registered Notes will, in
the absence of any provision to the contrary, be made to the persons shown on the Register on the relevant
Record Date (as defined in Condition 7.4) immediately preceding the due date for payment in the manner
provided in that Condition.
Interests in a Registered Global Note will be exchangeable (free of charge), in whole but not in part, for
Definitive Registered Notes without receipts, interest coupons or talons attached only upon the occurrence
of an Exchange Event. The Issuer will promptly give notice to Noteholders in accordance with Condition
15 if an Exchange Event occurs. In the event of the occurrence of an Exchange Event, Euroclear and/or
Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such Registered Global
Note) may give notice to the Registrar requesting exchange. Any such exchange shall occur not later than
10 days after the date of receipt of the first relevant notice by the Registrar.

77

For so long as any of the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Issuer
will appoint and maintain a paying agent in Singapore, where the Notes may be presented or surrendered
for payment or redemption, in the event that a Registered Global Note is exchanged for Definitive
Registered Notes in the circumstances set out above. In addition, in the event that a Registered Global Note
is exchanged for Definitive Registered Notes in the circumstances set out above, announcement of such
exchange will be made by or on behalf of the Issuer through the SGX-ST and such announcement will
include all material information with respect to the delivery of Definitive Registered Notes, including
details of the paying agent in Singapore.
Transfer of Interests
Interests in a Registered Global Note may, subject to compliance with all applicable restrictions, be
transferred to a person who wishes to hold such interest in another Registered Global Note. No beneficial
owner of an interest in a Registered Global Note will be able to transfer such interest, except in accordance
with the applicable procedures of Euroclear and Clearstream, Luxembourg, in each case to the extent
applicable.
General
Pursuant to the Agency Agreement (as defined under Terms and Conditions of the Notes), the Principal
Paying Agent shall arrange that, where a further Tranche of Notes is issued which is intended to be
consolidated and form a single Series with an existing Tranche of Notes, the Notes of such further Tranche
shall be assigned a common code and ISIN which are different from the common code and ISIN assigned
to Notes of any other Tranche of the same Series until at least the expiry of the distribution compliance
period (as defined in Regulation S) applicable to the Notes of such Tranche.
For so long as any of the Notes is represented by a Global Note held on behalf of Euroclear and/or
Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the
time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular
nominal amount of such Notes (in which regard any certificate or other document issued by Euroclear or
Clearstream, Luxembourg as to the nominal amount of such Notes standing to the account of any person
shall be conclusive and binding for all purposes save in the case of manifest error) shall be treated by the
Issuer, the Trustee and the Agents as the holder of such nominal amount of such Notes for all purposes
other than with respect to the payment of principal or interest on such nominal amount of such Notes, for
which purpose the bearer of the relevant Bearer Global Note or the registered holder of the relevant
Registered Global Note, as applicable, shall be treated by the Issuer, the Trustee and the Agents as the
holder of such nominal amount of such Notes in accordance with and subject to the terms of the relevant
Global Note, and the expressions Noteholder and holder of Notes and related expressions shall be
construed accordingly.
Any reference herein to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits,
be deemed to include a reference to any additional or alternative clearing system specified in the applicable
Pricing Supplement or as may otherwise be approved by the Issuer and the Trustee.

78

USE OF PROCEEDS
The net proceeds from each issue of Notes will be applied by the Bank for general lending and investment
purposes. If the net proceeds of any particular issue of Notes is intended to be applied by the Bank for
purposes other than as specified herein, such use of proceeds will be stated in the applicable Pricing
Supplement.

79

EXCHANGE RATES AND EXCHANGE CONTROLS


This Information Memorandum contains translations of Tugrik amounts into U.S. dollar amounts at
specific exchange rates solely for the convenience of the reader. For convenience only and unless
otherwise noted, all translations from Tugriks into U.S. dollars in this Information Memorandum were
made at the rate of MNT 1,394.50 to US$1.00, which translation represents the basic exchange rate
published by Bloomberg on 31 December 2011.
The following table sets forth the mid-closing exchange rates from Bloomberg, in Tugriks per US$1.00,
for each of the periods indicated:
Mid-Closing Exchange Rate
2005 ..............................................................................
2006 ..............................................................................
2007 ..............................................................................
2008 ..............................................................................
2009 ..............................................................................
2010 ..............................................................................
2011 ..............................................................................
2012:
January..........................................................................
February........................................................................
March ..........................................................................
April (up to 13 April) ...................................................

Low(2)

Average(1)

High(2)

Period End

1,187.00
1,164.00
1,162.20
1,143.95
1,291.25
1,208.00
1,191.00

1,201.47
1,180.13
1,170.33
1,167.76
1,451.77
1,355.83
1,264.10

1,232.50
1,232.50
1,190.50
1,283.76
1,665.00
1,473.00
1,394.50

1,232.50
1,165.00
1,169.60
1,283.76
1,445.00
1,259.00
1,394.50

1,365.50
1,325.00
1,318.50
1,299.00

1,393.34
1,339.08
1,331.98
1,307.00

1,431.50
1,361.50
1,343.50
1,314.00

1,365.50
1,340.00
1,318.50
1,311.00

(1)

Determined by averaging the rates on the last business day of each month during the relevant period for annual periods and
each business day for monthly periods.

(2)

The high and low figures for each period are determined based on the daily middle exchange rates during the period indicated.

Exchange Controls
Under the Currency Settlement Law of 1994, Mongolian commercial banks require approval from the Bank
of Mongolia in order to undertake transactions in amounts that may affect the exchange rate of the Tugrik.
There are no other restrictions on repatriation of foreign currencies from Mongolia and there are no foreign
exchange controls. Foreign currency is generally freely transferable within or from Mongolia. Foreign
exchange policy is under the supervision of the Ministry of Finance and the Bank of Mongolia and is
subject to modification.

80

CAPITALISATION AND INDEBTEDNESS


As at the date of this Information Memorandum, the Bank had an authorised share capital of MNT eight
billion consisting of four million ordinary shares of MNT 2,000 each, and an issued and fully paid up share
capital of MNT 6.6 billion consisting of 3,305,056 ordinary shares of MNT 2,000 each.
The following table sets forth the Banks capitalisation and indebtedness as at 31 December 2011. The
information set forth in the table has been derived from, and should be read in conjunction with, the
audited financial statements of the Bank as at 31 December 2011 appearing elsewhere in this Information
Memorandum, and is qualified in its entirety by reference to such financial statements, including the notes
thereto.
As at 31 December 2011
(MNT millions)

(US$ millions)

Liabilities:
Deposits from customers ..........................................................................................
Deposits and placements by banks and other financial institutions ..........................
Bills sold under repurchase agreements ....................................................................
Borrowings ...............................................................................................................
Current taxes payable ...............................................................................................
Debt securities issued ...............................................................................................
Subordinated debt securities issued ..........................................................................
Other liabilities (due within one year)......................................................................

1,277,296.0
35,063.6
171,484.5
174,380.5
1,501.2
207,134.0
41,693.5
42,071.6

916.0
25.1
123.0
125.0
1.1
148.5
29.9
30.2

Total liabilities .............................................................................................................

1,950,624.9

1,398.8

Shareholders equity:
Share capital .............................................................................................................
Share premium..........................................................................................................
Treasury shares .........................................................................................................
Revaluation reserves .................................................................................................
Unrealised gain on available-for-sale financial assets ..............................................
Retained earnings .....................................................................................................

6,610.1
7,392.2
(6,001.9)
18,702.1
3,736.0
108,976.3

4.7
5.3
(4.3)
13.4
2.7
78.1

Total shareholders equity...........................................................................................

139,414.8

99.9

Total liabilities and shareholders equity ...................................................................

2,090,039.7

1,498.7

There has been no material change in the Banks total capitalisation or indebtedness since 31 December
2011.

81

SELECTED FINANCIAL INFORMATION


The following tables set forth selected financial information of the Bank as at the dates and for the periods
indicated. This information has been derived from, and should be read in conjunction with the audited
financial statements of the Bank as at and for the years ended 31 December 2009, 2010 and 2011 and is
qualified in its entirety by reference to such financial statements, including the notes thereto. All of such
financial statements have been prepared in accordance with IFRS as modified by Bank of Mongolia
guidelines.
The Banks financial position and results of operations as at any past date or for any past period are not
and should not be taken as an indication of the Banks performance, financial position or results of
operations in future years.
Selected Statements of Comprehensive Income Data
Years ended 31 December
2009

2010

2011

Interest income ...........................................................................


Interest expense..........................................................................

(MNT millions)
77,313.6
(45,743.4)

(MNT millions)
89,212.7
(60,062.9)

(MNT millions)
143,500.5
(95,359.0)

Net interest income ....................................................................

31,570.2

29,149.8

48,141.5

Net fee & commission income ...................................................


Other operating income:
Foreign exchange gain, net ....................................................
Precious metal trading gain ...................................................
Debt securities redemption loss .............................................
Other......................................................................................

6,054.4

6,852.0

12,134.2

5,907.7
55.7

91.6

9,434.7
84.5
(280.6)
38.7

13,339.3
705.8

131.1

Other operating income, net .......................................................

6,055.0

9,277.3

14,176.2

Net non-interest income .............................................................

12,109.4

16,129.3

26,310.4

Operating income .......................................................................


Operating expenses:
Staff costs ..............................................................................
Technical assistance and foreign bank remittance fees ..........
Depreciation on property and equipment ...............................
Share of profit of an associate ...............................................
Others(1) .................................................................................
Impairment losses.......................................................................

43,679.6

45,279.1

74,451.9

(6,891.7)
(1,798.5)
(1,575.5)

(7,417.2)
(8,426.3)

(7,749.1)
(415.7)
(1,970.0)

(8,443.9)
(1,725.4)

(8,939.3)
(720.8)
(1,731.9)
75.0
(8,679.5)
(3,070.9)

Profit before tax .........................................................................


Corporate income tax .................................................................

17,570.4
(2,598.8)

24,975.0
(4,277.8)

51,384.5
(9,282.7)

Net profit for the year/period .....................................................

14,971.6

20,697.2

42,101.8

(1)

Costs incurred for loan collections, cleaning and other miscellaneous administrative expenses.

Selected Statements of Financial Position Data


As at 31 December

Asset:
Cash and cash equivalents:
Cash on hand .........................................................................
Deposits and placements with banks and other financial
institutions.........................................................................
Balances with the Bank of Mongolia(1) .................................
Deposits with the Bank of Mongolia .....................................
Investment securities:
Held-to-maturity investment securities ..................................
Available-for-sale investment securities .................................
Investment in an associate .....................................................
Loans and advances, net.............................................................
Bills purchased under resale agreements ....................................
Subordinated loans .....................................................................
Property, net and equipment, net ................................................
Intangible assets, net ..................................................................
Foreclosed real properties, net ...................................................
Other assets ................................................................................
Total assets ................................................................................

(1)

2009

2010

2011

(MNT millions)

(MNT millions)

(MNT millions)

24,216.0

35,988.0

50,082.9

63,061.7
57,065.7
122,641.4

286,797.9
79,820.4
150,861.6

168,120.7
256,761.0

88,890.5
1,409.9

406,214.7
799.5
7,000.0
21,439.9
800.7
2,099.3
14,724.8

259,138.9
1,596.6

464,466.6

7,000.0
19,811.1
655.9
977.3
31,765.8

105,985.7
241,784.6
2,276.0
1,123,331.9
36,966.1
7,000.0
79,145.0
433.4
579.2
17,573.2

810,364.1

1,338,880.1

2,090,039.7

Bank of Mongolia required that a minimum 5.0% and 11.0% of average customer deposits for two weeks must be maintained
with the Bank of Mongolia as at 31 December 2010 and 2011, respectively. In relation to the daily requirement, the Bank must
maintain no less than 50.0% of the required reserve amount at the end of each day. As at 31 December 2010 and 2011, the
required reserve amount was MNT 48,716.4 million and MNT 168,064.6 million, respectively.

82

As at 31 December

Liabilities:
Deposits from customers ............................................................
Deposits and placements of banks and other financial
institutions .............................................................................
Bills sold under repurchase agreements .....................................
Borrowings .................................................................................
Current taxes payables ...............................................................
Debt securities issued.................................................................
Subordinated debt securities issued ............................................
Other liabilities ..........................................................................
Total liabilities ..........................................................................

2009

2010

2011

(MNT millions)

(MNT millions)

(MNT millions)

579,522.8

919,944.7

1,277,296.0

31,469.2

53,302.0
1,343.6
59,639.5

17,946.0

53,584.9

50,678.1
1,482.0
173,280.3
31,218.5
20,399.1

35,063.6
171,484.5
174,380.5
1,501.2
207,134.0
41,693.5
42,071.6

743,223.1

1,250,587.6

1,950,624.9

Shareholders equity:
Share capital...............................................................................
Share premium ...........................................................................
Treasury shares ..........................................................................
Revaluation reserves ..................................................................
Unrealised gain on available-for-sale financial assets ...............
Retained earnings .......................................................................

6,610.1
7,392.2
(6,456.2)
13,683.3

45,911.6

6,610.1
7,392.2
(6,001.9)
13,418.3

66,873.8

6,610.1
7,392.2
(6,001.9)
18,702.1
3,736.0
108,976.3

Total shareholders equity ........................................................

67,141.0

88,292.5

139,414.8

Total liabilities and shareholders equity ................................

810,364.1

1,338,880.1

2,090,039.7

Other Selected Financial Data


As at 31 December
(1)

Return on average assets .........................................................


Return on average equity(2) ........................................................
Total non-performing loans to total loans(3) ...............................
Allowances for probable loan losses to total loans ....................
Capital adequacy ratio................................................................
Core capital ratio (Tier 1 only) ..................................................
Loans/deposits ratio ...................................................................
Liquidity ratio ............................................................................
Cost efficiency ratio(4) ...............................................................
Net interest margin.....................................................................
Non interest income ratio ...........................................................
NPL coverage ratio ....................................................................
NPL ratio ...................................................................................

2009

2010

2011

2.1%
22.6%
5.3%
3.6%
12.7%
10.1%
72.7%
47.0%
40.5%
4.7%
27.7%
67.2%
5.3%

2.3%
26.9%
4.1%
2.9%
16.3%
10.2%
52.0%
66.8%
41.0%
3.3%
35.6%
71.0%
4.1%

2.6%
39.8%
2.5%
1.6%
12.7%
8.2%
89.3%
42.8%
27.0%
3.5%
35.3%
63.6%
2.5%

(1)

Calculated as a ratio of each years profit after tax to average total assets. The figure for average total assets is an average
of the balance sheet total assets for each day of the relevant financial year.

(2)

Calculated as a ratio of each years profit after tax to average equity. The figure for average equity is an average of the balance
sheet equity for each day of the relevant financial year.

(3)

For further information regarding how the Bank classifies its loans, see The Bank Asset Quality Loan Classifications.

(4)

Calculated as the ratio of net operating expenses to net operating income for each period presented.

83

THE BANK
Overview
Trade and Development Bank of Mongolia LLC is a leading banking and financial services provider in
Mongolia, offering a wide range of domestic corporate and retail banking services, including large
corporate, SME and retail lending, deposit-taking, trade finance, remittance, cash management, treasury,
foreign exchange, gold bullion and other precious metals trading and investment banking services. The
Bank ranked as the third-largest bank in the country by equity base with total shareholders equity of MNT
139,414.8 million (US$100.0 million) and by assets with total assets of MNT 2,090,039.7 million
(US$1,498.8 million) as at 31 December 2011, according to the Banks internal data and the Bank of
Mongolia. In addition, the Bank has extensive experience in international banking transactions, including
trade finance, foreign exchange, remittance and syndicated lending activities in the international market.
The Bank has a prominent position in the domestic money markets, leading Mongolias foreign exchange
and gold bullion markets with a market share exceeding 27.8% and 51.0%, respectively, by trading volume
as at 31 December 2011, according to the Banks internal data and the Bank of Mongolia.
As the longest-serving bank in Mongolia, having commenced banking operations in 1990, the Bank acts
as primary lender to many of the countrys leading domestic and foreign corporate credits as well as
foreign representative offices across all major industrial and commercial sectors. Leveraging this
pre-eminent position and its long-standing customer relationships, the Bank has consolidated its
market-leading position in the handling of international trade finance and remittance with access to credit
lines with major international lenders and correspondent banking relationships with over 150 international
financial institutions.
The Banks strong corporate platform and network in the Mongolian banking sector has enabled the Bank
to capitalise on the growth of the Mongolian economy, which has experienced average GDP growth of
8.3% per annum for the period from 2003 through 2011 according to the IMF, and the accompanying
demand for more comprehensive banking solutions, through targeted lending to the growing SME sector
and increasing numbers of high-end retail customers, including staff of its corporate customers as well as
other high net-worth individuals. Such efforts have improved the loan portfolio mix amongst the Banks
corporate, commercial and retail segments. In addition, the Banks position in the corporate banking
market has facilitated expansion into complementary business segments such as treasury, foreign
exchange, gold bullion and other precious metals trading and money markets, as well as the Banks
investment banking services, as the Mongolian credit market continues to grow and becomes more
sophisticated. The Bank believes these dual factors of a strengthening Mongolian economy and the Banks
business growth initiatives have resulted in the Banks earnings increasing at a compound annual growth
rate of 41.8% for the period from 2003 through 2011. The Bank believes its diverse product offerings,
long-term relationships with its corporate customers and well-defined expansion strategy have poised it to
capitalise on the anticipated growth of the Mongolian economy.
As a customer-focused financial institution dedicated principally to serving its corporate customer base,
the Bank recognises the need to provide customers with convenient banking locations and personalised
customer service. From its headquarters in the capital city of Ulaanbaatar, the Bank operated a network of
42 branches in Mongolia as at 31 December 2011 including 30 branches located in Ulaanbaatar, one in
Umnugobi province near the Oyu Tolgoi copper project and 11 in industrial cities, such as Erdenet and
Darkhan. The Bank also operates one of the largest ATM networks in Mongolia with 99 ATMs, including
79 in Ulaanbaatar, seven each in Erdenet and Darkhan, and six in other rural areas. The Bank has a network
of approximately 957 merchants and approximately 1,344 point-of-sale terminals.
With a primary focus on corporate lending and deposit-taking, the Banks activities are concentrated in,
and its distribution strategy centres on, Ulaanbaatar, resulting in an emphasis on the quality of its branch
coverage for corporate customers in Mongolia as opposed to the quantity of branches. The Bank believes
its distribution strategy enables the Bank to service its core corporate customer base without losing
efficiencies through unnecessary expansion into rural regions, which are typically less profitable due to
lower business concentration in such regions. To reflect its primary focus on corporate banking, the Bank
plans to extend its branch network in Mongolia by identifying strategic locations with substantial new
business activity from key sectors of the Mongolian economy, particularly the mining sector. The Bank
intends to open 11 additional branches in 2012 with eight branches to be located in Ulaanbaatar and three
branches to be located outside Ulaanbaatar.

84

Competitive Strengths
The Bank has strong liquidity and as at 31 December 2011, the Banks return on average assets was 2.6%
as compared to 3.0%, 1.6% and 2.4% in respect of Khan Bank, Golomt Bank and XacBank, respectively,
according to public filings made by each bank. The Banks return on average equity was 39.8% as at 31
December 2011 compared to 28.8%, 27.0% and 19.3% in respect of Khan Bank, Golomt Bank and
XacBank, respectively, according to public filings made by each bank. The Bank believes it possesses the
following competitive strengths:

Leading corporate lender in Mongolia. The Bank has built a reputation as a leading corporate
banking service provider in Mongolia through its long-established presence, strong reputation and
extensive experience as well as its wide coverage of corporate and international trade-related
services. The Bank is the market leader in corporate lending with a 24.8% market share in 2011
according to the Bank of Mongolia. The Bank believes corporate customers view the Bank as a
reliable counterparty due to its prudent capital management strategy and position as a leading
corporate bank in Mongolia.

Well-positioned to take advantage of anticipated economic growth in Mongolia. The Bank will
continue its focus on corporate lending as well as developing SME and retail lending to take
advantage of growth in Mongolias mining sector and related development. The Bank believes its
diverse product offering, long-term relationships with corporate customers and well-defined
expansion strategy make the Bank well-positioned to capture future growth in the banking sector as
a result of the anticipated growth of the Mongolian economy in coming years.

Reputation as the international face of Mongolia. With over 150 correspondent relationships with
international financial institutions and 38 nostro accounts with major clearing banks around the
world, the Bank offers a wide range of trade finance instruments and services designed to appeal to
both domestic and international clients. The Bank believes it is the most experienced and advanced
participant among Mongolian banks in the international markets, including areas such as
international investment banking, syndicated and non-syndicated lending, trade finance and
remittance. In addition, the Bank diversified its funding sources by accessing the international capital
markets, as the first Mongolian issuer of debt securities in the international capital markets.

Diversified funding sources. The Bank has access to diversified funding sources from both domestic
depositors and foreign financial institutions, providing the Bank with greater financial flexibility as
compared to its domestic competitors, and believes corporate customers regard it as a preferred
deposit-taking institution. In addition, the Bank believes it has a lower cost of funding compared to
most other banks in Mongolia due to its large corporate deposit base, a significant portion of which
comprises current accounts, which typically carry a lower rate of interest as compared to individual
savings accounts.

Well-balanced asset portfolio. The Bank strives to maintain a balanced corporate loan portfolio and
has diversified overall credit exposure amongst the corporate, commercial and retail business
segments, thereby reducing the Banks reliance and concentration in any particular sector. The Bank
actively seeks to gain exposure to sectors that it believes it will contribute significantly to the growth
of Mongolias economy in the future, in particular the mining sector and related development.

Prudent risk management and strong corporate governance. The Bank has centralised organisational
and information systems that provide prompt reporting of operating risks, thereby enhancing the
Banks enterprise risk management and internal controls systems. Similarly, the Bank places great
importance on its implementation of sound corporate governance practices and maintains a system
of internal checks and balances and committees, consistent with international best practices, to
support its corporate governance structure. In response to the global financial crisis and other
macroeconomic factors affecting Mongolia, the Banks management increased its efforts in 2009 and
2010 to improve asset quality through enhancing its procedures for approving new loans and
monitoring and collecting existing loans, particularly for corporate customers in the construction
sector. In 2011, the Bank became the first commercial bank in Mongolia to establish an internal and
independent risk management committee to monitor credit, market and operation risks. The Banks
risk management committee is headed by the Chairman of the Banks Board. The Bank also
appointed one independent director to its Board in 2011. The Banks branch managers periodically
review loan usage, business operations of the Banks borrowers and collateral quality.

85

Enhanced compliance standards. The Bank, in conjunction with PricewaterhouseCoopers, has


implemented a comprehensive compliance program to update the Banks internal procedures
regarding anti-money laundering and anti-bribery regulations, and training and human resources
development programs. In order to enhance its internal audit procedures, the Bank has also recently
restructured its Internal Audit Department to separate audit functions into two divisions: the General
Audit Unit and the Special Audit Unit.

Experienced management team. The Bank has an experienced management team, including members
of its Board, that possesses extensive industry experience in Mongolia and overseas. The Bank
appointed one independent director to its Board in 2011. The management teams ability to provide
strategic direction, execute business initiatives and compete in a highly competitive market is
evidenced by the Banks growth and position in the Mongolian banking sector as well as its prudent
response to the global financial crisis of 2008 and 2009. The average experience of members of its
management team and the Board in the financial services and banking sectors exceeds 20 years, with
certain members of the management and the Board having held senior positions in other leading local
and international financial institutions.

Strategy
The Banks core strategy is to be the nations most profitable financial institution, while maintaining its
leading position as the largest lender to the Mongolian corporate sector and capitalising on its foundation
and reputation in the domestic market to diversify its products and services. The key components of the
Banks strategy to achieve these objectives include:

Consolidating its status as a preferred financial institution for Mongolian corporate customers. The
Bank aims to maintain its leading position in the Mongolian corporate banking sector by continuing
to improve its customer service and the range and quality of its product and service offerings. The
Bank wishes to further broaden its partnerships with international banks expand the banking services
it offers outside its core lending activities, including the development of cash management and
depository services and investment banking services, and use its position to cross-sell other corporate
finance products.

Expanding its services to SMEs in a focused manner. Although the Banks historical focus has been
on large corporate customers, it has increased its efforts to solidify its position as the preferred bank
of Mongolian SMEs by offering a range of loans and deposit products designed to meet the growing
demand for more sophisticated financial products in the Mongolian financial services market. With
its strong reputation and expertise in the Mongolian corporate banking sector, the Bank believes it
will be able to replicate and extend the core competencies of its corporate banking operations to the
SME sector.

Maintaining and strengthening its loan portfolio quality. The Bank intends to maintain and
strengthen its financial condition through rigorous monitoring of and, where possible, by improving
the quality of its loan portfolio. The Bank has implemented numerous initiatives in pursuit of this
strategy, including improvements made in the credit due diligence and loan approval process, the
deployment of a systemised credit monitoring and collection process and advanced training for its
account managers, risk analysts and credit officers. The Bank is committed to a strategy of growing
market share in the credit market without compromising its asset quality and, to that end, closely
monitors its non-performing loan to total loan ratio.

Targeting niche segments of the retail market. Drawing on synergies with its corporate and SME
strategies, the Bank targets the growing financial needs of the employees of its corporate and SME
customers by offering personal banking services such as payroll, remittance and savings products. In
addition, the Bank has also focused its marketing and product development efforts on retail services
for high net-worth individuals, who typically generate higher-margin business and represent better
asset quality as compared to the mass-market retail segment. As the Banks retail platform expands,
it expects such increased scale to enhance its ability to target high net-worth retail clients.

Expanding its deposit base. The Bank strives to manage its competitive cost of funding, increase its
operating margins and maintain its ability to leverage its asset base. To this end, the Bank expects
to continue to enlarge its deposit base by competing with other Mongolian banks to obtain
attractively priced deposits denominated in Tugriks and U.S. dollars in the domestic market. As the
Mongolian economy relies heavily on U.S. dollar pricing for certain goods, many local and foreign

86

corporate and SME customers operating in Mongolia maintain both Tugrik-denominated and U.S.
dollar-denominated deposits as a hedging strategy against inflationary pressures. Moreover, the Bank
believes that its extensive experience in foreign exchange and remittance, together with its
correspondent bank network and reputation for strong financial management, places it in an
advantageous position to attract foreign customers seeking a deposit-taking financial institution in
Mongolia.
Corporate History
The Bank was wholly owned by the Government at the time of its establishment in 1990. In 2002, the Bank
underwent a privatisation process, which resulted in Globull, a consortium owned by Banca Commerciale
Lugano and Gerald Metals Inc., owning the majority of the Banks share capital. In January 2005, the ADB
and IFC subscribed for newly issued shares of the Bank and became the Banks second-largest shareholders
representing 14.5% of the Banks then total issued and outstanding shares. In addition, the ADB and IFC
contributed MNT 9.6 billion to the Banks capital in the form of subordinated debt in 2004. The Banks
minority shareholders, mainly comprised of the Banks employees, were diluted from a 24.0% to a 19.0%
ownership position following a subsequent rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). The ADB and IFC exercised their tag-along rights and sold their shares to US Global, making
it the sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by
Central Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg
holds 100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of
2,760,841 ordinary shares of the Bank representing an 83.5% equity interest.
In February 2012, the Bank sold treasury stock representing 4.78% of its total issued and outstanding
shares to GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc. As at 31
December 2011, US Global Investment LLC held, directly and indirectly through Globull, 73.14% of the
Banks shares with the remaining shares held by minority shareholders. See Principal Shareholders. The
Bank was named the Development Supporting Bank of the Year by the Government in 2011.
On 14 August 2008, the Bank established a wholly owned subsidiary, TDB Capital LLC (TDB Capital),
which provides access to the international capital markets to the Banks corporate, institutional and high
net-worth customers. TDB Capital provides investment banking services such as corporate finance,
research and advisory, securities brokerage and asset management services. TDB Capital obtained an
underwriting and brokerage licence from the Financial Regulatory Commission of Mongolia in March
2011. As at 31 December 2011, its total Government bond trading volume was MNT 105.8 billion
(US$75.9 million). TDB Capital acted as the coordinator for a US$5 million private placement of
subordinated notes issued by the Bank in May 2011. TDB Capital became a member of the Mongolian
Stock Exchange in April 2011 and commenced security trading in May 2011.
The following table sets forth significant milestones achieved by the Bank:
Year

Milestone

1990
1992
1992
1993

First state-owned commercial bank in Mongolia


First bank in Mongolia to adopt International Financial Reporting Standards
First bank to introduce modern banking technology in Mongolia - introduced Reuters trading platform
First to offer American Express, Visa, Mastercard and JCB International credit cards, travellers cheques to
its customers
First bank in Mongolia to become a member of the Society for Worldwide Inter-Bank Financial
Telecommunications (SWIFT) network
First bank in Mongolia to offer Automatic Teller Machine ((ATM) services and currently operates one of
the largest network of ATMs in Mongolia
First commercial bank in Mongolia to buy and sell gold for export
First recipient of a bilateral investment made in the Mongolian banking sector; ADB and IFC injected
US$11 million in the Banks capital
First Mongolian bank to participate in international syndicated loans
First commercial bank in Mongolia to be rated by Moodys; credit rating was higher than the country rating
for Mongolia
First Mongolian company to issue debt in international capital markets; US$75 million notes issued under
its US$150 million Euro Medium Term Note Programme (2007 Programme)
First Mongolian bank to launch Mastercard credit cards and to issue Euro Mastercard
Fully repaid its US$75 million notes maturing in January 2010

1996
2001
2004
2004
2004
2006
2007
2008
2010

87

Year
2010
2010
2010
2011
2012

Milestone
Celebrated its twentieth anniversary as Mongolias longest serving and one of its largest banks
First bank in Mongolia to introduce the Europay, Mastercard and Visa (EMV) chips in credit cards
First Mongolian company to be a repeat issuer in the international capital markets; upsized its US$150
million programme to US$300 million and issued US$175 million notes
TDB Capital, a wholly owned subsidiary of the Bank, became the first to obtain an underwriting and
brokerage licence from the FRC
GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc., acquired 4.78% of the
Banks shares

Business Segments
The Bank organises its principal activities into five segments: corporate banking, treasury activities, retail
banking, SME banking and international and investment banking. The following table sets forth the
operating income (including interest income, net fee and commission income and other operating income
but excluding interest expenses) of each segment, and percentage of each segment to total operating
income, for the periods presented:
Years ended 31 December
2009

2010

2011

Corporate banking ........................................


Treasury activities.........................................
Retail banking...............................................
SME banking ................................................
International and investment banking ...........
Other.............................................................

(MNT millions)
53,933.8
10,316.9
21,371.9
3,475.0
325.4

%
(MNT millions)
60.3
54,629.2
11.5
29,428.7
23.9
16,943.1
3.9
3,190.3
0.4
405.2

745.6

%
(MNT millions)
51.9
76,654.9
27.9
48,373.3
16.1
37,399.2
3.0
6,135.9
0.4
661.4
0.7
661.1

%
45.1
28.5
22.0
3.6
0.4
0.4

Total .............................................................

89,423.0

100.0

100.0

100.0

105,342.1

169,885.8

Corporate banking
Corporate banking is the core business of the Bank. The Bank provides a wide range of corporate banking
services in Mongolia to approximately 400 leading Mongolian corporate customers and serves
substantially all of Mongolias major commercial business sectors. The Bank classifies a business
customer as corporate where the level of financing it provides to such customer is MNT 1.0 billion (or
its U.S. dollar equivalent) or more in the aggregate rather than basing the classification on the size or
turnover of the underlying business. The Bank aims to be the corporate banking service provider of choice
to its existing customers while, at the same time, seeking to attract new corporate customers. The Banks
corporate banking products and services include corporate lending, trade finance, syndicated lending and
deposit-taking. The Bank also provides its corporate customers with a variety of fee and commission-based
services, such as cash management services and remittances. In 2011, the Bank was named The Best
Mining Sector Financing Bank by the Mining Journal and The Best Contributing Bank in Urban
Development by the Mongolian Ministry of Roads, Transportation, Construction and Urban Development
and the Mongolian National Construction Association.
The Bank restructured its corporate banking activities in February 2007 by dividing the corporate business
unit into three sections: sales, appraisals and monitoring. The Bank believes this new structure makes it
more responsive to its customers needs, enhances its processing efficiency for loan applications, provides
enhanced cross-selling opportunities and supports the implementation of consistent loan documentation
and monitoring.
As at 31 December 2009, the Banks total corporate banking assets totalled MNT 344,406.5 million, which
increased by 7.1% to MNT 368,880.4 million as at 31 December 2010, which in turn increased by 110.3%
to MNT 775,630.6 million (US$556.2 million) as at 31 December 2011.
The growth in the Banks corporate banking business in 2010-2011 was primarily attributable to increased
demand for corporate loans fuelled by growth in the domestic market, expansion of the Banks corporate
customer base, and growth of the businesses of the Banks corporate customers; increases in the Banks
single borrower legal lending limit; the diversification and customisation of the Banks product and service
offerings in accordance with the needs of, and in response to feedback from, customers; the adoption of
enhanced marketing and cross-selling strategies; increases in the prices of fuel and petroleum products and
commodities such as copper, coal and gold; the growth of the commodities industry and the improved
condition of the Mongolian economy in general which has led to the improved financial position of many

88

of the Banks corporate customers. Due to the economic downturn in Mongolia in 2009, demand for
corporate loans fell significantly, which affected the Banks corporate banking business. Growth of the
mining sector and related industries has led to a corresponding increase in demand for corporate loans and
has generally boosted the corporate loan market in Mongolia.
Corporate lending
Corporate lending accounted for MNT 72,455.1 million (US$52.0 million), or 50.5%, of the Banks total
interest income for 2011, making corporate banking the largest contributor to the Banks operating income.
The following table sets forth the contribution to the Banks corporate banking operating income, by type
of corporate banking product, for the periods presented:
Years ended 31 December
2009

2010

2011

Corporate lending .........................................


Trade finance(1) .............................................
Commitment fees ..........................................
Others ...........................................................

(MNT millions)
52,151.4
1,136.7
349.2
296.4

%
(MNT millions)
96.8
52,443.7
2.1
1,802.8
0.6
283.6
0.5
99.1

%
(MNT millions)
96.0
72,455.1
3.3
3,184.1
0.5
881.8
0.2
133.9

%
94.5
4.2
1.1
0.2

Total .............................................................

53,933.7

100.0

100.0

100.0

(1)

54,629.2

76,654.9

Trade finance includes letters of credit and letters of guarantee only, which credit activities are primarily directed to the
Banks corporate customers to finance import and export activities.

The Banks corporate lending activities include providing loan and credit facilities in Tugriks and foreign
currencies, principally U.S. dollars, to corporate clients in Mongolia, overdraft and revolving credit
facilities, investment loans, saving collateralised loans, gold collateralised loans, working capital loans and
commercial mortgages with tenors ranging from six months to seven years. The Banks corporate loans
typically fund its customers imports, general working capital needs and capital expenditure requirements,
with a majority of such loans having maturities of three years or less. As demand for long-term financing
from customers increases, the Bank intends to increase its loan maturity limits accordingly. It is the Banks
policy to ensure that all of its domestic corporate loans are fully secured. The Bank also participates in
international syndicated lending activities. See International Banking.
As at 31 December 2009, the Banks corporate loans amounted to MNT 350,755.4 million, which increased
by 6.2% to MNT 372,606.2 million as at 31 December 2010, which in turn increased by 110.4% to MNT
783,778.4 million (US$562.0 million) as at 31 December 2011. As at 31 December 2009, interest income
from the Banks corporate loan portfolio totalled MNT 52,151.5 million, which increased by 0.6% to MNT
52,443.7 million as at 31 December 2010, which in turn increased by 38.1% to MNT 72,455.1 million
(US$52.0 million) as at 31 December 2011. The increase in corporate lending in 2010 was mainly due to
an increase in the demand for corporate loans driven by the growth in the trading sector. The increase in
corporate lending in 2011 was driven mainly by growth in the mining and corporate trading sectors. The
increase in interest income in 2010 and 2011 was due mainly to increase in corporate lending. As at 31
December 2011, the Bank had a 24.8% market share in corporate lending in Mongolia. The Bank had
15,515, 17,421 and 19,991 corporate customers as at 31 December 2009, 2010 and 2011, respectively.

89

The Bank aims to limit its exposure to each industry sector to 15%-20% of its total loan portfolio. In order
to manage the rapid growth in the mining sector and mining-related industries, the Bank partners with local
and international financial institutions to provide loans to its customers and aims to distribute loans among
mining-related borrowers to prevent loan concentration. The Bank obtains low risk financing from
international banks to provide financing to trading companies and obtains syndicated financing to service
the increase in demand for financing of petrol imports. The following table sets forth the industry
breakdown by amount and percentage of the Banks total corporate loans as at 31 December 2011:
As at 31 December 2011
Industry

Amount (MNT billions)

Mining and quarrying ...................................................................


Corporate trading ..........................................................................
Manufacturing ...............................................................................
Construction..................................................................................
Petrol import and trade .................................................................
Transportation and communication ...............................................
Agriculture ....................................................................................
Others ...........................................................................................

247.7
143.8
111.2
104.1
81.3
29.6
23.6
42.5

Percentage of Banks
corporate loan portfolio
31.6%
18.4%
14.2%
13.3%
10.4%
3.8%
3.0%
5.3%

Trade finance
The Bank provides corporate customers with various types of documentary credit instruments, including
import letters of credit, export letters of credit, standby letters of credit, letters of guarantee, collections
and structured transactions. These instruments are designed to provide the Banks corporate customers
with working capital funds and medium term financing with tenors of up to three years. The Bank also acts
as a leading participant in the international trade finance business in Mongolia, and has established
correspondent relationships with over 150 international financial institutions. See International
Banking. The Bank serves high-profile corporate customers in numerous industries, including wholesale
and retail goods, food, energy (primarily related to the import of oil), mining, transportation and
construction. The aggregate amount of credit limits established by major international financial institutions
with the Bank for international trade finance operations amounted to approximately US$177.4 million as
at 31 December 2011 as import activity increased due to a stronger Mongolian economy and increased
mining and infrastructure spending. The Bank handled 48.5% of the trade finance transactions in Mongolia
in 2011.
In August 2006, the Bank became the first Mongolian bank to be included in the Global Trade Finance
Program managed by the IFC. Under this program, the Bank had a credit limit of US$5.0 million for
transactions with tenors of up to three years and was able to expand its trade finance transactions within
an extensive network of countries and banks and enhance its trade finance coverage until 2008. In 2003,
ING Bank N.V. approved a credit facility in favour of the Bank which was increased to =C 11 million in
2011. In 2007, Commerzbank approved a =C 3.0 million credit facility in favour of the Bank which was
increased to =C 6.0 million in 2011.
In April 2009, the Russian Agricultural Bank approved a US$25.0 million interbank credit facility, which
has been successfully utilised for financing imports from Russia.
In March 2010, the Bank launched a trade finance program in cooperation with the ADB pursuant to which
letters of credit and guarantees issued by the Bank were backed by ADB. As at 31 December 2011, the total
trade finance transactions covered by the ADB guarantee amounted to US$7.7 million and total credit line
extended by ADB was US$15.0 million. In 2010, the Bank and Commerzbank signed a Basic Loan
Agreement for =C 15.0 million to foster trade relations between Mongolia and The Organisation for
Economic Cooperation and Development and the European Union countries. The funds are intended to be
used for long-term financing for imports of mining equipment and other products from European countries.
In July 2010, Export-Import Bank of Korea (KEXIM) increased the Banks credit facility from US$5.0
million to US$10.0 million and again to US$20.0 million to facilitate imports from Korea. In December
2010, the Bank and the Industrial and Commercial Bank of China entered into the Export Credit Agreement
to finance imports from China.

90

In March 2011, Export-Import Bank of Taiwan increased the Banks credit facility from US$2.0 million
to US$4.0 million to support the import of machinery and other finished products from Taiwan. The credit
facility was further increased to US$6.0 million in January 2012. In July 2011, the Bank entered into a
facility agreement with Commerzbank for refinancing of letters of credit and telegraphic transfers. In July
2011, the Bank also entered into a Export Credit Agreement with the Agricultural Bank of China to finance
imports from China. The Bank has also entered into loan agreements with Bayarn LB, BHF Bank and AKA
Bank to provide financing covered by export credit agencies to its customers. These increased direct and
uncovered lines of credit have expanded the Banks trade finance capacity both in terms of size and
geographic coverage. At present, the Bank is actively utilising these credit limits for its trade finance
transactions. The Bank was named the Best Trade Finance Bank in Mongolia for 2011 by the Global
Trade Review.
For 2009, the total transaction volume of the Banks trade finance business amounted to MNT 123,279.4
million, which increased by 59.1% to MNT 196,181.3 million for 2010, which in turn increased by 58.0%
to MNT 309,974.9 million (US$222.3 million) for 2011. For 2009, fee and commission income derived
from the Banks trade finance business totalled MNT 1,244.2 million, which increased by 56.4% to MNT
1,945.6 million for 2010, which in turn increased by 73.4% to MNT 3,373.0 million (US$2.4 million) for
2011. The Bank believes that the increase in the volume of trade finance activities between 2009 and 2010
was largely attributable to global economic recovery and improved financial performance of the Bank. The
increase in volume of trade finance activities between 2010 and 2011 was largely due to an increase in
imports and increased spending in the mining and infrastructure sectors.
Corporate deposit taking
The Bank is one of the leading banks in the corporate deposit-taking market in Mongolia. As at 31
December 2009, the Banks corporate deposit base totalled MNT 289,285.8 million, which increased by
64.8% to MNT 476,827.7 million as at 31 December 2010, which then increased by 18.8% to MNT
566,451.7 million (US$406.2 million) as at 31 December 2011. Corporate deposits represented 44.2% of
the Banks customer deposit base as at 31 December 2011.
The increase in the Banks corporate deposits from 31 December 2009 to 31 December 2011 was largely
due to a stronger Mongolian economy and improved financial performance of the Bank with 77.8% of the
Banks corporate deposits as current accounts. This provides a lower cost funding base than that of certain
competitors that rely more heavily on the retail markets for term deposits.
The Banks corporate deposit products consist of deposits, current accounts and escrow accounts. The
Bank maintains its policy of low fees and commissions for its current account related services such as
foreign and interbank remittances and cash withdrawals, and provides flexible currency rates with
conversion features.
Cash management services
The Bank provides various fee-based cash management services to its corporate customers, including wire
transfer, cash collection, processing of salary and other benefit payments and clearance of cheques. The
Bank is the first bank to provide cash management services in Mongolia and believes that it is a leading
supplier of foreign currency bank notes in Mongolia. For 2009, the Bank generated a fee and commission
income of MNT 169.4 million from its cash management services activities, which increased by 20.5% to
MNT 204.1 million generated for 2010, which in turn increased by 42.6% to MNT 291.1 million (US$0.2
million) for 2011. Such fee increase resulted primarily from improved cash collection. As at 31 December
2011, the Banks total bank notes import was approximately US$213.9 million.
Remittances
Since its establishment, the Bank has played a leading role in the international settlement and payment
system of Mongolia. The Bank generates revenue from remittances by charging a fee for each transaction.
These charges vary depending upon the service required from the Bank and the country of origin of the
remittance. The Bank also generates a margin from the daily conversion of inward foreign exchange into
local currency. Remittances are carried out on behalf of the Banks corporate customers in Mongolia.

91

For 2009, the Bank generated operating income of MNT 1,301.7 million from its corporate remittance
activities, which increased by 7.5% to MNT 1,399.5 million for 2010, which in turn increased by 43.6%
to MNT 2,009.8 million (US$1.4 million) for 2011 demonstrating the strengthening Mongolian economy
and increased economic activity primarily related to the mining sector and business sectors supporting
such operations.
Treasury activities
The Banks treasury activities include deposits with financial institutions, securities trading and liquidity
management, foreign exchange trading and gold and silver trading. In September 2008, the Bank
substantially ceased its proprietary trading operation in securities, foreign exchange and gold and silver
trading (apart from holding minimal positions for its own account from time to time to meet or anticipate
customer needs). Although the Bank still handles transactions in these areas, the primary focus of such
transactions is to meet client needs rather than directly generate revenue for the Bank. For 2010, income
generated from treasury activities accounted for MNT 29,428.6 million, or 27.9%, of the Banks total
operating income and accounted for MNT 48,373.4 million (US$34.7 million), or 28.5%, of the Banks
total operating income for 2011. The following table sets forth the contribution to the Banks total treasury
activity operating income, by type of treasury activity, for the periods presented:
Years ended 31 December
2009

2010

(MNT millions)

(MNT millions)

2011
%

(MNT millions)

Securities trading and liquidity


management .............................................
Foreign exchange trading..............................
Deposits with financial institutions...............
Gold trading..................................................
Silver trading ................................................
Others ...........................................................

6,317.6
(1,269.5)
5,017.5
372.6
(317.0)
195.7

61.2
(12.3)
48.6
3.6
(3.0)
1.9

15,466.7
9,434.7
4,278.6
43.9
40.6
164.1

52.6
32.1
14.5
0.1
0.1
0.6

29,385.4
13,339.3
4,559.4
703.7
2.1
383.5

60.7
27.6
9.4
1.5

0.8

Total .............................................................

10,316.9

100.0

29,428.6

100.0

48,373.4

100.0

The Bank was the largest bank in Mongolia in terms of foreign currency-denominated assets as at 31
December 2011 according to the Bank of Mongolia. The Bank was the leader in money-market activities
as at 31 December 2011 and held a market share of 28.2% of the Mongolian money market as at 31
December 2011. The Banks total portfolio of Government bonds was MNT 103.3 billion (US$74.1
million) and total portfolio of Bank of Mongolia bills was MNT 199.3 billion (US$142.9 million), as at
31 December 2011. The Bank is also cooperating with a branch of ING Bank N.V. to implement an
electronic trading and settlement platform to facilitate online trading of foreign exchange for its customers.
As at 31 December 2009, the Banks treasury assets amounted to MNT 273,095.3 million, which increased
by 117.5% to MNT 593,867.7 million as at 31 December 2010, which then decreased by 28.5% to MNT
424,457.7 million (US$304.4 million) as at 31 December 2011. The increase in treasury assets in 2010 was
due largely to prepayment of the Banks international debt obligations. The decrease in treasury assets in
2011 was due to an increase in money market assets related to an increase in the Banks loan portfolio.
Deposits with financial institutions
As at 31 December 2011, the Bank had placed local and foreign currency denominated deposits with
various international banks and financial institutions totalling approximately US$50.2 million, which had
a maturity of three to 182 days. As at 31 December 2011, the average maturity was 33 days and such
deposits had interest rates ranging from 4.75% to 6.35%, averaging 5.05%.

92

Securities trading and liquidity management


The Bank actively participates in securities trading and investment for its own account in the secondary
markets to assist it in the management of its liquidity position and to generate interest income and capital
gains. The Banks investment portfolio primarily consists of available-for-sale securities and short-term
held-to-maturity investments consisting of Government bonds and bills. The Bank trades primarily in Bank
of Mongolia Central Bank Bills and invests in Government bonds with a maturity of one to three years.
For 2009, the Banks securities trading volume exceeded MNT 1,600,802.0 million, which increased by
164.7% to MNT 4,237,653.0 million for 2010, which in turn increased by 102.1% to MNT 8,562,511.8
million (US$6,140.2 million) for 2011. The following table sets forth details of the Banks trading
securities in Bank of Mongolia Central Bank Bills:
As at 31 December
2009

2010

2011

Term
(days)
7
4

(MNT
millions)
33,082.0
799.7

Yield
(percentage)
10.00
5.00

Term
(days)
7

(MNT
millions)
135,834.0

Yield
(percentage)
11.0

Term
(days)
7
5
3

(MNT
millions)
69,928.6
61,337.4
36,966.1

Yield
(percentage)
12.25
12.25
11.00

(Repurchase
agreements)
84

51,108.4

11.02

84

86,432.9

9.04

84
196

49,021.8
19,010.5

16.25
13.94

Total

84,190.4

222,266.9

199,298.3

Total
(including
Repurchase
agreements)

84,990.1

222,266.9

236,264.4

The following table sets forth details of the Banks trading securities in Government bonds:
As at 31 December
2009

2010
WA Yield
(percentage)

Term
days
365
776

(MNT
millions)
5,000.0
28,121.0

2011

Term
days

(MNT
millions)

WA Yield
Term
(percentage)
days
7.2
365-366
8
436-546

730-733

744-801

1,095-1,097

(MNT
millions)
33,200.0
5,000.0
16,063.8
43,568.9
5,500.0

Total

33,121.0

103,332.7

Total
(including
(Repurchase
Agreements)

33,121.0

103,332.7

WA Yield
(percentage)
7.87
7.58
8.41
8.37
8

Since early 2000, the Bank has offered a deposit-backed margin trading facility for individual and
corporate customers. Margin trading is a form of capital-based investment for which the Bank serves as
an agent for principal clients trading on international foreign exchange and commodities markets. To take
advantage of the Banks margin trading facility, a client must pledge their account with the Bank as
collateral and the Bank charges the income from the investment as a fee for the service. The Bank
introduced a new margin trading product in 2007, whereby customers can pledge their gold accounts,
regardless of currency, as a collateral account to conduct trading by leveraged funds in foreign markets,
which allows customers to generate more trading profits.
The Banks securities trading assets (consisting of Bank of Mongolia bills and Government bonds) totalled
MNT 84,990.1 million as at 31 December 2009, which increased by 200.5% to MNT 255,387.9 million as
at 31 December 2010, primarily due to reduced lending by the Bank, which subsequently increased by
18.5% to MNT 302,631.0 million (US$217.0 million) as at 31 December 2011. The growth in the Banks
securities trading business in 2011 is largely due to implementation of short-term and investment
strategies.

93

Foreign exchange trading


The Bank conducts foreign exchange trading activities principally on behalf of its customers in several of
the worlds major currencies, including U.S. dollars, euros, Japanese yen and Sterling and maintains small
positions for its own account. The Bank believes it was the first Mongolian bank to begin treasury
activities on the international foreign exchange and money markets. The Bank held a market share
exceeding 27.8% of the Mongolian foreign exchange market as at 31 December 2011 according to the Bank
of Mongolia and believes it is the leader in the Mongolian foreign exchange markets. The Bank also plays
a key role in supplying market information and expert analysis on the economic situation, monetary policy
and currency demand and supply to the Bank of Mongolia.
Foreign exchange trading is divided into customer trading and margin trading, and was introduced by the
Bank in August 2005. Customer trading is arbitrage between customer cash or non-cash trades and the
interbank market price. Margin trading permits customers to trade by leveraging the funds in their
accounts. The funds are used as collateral to trade in foreign exchange markets. The Bank also engages in
a limited amount of foreign currency trading for its own account, with such activity designed to meet or
anticipate customer demands.
The Banks foreign exchange assets amounted to MNT 14,306.3 million at 31 December 2009, which
decreased by 53.1% to MNT 6,713.3 million as at 31 December 2010, which in turn increased by 7.3% to
MNT 7,202.8 million (US$5.2 million) as at 31 December 2011. The decrease in the Banks foreign
exchange assets from 31 December 2009 to 31 December 2011 was due primarily to the Banks foreign
exchange management policies. Foreign currency exchange volumes increased by 22.9% from 2010 to
2011.
Gold and other precious metals trading
The Bank has been active in the commercial gold trading business since it received the first commercial
gold trading licence from the Bank of Mongolia in January 2002. The Bank is one of the leading
participants in the market holding a 51.0% market share in the gold bullion market as at 31 December
2011. Currently, the Banks involvement in gold trading is limited to the purchase of gold from Mongolian
producers and onward sale to the Bank of Mongolia. The Bank may hold such purchases for two to three
business days to take advantage of pricing trends, but does not maintain any long-term proprietary
position. The Bank believes it was also the first commercial bank in Mongolia to buy and sell gold for
export. Since becoming active in the business, the Banks market share, in terms of the number of
customers, has increased every year. At present, over 40 of the approximately 95 gold producing businesses
in Mongolia are customers of the Bank. The Bank also maintains close relationships with mining
companies by providing them with credit transactions, gold trading and international settlement services.
To achieve economies of scale, the Bank usually exports gold through the Bank of Mongolia. In addition
to purchase and sale transactions, the Bank also offers its customers a range of derivative products, such
as options and forwards, to assist in the management of their commodity price exposure, which positions
the Bank hedges on a back-to-back basis.
The Banks gold and silver trading assets were MNT 761.0 million as at 31 December 2009, which
decreased by 99.4% to MNT 4.9 million as at 31 December 2010, which then increased by 24.5% to MNT
6.1 million (US$4,374.0) as at 31 December 2011. The decline in the Banks gold trading business in 2010
was largely due to the Banks management deciding in late 2009 to cease proprietary precious metals
trading and due to reduced sales of gold through official channels by gold mining companies in Mongolia.
Retail banking
The Bank provides a wide range of retail banking services in Mongolia to small businesses and individuals,
with particular focus on high net-worth customers. A business customer is classified as a retail customer
where the level of financing the Bank provides to that customer is below US$100,000. A customer is
classified as a high-net worth customer if such customer places aggregate long and medium-term
deposits of MNT 50.0 million (US$35,855.0) or more with the Bank. The Bank aims to provide a full range
of retail banking services, with particular emphasis on the quality of service, to its target market, which
includes high-income individuals who are owners, executives or employees of companies that are
corporate customers of the Bank and other high net-worth individuals. Further the Bank plans to expand
its branch network outside Ulaanbaatar, in industrial cities such as Erdenet and Darkhan.

94

The Banks retail banking products and services include retail lending (such as mortgages, small business
loans and consumer loans), deposit-taking and debit and credit card activities. Although the Bank has
historically also focused on corporate lending activities, which remains its core business area, in recent
years the Bank has expanded its retail banking business, recognising the potential for increased revenues,
particularly from small businesses and high net-worth customers.
The Bank is one of the leading banks in the retail deposit-taking market in Mongolia. As at 31 December
2011, deposits from retail customers were MNT 710.8 billion (US$509.7 million), representing an increase
of 60.4% compared to 2010.
The Bank is continuing to develop a private banking service for owners, executives or employees of
corporate customers of the Bank and other high net-worth individuals. As at 31 December 2011, the Bank
had approximately 1,000 private banking customers, who made deposits with the Bank in money-market
term deposit instruments denominated primarily in Tugriks and U.S. dollars. As at 31 December 2011,
deposits generated by private banking amounted to MNT 86,569.8 million (US$62.1 million) and
accounted for 12.2% of the Banks retail deposit base. As at 31 December 2009, the Banks retail deposit
base totalled MNT 290,237.0 million, which increased by 52.7% to MNT 443,117.0 million as at 31
December 2010, which in turn increased by 60.4% to MNT 710,844.3 million (US$509.7 million) as at 31
December 2011. As at 31 December 2011, retail deposits accounted for 55.6% of the Banks total deposit
base. The Bank believes this growth was largely due to an increase of consumer confidence in the
Mongolian banking sector.
To provide convenient means of completing transactions to its customers, the Bank currently operates one
of the largest ATM network in Mongolia, comprising ATMs strategically located at its branches and other
convenient locations, of which 79 are situated in Ulaanbaatar, seven in Erdenet, seven in Darkhan and the
remaining in rural areas. The Banks ATM network accepts both domestic and international cards and
accounts for approximately 12% of all ATMs in Mongolia, according to the Banks internal data. The Bank
charges domestic interchange fees for accepting cards from the Bank of Mongolias switching centre and
also a reimbursement fee for international transactions. The Bank believes that its ATM services assist it
in attracting new customers and increasing cross-selling opportunities. As a result, the Bank intends to
continue to upgrade and expand its ATM network in the future.
In 2004, the Bank was the first in Mongolia to launch a 24-hour mobile banking service, which enables
its customers to access various services, including balance enquiries, fund transfers, making requests for
cheque books and bank statements, reporting lost and stolen cards, MoneyGram transfers, American
Express transactions and access to customer care. The Banks telephone banking service, which is operated
through its in-house call centre, is available to all customers of the Bank. As at 31 December 2011,
approximately 3,750 customers had registered for the mobile banking service. The Bank was also the first
in Mongolia to offer electronic billing services to its customers.
The following table sets forth the contribution to the Banks retail operating income, by type of retail
banking product, for the periods presented:
Years ended 31 December
2009

2010

2011

Retail and mortgage lending .........................


Card activities...............................................
Retail remittances and cheques .....................
Others ...........................................................

(MNT millions)
10,139.6
2,366.6
1,340.4
7,470.3

%
(MNT millions)
47.4
12,293.8
11.1
2,207.6
6.3
1,428.1
35.2
1,013.6

%
(MNT millions)
72.6
29,734.0
13.0
3,385.6
8.4
2,030.0
6.0
2,249.6

%
79.5
9.1
5.4
6.0

Total .............................................................

21,371.9

100.0

100.0

100.0

16,943.1

37,399.2

The Banks retail banking assets were MNT 69,646.5 million as at 31 December 2009, which increased by
53.0% to MNT 106,574.2 million as at 31 December 2010, which in turn increased by 210.3% to MNT
330,662.3 million (US$237.1 million) as at 31 December 2011. The increase in the Banks retail banking
assets in 2011 was a result of increase in lending operations.

95

Retail and mortgage lending


The Banks retail lending activities include the provision of loan and credit facilities, which are principally
in MNT or U.S. dollars, to individuals and small businesses in Mongolia. The Banks loans to small
businesses are typically for capital expenditure requirements and general corporate purposes with a
maturity period of two years, whereas the Banks loans to individuals primarily comprise mortgages,
automobile loans and consumer goods loans. The majority of the Banks loans to small businesses have a
maturity of two years or less, whereas most of the Banks loans to individuals have a maturity of one year.
As with the Banks corporate lending, there has been significant demand from the Banks retail customers
for longer maturity loans and in 2010 the Bank increased the maturity to two years. It is the Banks policy
to ensure that all of its retail loans are fully secured. The following table sets forth the composition of the
Banks retail loan portfolio by category as at the dates specified:
As at 31 December
2009

2010

2011

Residential mortgages ...................................


Salary loans/including staff salary loans.......
Small business loans .....................................
Commercial mortgages .................................
Savings loans ................................................
Staff mortgages.............................................
Automobile loans ..........................................
Consumer goods loans ..................................

(MNT millions)
26,724.8
9,936.1
9,049.1
496.3
3,370.2
2,529.5
112.2
1,116.5

%
(MNT millions)
50.1
32,136.4
18.6
29,631.6
17.0
12,606.0
0.9
971.8
6.3
5,142.4
4.8
3,432.3
0.2
145.3
2.1
1,590.0

%
(MNT millions)
37.5
137,099.3
34.6
74,761.3
14.7
46,072.2
1.1
11,732.4
6.0
9,696.9
4.0
6,944.5
0.2
4,369.4
1.9
4,262.5

%
46.5
25.3
15.6
4.0
3.3
2.4
1.5
1.4

Total .............................................................

53,334.7

100.0

100.0

100.0

85,655.8

294,938.5

For 2009, interest income from the Banks retail loan portfolio totalled MNT 10,139.6 million, which
increased by 21.2% to MNT 12,293.8 million for 2010, which in turn increased by 141.9% to MNT
29,734.0 million (US$21.3 million) for 2011. The increase in the Banks retail lending in 2011 was a result
of competitive product pricing and branch-based sales teams instructed to promote retail lending products
to the Banks existing customers.
The Bank offers Mongolian residents mortgage housing loans, which can be used for the purchase or
construction of residential property as well as subsequent renovations. The Bank believes the competitive
interest rates and larger loan sizes associated with this product have been attractive to retail customers. The
Bank also offers the option of an adjustable/variable interest rate, which during a period of declining
interest rates has been attractive to customers and has enabled the Bank to control its lending margins as
compared to long-term fixed rate products. The Banks evolving strategy has been to market its mortgage
loans first to employees of corporate customers and subsequently to target salaried or self-employed
high-income individuals. The majority of customers drawing a mortgage loan from the Bank are existing
retail customers.
The Bank also believes that one of its competitive strengths in this business segment is its ability to
provide flexible mortgage products (such as multicurrency loans) with tenors of up to a maximum of 15
years. As at 31 December 2011, the Bank had a retail mortgage loan portfolio of MNT 137.1 billion
(US$98.3 million) comprising approximately 4,308 borrowers and representing 46.5% of the Banks total
retail loan portfolio. The NPL ratio for mortgage loans was 0.37% in 2011. The Bank requires security for
all residential mortgage loans in the form of a first ranking fixed charge on the property. For 2011, the
average amount of a mortgage loan was MNT 31.8 million (US$22,804.0) and the average rate of interest
charged is 14.1% per annum for mortgages denominated in Tugriks and 12.6% per annum for mortgages
denominated in U.S. dollars. The average market price of properties financed by mortgage loans varies:
in Ulaanbaatar, the average is approximately MNT 76.8 million (US$55,074.0); in Erdenet, the average is
approximately MNT 48.0 million (US$34,421.0); and in Darkhan, the average is approximately MNT 34.2
million (US$24,525.0). Approximately 82% of the Banks mortgage loan customers are based in
Ulaanbaatar. The maximum loan-to-value ratio for mortgage loans is set at 70% for all borrowers. As at
31 December 2011, the Banks loan-to-value ratio was 61.4%.
The Bank has issued salary cards to majority of its customers in connection with its payroll services
provided to corporate clients, particularly in the mining industry. The Bank directly deducts the instalments
due to it from the customers account every month. The Bank provides special consumer credit products
to the salary card holders, including salary loans and credit lines. As at 31 December 2011, the Bank had
issued approximately 96,000 salary cards.

96

Card activities
The Bank issues debit cards and credit cards from Visa and Mastercard to its retail customers. In 2011, the
Bank issued approximately 49,000 new cards. As at 31 December 2011, the Bank had issued approximately
160,000 bank cards, of which approximately 159,000 were Visa and Mastercard debit cards and
approximately 1,000 were Visa and Mastercard credit cards, comprising approximately 36.0% of the total
number of bank cards in issue in Mongolia according to the Banks internal data. As at 31 December 2011,
the total number of the Banks cardholders exceeded 160,000. The Banks credit card portfolio increased
approximately 82.3% in 2011, as measured by the number of cards issued, generating a 53.4% increase in
card service fees and commissions for 2011. Consistent with international trends in card security, the Bank
began issuing new cards with EMV chips in 2010 to improve security and decrease fraudulent transactions.
In 2010, the Bank launched the latest e-commerce solution with Verified by VisaTM and MasterCard Secure
Code TM to make shopping online safer for its cardholders.
The Bank remains one of a few financial institutions in Mongolia allowing its merchant partners to accept
transactions from any of the major international card issuers: Visa, MasterCard, JCB and Discover and
Diners Club International. The Bank has focused on improving and expanding its service quality by
establishing a number of co-branding initiatives with leading Mongolian corporations, including the
issuance of co-branded cards with Mobicom Co. Ltd., a leading domestic mobile operator, Magnai Trade
Co. Ltd., one of Mongolias largest petrol retailers and Oriflame Co. Ltd., an international cosmetics
company.
In 2010, the Bank, together with Bank of Mongolia and the national Clearing and Switching Center,
established a uniform electronic terminal network for its ATMs and POS terminals in order to provide
better service quality to its customers and merchants. In 2012, the Bank was the first to launch loyalty
cards exclusively for its female customers which offer a 5.0% to 10.0% discount at select merchants. The
Bank also issued co-branded cards in partnership with Magnai Trade LLC and M-Oil LLC to award bonus
points on purchases that can be redeemed for discounts. The Bank also introduced gift cards in 2011.
In 2010, the Bank launched the international EMV chip cards which is a global safety standard for cards.
The Bank believes EMV cards will reduce fraudulent card transactions and provide users with increased
security. The Bank has also developed a fraud detection tool designed to analyse card operations to detect
fraudulent transactions, which is expected to increase security and efficiency and reduce operating costs.
The Banks card business represents a major source of fee and commission income and provides significant
cross-selling opportunities. As at 31 December 2011, the Banks total outstanding overdraft and credit card
advances amounted to MNT 1,550.1 million, which represented 0.5% of the Banks retail loan portfolio.
For 2009, income from bank card fees and commissions totalled MNT 2,366.6 million, which decreased
by 6.7% to MNT 2,207.6 million for 2010, which in turn increased by 53.4% to MNT 3,385.6 million
(US$2.4 million) for 2011. The growth in bank card fees and commissions was due to greater card usage
driven primarily by an increase in the number of cards in issue and by the installation of new ATMs,
increased number of points of sale and the success of the sales and marketing campaigns conducted by the
Bank.
Retail remittances and cheques
Similar to its corporate remittance service, the Bank also provides remittance services to retail customers.
The Bank accepts all major cheques issued by reputable banks and financial institutions (such as The
Hongkong and Shanghai Banking Corporation Limited, American Express, Thomas Cook and JCB
International) and customers can send and receive money via MoneyGram and SWIFT. In November 2007,
the Bank received approval from American Express Travel Related Service Company Inc. to sell American
Express U.S. Dollar Gift Cheques in Mongolia. This product is currently available only in the United
States, Canada and Mongolia.
In 2008, the Bank was the named the Best Co-operational Agent in Asia-Pacific Region by MoneyGram
International Company. The Bank also recently became the first in Mongolia to begin multi-currency
payouts from MoneyGram and also began receiving Euro transfers from MoneyGram. The Bank was also
the first in Mongolia to offer printed forms for money transfer to its customers. In September 2009, the
Bank entered into a cooperation agreement with Hana Bank of Korea and PayOne LLC to introduce the
PayEasy remittance service and, in August 2009, the Bank launched a Swedish krona remittance service.

97

In 2011, the Bank generated fee and commission income of MNT 2,030.0 million (US$1.5 million) from
retail remittance and checking transactions, compared to MNT 1,428.1 million for 2010. The growth in fee
and commission income was primarily due to increased remittances to foreign banks and MoneyGram
transfers as a result of increase in transaction volumes driven mainly by reduced fees applicable to
MoneyGram transfer from April 2011. The following table sets forth the fee and commission income of
the Banks remittance and checking activities by type for the periods presented
Years ended 31 December
2009

2010

2011

Remittances to foreign banks........................


MoneyGram transfers....................................
Remittance from foreign banks .....................
Domestic remittance .....................................
Cheques ........................................................

(MNT millions)
942.7
249.5
26.1
82.1
40.0

%
(MNT millions)
70.3
1,034.8
18.6
253.7
2.0
37.8
6.1
69.9
3.0
31.9

%
(MNT millions)
72.4
1,501.6
17.7
298.1
2.8
59.6
4.9
133.1
2.2
37.6

%
74.0
14.6
3.1
6.5
1.8

Total .............................................................

1,340.4

100.0

100.0

100.0

1,428.1

2,030.0

Internet banking
The Bank has a well-developed Internet banking platform, with a two-step authentication security system,
which it believes is an essential component of its retail banking and corporate businesses as it provides
customers with greater convenience and improved access to the Banks services as well as reducing costs
and branch traffic. The Banks Internet banking services are accessible 24 hours a day, seven days a week,
and allow customers to carry out a wide variety of transactions, including inter-domestic bank payments
and foreign remittance through SWIFT network to companies and individuals, monitoring of account
balances online, transferring funds between accounts, ordering bank cards, making standing order and bill
payments and extending the term of savings accounts. As at 31 December 2011, approximately 1,421 of
the Banks customers had registered for its Internet banking services. Since 2011, the Bank charges service
fees to its customers for Internet banking services. Internet banking money transferring service fees
amounted to MNT 75.4 million in 2011.
SMS banking
The Bank has operated a short messaging service (SMS) mobile telephone-based banking facility for its
customers since January 2005 in conjunction with Mobicom Co. Ltd., Unitel LLC and Skytel LLC. The
Banks SMS banking service was launched primarily for the convenience of its retail customers and
provides instant access to account balance information and currency exchange information. As at 31
December 2011, approximately 65,599 of the Banks customers had registered for its SMS banking facility,
which represented approximately 23.6% of the Banks entire retail customer base.
Electronic billing service
The Bank was the first in Mongolia to launch an electronic billing service in partnership with leading
Mongolian telecommunications companies such as Mobicom Co. Ltd, Skytel LLC, Unitel LLC, Citinet
LLC, Ulusnet LLC, Tunamal Com LLC, MCS Com LLC and G-mobile LLC. The Banks electronic billing
service provides greater flexibility and convenience to customers and enables them to pay bills from
current or saving accounts. As at 31 December 2011, approximately 6,946 of the Banks customers had
registered for its electronic billing service.
SME banking
The Bank identified the SME sector as a business segment with potential for high margins and rapid
growth and as a significant source of future corporate customers. The Bank classifies a business customer
as an SME where the level of financing it provides to that customer is between MNT 150.0 million and
MNT 1,000.0 million, rather than basing the classification on the size or turnover of the business itself.
The SME Banking Department seeks to develop new revenue opportunities and new product offerings to
service the needs of this segment, while adhering to a better structured and customised lending policy. One
of the main objectives of the SME Banking Department is to assist SME clients to progress and mature
into the Banks corporate banking portfolio as their credit quality and scale increases. Since establishing
the SME Banking Department in January 2006, the Bank has designed a range of banking products and

98

services for SMEs similar to those offered generally under its corporate banking umbrella, but tailored to
meet the needs of SME customers using financing tools available in Mongolia. The Banks SME products
include a commercial mortgage product pioneered in Mongolia by the Bank. The maximum loan-to-value
ratio of a commercial mortgage is 80.0% as compared to 70.0% for residential mortgages.
Some of the Banks SME products and service initiatives include the SME Toolkit website, which the
Bank hosts in cooperation with IFC. The SME Toolkit website serves as a online portal through which
SMEs receive free professional advice on business issues, such as the planning and management of
businesses, financial accounting, the development of sales and marketing policies.
The Bank has been committed to offering competitive terms to its SME customers across a wide variety
of commercial sectors and has deepened its cooperation with the World Bank, Kreditanstalt fr
Wiederaufbau (KfW) and the Japan International Cooperation Agency (the JICA) so as to continue to
offer its customers low interest loans with funds provided by these institutions. In addition, the Bank has
worked with the Mongolian Ministry of Food, Agriculture and Light Industrys fund for promoting SMEs
to coordinate low interest project loans funded by the Ministry.
For 2011, the SME sector accounted for MNT 6,135.9 million (US$4.4 million), or 3.6%, of the Banks
total operating income. As at 31 December 2010, the Banks loan portfolio extended to the SME sector was
MNT 20,208.5 million which increased by 209.5% to MNT 62,534.8 million (US$44.8 million) as at 31
December 2011. For 2010, interest income from the Banks loan portfolio extended to the SME sector
totalled MNT 3,105.1 million, which increased by 93.4% to MNT 6,006.5 million (US$4.3 million) for
2011, at an average interest rate of 14.5% per annum. The increase in the Banks SME loan portfolio from
31 December 2010 to 31 December 2011 was primarily due to an increase in financial support from
developed countries.
International banking
The international banking department of the Bank covers three main areas of business: correspondent
banking and establishing relations with international financial institutions; nostro account management and
establishing trade finance lines; and syndicated lending. The Bank provides import, stand-by and revolving
letters of credit and guarantees to its customers to support cross border transactions. In 2010 and 2011,
approximately 57.0% and 48.5%, respectively of Mongolias trade finance related transactions were
implemented by the Bank according to the Banks internal data.
In 2011, income from the Banks international banking activities totalled MNT 661.4 million. As at 31
December 2011, the Banks trade finance facility was US$222.3 million comprising of US$74.1 million
import-related letters of credit, US$57.3 million export-related letters of credit, US$86.6 million of foreign
and domestic guarantees and US$4.0 million of import collections. The total amount of the Banks
incoming remittances for 2009, 2010 and 2011 was US$1.2 billion, US$2.1 billion and US$2.7 billion,
respectively. The total amount of the Banks outgoing remittances for 2009, 2010 and 2011 was US$0.9
billion, US$1.3 billion and US$2.5 billion, respectively.
As at 31 December 2011, the Bank also has credit lines with 25 major international banks and financial
institutions including KEXIM, Export-Import Bank of Taiwan, Commerzbank AG, Atlantic Forfaitierungs
AG, ING Bank N.V., Industrial and Commercial Bank of China and Baoshang Bank, which support the
services the Bank provides to its customers that are in the business of importing products from Korea,
Taiwan, Europe and China. The Bank also began a trade facilitation program managed by ADB in 2010.
Total borrowings from international financial institutions increased from US$29.4 million in 2010 to
US$70.3 million in 2011.
The Bank has direct correspondent relationships with more than 150 counterparties located in Europe,
North America and Asia, including Standard Chartered Bank, HSBC Bank N.A., Citibank N.A., Bank of
Tokyo-Mitsubishi UFJ Ltd., Commerzbank AG, Credit Suisse, Australia and New Zealand Banking Group
Limited, Euroclear Group, Bank of China (Hong Kong) Limited and ING Bank N.V..
Currently, the Bank maintains 38 nostro accounts in 14 currencies at 27 top rated foreign banks in 16
different countries. This enables the Bank to carry out payments in all the major currencies and to receive
up-to-date information online regarding the movement of funds in the accounts. The Bank is also a member
of SWIFT.

99

The Bank has on-lending programmes with the World Bank, ADB, KfW, JBIC, Export-Import Banks of
Taiwan and Korea, Commerzbank and Russian Agricultural Bank. These are instrumental in providing long
term financing to the Banks SME and private sector clients.
The Bank has implemented the Credit Program for Small and Medium Sized Enterprises and Promotion
of the Financial Sector II program in partnership with KfW bank for over 14 years. In 2011, Bank was
able to accumulate =C 605,530.0 for three sub-loans. As at 31 December 2011, the total outstanding loan
amount was MNT 3,457.6 million (US$2.5 million).
In 1999, the Bank entered into a subsidiary loan agreement with the World Bank through the Mongolian
Ministry of Finance to finance sub-loan under the Private Sector Development Credit program. Under
the second phase of the program, the Bank entered into a subsidiary loan agreement with the World Bank
to finance sub-loans. Within the World Bank projects, the Bank implemented technical support projects to
improve the knowledge and qualification of its staff. It also developed a training assistance program
approved and financed by the World Bank. As at 31 December 2011, the total outstanding loan amount was
MNT 6,674.6 million (US$4.8 million).
In 2006, the Bank entered into a loan financing agreement with Japan International Cooperation Agency
(JICA) through the Mongolian Ministry of Finance to finance borrowers under the Two-Step Loan
Project for small and medium scale enterprises development and environmental protection program. In
2011, the Bank was re-selected as a participating bank for the second phase of the program. As at 31
December 2011, the total outstanding loan amount was MNT 6,640.1 million (US$4.8 million).
The Bank entered into a finance agreement with ADB under which it can borrow upto US$11.0 million
from ADB through the Mongolian Ministry of Finance under the Agriculture and Rural Development
Project to provide loans to customers to finance the cost of goods, works and consulting services required
to carry out value chain development sub-projects. In 2011, the total funding received was MNT895.0
million and the total outstanding loan amount was US$85,482.0.
Syndicated lending
The Bank was the first in Mongolia to offer syndicated loan facilities and partners with international and
domestic financial institutions to syndicated loan facilities to its corporate customers particularly, in the
petroleum and mining sectors. The Bank is the only bank in Mongolia to have arranged syndicated loan
financing denominated in U.S. dollars as well as Tugriks with international financial institutions for MNT
58.0 billion and US$171.2 million since 2005. Initially, the Bank participated in international syndicated
lending activities, primarily aimed at providing primary and secondary syndicated loans, arranged on the
international market, to banks in countries comprising the Commonwealth of Independent States but has
not participated in such syndication since 2008. The Bank continues to arrange, together with other foreign
banks, syndicated transactions for its local corporate customers when such customers have required loans
above the single borrower exposure limits of the Bank. In 2011, the Bank arranged a total of four
syndicates denominated in U. S. dollars as well as Tugriks, with an aggregate transaction value of US$65.0
million and MNT 50.0 billion on behalf of clients. The Bank arranged a US$14.2 million syndicated loan
to the MSE along with five other local commercial banks.
Investment banking
Investment banking is one of the main areas of the Banks planned future growth and is part of the Banks
strategy to diversify its overall business portfolio. The Bank has used its leading position and expertise in
the industry to provide this new area of client service by graduating from basic service types to more
diversified investment banking products.

100

In January 2007, the Bank established its US$150.0 million Euro Medium Term Note Programme, which
was subsequently increased to US$300.0 million (the 2007 Programme), and issued US$75.0 million of
senior notes bearing interest at a rate per annum of 8.625%, due 2010, which represented the first issuance
of international debt securities from an issuer in Mongolia. The issuance was repaid in full in January
2010. The Bank was the first Mongolian issuer of debt securities in the international capital markets.
To diversify its product and to leverage its strong corporate relationships in Mongolia, the Bank launched
its investment banking operations in 2007. As part of its equity securities investment activities, the Bank
acquired equity securities in certain foreign financial institutions in November 2007. The continued
downturn in the global financial services sector caused the Banks Asset and Liability Committee
(ALCO), consistent with its internal risk management procedures, to convene a meeting in January 2008
to evaluate these positions. The ALCO decided to close these positions and recognise a net investment loss
of approximately MNT 3,000.0 million (US$2.2 million) and which resulted in the Bank ceasing equities
investment from January 2008.
In August 2007, as part of the Banks overall strategy, the Bank established an investment banking
department to introduce and offer investment banking products to the Mongolian market, in particular, to
leading corporations in the countrys key economic sectors, and to attract funds from foreign capital
markets.
In 2008, following its belief that there is significant potential in the local Mongolian capital markets, the
Bank separated its investment banking department formed TDB Capital as its wholly owned subsidiary.
TDB Capital provides investment banking services such as corporate finance, research and advisory,
securities brokerage and asset management services. The Bank is the first Mongolian bank to establish an
investment banking subsidiary, TDB Capital which obtained underwriting and brokerage licences from the
Financial Regulatory Commission of Mongolia in March 2011. TDB Capital acted as the coordinator for
a US$5 million private placement of subordinated notes issued by the Bank in May 2011. TDB Capital
became a member of the Mongolian Stock Exchange in April 2011 and commenced security trading in May
2011. The Bank plans to leverage its international banking experience in the Mongolian markets to provide
a gateway for its investment banking business.
In October 2010, the Bank launched an issue of US$175.0 million notes of which US$150.0 million were
senior unsecured notes and US$25.0 million were subordinated notes bearing interest at the rate per annum
of 8.500% and 12.500%, respectively, under its 2007 Programme. The proceeds from the issuance of the
notes were used to increase the Banks funding and capital base. The Bank was named Foreign Investment
Envoy by the Foreign Investment and Foreign Trade Agency of Mongolia in 2011.

101

Organisational Chart
The following chart sets forth the organisational structure of the Bank as at 31 December 2011:
Supervisory
Board

Shareholders
meeting

Audit
Committee
RGB
Risk
Committee
Executive
Committee

President

Asset Liability
Committee

CEO

General Audit
Unit

Internal Audit
Department

Chief Auditor

Administration &
HR Department

Special Audit
Unit

HR Unit

Board of
Directors
Credit
Committee

First Deputy CEO

Product
Development
Committee

Corporate
Banking
Department

International
Banking
Department

Marketing
Department

Mining
Department

Retail Banking
Department

Branch
Management
Department

Branches

Customer
Service
Unit

Risk Management
Department

Loan
Administration
Unit

Operational Risk
Management
Unit

Treasury
Department

Trading
Unit

Legal Department

Corporate
Security
Department

Special Asset
Unit

Cash & Bullion


Management Unit

Interbank
Settlement Unit

Trade Finance
Settlement Unit

General Affairs
Unit

Deputy CEO
Sub-credit
Committee

Card
Management
Department

Customer
Information
Unit

Deputy CEO
Tender
Committee
Deputy CEO
Financial
Management &
Controlling Department

Supply, Sales &


Procurement
Contracting Unit

Deputy CEO
Operational Risk
Committee
Deputy CEO
Ethics
Committee

Treasury Trading
Settlement Unit

IT Department

Settlement Unit

Branch Network
The Banks business activities are conducted principally through its branch network in Mongolia under
supervision from its head office. The Banks branches are the first and most frequent point of contact for
its customers. Each branch conducts marketing research in their respective region, seek out new business
opportunities and meet with potential customers. Therefore, in order to deliver the best possible services,
the Bank has staffed its branches with employees who have undergone training at the head office and who
are also familiar with the local region and its customers. The Bank operated a network of 30 branches in
Ulaanbaatar, mainly in districts with relatively high concentrations of business activities and population,
and 12 branches in rural areas, which are located in close proximity to the road and railway networks as
at 31 December 2011. The Bank currently has approximately 345 employees working at its branches in
Ulaanbaatar and 150 employees working in its branches in the rural areas. The Bank tailors its services to
match customer demand in each market segment. For example, its branch in the Kharkhorin area which is
located in a marketplace offers a variety of loan products to small business owners in the vicinity. The
Banks branches in rural and semi-urban areas offer specialised collateral criteria to its lower income
earning customers.

102

In addition to its branches, the Bank operates the Private Banking Centre and the Card Service Centre in
Ulaanbaatar, and five settlement centres, which are located in rural areas. In September 2010, the Bank
opened two branches in the main districts of Ulaanbaatar, Sukhbaatar and Bayanzurkh. The Bank
periodically reviews the profitability, effectiveness and potential of the existing branches and 16 new
branches were opened in 2010 and 2011. The Banks strategy for branch coverage focuses on districts with
a higher population and more economic activity, mainly Ulaanbaatar and other major cities such as
Darkhan and Erdenet as well as locations along the road and the railway networks and areas with strategic
mining deposits such as Oyu Tolgoi, Tavan Tolgoi and Mardai. Future branch expansion will focus on
broader product distribution with improved efficiency through quality and strategic branch coverage.
The Bank seeks to expand the number of physical contact points available to customers through the dual
strategy of opening more branches and by cooperating with other Mongolian banks to allow customers to
receive the Banks products and services at the branches of those banks. In May 2010, the Bank launched
an integrated card payment clearing system with Khan Bank, Capital Bank, Ulaanbaatar City Bank and
Savings Bank to allow cardholders of each bank to make card payments at any point of sale terminal
operated by any other member bank. The Bank intends to continue to expand its branch network through
the addition of branches and settlement centres in strategic locations, based upon considerations relating
to growth potential, profitability, productivity and compatibility with its general strategy.
The Bank is also improving its alternative client contact points by building up its call centres and its
electronic banking network, which are cost effective and efficient options for customers to access the
Banks products and services.
Funding
The Banks primary source of the funding is derived from the current and deposit accounts of its corporate
and retail customers. Retail customers maintain current accounts in several major currencies. The Bank
also provides alternative deposit products such as term deposits, deposits with advanced interest payment
and savings accounts in both local and foreign currency. For its corporate customers, the Bank provides
several products such as corporate time deposits and escrow accounts. In 2011 as compared to 2010, the
Bank experienced significant increases in retail and corporate funding. The Bank believes that its deposit
products are competitive not only because of high interest rates but also due to the Banks service quality,
extensive branch network, and convenient and secure banking products and services. As at 31 December
2011, customer deposits accounted for 65.5% of the Banks liabilities. The following table sets out the
composition of the Banks customer deposit portfolio as at the dates specified:
As at 31 December
2009

2010

(MNT millions)
Corporate:
Current accounts:
Domestic ..................................................
Foreign .....................................................
Deposit accounts:
Domestic ..................................................
Foreign .....................................................
Retail:
Current accounts:
Domestic ..................................................
Foreign currencies ....................................
Deposit accounts:
Domestic ..................................................
Foreign currencies ....................................
Total .............................................................

(MNT millions)

2011
%

(MNT millions)

84,971.2
123,621.6

14.7
21.3

138,183.6
161,300.5

15.0
17.5

270,988.1
169,608.4

21.2
13.3

45,878.0
34,814.9

7.9
6.0

16,715.5
160,628.1

1.8
17.5

50,921.4
74,933.9

4.0
5.9

11,681.9
19,867.4

2.0
3.4

19,852.2
23,826.9

2.2
2.6

32,962.3
54,384.6

2.6
4.3

145,314.1
113,373.5

25.1
19.6

265,522.9
133,915.0

28.9
14.6

400,399.2
223,098.2

31.3
17.5

579,522.8

100.0

919,944.7

100.0

1,277,296.0

100.0

103

The following table sets forth the Banks funding costs in relation to its corporate and retail deposits as
a percentage of its total funding costs as at the dates specified:
As at 31 December
Current account:
Domestic .................................................. ............................
Foreign ................................................... ..............................
Time and savings deposits:
Current ................................................ .................................
Foreign ............................................... ..................................

2009

2010

2011

3.1%
1.3%

3.9%
1.6%

3.4%
1.4%

12.8%
6.9%

12.7%
5.9%

10.8%
5.1%

The Bank also relies on the interbank market, primarily to manage its liquidity position, and on funding
from other financial institutions for its longer-term needs. The proceeds from the issue of US$5.0 million
private placement notes due 2016 issued in May 2011, and US$150.0 million senior notes due 2013 and
US$25.0 million subordinated notes due 2015 under its Euro Medium Term Note Programme in October
2010 were used for loan allocation, investments and to fulfil the minimum reserve requirement limit set
by the Bank of Mongolia.
As the Mongolian economy has developed, the Banks clients have increased their investment activity and
capital expenditures, resulting in increased demand for financing, particularly large-scale financing, and
for longer-term borrowings. The Bank anticipates that this trend will continue, particularly in the mining
sector. To capitalise on such developments, the Bank is exploring possible methods of establishing new
sources of funding in both foreign and domestic currency. This may include development of a strategic
partnership with another international financial institution, expansion of the Banks shareholder base and
accessing equity or debt capital markets.
In February 2012, The Goldman Sachs Group, Inc. acquired a 4.78% stake in the Bank for a total
consideration of 157,862 shares.
Loan Portfolio
As at 31 December 2011, the Bank had a total loan portfolio of MNT 1,141,251.7 million (US$818.4
million), of which approximately 44.9% was denominated in Tugriks and approximately 54.8% was
denominated in U.S. dollars. The following table sets forth the composition of the Banks loans by
currency as at the dates specified:
As at 31 December

Loans
Loans
Loans
Loans

in
in
in
in

U.S. dollars ....................................


Tugriks ...........................................
Euros..............................................
RMB ..............................................

Total .............................................................

2009

2010

2011

(MNT millions)
220,067.9
193,559.7
7,709.4
0.3

%
(MNT millions)
52.2
263,253.5
45.9
208,590.4
1.8
6,520.7

105.9

%
(MNT millions)
55.0
625,531.2
43.6
512,748.6
1.4
2,971.9

%
54.8
44.9
0.3

100.0

100.0

100.0

421,337.3

478,470.5

1,141,251.7

The increased percentage of loans denominated in Tugriks in 2011 has been due largely to increased
demand as a result of the appreciation of the local currency against the U.S. dollar.

104

Loan maturity profile


The following table sets forth the composition of the Banks loan portfolio by maturity as at the dates
specified:
As at 31 December
2009

2010

(MNT millions)
Due in one month or less .............................
26,303.7
Due after one month but before or
at six months ............................................
60,625.4
Due after six months but before or
at one year ...............................................
140,833.3
Due after one year but before or
at three years............................................
140,368.4
Due after three years but before or
at five years .............................................
25,684.5
Due after five years but before or
at 10 years................................................
26,839.4
Due after 10 years ........................................
502.6

Total .............................................................

421,337.3

(MNT millions)
6.2
24,693.2

2011
%

(MNT millions)
5.2
29,349.0

%
2.6

14.4

54,230.2

11.3

151,374.6

13.3

33.4

136,706.6

28.6

238,933.6

20.9

33.3

209,930.5

43.9

493,204.2

43.2

6.1

19,807.3

4.1

60,516.9

5.3

6.4
0.1

21,609.9
11,492.8

4.5
2.4

68,137.2
99,736.2

6.0
8.7

100.0

478,470.5

100.0

1,141,251.7

100.0

Loan types
The following table sets forth the composition of the Banks loans by type as at the dates specified:
As at 31 December
2009

2010

2011

(MNT millions)
193,574.9
Long-term loans(1) ........................................
227,762.4
Short-term loans(2) ........................................

%
(MNT millions)
46.0
262,840.5
54.0
215,630.0

%
(MNT millions)
54.9
721,594.5
45.1
419,657.2

%
63.2
36.8

Total loans and advances ............................

100.0

100.0

100.0

(1)

Maturing after one year.

(2)

Maturing in one year or less.

421,337.3

478,470.5

1,141,251.7

Loan concentrations
The Bank limits its total exposure to any single borrower as required by Mongolian regulations. Currently,
the Banks exposure to any single borrower or obligor may not, and does not, exceed 20.0% of the Banks
total capital and total loan exposure to any industry will not exceed 25% of the Banks total loan issuance.
The Bank monitors concentrations of credit risk by industry sector, customer type and geographic location.
The Bank plans to limit loan concentration in the Ulaanbaatar area by expanding in other provinces and
in the rural areas. The Bank expects to funds its lending operations with assistance from domestic and
international financial institutions.
Further information regarding the Banks loan portfolio by industry sector and customer type is provided
below.

105

Loans by industry sector


The following table sets forth the composition of the Banks total loan portfolio by industry sector as at
the dates specified:
As at 31 December
2009

2010

2011

Mining and quarrying ..................................


Corporate trading ..........................................
Mortgage loan...............................................
Manufacturing...............................................
Construction..................................................
Petrol import and trade .................................
Card loan ......................................................
Transportation and communication ...............
Agriculture....................................................
Finance service .............................................
Saving collateralised loan .............................
Hotel, restaurant and tourism........................
Education ......................................................
Electricity and thermal energy ......................
Health ...........................................................
Others ...........................................................

(MNT millions)
64,554.9
54,499.5
30,728.6
103,251.5
96,088.3
17,932.7
11,052.2
1,846.1
22,347.6
276.3
3,370.2
2,425.0
1,038.8
143.9
3,859.1
7,922.6

%
(MNT millions)
15.3
74,974.3
12.9
72,763.7
7.3
37,433.6
24.5
77,532.6
22.8
75,773.0
4.3
47,735.9
2.6
30,568.8
0.4
2,701.9
5.3
19,519.6
0.1
253.2
0.8
17,940.5
0.6
1,036.8
0.2
768.4
0.0
430.3
0.9
2,462.4
1.9
16,575.5

%
(MNT millions)
15.7
252,935.0
15.2
190,332.6
7.8
146,144.0
16.2
136,709.9
15.8
117,683.1
10.0
82,931.3
6.4
76,311.4
0.6
32,484.0
4.1
26,502.9
0.1
4,824.8
3.7
9,696.9
0.2
16,930.5
0.2
1,946.2
0.1
1,654.3
0.5
1,167.2
3.4
42,997.6

%
22.2
16.7
12.8
12.0
10.3
7.3
6.7
2.8
2.3
0.4
0.8
1.5
0.2
0.1
0.1
3.8

Total .............................................................

421,337.3

100.0

100.0

100.0

478,470.5

1,141,251.7

Loans by business segment


The following table sets forth the composition of the Banks loans by business segment as at the dates
specified:
As at 31 December
2009

2010

2011

(MNT millions)
Corporate ......................................................
350,755.4
Retail ............................................................
53,334.7
SME..............................................................
17,247.2

%
(MNT millions)
83.2
372,606.2
12.7
85,655.8
4.1
20,208.5

%
(MNT millions)
77.9
783,778.4
17.9
294,938.5
4.2
62,534.8

%
68.7
25.8
5.5

Total .............................................................

100.0

100.0

100.0

421,337.3

478,470.5

1,141,251.7

Loans by customer type


The following table sets forth the composition of the Banks loans by customer type as at the dates
specified:
As at 31 December
2009

2010

2011

Private corporations ......................................


Individuals ....................................................
State enterprises............................................
Financial institutions.....................................
Other.............................................................

(MNT millions)
352,322.1
55,124.5
13,417.8
80.2
392.7

%
(MNT millions)
83.6
370,712.9
13.1
97,380.1
3.2
9,322.6
0.0
250.1
0.1
804.8

%
(MNT millions)
77.4
852,640.0
20.4
280,446.0
1.9
4,648.8
0.1
1,177.5
0.2
2,339.4

%
74.7
24.6
0.4
0.1
0.2

Total .............................................................

421,337.3

100.0

100.0

100.0

478,470.5

1,141,251.7

Loans by geographic location


The following table sets forth the composition of the Banks loans by geographic location as at the dates
specified:
As at 31 December
2009

2010

2011

(MNT millions)
Ulaanbaatar ...................................................
411,982.4
Outside Ulaanbaatar......................................
9,354.9

%
(MNT millions)
97.8
449,905.2
2.2
28,565.3

%
(MNT millions)
94.0
1,054,575.3
6.0
86,676.4

%
92.4
7.6

Total .............................................................

100.0

100.0

100.0

421,337.3

106

478,470.5

1,141,251.7

Credit assessment and approval


The Bank evaluates the credit of every loan applicant before approving any loan. The Banks assessment
and approval process is well-defined, tailored to all types of borrower and is in line with the Banks overall
lending strategy. The Bank applies the same process for both loans and credit card applications. Mongolian
banks, with the assistance of IFC, established a private credit bureau in 2009, and the Law of Mongolia
on Credit Information was adopted on 20 November 2011 by Parliament and came into force on 1 January
2012. Pursuant to such law, activities related to credit information are subject to be licenced by the Bank
of Mongolia. However, as at the date of this Information Memorandum, the private credit bureau
established by the commercial banks did not have the relevant licence. The Bank of Mongolia keeps
records of and provides details of defaults and outstanding judgements against borrowers through an
internet-based system maintained and updated in a daily basis. This source, together with the Banks
internal data, provides the basis of the credit approval process.
The overall credit assessment and approval process for loans is collectively managed by three credit
committees, namely, the branch credit council (the BCC), the sub-credit committee (the SCC) and the
central credit committee (the CCC, and together with the BCC and the SCC, the Credit Committees).
In response to the growth of the Banks loan portfolio, the Bank has reorganised its corporate and SME
banking department into three units:

Sales: dedicated to attracting new customers, expanding relationships with existing customers,
promoting the Banks products and cross-selling opportunities and getting customer feedback;

Analysis: responsible for analysing the loan requests and conducting the procedure to get approval
from the Banks Credit Committees; and

Monitoring: responsible for reducing credit risk by monitoring loan disbursement and subsequent
repayment and also by monitoring the borrowers business activity.

In addition to improving its responsiveness to customers needs, the Bank believes its new corporate
structure has shortened the loan approval procedure, delegated the credit analysis and risk management
duties to a specialised unit, divided the responsibilities to achieve greater efficiency and promoted
teamwork. The Bank believes the clear segregation of responsibilities among the three units has
strengthened the enforcement of its credit policies and has enhanced the monitoring of existing loans. As
a second measure to address the growth in its loan portfolio, the Bank has recruited and trained more staff
who will have greater experience in areas such as project financing and risk management.
Loan approval process
Prior to granting a loan, the Bank carries out an assessment of the risk profile of the potential borrower
and the loan based upon various qualitative and quantitative factors, including:

assessment of the borrowers industry sector and relevant macro-economic factors;

the purpose for which the loan is sought and the capacity and sources of funds for repayment;

in the case of a project loan, the viability of the underlying project;

the credit history of the borrower;

validation of related documents;

the proposed terms and conditions and covenants of the loan; and

availability of collateral and the adequacy of and ability to enforce against the collateral offered as
security for the loan.

For all loan applications, the initial analysis, due diligence and assessment of preliminary risks are carried
out by an account manager, who is part of the analysis unit assigned to the application. The account
manager prepares a credit proposal, which includes a basic information report, legal opinion, an income
statement, balance sheet and cash flow projection as well as a credit rating model that shows the current
rating of the borrower and the applicable interest rate for the proposed facility. This is then submitted to
the Banks risk management department (the RMD).

107

All applications are also assigned to a risk analyst from the RMD. Within the RMD, two risk analysts are
assigned to corporate risk assessment and two risk analysts are assigned to SME credit risk assessment.
In addition, there are 16 branch risk analysts, nine of whom are based in the head office and are each
responsible for three to four branches in Ulaanbaatar. The other seven are based in branches outside of
Ulaanbaatar. The risk analyst reviews the credit proposal and is responsible for the credit risk assessment,
the appraisal of the collateral and participation in the final decision regarding the approval of the loan. In
the case of corporate or SME loans, the Director of the RMD reviews the credit assessment. All risk
analysts report directly to the RMD at the head office. The risk analyst prepares an executive risk summary
which is compiled on the basis of an assessment of various factors including a financial analysis of the
applicant, the type of business and the management of the applicant, macroeconomic conditions, an
appraisal of the collateral and concludes with a recommendation by the RMD. This executive risk summary
is submitted directly to the relevant Credit Committee together with, but independent of, the credit
proposal of the account manager. By separating the risk management function from the business operation
function, the Bank has attempted to enhance the independent nature of its credit risk analysis.
Depending on the loan amount, one of the three Credit Committees makes the final decision regarding
approval of the loan:

For loans of MNT 100.0 million or less, the decision is made by the BCC. Each branch has a BCC.
The maximum loan size which an individual BCC is authorised to approve can vary with the highest
possible limit being MNT 100.0 million. The credit limit for each BCC is set by the RMD and is
based on quantitative factors such as the branchs loan portfolio amount and its existing
non-performing loan amount as well as on qualitative factors such as the qualification and experience
of the branch manager and the account managers and the location of the branch. The maximum limit
is subject to quarterly review by the RMD which takes into account elements of the branchs
performance including its loan portfolio quality and the volume of business proposals it generates.
In addition, the Bank assesses each branchs maximum limit by review of the branch staff s
experience and the Branchs financial position.

For loans which are above MNT 100.0 million or above the maximum limit of an individual BCC and
are below MNT 350.0 million, the decision is made by the SCC, which is based in the head office.
The SCC bases its decision on a review of the credit proposal and the recommendation given by a
BCC.

For all loans above MNT 350.0 million, the decision is made by the CCC.

The Credit Committees consider several factors, both financial and non-financial, including the customers
creditworthiness, collateral sufficiency and any existing relationship the customer has with the Bank.
Approvals of the Credit Committees require unanimous approval by all committee members. The following
table sets forth the constitution of each of the Credit Committees:
Position

Members of the
Branch Credit Council

Chairman.................... Branch manager


Vice chairman ............ Risk analyst(1)
Member...................... Senior operational officer or
Senior account manager of the
branch
Member......................
Member......................

(1)

Member of the
Sub-Credit Committee

Members of the
Central Credit Committee

Deputy CEO
Chief Risk Officer
Director of Retail Banking
Department

First Deputy CEO


President
Chief Risk Officer

Deputy CEO
Director of Corporate Banking
Department

The Risk Analyst may exercise veto power in connection with lending decisions of the BCC.

Collateral policy
According to the Banks collateral policy, the Bank requires all loans to be 100% collateralised except for
salary loans. In June 2009, the Risk Management Department revised the Banks collateral policy and
collateral valuation procedure to require a minimum ratio of real estate collateral to the principal amount
of the loan ranging from 60% (for short-term working capital financing) to 95% (for long-term project

108

loans and investment loans). It is the Banks policy to ensure that it receives adequate first priority
collateral as security for each of its loans. The risk analysts of the RMD use three types of valuation
methods to appraise the value of collateral, namely the income approach, the cost approach and the
market-based approach. The key features of these approaches are set out below:

Income approach: the income approach uses the present value of any future income expected from
an asset. This will include any rental income that the asset may generate and, if the asset includes
equipment, the income from any products produced by that equipment.

Cost approach: the cost approach compares the construction or replacement cost of the relevant
assets with those of the same function, age, condition and location, deducting physical, operational
and economic amortisation. Using this approach, the Bank also analyses the market prices of raw
materials, labour, equipment and utility.

Market-based approach: the market-based approach values an asset by comparing it to the value of
other assets that have the same function, age, condition and location.

The most common forms of collateral accepted by the Bank as security for its loans are real property,
equipment, mining licences, gold, deposited savings accounts receivable, inventory and sales proceeds.
The Bank also accepts personal and corporate guarantees in circumstances where other forms of collateral
are deemed inadequate. The Bank prefers loans to be secured on real estate and mining licence collateral
since such collateral can be perfected by registration with state agencies.
After the loan has been approved, the Bank continues to monitor the value of the collateral. The frequency
with which the Bank revalues any collateral varies depending on its type and quality, and the repayment
schedule for the related loan. In general, the Banks credit assessment and approval systems have been
designed to facilitate the making of consistent credit decisions, provide for regular reviews of collateral
values and provide the Bank with an objective methodology for risk-based pricing determinations.
Credit surveillance
The Bank continuously reassesses the credit risk on each loan by (i) monitoring the financial and market
position of the borrower and (ii) assessing the sufficiency of the collateral or other security for the loan.
The financial and market position of the borrower is regularly reviewed, and on the basis of such review,
the internal credit rating of the borrower may be revised. The review is based on the flow of funds into
the customers accounts, its most recent financial statements, condition of the economy and other business
and financial information submitted by the borrower or otherwise obtained by the Bank.
The current market value of the collateral or other security is monitored regularly to assess its sufficiency
with respect to the loan in question. The reappraisal of collateral is performed by the RMD and a report
submitted to the CCC.
The RMD has overall responsibility for the oversight of the Banks credit risk and amending the Banks
risk management systems, and reports directly to the CCC and makes recommendations to the Banks
business divisions. The director of the RMD reports directly to the Chief Risk Officer. The broad areas of
the RMDs responsibility are:

formulating credit policies, in consultation with the business units, which cover the Banks position
on collateral requirements, credit assessment, risk grading and reporting, documentary and legal
compliance with regulatory requirements;

monitoring compliance and risk appetite of the Banks business divisions;

establishing an authorisation structure for the approval and renewal of credit facilities: renewals and
reviews of existing facilities are subject to the same process as a first-time application;

reviewing and assessing credit risk: prior to making a commitment to a customer, the Bank assesses
all credit exposure which is in excess of the designated limit; and

providing advice, guidance and training to business units on general risk management and fostering
a culture of risk awareness amongst the employees of the Bank.

109

The Bank has established a two-stage monitoring system, which comprises the preparation of the review
report and excess control report, to monitor the existing credit status and exposure of each loan more
accurately.
Review report. For corporate, SME and retail loans, the relevant account manager will prepare a review
report for each borrower at least once a year, which is presented directly to the CCC. A more frequent
review is conducted by the Bank if the borrower breaches the repayment schedule. The report details the
latest information on the business activity and financial situation of the borrower, the borrowers financial
performance against the initial projection, the condition of the collateral and the condition of the
borrowers assets and liabilities. The main purpose of the review report is to assess the risks after the
disbursement of the loan including ensuring use of proceeds in accordance with the terms of the loan and
the accuracy of credit rating.
Excess control report. For corporate and SME loans with a payment default exceeding 20 days, the relevant
account manager will prepare an excess control report at the end of each month, which is submitted to the
relevant senior risk analyst within RMD. The senior risk analyst will prepare a list of all loans in default
of more than 20 days as well as a provisioning report setting out the corresponding estimated classification
proposal based on qualitative and quantitative factors. The senior risk analyst will then present the excess
control report and the provisioning report to the CCC. In respect of corporate and SME loans, the CCC
will then decide whether to maintain, downgrade or upgrade the loan classification, or to forward the loan
to the special asset unit (the SAU) for restructuring.
For retail loans with a payment default exceeding 20 days, a senior risk analyst will prepare an excess
control report at the end of each month, which is submitted to the centre for retail excess loans and then
to the Sub-Credit Committee. The senior risk analyst will finally report to the Credit Committee.
Problem loans are identified on a daily basis based on signs of daily servicing deterioration, these may
include loans which have overdue payments but are not yet classified as non-performing loans and loans
which are non-performing loans but have not yet been transferred to the SAU for further action and
continue to be monitored by the relevant business unit. Once identified, an account manager with the
monitoring unit, monitors, the problem loan firstly by confirming through, among other things, checking
of contracts and invoices that the loan amount has been used for the stated purpose. Subsequent periodic
onsite monitoring is done to appraise the financial situation and business activities of the borrower and its
compliance with the covenants in the loan agreement. The account manager may also gather information
about the borrower from third party sources. Finally, the account manager monitors the repayment of the
loan and follows up with borrower to emphasise the repayment schedule. The Bank carries out the daily
analyses of problem loans by collecting information about such loans in the above manner, looking into
the causes of problems and working out measures to effect their early redemption. On the basis of the
findings of such analyses, an excess control report is submitted to the CCC regarding the problematic loans
in the Banks loan portfolio and the level of acceptable credit risk. The report is then distributed to the
Banks branches on a daily basis to update each branch with information on problem loans and past dues.
The Bank writes-off a loan when the CCC determines that it is uncollectible upon approval from the Banks
representative governing board. This determination is made after considering the position of the borrower
such as any dramatic changes in the borrowers financial position and the insufficiency of the collateral
proceeds to cover the entire exposure. The determination is made in accordance with the Asset
Classification and Provisioning Regulation approved by the Governor of the Bank of Mongolia and the
Minister of Finance. The write-off proposal to the CCC is initiated by the SAU and reviewed by the RMD.
The Bank established the SAU in July 2007 with the primary function of reducing overall credit risk and
recovering problem loans. When the CCC classifies a loan as a problem loan after review of the Excess
Reports, the loan file is transferred to the SAU. The SAU takes the required steps to recover the loan either
through non-court methods where a settlement is reached between the bank and the borrower directly or
by lodging a claim with the courts. Due to the early stage of development of the Mongolian legal systems,
a claim can take one to two years to work its way through the courts and then for recovery to be made
through the bailiff. The SAU is under the supervision of the Deputy Chief Executive Officer of the Bank
and submits its proposals on a monthly basis to the CCC.
The SAU utilises a variety of methods to recover delinquent loan amounts through settlements with
borrowers. Primarily, the SAU will work with borrowers in delaying repayment, rescheduling payments or
extending the term of a loan (although Mongolian law imposes certain restrictions on the Banks ability
to extend the term of a loan). Additionally, during the recent economic downturn in Mongolia, many

110

construction projects encountered increased costs due to shortages of construction materials imported from
the PRC, limited labour supply and decline in demand for completed projects exacerbated by a reduction
in mortgage financing available to potential buyers. In some cases, the Bank increased the principal
amount of the loan to enable completion of construction, sale of the project or project units and recovery
for the Bank.
Each business unit is required to implement the Banks credit policies and procedures within its day-to-day
business activities and is supervised by the RMD to ensure that such implementation is effective. Each
branch is responsible for the quality and performance of its credit portfolio and for monitoring and
controlling the credit risks in its portfolios including those that were subject to approval by the SCC and
the CCC. A further level of oversight is provided by the Internal Audit Department (the IAD) which
conducts regular audits of the business units.
During 2007, the Bank took additional steps to centralise its loan approval process and bring it under the
greater scrutiny of the CCC. It has also increased the number of staff in the RMD and invested in more
comprehensive training for the risk analysts who receive their training at the head office and are then
deployed to the branches. All loan disbursements and drawdowns are now reviewed by the risk analysts.
These measures resulted in tighter overall monitoring of the Banks loan portfolio.
Asset Quality
Loan classifications
The Bank classifies its loans and maintains loss reserves in compliance with requirements set by the Bank
of Mongolia. The RMD is responsible for loan classification and loan loss provisioning.
The loan classifications employed by the Bank are generally determined by reference to the number of days
that the relevant loan is overdue with qualitative factors also taken into account and are as follows.
Performing loans
These are loans under which no sums are in arrears.
Past due loans
These are loans under which sums are up to 90 days in arrears.
Non-performing loans
Non-performing loans include:

substandard loans: loans under which sums are greater than 91 days but equal to or less than 180 days
in arrears;

doubtful loans: loans under which sums are equal to or greater than 181 days but equal to or less than
360 days in arrears; and

bad loans: loans under which sums are equal to or in excess of 361 days in arrears.

The following table sets out the composition of the Banks loans by asset quality classification as at the
dates specified:
Years ended 31 December
2009

2010

2011

Performing (0%(1))........................................
In arrears (5%(1)) ..........................................
Non-performing ............................................
Substandard (25%(1)) ................................
Doubtful (50%(1)) .....................................
Bad (100%(1))...........................................

(MNT millions)
380,003.2
18,841.8
22,492.2
1,407.1
14,512.8
6,572.3

%
(MNT millions)
90.2
441,840.5
4.5
16,904.4
5.3
19,725.6
0.3
3,677.0
3.4
7,618.4
1.6
8,430.2

%
(MNT millions)
92.4
1,107,176.3
3.5
5,893.7
4.1
28,181.7
0.8
602.8
1.6
20,209.0
1.7
7,369.9

%
97.0
0.5
2.5
0.1
1.8
0.6

Gross loans ..................................................

421,337.3

100.0

100.0

100.0

(1)

478,470.5

This percentage is the standard provisioning requirement set by the Bank of Mongolia.

111

1,141,251.7

As at 31 December 2009, the proportion of total loans which were non-performing was 5.3%, which
decreased to 4.1% as at 31 December 2010, and decreased to 2.5% as at 31 December 2011.
Non-performing loans as a percentage of the total loan portfolio decreased from 2009 to 2011 principally
due to increase in the demand for loans and prudent management policies of the Bank.
As a result of its experience during the economic downturn in 2008, the Bank instituted several changes
in its policies for approving new construction loans. The Bank has decreased the number of builders to
which it will provide financing and now provides funding for only larger-scale construction projects. In
order to safeguard against any future economic downturn, the Bank ensures that only its corporate banking
team, rather than individual branches, can approve new construction loans and project owners must fund
more than 30% of the total project costs. The percentage of loans for each economy sector as against the
Banks total loan portfolio was below 25% as at 31 December 2011.
Allowances and loan loss provisioning policy
The Bank classifies and estimates risks of loan losses, contingent liabilities and other assets based on
quantitative (the number of days for which the loan has been overdue) and qualitative factors in accordance
with the Asset Classification and Provisioning Regulation approved by the President of the Bank of
Mongolia and the Minister of Finance.
The RMD is responsible for ensuring that the Bank maintains an allowance for loan losses, in accordance
with the requirements set by the Bank of Mongolia, which is available to absorb losses incurred in its loan
portfolio. This allowance is based upon the classification of the Banks loans and guarantees as at each
balance sheet date. If additions or changes to the allowance for loan losses are required, the Bank will
record provisions for loan losses, which will be treated as charges against operating income. Loan
exposures that the Bank deems to be uncollectible, including actual loan losses, net of recoveries of
previously provisioned amounts, are charged against the allowance for loan losses only after all domestic
legal remedies available to enforce the loan and any collateral offered as security in connection therewith
are exhausted or realised, as the case may be.
The Bank classifies its loans as described above as at each balance sheet date. The allowance for loan
losses is calculated, based on such classifications, by RMD using the percentages indicated in the table
below setting forth the Banks allowances for loan losses by loan classification, each of which is at least
equal to the minimum requirement set by the Bank of Mongolia. The following table sets forth details of
the Banks provisioning for the periods specified:
Years ended 31 December

Total provisions balance as at 1 January ....................................


Charge for the year[s] less write-backs ......................................
Recoveries ..................................................................................
Directly written-off ....................................................................
Exchange difference ...................................................................
Total ..........................................................................................

2009

2010

2011

(MNT millions)
6,984.3
8,301.1
(168.4)

5.6

(MNT millions)
15,122.6
1,915.4
(1,750.7)
(1,285.7)
2.2

(MNT millions)
14,003.8
5,228.2
(1,252.0)
(60.2)

15,122.6

14,003.8

17,919.8

The following table sets forth an analysis of the Banks allowances for loan losses as at the dates specified:
As at 31 December
2009
Performing (0%(1)) .....................................................................
Past due (5%(1)) .........................................................................
Non-performing ..........................................................................
Substandard (25%(1)) .............................................................
Doubtful (50%(1)) ..................................................................
Bad (100%(1)) ........................................................................

942.1
14,180.5
351.8
7,256.4
6,572.3

Total ..........................................................................................

15,122.6

(1)

2010
(MNT millions)

845.2
13,158.6
919.2
3,809.2
8,430.2

This percentage is the standard provisioning requirement set by the Bank of Mongolia.

112

14,003.8

2011

294.7
17,625.1
150.7
10,104.5
7,369.9
17,919.8

The total non-performing loans of the Bank amounted to MNT 28,181.7 million (US$20.2 million) in
principal as at 31 December 2011. In total, the Banks 10 largest non-performing loans amounted to MNT
24,764.9 million (US$17.8 million) as at 31 December 2011. The Bank is taking steps to realise the
collateral securing the loans, which principally consists of buildings and industrial equipment, or to
re-structure the loans according to applicable Bank of Mongolia regulations.
Risk Management
Overview
The Banks Risk Management Committee (RMC) was established in 2011. The main duties of the RMC
is setting the risk appetite and limits, designing the risk profile of the Bank and developing and
implementing risk governance policies. The Board appointed a Chief Risk Officer who is in charge of
creating its risk governance framework and monitoring risk appetite. The Chief Risk Officer independently
reports to the Board and the RMC on a quarterly basis. The RMC is headed by the Chairman of the RGB
and includes the Chief Risk Officer and the Boards independent director. The RMC reports to the Board
on a quarterly basis in respect of compliance by the Bank of corporate governance principles, and monitors
the risk profile of the Bank and compliance of risk limits and risk appetite of each business division of the
Bank. The Chief Risk Officer supervises the Risk Management Department which in turn supervises and
monitors the Credit Committee, ALCO and the Operational Risk Management Committee on a daily basis
with respect to controlling the risk appetites and monitoring limits of the business divisions. The Chief
Risk Officer is a member of the Credit Committee and ALCO.
The Bank is in the process of implementing a program in partnership with PricewaterhouseCoopers which
is designed to support and improve compliance of the Bank with its risk management policies. Under the
program, a database will be created to store necessary information in respect of customers in order to
mitigate money laundering risks and to perform customer checks against the Banks internal sanction list.
The following chart shows the organisational structure and reporting lines of the Banks internal risk
management and control function:
Board

Risk Management
Department

Support to CC

Credit risk

Counterparty risk
Country risk

Problem loan
management
Loan monitoring

Chief Risk Officer

Risk Management
Committee

Market risk

Operational risk

Trading risk
Liquidity risk
Interest rate risk
Portfolio management

Market Risk
Management
SME
credit risk

Corporate
credit risk

Collateral appraisal
and monitoring

Retail
credit risk

Loan review

Credit Risk Management

113

Procedure
System
People
External factors
Compliance

Operational Risk
Management

Credit risk management


The CCC, comprising the first deputy CEO, the President, one deputy CEO, the Chief Risk Officer and the
director of the Banks corporate banking department are responsible for overseeing the Banks credit risk
management. The Bank monitors credit risk by monitoring individual credits, which includes off-balance
sheet exposures to obligors as well as the Banks overall credit portfolio. The RMD is responsible for
overseeing the risk management of the Banks loan portfolio. The Bank monitors the quality of its credit
portfolio on a day-to-day basis and takes remedial measures when necessary. Such a system enables the
Bank to ascertain whether its loans are being serviced in accordance with their terms, the adequacy of the
provisions made against loan losses, whether the overall risk profile is within the limits established by
senior management and whether the Banks lending activities are in compliance with regulatory limits.
In order to monitor the creditworthiness of its borrowers, the Bank has implemented two procedures to
manage its credit risk exposure. First, in relation to the non-payment of loan instalments and interest
amounts, the CCC determines the appropriate measure to be taken on the excess loan, whether to reclassify
the loan and the provision that should be made. Second, an annual assessment is made on each existing
loan in order to assess credit risk after the loan has been advanced and accuracy of credit ratings. See
Loan Portfolio Credit Surveillance.
The Bank also monitors the collateral offered as security for each of its loans throughout the term of the
loan so as to verify its existence and that it has not deteriorated in quality. The frequency with which
collateral is monitored varies in accordance with the type of collateral. For example, real estate collateral
is revalued every year, mining licence collateral is revalued each year on the basis of the most recent
reserves data and equipment collateral is revalued each year to account for depreciation. Mining licence
collateral is initially valued by a Government agency and is subsequently adjusted by the Bank according
to the level of depletion of the resources of a mine. The RMD is responsible for the monitoring and
reporting of collateral.
The Bank has imposed internal lending limits in compliance with the regulations of the Bank of Mongolia
and expects that certain Basel II compliant risk models of probability of default and loss given default will
be implemented in 2012 in its internal risk management framework. As a result, the Bank limits its credit
exposure to a single industry sector to 25.0% of its total loan portfolio especially in relation to mining,
construction and meat processing industries. The Bank has a specialised financing policy for mining,
construction and meat processing industries and risks associated with these sectors are regularly assessed
by CCC. The Banks also limits the total amount of loan exposure to a single borrower to 20.0% of the
Banks total capital and the total exposure for loans and other assets similar to loans to a single related
party of the Bank must not exceed 5.0% of the Banks total capital. Related parties include shareholders,
managers and employees of a company, their spouses and affiliated companies. The Bank is in compliance
and has at all times complied with these limits.
Market risk management
The Bank faces market risks arising from open positions in currencies, which are sensitive to general and
specific market movements. The Banks Risk Management Committee sets limits on the amount of market
risk appetite that is acceptable. The overall responsibility for managing the market risk lies with the ALCO
(subject to the final approval of the Risk Management Committee) which reviews and approves risk
management policies devised by the RMD and monitors their implementation. The limits on open position,
loss limit, dealer limits and the VaR limit are set by the ALCO and are subject to the final approval of the
Risk Management Committee. The parameters on margin trading and foreign currency trading are set by
the RMD. The RMD monitors the limits on a daily basis using an internally built VaR model and in
accordance with the policies stated in its trading risk manual and provides daily reports to senior
management. Only the ALCO has the authority to approve an exception to the set limits. Although the bank
maintains small positions in foreign currencies and gold trading to meet client demand, the Bank has not
generally engaged in proprietary trading in securities, foreign currencies or precious metals since
September 2008.
Liquidity risk management
The Bank places significant emphasis on the effective management of its balance sheet, the reduction of
interest rate risks and liquidity management. The Banks goal is to ensure that it will, even under adverse

114

conditions, have sufficient liquidity to meet its contractual and regulatory financial obligations. The Bank
formulates its risk management policies in accordance with the guidelines provided by the Bank of
Mongolia and the Basel Committee. The Bank revised its liquidity risk management policy and
methodology in August 2011. Some of the main principles of the Banks risk management policy are:

using the gap method to prevent and check liquidity risk and shortage and excess of financial inflow
and outflow;

managing and controlling the liquidity risk;

systematically controlling liquid assets by foreign currencies, foreign currency transactions and
foreign currency cash flow movements;

monitoring the quality of the Banks liquid assets; and

analysing normal and extraordinary market circumstances by using its internal net reserve controlling
system to manage/allocate liabilities to assets under the contingency plan.

The Bank uses the following ratios to determine its liquidity position:

monitoring and maintaining a healthy asset-liability ratio;

maintaining a higher cash inflow over cash outflow in the short term;

monitoring and limiting loan and funding concentration;

setting limits on cumulative gap;

determining the net gap of cash inflow and outflow; and

dividing market funds in four types based on volatility and monitoring liability allocation.

The Bank evaluates its liquidity risk management on a quarterly basis for breach of limit, current level of
liquidity risk, etc. In the event of a liquidity crunch the Bank intends on rely on interbank deposits and
loans and deposits from Bank of Mongolia.
Interest rate risk management
Increased competition among commercial banks in Mongolia has led to relatively favourable terms and
conditions being offered to customers and has become one of the key factors influencing interest margins.
The interest rate risk is measured by the extent to which changes in market interest rates impact the Banks
margins and net income. The interest rate risk is managed through the monitoring of interest rate gaps and
by ensuring compliance with pre-approved policies and limits set by the ALCO (subject to final approval
of the Risk Management Committee). These policies and limits are based on the cost of funding, other
operating costs, the inflation rates, the interest rate of the central bank securities and other factors. The
RMD is responsible for the modification of the borrowers credit rating model and the day-to-day review
of compliance with such policies and limits.
Operational risk management
Operational risk management focuses on supporting and advising the management of the Banks business
units and branches with regards to the formulation, development and implementation of operational risk
management policies designed to balance the avoidance of financial losses and damage to the Banks
reputation against maintaining cost efficiencies. The key aspects of operational risk management include:

identification of risks as yet unidentified and uncontrolled;

measurement of the probability and impact of risks;

mitigation measures to stay within acceptable risk levels; and

monitoring risks, which is undertaken by the Operational Risk Management Committee.

115

At the end of 2009, the Bank established the Operational Risk Management Committee comprised of
management from the Banks units such as the RMD, Internal Audit Department, the IT Unit, the Legal
Unit, the Human Resources Department, the Corporate Security Department and the Financial Accounting
and Control Department. The Operational Risk Management Committee is responsible for the
improvement and development of operational risk management policies. The IAD provides further
inspection by way of periodic reviews to ensure that the policies are being complied with. The results of
the internal audit reviews are discussed with the management of each of the business units and a summary
submitted to the Banks executive committee including the Banks chief executive officer, the first deputy
chief executive officer and four deputy chief executive officers.
The Operational Risk Management Unit (ORMU) of the Bank is responsible for preparing a detailed plan
for risk identification and assessment based on Basel guidelines and implements processes to mitigate risk.
The Operational Risk Management Committee considers risks identified by the ORMU and implements
rules for new and existing products and services offered by the Bank to reduce operational risks faced by
the Bank.
The Bank periodically develops and upgrades risk and control self-assessment procedures for treasury,
loan, deposits and operational software and technology by identifying risks in these areas, assessing risk
impacts and existing controls and defining mitigation options for unacceptable risks.
The IAD conducts regular audits of the business units and the credit processes and is responsible for
periodic reviews to ensure compliance with, and effectiveness of, the risk management policies
implemented by the RMD. The Bank regularly arranges for training for members of the IAD at the
Mongolian Institute of Internal Auditors and the European Bank of Reconstruction and Development and
on Bank of Mongolia training programmes and certified public accounting training courses. The IAD is
regularly reviewed by the RMC and reports directly to the Board and the Executive Committee.
The following table sets forth a comparison of the Banks NPL ratio as a percentage of its total loan
portfolio with the NPL ratio of the Mongolian banking industry for the periods presented:
As at
31 December 31 December
2009
2010
The Bank ......................................
Mongolian banking sector(1)...........

(1)

5.3%
17.1%

4.1%
11.3%

31 March
2011

30 June
2011

5.1%
10.0%

3.7%
8.5%

30 September
2011
3.5%
7.4%

31 December
2011
2.5%
5.8%

Bank of Mongolia data

The following table sets forth the Banks loans in arrears as a percentage of its total loan portfolio for the
periods presented:
As at
31 December 31 December
2009
2010
In arrears ......................................

4.5%

3.5%

31 March
2011

30 June
2011

0.8%

0.4%

30 September
2011
0.4%

31 December
2011
0.5%

The following table sets forth the Banks NPL coverage ratio for the periods presented:
As at
31 December 31 December
2009
2010
NPL coverage ratio .......................

67.2%

71.0%

31 March
2011

30 June
2011

48.5%

48.9%

30 September
2011
49.3%

31 December
2011
63.6%

The following table sets forth the Banks capital adequacy ratio for the periods presented:
As at
31 December 31 December
2009
2010
Capital adequacy ratio ..................

12.7%

16.3%

116

31 March
2011
13.1%

30 June
2011
12.5%

30 September
2011
12.5%

31 December
2011
12.7%

Capital Adequacy
The Bank of Mongolia monitors the capital requirements of all Mongolian banks, including the Bank. The
Bank of Mongolia has established a minimum capital adequacy ratio for Mongolian banks, which currently
exceeds guidelines recommended under Basel Capital Accord Standards. This ratio is currently set at
12.0%, based on total equity and total assets as adjusted for their risk. The Bank complies and has at all
times complied with the prevailing mandatory capital adequacy ratios set by the Bank of Mongolia. The
Banks capital adequacy ratio was 16.3% and 12.7% as at 31 December 2010 and 31 December 2011,
respectively.
The following table sets forth additional information regarding the Banks capital base, as at the dates
specified:
As at 31 December
2009

2010

2011

(MNT millions)

(MNT millions)

(MNT millions)

Tier 1 capital:
Share capital...............................................................................
Retained earnings .......................................................................
Additional paid-in capital...........................................................
Treasury stock ............................................................................
Adjustment .................................................................................

6,610.1
45,911.6
7,392.2
(6,456.2)
(544.9)

6,610.1
66,873.8
7,392.2
(6,001.9)

6,610.1
108,976.3
7,392.2
(6,001.9)

Total Tier 1 capital ...................................................................

52,912.8

74,874.3

116,976.7

Tier 2 capital:
Preferred stock ...........................................................................
Revaluation fund ........................................................................
Unrealised gain on available-for-sale financial assets ................
Subordinated debt securities issued ............................................

13,683.3

13,418.3

31,218.5

18,702.1
3,736.0
41,693.5

Total Tier 2 capital ..................................................................

13,683.3

44,636.8

64,131.6

Total Tier I and Tier II capital ...............................................

66,596.1

119,511.1

181,108.3

Risk weighted assets ..................................................................


Capital adequacy ratio................................................................
Tier 1 ratio(1) ..............................................................................
Tier 2 ratio .................................................................................

523,167.3
12.7%
10.1%
2.6%

733,794.3
16.3%
10.2%
6.1%

1,429,184.3
12.7%
8.2%
4.5%

(1)

Total Tier I ratio has been expressed as a percentage of risk weighted assets.

The Bank issued US$175.0 million of senior Notes in 2010, the proceeds of which were not deployed
before year end 2011 resulting in 16.3% CAR. In 2011, when the bond proceeds of such issuance were
deployed, the Banks CAR fell to 12.7%.
Property
The Bank owns or leases premises where its head office and branches are located. The Banks premises
are mainly leased on a short-term basis of one to two years. However, the Bank generally acquires premises
where possible and where it believes that the value of real estate is likely to appreciate in value and that
rental costs are likely to increase. As at 31 December 2011, 30 of the Banks branches were leased and 12
branches were owned. The total net book value of the Bank owned premises was MNT 21,961.1 million
(US$15.7 million) as at 31 December 2011.
Information Technology
The Bank views IT as an integral part of its operations and is committed to investing in its IT infrastructure
to support its existing operations and growth. The core element of the Banks IT infrastructure is its
software system, which is located at the Banks head office and networked with all of the Banks branches.
This system facilitates full-scale operational and analytical support for wire transfers and cash settlements,
credit decisions, lending activities, bank deposit maintenance, transactions in foreign currencies and
remote account management services such as Internet banking and telephone banking.

117

To minimise system downtime, the Bank maintains an off-site IT back-up recovery centre, which is
updated in real time and is located at a separate site from the Banks head office, to safeguard information
in the event of a technical or operational failure. This back-up facility contains a substantially complete
duplicate of all of the Banks core IT systems and can provide emergency back-up data if the Banks
primary electronic data centre fails. The Bank conducts IT disaster recovery drills twice annually to
enhance the effectiveness of its back-up systems.
In December 2007, the Bank upgraded its core software system moving to the core banking system,
GRAPE BANK system, the information management system GRAMIS and a GRAPEMASTER system for
general ledger system. The Bank has continued to improve its technology platform through upgrades to the
core system, including implementation in 2009 of the treasury system Grats, a new trade financing
system, complete credit card module and fraud detection system GraPolicy. In addition, the Bank also
continues to utilise technology to centralise and standardise its operations.
The new core software system has the following advantages intended to support and enhance the Banks
overall operational efficiency and improve security:

specifically designed for business processes to reduce the cost of individual transactions;

features a sophisticated security system with a two-step transaction control. Therefore, depending on
certain factors such as amount limits, transaction types and exchange rates, the system will not allow
the transaction to proceed without the approval of a senior officer;

provides a flexible information management system to generate meaningful, analytical reports on


outstanding balance, loans and deposits more easily for any period within the specified parameters;

able to generate an overview of a single customers different relationships with the Bank;

provides complete transaction support for back-office operations;

low maintenance costs; and

equipped to handle the changing demands of the banking industry.

The Bank implemented EMV technology to limit fraudulent transactions and to provide global
interoperability. In 2009, the Bank installed video camera surveillance near all its ATM machines, which
provide round-the-clock monitoring. The Bank has also implemented an improved version of loan
information database designed to reduce defaults on loans and to allow the Bank to maintain and monitor
its customers credit history. The Bank has also integrated its card and core banking systems to avoid
duplication, reduce expense and enhance monitoring.
In 2010, the Bank implemented the Money Gram Agent Bank Connection Project in all of its branches
with the aim to increase efficiency by reducing application processing time. The Bank also implemented
an information delivery system which allows its customers to control their account usage and receive
information on their mobile phones or by electronic mail.
The Bank, in cooperation with Bank of Mongolia, implemented an integrated card payment system in
Mongolia in 2009 and entered into a memorandum of understanding with the Bank of Mongolia and Khan
Bank to kick-off card payments by participant banks through the integrated payment system from June
2010.
Since 2011, the Banks ATM machines have accepted Pulse, Diners Club and Discover brand cards.
Further, the Bank also launched co-branded and gift cards, extended its sub-agent network, upgraded its
core banking system, implemented a back-up Internet network, upgraded to SWIFT 7.0 and implemented
a mobile banking system. The Banks IT department has upgraded its salary and property, plant and
equipment accounting systems and has linked approximately 300 point-of-service machines and 20 ATM
machines to its service network.
The Bank invested approximately MNT 519.1 million on IT infrastructure during 2009, which increased
by 67.9% to MNT 872.0 million invested during 2010 which in turn increased by 28.3% to MNT 1,119.5
million (US$0.8 million) invested during 2011.

118

Competition
As at 31 December 2011, there were 14 commercial banks in Mongolia, 13 of which were privately owned
and one of which was state-owned. Pursuant to the Law of Mongolia on Development Bank, a
government-owned policy oriented, statutory financial institution named Development Bank of Mongolia
LLC was established in March 2011. There were also approximately 195 non-bank financial institutions
(NBFIs) and 162 saving and credit cooperatives. The Banks principal competitors include Golomt Bank
and Khan Bank, and international banks such as ING Bank N.V. and Standard Chartered Bank.
As at 31 December 2011, the Bank was one of the top three banks in Mongolia in terms of total assets,
total deposits, total loan portfolio and shareholders equity, according to data published by the Bank of
Mongolia. Although the Bank currently has a comparatively small branch network, representing
approximately 2.5% of the total number of bank branches in Mongolia, it intends to focus on selectively
expanding its branch network in the near future as it targets the expansion of its retail lending business.
In 2011, the Bank established a branch in the Umnugobi province near the Oyu Tolgoi copper project. The
Bank plans to establish new branches in strategically important rural areas and near mining projects such
as Oyu Tolgoi and Tavan Tolgoi.
As at the date of this Information Memorandum, the Bank operated one of Mongolias largest ATM
network. The Bank has a market share of approximately 24.8% in the corporate lending sector. As at 31
December 2011, total savings of the Bank amounted to MNT 740.5 billion (US$531.0 million) or
approximately 19.7% of the total savings and total deposits were MNT 1,277.3 billion (US$916.0 million)
or 18.4% of the total deposits in the Mongolian banking sector. As at 31 December 2011, the Banks total
assets amounted to MNT 2,090 billion (US$1.5 billion) and capital was MNT 139.4 billion (US$100.0
million) representing a market share of 22.3% and 20.6%, respectively.
Despite the challenges posed to the Banks leading position by competitors backed by foreign investors and
certain factors such as the Banks comparatively smaller branch network, the Bank believes that its large
corporate customer base, high operating standards, high quality and price competitive products, its skilled
and well-trained staff and strong international banking relationships provide a solid platform for it to
continue to strengthen its position as the premier bank in Mongolia.
Employees
As at 31 December 2009, 2010 and 2011, the Bank had 689, 751 and 1,014 active full-time employees,
respectively. As at such date, the Bank did not employ any staff on a part-time basis. The Bank believes
it remains the employer of choice for many applicants and continues to receive applications exceeding its
available vacancies. The Banks net profit per employee increased from MNT 21.7 million as at 31
December 2009 to MNT 27.6 million as at 31 December 2010 and further increased to MNT 41.5 million
(US$29,759.8) as at 31 December 2011. The Bank has been working with the State Labour Exchange and
Altan Focus LLC (a recruitment agency) to survey the available labour pool and select the best candidates.
The Bank is also expanding its cooperation with local universities so as to enable first pick of qualified
graduates, and substantially all new employees possess a university degree or above.
Each year the Human Resources Department, in cooperation with international training providers, prepares
and implements a series of training programmes designed to improve the professional skills of the Banks
employees. In 2011, the Bank conducted 128 training programmes in more than 10 areas including
General Banking Training, IT Training, Securities Safety Products and Services Training, Financial
Reporting Training, Audit Training, Risk Training, Legal Training and Customer Service
Training. These were coordinated by the Human Resources Department and involved other departments
of the Bank as well. The Bank also sends its employees on overseas courses in the United States, Germany,
Luxembourg, Russia and Singapore, particularly in areas such as risk management, treasury, trade and
information technology. Through this approach, the Bank benefits from the knowledge of international
methods and helps to ensure that its workforce has an understanding of international banking standards and
practices.
The Bank issues salary loans and mortgage loans to its employees on favourable terms. The interest rate
on salary loans is 1.0% per month and 6.0% per annum in respect of mortgage loans. As at 31 December
2011, the Bank had issued salary loans in the amount of MNT 982.9 million and mortgage loans in the
amount of MNT 7,103.6 million.

119

None of the Banks employees are members of a trade union and, since its inception, the Bank has not
experienced any strikes or disruptions due to labour disputes. The Bank believes that it has good relations
with its employees.
Legal Proceedings
In April 2006, the Bank identified through an internal audit that a former branch manager had been
fraudulently obtaining loans for her own use, which loans were secured against deposits in the Banks
customers accounts. The Bank believes that such fraudulent activity resulted in a loss to the Bank of
approximately MNT 3,456.8 million (US$2.5 million) of which MNT 1,378.6 million (US$1.0 million) has
been recovered. On 14 December 2007, the court ordered that the former branch manager transfer MNT
2,078.2 million (US$1.5 million) to the Bank.
As a result of an internal investigation, the Bank improved its internal investigations and audit systems and
reviewed its ongoing risk management policies in an effort to reduce the likelihood of further incidents.
In particular, the Bank centralised important decision-making responsibilities and created the Operational
Risk Management Unit within the Risk Management Department. The Bank has also purchased additional
software to enable real-time monitoring of the Banks activities and has implemented such software in
August 2010. In 2009, the Bank experienced another occurrence involving the misappropriation of funds
by a branch employee involving a small sum which it recovered subsequently.
The Bank is, from time to time, the subject of legal proceedings and other investigations which arise in
the ordinary course of business. The Bank is not involved in any, and does not believe that there are any
pending or threatened actions, suits or proceedings against or affecting it which, if determined adversely
to the Bank, could individually or in the aggregate have a material adverse effect on the Banks financial
condition or results of operations or might be material in the context of the Notes.

120

MANAGEMENT
Representative Governing Board
The Representative Governing Board (RGB) of the Bank consists of five members (including one
independent director) (the Board and the Directors, respectively) who are remunerated at a rate
approved by the shareholders at a shareholders meeting. Between shareholders meetings, the Banks
authority is vested in the Board, which is required to meet at least once a year. The Directors are required
to report to the shareholders at least once a year at a shareholders meeting.
As at the date of this Information Memorandum, the Directors are as follows:
Mr. Erdenebileg Doljin
Mr. Erdenebileg Doljin was appointed as the Chairman of the RGB on 28 December 2006. He is currently
a member of the representative governing board of Ulaanbaatar City Bank. He holds a Bachelors degree
in Law from the Institute of Law in Mongolia and a Masters degree in Business Administration from the
Academy of Management in Mongolia. Mr. Erdenebileg has over 10 years of experience in the banking
industry.
Mr. Batjargal Dorligjav
Mr. Batjargal Dorligjav was appointed as an independent director of the RGB on 27 April 2011. Mr.
Batjargal also serves as a director of business consultant service in the Institute of Finance and Economics
of Mongolia. He holds a Masters degree in Business Administration from Maastricht University of
Management in the Netherlands and a doctorate in Macroeconomics from the Bishkek State and Economic
and Commercial Institute in Kyrgyzstan.
Mr. Enkhbold Chuluunbaatar
Mr. Enkhbold Chuluunbaatar was appointed to the Board on 28 December 2006. Prior to joining the Bank,
he was employed as an engineer with Mongolian Telecommunications Company from 1999. He holds a
Bachelors degree in Electrical Engineering from the Technical University of Novosibirsk in the Russian
Federation and a degree in Telecommunications Engineering from the Polytechnics University in
Mongolia. Since 2005, he has also been a member of the Institute of Finance and Economics of Mongolia.
Mrs. Tsolmon Tamir
Mrs. Tsolmon Tamir was appointed to the Board on 28 December 2006. She is also a project officer for
the Economic Policy Project at the International Development Agency of the United States since 2004.
Prior to joining the Bank, she was an Officer of the United States Peace Corps from 2002 to 2004. She
holds a Masters degree in Education from Kurtin University in Perth.
Mr. Randolph S. Koppa
Mr. Randolph S. Koppa was appointed as the President of the RGB in July 2007. He was first appointed
as the Chief Executive Officer of the Bank in October 2004 and President in July 2007. He has held various
management positions at financial institutions in 12 different countries during his 45-year career in
banking, including 16 years at ING Bank N.V.. He holds a Bachelor of Arts degree in International
Relations from the University of Wisconsin in Madison.
Executive Committee
The members of the Banks Executive Committee are selected by its Board and as of the date of this
Information Memorandum are as follows:
Name

Age

Medree Balbar.....................................
Orkhon Onon ......................................
Khurelbaatar Dambiijav .....................
Orgodol Sanjaasuren ..........................
Soronzonbold Lkhagvasuren ..............
Otgonbileg Demchigjav .....................

58
37
51
43
36
38

Title

Chief Executive Officer


First Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer

121

The biographies of members of the Executive Committee of the Bank are as follows:
Mr. Medree Balbar
Mr. Medree Balbar was appointed Chief Executive Officer of the Bank in July 2007. Mr Medree was one
of the co-founders of the Bank and has worked at the Bank from 1991 to 2000, holding several positions,
including Chief Executive Officer from 1999 to 2000. From 2000 to July 2007, Mr. Medree held several
positions in other Mongolian financial institutions, including Chief Executive Officer of Capitron Bank
and Chief Executive Officer of the Gurvan Bar Credit, a non-banking financial institution in
Ulaanbaatar. Mr. Medree has over 19 years of experience in the banking industry.
Mr. Orkhon Onon
Mr. Orkhon Onon, First Deputy Chief Executive Officer, was appointed as the Deputy Chief Executive
Officer of the Bank in January 2007. He was later promoted to First Deputy Chief Executive Officer in
October 2007. Mr. Orkhon previously held the position of Chief Executive Officer of Ulaanbaatar City
Bank and, prior to his role with Ulaanbaatar City Bank, was a financial advisor to the National Council
of the Millennium Challenge Account. Between 2003 and 2004, he was a Senior Banking Officer in the
Banks Corporate Banking Department. Mr. Orkhon has over 13 years of experience in the banking
industry.
Mr. Khurelbaatar Dambiijav
Mr. Khurelbaatar Dambiijav was appointed Deputy Chief Executive Officer in August 2007. He has
worked at the Bank between 1993 and 2005 first as Director of the Cash and Customer Service Department
and then as the Director of the Branch Management Department. Between 2005 and August 2007, he held
the position of Vice Director at Mongol Post Bank. Mr. Khurelbaatar has over 21 years of experience in
the banking industry.
Mr. Orgodol Sanjaasuren
Mr. Orgodol Sanjaasuren was appointed Deputy Chief Executive Officer in December 2009. He was
previously with the Bank between 1996 and 2001 as Director of Personnel and Administrative Department.
Mr. Orgodol has held several positions in the financial industry including serving as Chairman of the
Mongol Post Bank; Director General of Zoos Gold LLC, Legal Adviser to the Ministry of Fuel, energy,
Geology and Mining, and has held positions with World Bank and IFC. Mr. Orgodol obtained his
Bachelors degree from the National University of Mongolia in 1992 and a Masters degree in International
Banking and Finance from the Boston University in 2003. Mr. Orgodol has over 12 years of experience
in the banking industry.
Mr. Soronzonbold Lkhagvasuren
Mr. Soronzonbold Lkhagvasuren was appointed Deputy Chief Executive Officer in 2011. Prior to joining
the Bank, he was the First Deputy Chief Executive Officer at XacBank from 2010 to 2011 and has also
worked in XacBanks strategic planning and marketing division, customer service division, public
relations and has been involved in upgrading the banks IT system. Mr. Soronzonbold has over nine years
of experience in the banking industry.
Mrs. Otgonbileg Demchigjav
Mrs. Otgonbileg Demchigjav was appointed Deputy Chief Executive Officer in 2011 prior to which she
was a Director in the Banks Risk Management Department. Mrs. Otgonbileg has over 14 years of
experience in the banking industry.

122

The Asset and Liability Committee


The Executive Committee has established the ALCO to develop and monitor the Banks policies on risk
management. The ALCOs specific duties include managing the Banks short to long term liquidity,
assessing the Banks balance sheet structure with a view to maximising net interest profit and ensuring the
Banks compliance with the requirements set by the Bank of Mongolia. Any increased exposure to a
particular industry sector must have the prior approval of the ALCO and also the Risk Committee. As at
the date of this Information Memorandum, the members of the ALCO are as follows:
Name
Medree Balbar ..............................................
Randolph S. Koppa .......................................
Orkhon Onon ................................................
Khurelbaatar Dambiijav ................................
Orgodol Sanjaasuren .....................................
Soronzonbold Lkhagvasuren .........................
Otgonbileg Demchigjav ................................
Yanjmaa Dagmid...........................................
Gantumur Lhagvajav.....................................

Title
Chief Executive Officer
President
First Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Deputy Chief Executive Officer
Director of Financial and Control Department
Director of Treasury Department

Position in ALCO
Chairman
Member
Member
Member
Member
Member
Chief Risk Officer
Member
Secretary

Audit Committee
The Audit Committee was established in August 2011. The Audit Committees specific duties include
preparing valuations, implementing risk management guidelines, ensuring compliance with accounting
rules, monitoring internal audit and preparing reports for review by the Banks Board and shareholders and
implementing corporate governance principles. As at the date of this Information Memorandum, the
members of the Audit Committee are as follows:

Name
Erdenebileg Doljin ........................................
Batjargal Dorligjav .......................................
Gantugs Damdin ...........................................
Erdenebileg Jadambaa...................................
Bayarsaikhan Khurtsbileg .............................

Title
Chairman of the RGB
Independent Director
Deputy Chief Executive Officer - Ulaanbaatar City Bank
Deputy Chief Executive Officer - Ulaanbaatar City Bank
Chief Executive Officer - National Finance Corporation

Position in Audit
Committee
Chairman
Member
Member
Member
Member

Risk Committee
The Risk Committee was established in August 2011. The Risk Committees specific duties include
formulating the Banks risk management methodology, risk management development, risk profile and risk
governance development of the Bank. The Risk Committee consists of three members who meet once every
six months to discuss the Banks risk strategy and has the power to define the Banks risk management
policies. As at the date of this Information Memorandum, the members of the Risk Management Committee
are as follows:

Name

Title

Erdenebileg Doljin ........................................ Chairman of the RGB


Batjargal Dorligjav ....................................... Independent Director
Otgonbileg Demchigjav ................................ Deputy Chief Executive Officer

Position in Risk
Committee
Chairman
Member
Chief Risk Officer

Supervisory Board
The supervisory board of the Bank (the Supervisory Board) was established by a resolution of the
shareholders of the Bank dated 30 April 2008, for the primary purpose of independent monitoring of the
Banks activities and reports directly to the Banks shareholders.

123

As at the date of this Information Memorandum, the members of the Supervisory Board are as follows:
Nanzaddorj Tsagaan
Nanzaddorj Tsagaan was appointed to the newly established Supervisory Board on 30 April 2008. Mr.
Nanzaddorj is a qualified lawyer and had previously held the position of executive director of Nukht LLC,
a company specialising in tourism and trade activities in Ulaanbaatar. He was previously the department
head of the State Property Committee of Mongolia.
Erdenebileg Jadamba
Erdenebileg Jadamba was appointed to the newly established Supervisory Board on 27 April 2011. Mr.
Erdenebileg is a lawyer and has worked in several positions prior to joining the Bank in 2010. Currently,
Mr. Erdenebileg also serves as the Deputy Chief Executive Officer of the Ulaanbaatar City Bank.
Employees
As at 31 December 2011, the Bank had 800 employees in Ulaanbaatar (including 461 employees in the
head office) and 142 employees in its branches in other provinces and 72 employees were on a long leave
of absence. The Bank plans to set up 11 new branches in 2012 which is expected to create further job
opportunities. The Bank maintains cordial relations with its employees and has not experienced any
industrial actions in the past three years.
Compensation
Total remuneration and employee benefits paid to executive officers and directors of the Bank amounted
to MNT 1.6 billion in 2010 and MNT 2.5 billion in 2011.

124

PRINCIPAL SHAREHOLDERS
History and Background
The Bank was formed in October 1990 by the Government pursuant to resolution no. 71. The Bank initially
functioned as the international banking department of the State Banking Committee for the Government.
In April 1993, the Mongolian Minister of Finance ratified the Banks charter and henceforth the Bank
operated as a separate state bank wholly owned and controlled by the Government. By November 2001,
following the implementation of an employee stock ownership scheme, approximately 24.0% of the Banks
shares were owned by its employees and the remaining 76.0% by the Government.
As part of the Governments privatisation programme, the Government announced a public bidding process
to privatise the Bank in 2002. In December 2002, Globull, a consortium formed by Gerald Metals, Inc. and
Banca Commerciale Lugano, bought 76.0% of the Banks shares from the Government. Given Banca
Commerciale Luganos profile and limited experience operating banks in emerging market economies,
ING Bank was retained to provide technical assistance to the Bank as part of a management and technical
assistance programme until the end of 2006. In January 2005, ADB and IFC subscribed for newly issued
shares of the Bank and became the Banks second-largest shareholders representing 14.5% of the Banks
then total issued and outstanding shares. In addition, ADB and IFC contributed MNT 9.6 billion to the
Banks capital in the form of subordinated debt. The Banks minority shareholders, mainly comprised of
the Banks employees, were diluted from a 24.0% to a 19.0% ownership position following a subsequent
rights issue in 2005.
In December 2006, Gerald Metals, Inc. sold its shares in Globull to US Global Investments LLC (US
Global). ADB and IFC exercised their tag-along rights and sold their shares to US Global, making it the
sole owner of Globull and the ultimate holding company of the Bank. US Global is co-owned by Central
Asia Mining LLC and Mr. Erdenebileg Doljin, the current Chairman of the Bank. Mr. Erdenebileg holds
100.0% of the shares of Central Asia Mining LLC and is the sole ultimate beneficial owner of 2,760,841
ordinary shares of the Bank representing an 83.5% equity interest.
In February 2012, the Bank sold treasury stock representing 4.78% of its total issued and outstanding
shares to GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc.
Current Ownership Structure
As used herein, beneficial ownership means the sole or shared power to vote or direct the voting or to
dispose of or direct the sale of any security. A person is deemed to be the beneficial owner of securities
that can be acquired within 60 days upon the exercise of any option, warrant or right. Shares subject to
options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the ownership percentage of the person holding the options, warrants or rights,
but are not deemed outstanding for computing the ownership percentage of any other person. The amounts
and percentages are based upon the shares of the Bank outstanding as at the date of this Information
Memorandum.
The following table sets forth information regarding beneficial ownership of the Banks shares as at the
date of this Information Memorandum held by:

each person who is known to the Bank to have more than 5.0% beneficial share ownership;

each of the Banks Directors and the Board as a group; and

all of the Banks employees as a group.

Name of shareholder

Number of shares

Percentage of shares

Globull Investment & Development SCA(1) .......................................................


Minority shareholders / Individuals ..................................................................
US Global Investment LLC(2) ............................................................................
GS Mongolia Investments Limited(3) ..................................................................
TDB - Treasury Stock ........................................................................................

2,175,594
603,801
241,784
157,862
126,015

65.8%
18.3%
7.3%
4.8%
3.8%

Total...................................................................................................................

3,305,056

100.0%

125

(1)

US Global owns 100.0% of the outstanding share capital of Globull.

(2)

As at 31 March 2012, US Global was a joint venture owned equally by Central Asia Mining LLC and Mr. Erdenebileg Doljin
(the current Chairman of the Board) and owned 2,175,594 or 65.8% shares of the Bank indirectly through Globull Investment
& Development SCA, its investment vehicle, and 241,784 or 7.31% shares directly. As at 31 March 2012, Central Asia Mining
LLC was 100.0% owned by Mr. Erdenebileg Doljin and is the sole ultimate beneficial owner of 2,760,841 ordinary shares of
the Bank representing an 83.5% equity interest.

(3)

GS Mongolia Investments Limited, a subsidiary of The Goldman Sachs Group, Inc., acquired a 4.78% stake in the Bank in
February 2012.

126

THE MONGOLIAN ECONOMY


Unless otherwise expressly stated, the information and statistics set out in this section are derived from
publicly available information. Such information and statistics have not been verified by the Bank or any
of the Dealers or their affiliates or advisers.
Mongolia is a landlocked country in East and Central Asia bordering Russia to the north and China to the
south, east and west. It occupies a territory of 1.56 million sq. km, and is approximately twice the
combined size of the United Kingdom and France. Mongolias terrain consists of desert, steppe and
mountain climate zones. Climatic extremes are the norm, with temperatures ranging from minus 40 degrees
centigrade in the winter to 40 degrees centigrade in the summer. With a population of approximately 2.83
million as of 31 December 2011, Mongolia is the worlds 19th largest and the most sparsely populated
country.
History
The first unified Mongolian state was formed in AD 1206 when Mongolian tribes were united under the
leadership of Chinggis Khan. This state was expanded further through conquests by Chinggis Khan and his
descendants. The Mongolian state eventually covered most of Eurasia. Beginning in the 14th century,
internal instability caused by disharmony among descendants of Chinggis Khan, who were assigned as
rulers of various parts of the Empire, led to the collapse of Mongolian rule in most of the conquered
territories.
The territory of Mongolia, having fought continuous wars with the Chinese Ming dynasty, eventually
succumbed to the newly emerged Manchu state, which subsequently conquered China and established the
Qing Empire. After over 200 years of Manchu rule, the northern half of the Mongolian-inhabited territory
declared its independence in 1911, leading to the establishment of the current Mongolian state. Mongolias
independence was eventually achieved in 1921 with the Soviet Unions support.
In 1924, under pressure from the Soviet Union and amidst fears that China would invade Mongolia, a
communist regime was established which lasted for almost 70 years. In 1991, following weeks of peaceful
demonstrations, the ruling communist party, the MPRP, called for the establishment of the State Baga
Khural. This provisional parliament was tasked with drafting the new constitution of Mongolia. State Baga
Khural was subsequently promulgated in 1992, paving the way for the first free democratic election in
Mongolia.
Recent Political Development
The Mongolian political system is established under the framework of parliamentary democracy, in which
the State Great Khural holds legislative powers and the executive branch is headed by the prime minister
who appoints cabinet ministers. The President of Mongolia is the head of state and the commander-in-chief
of Mongolias armed forces with limited executive powers.
There have been six parliamentary and presidential elections since 1991, each election being held once
every four years. Although the MPRP won the parliamentary and presidential elections in 1992, MPRP was
defeated by the Democratic Party in the subsequent parliamentary election in 1996. The 2000
parliamentary election returned the MPRP to dominant power, but their representation was subsequently
reduced in 2004.
After the 2004 election, a coalition government was formed and Elbegdorj Tsakhia, then leader of the
Democratic Party, was elected Prime Minister. He was replaced by MPRP leader Enkhbold Miyeegombo
in January 2006. On 7 November 2007, the Prime Minister submitted a letter of resignation to the
Mongolian parliament following his failure to be re-elected as chairman of the MPRP. Subsequent to
Enkhbold Miyeegombos resignation, Bayar Sanjaa was appointed Prime Minister and a new government,
comprised of the Prime Minister, other ministers from the MPRP and ministers from other parties, was
formed in November 2007. Mr. Bayar held the position of the Prime Minister until October 2009, when
he resigned due to poor health. He was replaced by Batbold Sukhbaatar, previously the Minister of Foreign
Affairs.

127

The next parliamentary elections were held in May 2008 which once again resulted in MPRP winning the
majority in the parliament. Accusations of electoral fraud brought forward by the opposition led to riots
which caused property damage and a number of deaths. Subsequently, MPRP chose to invite opposition
politicians to the cabinet, thus forming the coalition government. In January 2012, the Democratic Party
announced its decision to withdraw from the coalition government that was formed with the MPRP in
2008.
In May 2009, Democratic Party figure Elbegdorj Tsakhia was elected President, ending the long tenure of
MPRP politicians in the presidential seat.
MPRP changed its name to the Mongolian Peoples Party (the MPP) in 2010 and thereafter former
president of Mongolia Enkhbayar Nambaryn received judicial permission to re-register the name
Mongolian Peoples Revolutionary Party as a different party than the MPP. The Parliamentary Election
Law was revised on 15 December 2011. Parliamentary elections are set for June 2012, and presidential
elections is scheduled for 2013.
An Overview of the Mongolian Economy
The modern Mongolian state operated on the basis of a planned economy up until 1990, when the
establishment of a new consensus government undertook a sustained transition to a free market economy.
The Government relinquished its role as the primary factor in the economy and began limiting itself to
policies supporting a market-oriented economy. Main components of the Governments programme include
privatisation of state enterprises, price liberalisation, changes in national law, and an action plan for
environmental protection.
Mongolias economy is currently one of the fastest growing economies in the region with its newly
discovered mineral wealth and increasing foreign interest. Foreign direct investment in Mongolia increased
from US$1.0 billion as at 31 December 2009 to US$1.6 billion as at 31 December 2010 and further
increased to US$5.3 billion as at 31 December 2011, according to data published by the World Bank in its
quarterly economic update in February 2012. Total exports increased from US$1.9 billion as at 31
December 2009 to US$2.9 billion as at 31 December 2010 and further increased to US$4.8 billion as at
31 December 2011, according to data published by the World Bank in its quarterly economic update in
February 2012. Mongolias GDP growth averaged nearly 9.0% annually from 2004 to 2008, underpinned
by an increase in foreign direct investment (FDI), with capital inflows predominantly directed to the
mining industry and assisted by upward price trends for commodities such as copper, gold and iron. In
2011, the countrys economy continued to expand and achieved nominal GDP of approximately US$8.6
billion and GDP per capital of approximately US$3,067.0.
Macroeconomic data

Nominal GDP (MNT billions).......................................


Nominal GDP (US$ billions)(1) .....................................
GDP per capita (US$)(1) ...............................................
Real GDP growth..........................................................
CPI (Ulaanbaatar) (year-on-year (yoy) charge) .........
Exports (US$ millions) .................................................
Imports (US$ millions) .................................................
Loan to GDP ratio ........................................................
Loan to deposit ratio.....................................................

2008

2009

2010

2011

6,555.6
5.2
1,946.0
8.9%
24.2%
2,534.5
3,244.5
40.2%
112.8%

6,590.4
4.6
1,685.0
-1.3%
1.9%
1,885.4
2,137.7
40.3%
87.6%

8,414.5
6.7
2,434.0
6.1%
13.0%
2,908.5
3,200.1
38.6%
69.6%

10,829.7
8.6
3,067.0
16.0(2)
11.1
4,780.4
6,526.9
49.6%
81.7%

Source: National Statistical Office of Mongolia


(1)

Mongolia Quarterly Economic Update, The World Bank - February 2012. The following exchange rates were applied: 2008
- MNT1,267.0 = US$1.00; 2009 - MNT1,443.0=US$1.00; 2010 - MNT1,257.0=US1.00; and 2011 - MNT1,264.79=US$1.00.

(2)

Mongolia Quarterly Economic Update, The World Bank - February 2012.

Traditionally, economic activity in Mongolia has been based on agriculture and animal husbandry, but
recently the focus has shifted to the mining sector as the country is well-endowed with some of the largest
mineral deposits in the world. Mongolia currently has the fourth-largest copper reserves and ninth-largest

128

coal reserves globally. There is also evidence of significant deposits of uranium, gold, lead, zinc and rare
earth metals. The mining sector is also a predominant source of foreign currency for the country, with
mineral products representing approximately 81.1%, 85.3% and 90.0% of total exports in 2009, 2010 and
2011, respectively.
To reduce its reliance on commodity reserves, to create new job opportunities and to develop a diverse and
sustainable economy, the Government has proposed building industrial parks in strategic locations around
the country to increase value-added natural resources exports. For example, the Sainshand industrial park,
expected to be located in southern Mongolia with intersecting rail access to the Tavan Tolgoi-Choibalsan
railway, has been designed to include an oil refinery, a copper smelter, a coking coal plant and a water
supply network project. Developing and strengthening downstream businesses that can service the mining
boom will be important for Mongolia to ensure development of goods and services beyond mining as well
as to provide more equitable wealth distribution.
In the Spring 2010 session, Parliament passed the State Policy of Railway Development. According to the
policy, construction will be divided into three phases as the Government aims to link the eastern railways
directly to the sea ports in China and Russia to increase access to international markets. Phase I involves
the construction of a 1,100-kilometre main railway line from the Tavan Tolgoi coal deposit to Choibalsan
on the northern Russian border via the Sainshand Industrial Park. Phase II will connect the mineral
deposits along the southern perimeter of Mongolia to the main railway line and to the PRC market and is
expected to be completed in 2014. A total investment of approximately US$8 billion will be required to
renew existing railway capacities and build new lines.
Nominal GDP Composition by Sector

Mining and quarrying.................................................................


Agriculture, forestry and fishing ................................................
Wholesale and retail trade..........................................................
Transportation and storage .........................................................
Manufacturing ............................................................................
Real estate activities ..................................................................
Education ...................................................................................
Government ................................................................................
Other ..........................................................................................

2009

2010

2011

19.5%
17.9%
6.6%
8.3%
6.4%
7.3%
4.7%
4.1%
25.2%

22.7%
14.3%
8.3%
7.7%
6.4%
6.6%
4.0%
3.6%
26.4%

20.2%
13.0%
9.7%
7.2%
7.1%
6.6%
4.0%
3.5%
28.8%

Source: National Statistical Office of Mongolia


(1)

Others is comprised of electricity, gas steam and air conditioning supply; construction; public administration and defence;
compulsory social security; human health and social work activities; water supply; accommodation and food; information and
communication; professional scientific activities; administrative and support; arts, entertainment; other service activities and
net taxes on products.

The 2008/2009 Global Financial Crisis


Mongolias reliance on trade with China meant that the worldwide financial crisis hit hard. The economy
experienced a severe external shock in late 2008 and early 2009 as mineral prices collapsed and export
demand fell which resulted in a slump in global commodity prices in mid-2008. The economic downturn
saw the economy contract by 1.3% in 2009. In particular, the price of copper, the countrys main export,
fell by as much as 65.0% from US$8,700 per tonne in April 2008 to US$3,000 per tonne in March 2009.
Prices of other key export commodities such as coal, zinc, cashmere, and crude oil also fell significantly.
Only the price of gold held up due to its value as a perceived safe-haven investment.
This external price shock was combined with an external demand shock due to the slowdown in economic
activities in Mongolias major trading partners. Growth in industrial production in China, which was
acquiring approximately 70.0% of Mongolias exports, slowed down from approximately 16.0%
year-on-year growth in mid-2008 to 5.0% in the first quarter of 2009. The result was that Chinese demand
for copper and other Mongolian goods fell sharply. This resulted in a sharp decline in Chinese demand for
Mongolian copper imports, which recorded an annual decrease of approximately 50.0% in the first half of
2009.

129

The external shock also led to a sharp deterioration in Mongolias current account balance and its trade
balance deteriorated markedly through late 2008 and early 2009. The value of exports fell with
international commodity prices, more than outstripping moderation in the growth rate of imports. As a
result, the current account balance moved from a surplus of 6.7% of GDP in 2007 to a deficit of 14.0%
in 2008 and increased to a deficit of over 15.0% in the first two quarters of 2009.
The Mongolian currency weakened significantly due to a currency flight which was further aggravated by
the Bank of Mongolias attempt to defend the currency and maintain its de facto currency peg to the US
dollar. In the process, the Bank of Mongolia lost US$500 million of foreign currency reserves between July
2008 and February 2009 while the Mongolian currency depreciated, by approximately 38.0% between the
end of October 2008 and the middle of March 2009.
Subsequent measures were taken to prevent an overshooting of the exchange rate included abandoning the
de facto peg and the introduction a transparent bi-weekly foreign exchange auctioning mechanism. The
Bank of Mongolia significantly raised interest rates in March 2009 to 14.0% per annum from 9.75% per
annum in an attempt to restore confidence in the local currency. These policies, combined with a narrowing
trade deficit, resulted in a stabilisation of the nominal exchange rate since April 2009 and enabled the Bank
of Mongolia to rebuild international reserves. Meanwhile, the spread between the ask and bid rates in the
parallel and commercial bank foreign exchange markets, which is often a strong indicator of market
liquidity, has remained low, after the sharp spikes in late 2008 and early 2009. In January 2010, the
exchange rate against the U.S. dollar depreciated slightly, by 0.6%, compared with December 2009.
Mongolias Transformation to a Market Economy
Mongolia continues its transformation to a market economy notwithstanding the severe adverse impact of
the global economic slowdown in 2008 and 2009. Mongolia experienced a turnaround in late 2009 and the
beginning of 2010. In terms of nominal GDP, the economy recorded a healthy growth of 16.0% for 2011,
following an expansion of 27.7% in 2010, due to an improvement in business environment and increases
in FDI that resulted from the growth in mining production and money circulation. The growth supported
by the mining sector translated into expansion for other economic sectors such as wholesale, retail, trade,
transportation, manufacturing and construction sectors.
Mongolias turnaround may be attributable to the authorities policy response to the crisis, supported by
significant resources from the international community, including a US$229.2 million stand-by loan
facility from the IMF. In addition, overall global economic recovery, strong demand for natural resources
from the PRC and an upswing in copper prices contributed to the recovery. At the same time, having
identified and learnt from previous economic instabilities, legislative reforms and tightened fiscal
framework including the, Fiscal Stability Law, have been approved for 2011 that is intended to encourage
continued macroeconomic stability.
The signing of an investment agreement in October 2009 to develop the Oyu Tolgoi mine, which is
considered to be one of the worlds largest untapped copper deposits, is a major milestone in the
development of Mongolias mining sector and is expected to be a key driver of its future economic growth.
According to Asian Development Outlook 2011 published by the Asian Development Bank, US$4.0 billion
of investment is expected over the next two years in this project alone, an amount roughly equivalent to
Mongolias entire GDP in 2009. The mine is scheduled to start production in 2013. Preparations are also
being made to develop the coal deposits of one of the largest undeveloped coalfields in the world, Tavan
Tolgoi.
As at 31 December 2011, the fiscal deficit increased to 3.6% of GDP in 2011, down from a 0.5% surplus
in 2010, reflecting the large cash handouts and increase in infrastructure spending. However, revenues
have improved markedly, increasing annually by 40.9% in real terms as of the end of 2011. Imports
increased to 104.0% year-on-year, mainly driven by transport equipment and machinery as the mining
sector expands, in particular the Oyu Tolgoi copper mine. On the other hand, Mongolian exports were up
by 64.4% year-on-year in 2011 supported by the upward momentum in metal prices and large coal and
copper imports by China, the export destination for 92.1% of Mongolias exports on 2011.
With the recent developments in the mining industry, Mongolia shows promising growth prospects. The
ADB expects Mongolias economic growth to continue its momentum in 2012, supported by high global
mineral prices, development of new mines, and fiscal spending while the IMF estimates that Mongolia will
become the fourth-fastest growing economy in the world over the next five years.

130

Key Statistical Indicators


The following tables set forth selected recent information on the geography, climate, population, economy
and politics of Mongolia:
Geography:
Location ............................................. Northern Asia, between China and Russia (landlocked)
Area ................................................... 1,564.9 thousand square kilometres(1) (19th largest in the world)
Land boundaries ................................. Total: 8,253 kilometres, with China (4,710 kilometres in the south), and with the Russia
(3,543 kilometres in the north)
Climate............................................... Dry continental climate with desert, steppe and mountain zones with large daily and seasonal
temperature ranges
Major natural resources .................... Copper, coal, iron ore, gold, silver, fluorspar, uranium and rare earth elements
People:
Population ..........................................
Population growth rate .......................
Life expectancy at birth .....................
Ethnic groups .....................................
Religious ............................................
Government:
Government type ................................
Capital................................................
Head of State .....................................
Executive branch................................

Legislative branch ..............................


Judicial branch ...................................
Political parties ..................................
Suffrage .............................................
State structure ....................................

Economy:
Nominal GDP.....................................
GDP growth rate ................................
GDP per capita...................................
Unemployment rate ...........................
Major exports.....................................
Exports...............................................
Key export partners............................
Major imports ....................................
Imports...............................................
Key import partners ...........................
State Budget.......................................

2.8 million(1)
1.7%(1) (2008 2010)
Total population average: 66.9 years(2) (2009 actual)
Mongol (94.9%), Kazakh (5%), others (including Chinese and Russian) (0.1%)
Buddhist (50%), Others (6%), Muslim (4%), none (40%)

Mixed parliamentary/presidential
Ulaanbaatar
President (elected by a universal popular vote for a term of four years)
Prime Minister and Cabinet: Prime Minister and Cabinet appointed by the State Great Khural
(Parliament) in consultation with the President (Prime Minister is usually the Chairman of
the political party having majority in Parliament)
State Great Khural (Unicameral, 76 seats; members elected for a term of four years)
Supreme Court (serves as appeals court for peoples and provincial courts; judges are
nominated by the General Council of Courts for approval by the President)
With the departure of the Democratic Party from the coalition government effective 5
January 2012, the MPP is the current ruling party
18 years of age; universal
Unitary State; territory of Mongolia is divided administratively into 21 aimags and the
capital city

MNT 10.8 trillion (US$8.6 billion)(3) (2011 actual)


16.0%(3) (2011 actual)
US$3,067.0(3) (2011 actual)
9.0%(1) (2011 actual)
Copper, coal, crude oil, zinc ore, iron ore, gold, cashmere
US$4.8 billion(1) (2011 actual)
China (92.1%), Canada (1.9%), Russia (2.0%), United Kingdom (0.4%), Korea (0.8%), Italy
(1.1%), Germany (0.3%), USA (0.1%)(1)
Oil products, machinery and equipment, vehicles, food products, chemical and metallurgical
industrial products
US$6.5 billion(1) (2011 actual)
Russia (24.5%), China (30.8%), Japan (7.4%), Korea (5.4%), USA (8.2%), Germany (4.2%),
Singapore (1.0%), Ukraine (2.3%)(1)
Revenues and grants: MNT 4.4 trillion (US$3.2 billion)(1) Total expenditures and net lending:
MNT 4.8 trillion (US$3.4 billion)(1)

(1)

National Statistical Office of Mongolia, December 2011 Monthly Bulletin.

(2)

ADB, Mongolia Fact Sheet 2010.

(3)

Mongolia Quarterly Economic Update, The World Bank - February 2012.

131

THE MONGOLIAN BANKING INDUSTRY


Unless otherwise expressly stated, the information and statistics set out in this section are derived from
publicly available information, including information published by the Bank of Mongolia. Such
information and statistics have not been verified by the Bank or any of the Dealers or any of their
respective affiliates or advisers. The information may not be consistent with other information compiled
within or outside of Mongolia.
Mongolia began its transition to a free-market economy in 1991. Like other centrally planned economies,
Mongolia had adopted a Soviet-style monobanking system in which the State Bank of Mongolia conducted
all banking business. The shift to a two-tiered banking system, comprising the Bank of Mongolia as the
central bank and a number of state-owned and private commercial banks, and divestiture of the financial
and banking services from the former State Bank of Mongolia, were the Governments first steps in
reforming the financial sector. The commercial banks that emerged from the divestiture inherited
non-performing loans from the former monobanking system, and approved, in turn, loans to poorly
performing enterprises. During this transition period, several banking crises occurred in Mongolia in 1994,
1996 and 1998, as the increase in non-performing loans had damaged the solvency and stability of the
banking system. With many banks facing severe liquidity problems, public confidence in the banking
system fell. This, coupled with institutional weaknesses in the new banks, an inadequate legal and
regulatory framework, and general macroeconomic problems culminated in deposit runs on the system.
To restore confidence in the banking system, the Government initiated financial sector reforms aimed to
promote a sound, market-based, and efficient financial system to mobilise and allocate resources. The
focus was on (i) making the legal and regulatory framework for banks consistent with international
standards, (ii) reducing the Governments involvement while encouraging adherence to market principles
and commercialising the banking system and (iii) facilitating bank restructuring. Previously insolvent
banks were rehabilitated, state ownership in banks was gradually divested and foreign ownership in the
banking sector increased, which resulted in enhanced efficiency and competition. Progress has been made
in the development of communication technology and management information systems in banks resulting
in improved internal controls and enhanced financial products and services.
Ongoing Strengthening of the Financial System
The Bank of Mongolia, Financial Stability Council (which was jointly established by the Bank of
Mongolia, the Ministry of Finance and Financial Regulatory Committee in May 2007), and Financial
Regulatory Commission are responsible for financial stability and supervision of the financial sector in
Mongolia. The main objective of the Bank of Mongolia is to ensure the stability of Mongolias currency,
the Tugrik. Within this main objective, the legislation states that the Bank of Mongolia is to promote
balanced and sustained development of the national economy, through maintaining the stability of money,
financial markets, and the banking system. The Bank of Mongolia formulates and implements monetary
policy to achieve its main objective. Additionally, the legislation provided far-reaching financial oversight
responsibilities to the Bank of Mongolia, and its functions include management of interest rates and
exchange rates, oversight of Government borrowing, supervision of interbank settlements and lending,
printing and issuance of bank notes and coins, management of Mongolias foreign currency reserves, and
financial supervision of commercial banks. The Bank of Mongolia is independent from the Government,
and the governor of the Bank of Mongolia is appointed by Parliament for a period of six years.
The Financial Regulatory Commission was established in 2006 to monitor and regulate the securities
market, commercial insurance organisations, NBFIs, and savings and credit cooperatives, with its key aim
being to ensure Mongolias national financial market stability. Its functions also include developing and
implementing policy to ensure the stabilisation and regulation of the securities markets, supervising
compliance with the relevant legislation, granting and monitoring licences to carry out activities on the
securities market, supervising and training participants.
In the current decade, with an ongoing commitment to financial reforms, the Bank of Mongolia has
attempted to strengthen its regulatory capacity by (i) upgrading its bank supervision process; (ii)
introducing a loan classification and loan loss provisioning system; (iii) introducing prudential norms; and
(iv) improving of enforcement procedures. The number of staff supervising the 14 banks and their branches
has increased significantly, and they have undergone more training than in the past. Bank examinations are
now driven more by risk assessments. Loan loss reserve requirements have increased. Performing loans
now require no reserve, while overdue loan provisions are 5.0%. According to the Bank of Mongolias
guidelines, loans must be classified as overdue if interest is overdue, even if the principal is up to date.

132

These changes reflect greater prudence with a focus on obtaining earlier indications of loan problems.
More recently, the authorities have further tightened prudential ratios on asset classification and loss
provisions. New requirements mandate the recognition of restructured loans as nonperforming and the
establishment of provisioning for excessive related-party loans. Recognition of the problem assets and the
corresponding increase in loss provisions will reduce capital ratios and raise nonperforming loans.
Prudential norms introduced in 1996 closely mirror key international norms, particularly the capital
adequacy principle. The minimum capital adequacy ratios for commercial banks are currently at 6.0% for
the tier 1 ratio and 12.0% for the total capital ratio. The Bank of Mongolia also increased the minimum
paid-in capital required for commercial banks to MNT 16.0 billion by 1 May 2013 which banks are
required to comply to avoid having their licenses revoked. These steps were intended not only to improve
the safety and soundness of the banking system but also to induce the shareholders of existing banks to
pay closer attention to their investments. In order to monitor the health and stability of the financial
system, a financial stability committee was established and approved by the Ministry of Finance in 2005.
The committee works to ensure that the public is alerted to possible financial crises, interacts directly with
the management of financial institutions, and gives financial support where and when it is needed.
Recent Developments in the Banking Sector
The banking crisis of 2008-2009 represented a significant setback and highlighted the increased
vulnerabilities of Mongolian commercial banks balance sheets. At the height of the economic crisis,
Parliament adopted the Law on Deposit Guarantee in November 2008 to calm depositors fears. The
guarantee was adopted for a period of four years, with amendments in March 2009 and July 2010, to
include current accounts. Pursuant to this legislation, Mongolian banks are required to deposit into a
government account with the Bank of Mongolia, a fee equal to 0.5% of their deposits. In the aftermath of
the crisis, banking system profitability fell, and NPLs more than doubled. Anod Bank was taken into
conservatorship in December 2008 and a State Bank was established when Zoos Bank failed in November
2009. The State Bank was established with a capital injection of MNT28.0 billion from the Government
and took over the deposits and receivables of Zoos Bank. Towards the goal of maintaining stabilisation of
deposits subsequent to the expiration of the blanket guarantee, the Bank of Mongolia has submitted a draft
deposit insurance law to the Parliament.
Mongolia has since successfully restored economic stability, which has in turn supported a turnaround for
the banking sector. Banks have returned to profitability since 2010 and the average NPL ratio declined
from a peak of 17.1% in 2009 to 5.8% in 2011. The system-wide CAR also showed improvement and
increased to 15.0% in 2011. Following the recovery, the authorities have tightened the coverage of the
blanket deposit guarantee in June 2010, to eliminate coverage for interbank deposits and expand the
restriction on the coverage of deposits of related parties. In addition, guarantees of deposits with interest
paid in excess of the Central Bank Bill rate are no longer provided. Since 2008, banks have begun to
increase their reliance on domestic deposits to finance their loans. This resulted in reduced banking system
vulnerability to volatile funds. Hence, the loan to deposit ratio (LDR) decreased substantially from its
high of 112.8% in 2008 to 81.7% in 2011.
As at 31 December 2011, the Mongolian financial sector comprises 14 commercial banks, two
representative offices of foreign banks, 195 licensed NBFIs and 162 Saving and Credit Cooperatives. The
Mongolian financial system is dominated by the commercial banks. Of the 14 banks operating in Mongolia,
13 are privately owned, and one is state-owned. As at December 2011, the 14 banks accounted for 95.0%
of total financial system assets. The non-bank financial sector, including insurance and the stock market,
is significantly smaller. As at 31 December 2009, 2010 and 2011, the aggregate net profits of the four
leading banks of Mongolia namely, the Bank, Khan Bank, Golomt Bank and XacBank, was US$29.6
billion, US$55.8 billion and US$102.5 billion, respectively, according to public filings made by each bank.
On 7 April 2011, the London Stock Exchange Group (the LSE) and the State Property Committee of
Mongolia entered in to an exclusive Strategic Partnership Agreement (the Partnership Agreement) to
restructure and develop the MSE. Pursuant to the Partnership Agreement, the LSE appointed a management
team of five members to oversee MSEs development. The management team from LSE will be involved
in advisory and training capacities for creating infrastructure for the capital markets and appropriate
legislative framework, modernisation of market rules and operations for expansion of tradable asset classes
(derivatives and exchange traded funds) and introduction of international standards in the Mongolian
market index. The MSE is expected to go through a comprehensive reform and upgrade of facilities.

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Pursuant to the Master Service Agreement, Millennium IT Software Limited, a subsidiary of London Stock
Exchange group, installed Millennium IT integrated trading platform, at the Mongolian Stock Exchange
and Securities Clearing House and Central Depositary. Millennium IT trading platform is a software
combined with high performance connectivity which provides the global trading community with
innovative tools and access to liquidity in Mongolian capital market.
The Bank was the first commercial bank in Mongolia to be appointed as the clearing bank by the central
depository of Mongolia on 12 April 2012.
Deposit Funding and Lending Activity
The banking system has shown rapid growth. Total banking assets have grown at a solid compounded
annual growth rate (CAGR) of 29.0% from 2007. By the end of 2011, total banking assets amounted to
MNT9.4 trillion. Improving macroeconomic conditions, rising personal income and competition among
commercial banks fuelled the asset growth. In 2011, the ratio of total banking assets to GDP reached at
86.5%, which was 18.3% higher than in 2007. Current account and deposits (excluding government
deposits) represent 61.2% of total banking assets in 2011, a marked increase from 51.2% in 2008. In
December 2011, the volume of local currency demand, time and saving deposits climbed to a new peak of
approximately MNT2.8 trillion, up 44.2% from a year ago due to the combined effect of the publics
expectations of domestic currency appreciation and the blanket guarantee law covering bank deposits
besides the post-crisis economic growth led by the mining sector. In addition, foreign currency demand,
time and saving deposits increased by 29.1% from December 2010 and peaked at MNT 964.3 billion in
December 2011. In February 2011, the Bank of Mongolia increased the rate of reserve requirement from
5.0% to 9.0% and again in August 2011 to 11.0%. The minimum liquidity ratio applicable to all
commercial banks in Mongolia was amended to 25.0% on 1 January 2012.
Meanwhile, bank lending grew at a strong pace. Total loans outstanding increased at CAGR of 28.3% since
December 2007. In December 2011, total loans outstanding amounted to MNT5.7 trillion, an increase of
72.3% since December 2010. However, risk aversion amongst the commercial banks remains high and
banks have been accumulating deposits. Total deposits have increased by 44.0% since December 2010. As
deposits grew at a relatively slower pace than loan portfolio, the LDR reached to 84.8% in December 2011
from 70.9% in December 2010. The following table sets forth the year-on-year credit and deposit growths
of the banking sector as at the dates indicated:
As at 31 December
2008
Loans .....................................................................................................................
% year-on-year.......................................................................................................
Deposits .................................................................................................................
% year-on-year.......................................................................................................
Loan to deposit ratio % .........................................................................................

2,691.9
28.2
2,386.4
0.1
112.8%

2009
2,703.8
0.7
3,085.2
33.9
87.6%

2010
3,284.1
22.4%
4,720.5
58.3%
69.6%

2011
5,659.5
72.3%
6,929.7
44.0%
81.7%

Source: Bank of Mongolia; deposits include current, savings and time deposits

Bank Asset Quality


NPL ratio reached a peak of 17.1% in December 2009. Since the beginning of 2010, the overall NPL ratio
took a positive turn and reached 11.3% in December 2010. The steady NPL ratio decline continued through
2011, primarily as a result of Mongolias economic improvements and growing corporate sector business
activities that led to solid growth of loan portfolio. In December 2011, total stock of NPLs amounted to

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MNT 326.9 billion, a decrease of 29.2% and 11.8% from December 2009 and 2010, respectively. Indeed,
the banking system witnessed a marked improvement of NPL ratio, which stood at 5.8% as at 31 December
2011. The following table sets forth the change in quality of loans outstanding as at the dates indicated:
As at 31 December 2011

Mongolian
banking
sector(1)

Percentage of
the Mongolian
banking
sectors total
loans

The Bank

Percentage of
the Banks total
loans

(MNT millions, except percentages)


Performing (0%) ...........................................................
Past due (5%) ...............................................................
Non-performing ............................................................
Substandard (25%) ...................................................
Doubtful (50%) ........................................................
Bad (100%) ..............................................................

5,180.7
72.7
326.9
57.6
29.4
239.8

92.8
1.3
5.9
1.0
0.5
4.3

1,107.2
5.9
28.2
0.6
20.2
7.4

97.0
0.5
2.5
0.1
1.8
0.6

Total .............................................................................

5,580.3

100.0

1,141.3

100.0

(1)

Bank of Mongolia.

Banking System Capitalisation


Mongolias banks generally are believed to be adequately capitalised due to improvements in earnings and
equity contributions that followed the Bank of Mongolias increase of the minimum capital requirement
to the current level of MNT 8.0 billion. The commercial banks will need to increase their capital to MNT
16.0 billion by 1 May 2013 in accordance with the Bank of Mongolias directive.
Capital in the banking sector (prepaid tax deducted) reached MNT 676.9 billion as at 31 December 2011,
which increased by 77.0% from a year ago. As a result, the risk weighted capital adequacy ratio for the
whole banking system, which is one of the main indicators of capability of the banks to withstand risk,
stood at 15.0% as at 31 December 2011, 3.0% above the regulatory minimum requirement. The following
table sets forth the increase in capital of the banking sector as at the dates indicated:

Capital adequacy ratio ..................................


CAR (%).......................................................

2007

2008

2010

2011

376.4
14.0

(MNT billions, except percentages)


340.6
230.2
382.5
11.1
13.3
15.1

2009

676.9
15.0

Source: Bank of Mongolia

Competitive Landscape of the Banking Sector


The Bank, together with Golomt Bank, Khan Bank and XacBank, were the leading banks in the industry
by the size of assets, loans and deposits. The following table sets forth the capital adequacy ratio of the
four largest banks in Mongolia as at 31 December 2011:

Capital adequacy ratio ..................................................

Trade and
Development
Bank of
Mongolia LLC

Golomt Bank

Khan Bank

XacBank

12.7%

14.7%

15.4%

20.2%

Source: Public filings made by each bank

135

REGULATION AND SUPERVISION


Law of Mongolia on Central Bank (Bank of Mongolia) (1996)
This law establishes the legal framework for the operations of the Mongolian Central Bank also referred
to as the Bank of Mongolia. The Bank of Mongolia was established in 1924 and its primary activities are
formulating and implementing monetary policy, setting the amount and proportion of compulsory reserves
of banks, granting credit to banks, issuing banking licences, supervising the operations of Mongolian
commercial banks, facilitating interbank settlements, and regulating foreign currencies. The board of
directors of the Bank of Mongolia is the monetary policy arm, which consists of the Governor, the First
Deputy Governor, the Deputy Governor and a number of departmental directors. The Governor may also
attend meetings of cabinet ministers and be consulted on issues related to the Mongolian banking sector.
The Bank of Mongolia uses Central Bank bills, repurchase/reverse repurchase transactions and overnight
facilities to achieve policy targets. The Governor decides the amount of liquidity absorbed from or injected
into the interbank market on a weekly basis.
Banking Law of Mongolia (2010)
Commercial banks and their activities are governed by the Banking Law. Within the context of
implementing state policies for the protection and stability of the banking sector, the Parliament of
Mongolia enacted a new Banking Law effective from March 2010 as a revision and restatement of the
previous banking law of 1996. The revisions to this law are aimed at tightening banking sector
requirements through increased transparency, adequate monitoring and other preventative measures. In the
Banking Law, commercial banks are defined as being state, privately or jointly owned, depending on the
ownership of their paid-in capital; as joint-stock companies or limited liability companies; and as general
or specialised banks, depending on the type of banking services that are provided. The Banking Law
permits these institutions, upon authorisation by the Bank of Mongolia, to conduct the following activities:

accept deposits;

provide loans;

provide transaction services;

provide payment guaranties to third parties on their own behalf;

purchase, sell and deposit foreign currencies;

purchase, sell and deposit precious metals and gem stones;

receive valuables into custody;

conduct foreign exchange and transaction services;

issue, buy and sell securities;

purchase and sell loans and other financial instruments;

conduct financial leasing transactions; and

engage in other financial activities or services licensed by the Bank of Mongolia and permitted under
Mongolian law.

Further, subject to the permission of the Financial Regulatory Committee of Mongolia and the Bank of
Mongolias confirmation that it does not object, the Banking Law allows commercial banks and their
controlled entities and subsidiaries to engage in the following additional activities:

investment, financial consulting and information services;

trustee services;

insurance brokerage;

136

underwriting;

custodial services;

factoring; and

providing other financial services permitted by law.

Summary of the Main Provisions of the Banking Law (as amended in 2010)
The transfer of a banks shares
Banks are required to inform the Bank of Mongolia in writing if changes occur in the size or structure of
their share capital. Further, in the event that a party attempts to become a shareholder with significant
influence in a bank, or an existing shareholder with significant influence changes the size or structure
of his ownership interest in the bank, then the bank must inform the Central Bank in writing and obtain
permission prior to making any such change.
A shareholder with significant influence in one bank, along with parties that are related to such
shareholder, are prohibited from becoming shareholders with significant influence in another bank. If
such a situation arises, or if a party alone or with others becomes a shareholder with significant influence
without the permission of the Central Bank, and this situation is discovered following an inspection, then
the Central Bank will suspend all dividend issues and the voting rights related to the shares in question.
In order to satisfy the law, the Bank of Mongolia will require the sale of said shares within 30 days
following the last date of possession of the shares.
Subsidiaries and controlled entities
Upon obtaining the permission of the Bank of Mongolia, a bank may incorporate controlled entities and
subsidiaries with the sole purpose of conducting financial activities.
Capital requirements
The Banking Law provides that the minimum amount of paid-in capital for a bank is be determined by the
Bank of Mongolia, after taking into consideration factors such as the state of the national economy, the
local inflation rate, the solvency of banks, and the specific types of operations to be undertaken by a bank.
Pursuant to decree No. 200, dated 8 April 2004, the President of the Bank of Mongolia has set the minimum
required amount of paid-in capital for banks to MNT 8.0 billion. In July 2011, the President of the Bank
of Mongolia issued Order No. 404 pursuant to which the minimum required paid-in capital for commercial
banks was increased to MNT 16 billion effective 1 May 2013.
A bank may only distribute dividends if, after said distribution, it will continue to meet the mandatory
prudential ratios set by the Bank of Mongolia. A bank must determine the amounts of any decrease or
increase in its capital in accordance with profits earned or losses accrued from banking activities and
fluctuations in the amount of its compulsory reserve fund.
The Bank of Mongolia, together with the Mongolian Ministry of Finance, issues procedures for the
establishment and allocation of funds from a reserve fund created to cover losses that may accrue from
defaults on loan repayments.
Single borrower and related party limits
The total value of loans, loan equivalent assets and guarantees provided to a single borrower or related
parties of said borrower by a bank must not exceed 20% of the capital of said bank.
Guarantee limits
The total value of guarantees provided by a bank may not exceed the total amount of said banks capital.

137

Conflicts of interests
If loans, loan equivalent assets and guarantees to a single borrower fall past due by more than six months,
or if the total value of loans, loan equivalent assets and guarantees provided to a single borrower exceeds
5% of the total capital of a bank, said borrower shall be prohibited from participating in such banks
management.
Exposure limits
The total amount of securities that may be purchased by a bank must not exceed 20% of the capital of a
bank, or, in respect of any specific issuer, 10% of the total amount of the shares issued by it. This does
not apply to securities issued by the Government, the Bank of Mongolia, shares issued by a credit
information bureau, or shares affiliated companies or subsidiaries of the bank.
Disclosure requirements
In addition to publishing the requisite financial statements, a bank is required to publicly disclose
information on (i) the identities of shareholders with significant influence, executive officers, their
deputies, the chief accounting officer, senior executives of the banks branches, and the names of the
supervisory committees members; (ii) information on the banks loans, credit facilities, obligations,
services and transactions provided to related parties; (iii) the form, timeline and implementation approach
for re-organization, legal status and location of the proposed new entity, nature of operation that will be
carried out by the bank, principal documents with respect to financial activities; and (iv) other information
considered necessary by the Bank of Mongolia to assess the banks exposure to risks.
Law of Mongolia on Deposits, Loans, and Transactions of the Bank and Authorised Legal Person (1995)
The Law of Mongolia on Deposits, Loans and Transactions of the Bank and Authorised Legal Person
regulates deposit of funds with banks and legal persons authorised to carry out deposit taking activity;
conduct of transactions through the banks and legal persons authorised to conduct banking transactions;
and operations of granting loan from and repayment of loans to banks and legal persons authorised to carry
out lending activities. Under this law, banks are required to pay deposits at the depositors first demand
in accordance with the deposit agreements and pay interest on deposits in accordance with applicable law
and regulations.
Law on Deposit Guarantee (2008)
Pursuant to the Deposit Guarantee Law, enacted in 2008, the Mongolian State insures the current accounts
and deposit accounts of citizens and legal entities at Mongolian commercial banks for the term of the
Deposit Guarantee Law, or until 25 November 2012. The Deposit Guarantee Law covers all situations of
non-payment of deposits by Mongolian banks, regardless of whether such non-repayment is due to
insolvency or other reasons. As a measure to prevent abuse and unnecessary expense, deposits of related
persons (as defined by the Banking Law), depositors or holders of subordinated or convertible debts and
deposits from the interbank market or from foreign banks and financial institutions are excluded from this
scheme.
Law on Executing Domestic Settlement Transactions by National Currency (2009)
The Mongolian Parliament enacted this legislation to control fluctuations as a response to a sudden
devaluation of the Tugrik. According to this law, all prices, settlements and advertisements within the
territory of Mongolia must be conducted in Tugriks, thereby prohibiting the use of foreign currency for
domestic transactions. The law also prohibits the indexing of Mongolian Tugrik contracts to any foreign
exchange index. However, this legislation allows savings deposits, loans from bank and non-bank entities,
other equivalent services, and derivative financial agreements and their obligations to be expressed and
executed in foreign currencies.
Law on Combating Money Laundering and Terrorist Financing (2006)
The Law on Combating Money Laundering and Terrorist Financing was adopted by Parliament on 8 July
2006 for the purpose of combating money laundering and terrorist financing. The law defines a suspicious
transaction as a transaction that involves funds with no clear source or recipient or a transaction that is
conducted through a country that does not have a financial monitoring mechanism to combat money

138

laundering and terrorist financing or a transaction that is suspected of money laundering and terrorist
financing and permits the Financial Information Service (an affiliate organisation of the Bank of Mongolia
with specific purpose of combating money laundering and terrorist financing activities) to suspend and
investigate such transactions.
Law on Non-Banking Financial Activities (2002)
The Law on Non-Banking Financial Activities allows NBFIs to engage in lending, factoring, foreign
currency exchange, electronic payments, remittance services, issuing of guarantees and payment
instruments, investments in short-term financial instruments, trust services and financial and investment
consultancy services. These activities must be licensed separately and are subject to prudential regulation
by the Financial Regulatory Committee of Mongolia. NBFIs are not allowed to accept deposits.
Accounting Law (2001)
The Accounting Law requires all business entities to adopt and adhere to IFRS as modified by Bank of
Mongolias guidelines and to submit audited quarterly financial statements and reports to the Mongolian
Ministry of Finance. The Mongolian Ministry of Finance has prescribed a format promulgated by the IFRS
as modified by Bank of Mongolias guidelines for these reports, the implementation of which became
effective in 1995.
Mongolia also has three accounting associations: the Accounting Council (with 26 members), the National
Association of Certified Public Accountants (with a membership of 200 associate unlicensed accountants)
and the Union of Finance Specialists Association (comprising accountant members employed by the
Ministry of Finance). Under the provisions of the Accounting Law, the Accounting Council is responsible
for developing accounting forms and methodology, and for training, while the Ministry of Finance is
responsible for implementing all reforms to the accounting and auditing systems.
The Asian Development Bank, the World Bank and other non-governmental organisations provide
technical assistance in the ongoing development of policy, legal and regulatory measures in the field of
accounting law and practice. The Ministry of Finance and the accounting associations are committed to the
formulation of generally accepted accounting principles and the implementation of international
accounting standards.
Law of Mongolia on Asset-Backed Securities (2010)
The Law of Mongolia on Asset-Backed Securities regulates the issuance of asset-backed securities,
supervision thereof, and protects the interests of the investor. The law provides that only SPVs, banks and
housing finance companies may issue asset-backed securities that are classified as (i) guaranteed
security issued by SPVs, and (ii) securitised security issued by banks and housing financing companies.
The issuance of asset-backed securities requires a specific license granted by the FRC and the asset-backed
securities must be registered with the FRC.
Law of Mongolia on Mortgages (2009)
The Law of Mongolia on Mortgages regulates pledges of immovable property and property rights to secure
performance of obligations; conclusion of immovable property pledge agreement; and performance of the
obligation thereto. Under this law, pledgers and pledgees may agree upon non-judicial foreclosure of
immovable property. However, proceedings relating to foreclosure of land can only be brought before the
courts of Mongolia. The concept of mortgage deed was introduced by this law whereby the pledger
prepares a mortgage deed to be submitted to the state registry along with pledge agreement.
The Law on Drivers Insurance (2011)
The Law on Drivers Insurance was enacted on 6 October 2011 and became effective on 1 January 2012.
The objective of the Law on Drivers Insurance is to insure drivers under official insurance schemes in
order to recover damages caused in a car accident and to protect the victim(s) rights. Under this law, a
drivers insurance is based on the following guidelines: mandatory insurance for the auto vehicles;
compensation payment for the victims; reinstating breached rights and generating financial resources to
compensate for damages occurred in a traffic accident.

139

Law on Credit Information (2011)


The Law on Credit Information was enacted on 20 October 2011 and became effective on 1 January 2012.
The Law on Credit Information governs private credit information agencies and the credit information
database managed by the Bank of Mongolia. Any legal entity may apply to the Bank of Mongolia for a
licence and become an authorised credit information agency. Such agencies are authorised to provide up
to six years of loan information in respect of a borrower.
The Law on Credit Information governs the maintenance of credit information databases and disclosure of
credit information, and regulates private credit information agencies. It also governs method of collection
of credit information; the manner in which loan histories are prepared, distributed, protected and used;
made accessible to consumers. Transmission of credit information outside of Mongolia without prior
authorisation of the Bank of Mongolia is prohibited.
Law on Electronic Signature (2011)
The Law on Electronic Signature was enacted on 15 December 2011. The purpose of this law is to regulate
matters relating to the legal status and application for electronic and digital signatures, and establishing
an infrastructure for digital signature public key.
An electronic signature is an electronic input consisting of a word, letters, a mark or an image that is
incorporated or annexed in an electronic document for the purpose of identifying the party signing such
document. A digital signature is a type of electronic signature where information is encoded by using a
digital key for the purpose of preventing a fraud and/or altering the document.
Law on Information Transparency and Right to Information (2011)
The Law on Information Transparency and Right to Information was enacted on 16 June 2011. Its objective
is to ensure transparency in state and public affairs and to secure the right to information in accordance
with the provisions of the Constitution of Mongolia, the Law on State Secrecy, the Law on Adopting the
List of State Secrets and the Law on Individuals Privacy.
The Law on Information Transparency and Right to Information applies to the executive and judicial
agencies and state-owned companies but it does not apply military and intelligence organisations.
According to the Law on Information Transparency and Right to Information, any person or legal entity
has access to information related to agreements, contracts or documents of such state bodies and any
information which such organisations possess.
Law of Mongolia on Credit Guarantee Foundation (2012)
The Law of Mongolia on Credit Guarantee Foundation regulates matters relating to increasing financial
possibilities for the operations of SME and supporting the employment market; establishing legal
foundations of the Credit Guarantee Foundation with the purpose of securing sustainable income
generation for the citizens; and providing credit guarantee services for the entrepreneurs of small and
medium enterprises. Activities of such statutory credit guarantee institution, among other things, will
include providing credit guarantee up to 60% of the total loan of those small and medium enterprises which
do not have adequate assets for the loan security.
Governors Orders of the Bank of Mongolia
Pursuant to Governor of Bank of Mongolias Order No.404 dated 8 July 2011 (Order 404), all banks in
Mongolia are required to have minimum paid in capital of MNT 16 billion by 1 May 2013. The Governor
of Bank of Mongolia passed Order No.726 dated 14 December 2011 (Order 726), which requires all
banks in Mongolia to readjust their capital adequacy requirement (as described below) and amends
regulation relating to setting and monitoring prudential ratios applicable to commercial banks in Mongolia.

140

The new minimum capital adequacy ratio requirement will be effective from 30 June 2012 according to
Order 726 and provides for staged increase in the minimum capital adequacy ratio in the following manner:
Effective date:
Tier 1 capital to risk weighed asset adequacy ratio ...................
Capital to risk weighed asset adequacy ratio .............................
Additional capital requirement(1) ................................................
Total capital to risk weighed asset adequacy ratio .....................

(1)

As at
30 June 2012

As at
1 December 2012

As at
30 June 2013

7.0%
12.0%
0.5%
12.5%

8.0%
12.0%
1.0%
13.0%

9.0%
12.0%
2.0%
14.0%

Commercial banks in Mongolia, including the Bank, which constitute more than 5.0% of total assets of the Mongolian banking
system during the course of past six months upon issuance of Order 726 will be subject to additional capital requirement.

141

TAXATION
The following is a general description of certain relevant tax considerations relating to the Notes. It does
not purport to be a complete analysis of all tax considerations relating to the Notes, whether in the
jurisdictions mentioned below or elsewhere. Prospective purchasers of Notes should consult their own tax
advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of Notes and
receiving payments of interest, principal and/or other amounts under the Notes and the consequences of
such actions under the tax laws of those countries. This summary is based upon the law as in effect on the
date of this Information Memorandum and is subject to any change in law that may take effect after such
date.
Mongolian Taxation
Tax laws of Mongolia underwent substantial reforms in 2006 to provide a more favourable tax environment
to business entities and individuals. Under the 2006 Business Entities Income Tax Law of Mongolia, local
entities are subject to 10% income tax on interest (including, among others, interest on loans, savings
account, warranties and notes). In accordance with the Personal Income Tax Law of Mongolia, interest
income earned by local and foreign individuals is subject to tax at the flat rate of 10%. However,
individuals are exempt from personal income tax on interest income until 1 January 2013.
Pursuant to amendments to the 2006 Business Entities Income Tax Law in Mongolia, which became
effective on 1 January 2012, non-resident legal entities are subject to Mongolian income tax at 20.0% on
income which is sourced from Mongolia, including interest earned in respect of the Notes. As at the date
of this Information Memorandum, the Mongolian tax authorities have not provided guidance as to the
scope of this new source concept, and thus, its potential application to capital gains on the disposal of
Notes is uncertain.
If the beneficial owner of the income is a resident of a country with which Mongolia has a bilateral treaty
for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and
property, a lower tax rate will be applied to interest income and relief from potential capital gains tax may
be available. Interested parties should consult their own tax advisors to determine potential applicability.
No stamp duties or similar taxes or charges are payable under the laws of Mongolia in respect of the
execution, issue, sale or transfer of the Notes. There is no capital gains tax payable by a holder of Notes
in connection with its interest in the Notes.
EU Savings Tax Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State of the
European Union (each, a Member State) are required to provide to the tax authorities of another Member
State details of payments of interest (or similar income) paid by a person within its jurisdiction to an
individual resident in that other Member State. However, for a transitional period, Luxembourg and Austria
are instead required (unless during that period they elect otherwise) to operate a withholding system in
relation to such payments (the ending of such transitional period being dependent upon the conclusion of
certain other agreements relating to information exchange with certain other countries). A number of
non-EU countries and territories including Switzerland have adopted similar measures (a withholding
system in the case of Switzerland).
On 15 September 2008, the European Commission issued a report to the Council of the European Union
on the operation of the Directive, which included the Commissions advice on the need for changes to the
Directive. On 13 November 2008, the European Commission published a more detailed proposal for
amendments to the Directive, which included a number of suggested changes. The European Parliament
approved an amended version of this proposal on 24 April 2009. If any of those proposed changes are made
in relation to the Directive, they may amend or broaden the scope of the requirements described above.

142

SUBSCRIPTION AND SALE


Notes may be sold from time to time by the Issuer to Merrill Lynch International and ING Bank N.V.,
Singapore Branch or any other person appointed as a dealer (together, the Dealers) under the amended
and restated programme agreement dated 16 April 2012 and made between the Issuer, Merrill Lynch
International and ING Bank N.V., Singapore Branch (such programme agreement as further amended
and/or supplemented and/or restated from time to time, the Programme Agreement). The Programme
Agreement sets out the arrangements under which Notes may from time to time be agreed to be sold by
the Issuer to, and purchased by, the Dealers. Any such agreement will, inter alia, make provision for the
form and terms and conditions of the relevant Notes, the price at which such Notes will be purchased by
the Dealers and the commissions or other agreed deductibles (if any) payable or allowable by the Issuer
in respect of such purchase.
The Programme Agreement makes provision for the resignation or termination of appointment of existing
Dealers and for the appointment of additional or other Dealers either generally in respect of the Programme
or in relation to a particular Tranche of Notes.
United States
The Notes have not been and will not be registered under the Securities Act and may not be offered or sold
within the United States (or, in certain circumstances, to, or for the account or benefit of, U.S. persons)
except in certain transactions exempt from the registration requirements of the Securities Act.
In connection with any Notes which are offered or sold outside the United States in reliance on exemption
from the registration requirements of the Securities Act provided under Category 1 of Regulation S
(Category 1 Notes), each Dealer has represented and agreed, and each further Dealer appointed under
the Programme will be required to represent and agree, that it will not offer, sell or deliver such Category
1 Notes within the United States, as such term is defined in the U.S. Internal Revenue Code of 1986 and
regulations thereunder. Each Dealer has agreed that it will not offer, sell or deliver any Notes within the
United States, except as permitted by the Programme Agreement.
In connection with any Notes which are offered or sold outside the United States in reliance on an
exemption from the registration requirements of the Securities Act provided under Category 2 of
Regulation S (Category 2 Notes), each Dealer has represented and agreed, and each further Dealer
appointed under the Programme will be required to represent and agree, that it will not offer, sell or deliver
such Category 2 Notes (i) as part of their distribution at any time or (ii) otherwise until 40 days after the
completion of the distribution of all Notes of the Tranche of which such Category 2 Notes are a part, within
the United States or to, or for the account or benefit of, U.S. persons. Each Dealer has further agreed, and
each further Dealer appointed under the Programme will be required to agree, that it will send to each
dealer to which it sells any Category 2 Notes during the Distribution Compliance Period a confirmation
or other notice setting forth the restrictions on offers and sales of the Category 2 Notes within the United
States or to, or for the account or benefit of, U.S. persons.
Until 40 days after the commencement of the offering of any Series of Notes, an offer or sale of such Notes
within the United States by any dealer (whether or not participating in the offering) may violate the
registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance
with an available exemption from registration under the Securities Act.
Bearer Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the
United States or its possessions or to a United States person, except in certain transactions permitted by
U.S. tax regulations. In respect of Bearer Notes where TEFRA D is specified in the applicable Pricing
Supplement:
(a)

except to the extent permitted under U.S. Treas. Reg. Section 1.163-5(c)(2)(i)(D) (the D Rules),
each Dealer has represented, and each further Dealer appointed under the Programme will be required
to represent, that (i) it has not offered or sold, and agrees that during the restricted period it will not
offer or sell, Notes in bearer form to a person who is within the United States or its possessions or
to a United States person, and (ii) it has not delivered and agrees that it will not deliver within the
United States or its possessions definitive Notes in bearer form that are sold during the restricted
period;

143

(b)

each Dealer has represented, and each further Dealer appointed under the Programme will be required
to represent, that it has and agrees that throughout the restricted period it will have in effect
procedures reasonably designed to ensure that its employees or agents who are directly engaged in
selling Notes in bearer form are aware that such Notes may not be offered or sold during the restricted
period to a person who is within the United States or its possessions or to a United States person,
except as permitted by the D Rules;

(c)

if it is a United States person, each Dealer has represented, and each further Dealer appointed under
the Programme will be required to represent, that it is acquiring Notes in bearer form for purposes
of resale in connection with their original issuance and if it retains Notes in bearer form for its own
account, it will only do so in accordance with the requirements of U.S. Treas. Reg. Section
l.163-5(c)(2)(i)(D)(6); and

(d)

with respect to each affiliate that acquires Notes in bearer form from a Dealer for the purpose of
offering or selling such Notes during the restricted period, such Dealer repeats and confirms the
representations and agreements contained in subparagraphs (a), (b) and (c) on such affiliates behalf.

Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and
regulations thereunder, including the D Rules.
In respect of Bearer Notes where TEFRA C is specified in the applicable Pricing Supplement, such Bearer
Notes must be issued and delivered outside the United States and its possessions in connection with their
original issuance. Each Dealer has represented and agreed, and each further Dealer appointed under the
Programme will be required to represent and agree, that it has not offered, sold or delivered, and will not
offer, sell or deliver, directly or indirectly, such Bearer Notes within the United States or its possessions
in connection with their original issuance. Further, each Dealer has represented and agreed, and each
further Dealer appointed under the Programme will be required to represent and agree, in connection with
the original issuance of such Notes that it has not communicated, and will not communicate, directly or
indirectly, with a prospective purchaser if such purchaser is within the United States or its possessions and
will not otherwise involve its U.S. office in the offer or sale of such Bearer Notes.
Each issue of Index Linked Notes or Dual Currency Notes shall be subject to such additional U.S. selling
restrictions as the Issuer and the relevant Dealer may agree as a term of the issue and purchase of such
Notes, which additional selling restrictions shall be set out in the applicable Pricing Supplement. The
relevant Dealer agrees that it shall offer, sell and deliver such Notes only in compliance with such
additional U.S. selling restrictions.
Public Offer Selling Restriction under the Prospectus Directive
In relation to each Member State of the European Economic Area which has implemented the Prospectus
Directive (each, a Relevant Member State), each Dealer has represented and agreed, and each further
Dealer appointed under the Programme will be required to represent and agree, that with effect from and
including the date on which the Prospectus Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make an offer of Notes which are the subject
of the offering contemplated by this Information Memorandum as completed by the Pricing Supplement
in relation thereto to the public in that Relevant Member State except that it may, with effect from and
including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant
Member State:
(a)

if the Pricing Supplement in relation to the Notes specifies that an offer of those Notes may be made
other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a
Non-exempt Offer), following the date of publication of a prospectus in relation to such Notes
which has been approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the competent authority in
that Relevant Member State, provided that any such prospectus has subsequently been completed by
the Pricing Supplement contemplating such Non-exempt Offer, in accordance with the Prospectus
Directive, in the period beginning and ending on the dates specified in such prospectus or Pricing
Supplement, as applicable and the Issuer has consented in writing to its use for the purpose of that
non-exempt offer;

(b)

at any time to any legal entity which is a qualified investor as defined under the Prospectus Directive;

144

(c)

at any time to fewer than 100 or, if the Relevant Member State has implemented the relevant
provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant
Dealer or Dealers nominated by the Issuer for any such offer; or

(d)

at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of Notes referred to in paragraphs (b) to (d) above shall require the Issuer or
any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a
prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes
in any Relevant Member State means the communication in any form and by any means of sufficient
information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to
purchase or subscribe the Notes, as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and the expression Prospectus Directive
means Directive 2003/71/EC (and the amendments thereto, including the 2010 PD Amending Directive, to
the extent implemented in the Relevant Member State), and includes any relevant implementing measure
in the Relevant Member State and the expression 2010 PD Amending Directive means Directive
2010/73/EU.
United Kingdom
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that:
(a)

in relation to any Notes which have a maturity of less than one year, (i) it is a person whose ordinary
activities involve it in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell any
Notes other than to persons (A) whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or as agent) for the purposes of their businesses
or (B) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as
principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise
constitute a contravention of Section 19 of the FSMA by the Issuer;

(b)

it has only communicated or caused to be communicated and will only communicate or cause to be
communicated an invitation or inducement to engage in investment activity (within the meaning of
Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in
circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and

(c)

it has complied and will comply with all applicable provisions of the FSMA with respect to anything
done by it in relation to any Notes in, from or otherwise involving the United Kingdom.

Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of
Japan (Act No. 25 of 1948, as amended; the FIEA). Each Dealer has represented, and each further Dealer
appointed under the Programme will be required to represent, that it will not offer or sell any Notes,
directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (as defined under Item 5,
Paragraph 1, Article 6 of the Foreign Exchange and Foreign Trade Act (Act No. 228 of 1949, as amended)),
or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, a resident
of Japan except pursuant to an exemption from the registration requirements of, and otherwise in
compliance with, the FIEA and any other applicable laws, regulations and ministerial and ministerial
guidelines of Japan.

145

Hong Kong
Each of the Dealers has represented and agreed, and each further Dealer appointed under the Programme
will be required to represent and agree, that:
(a)

it has not offered or sold, and will not offer or sell, in Hong Kong, by means of any document, any
Notes (except for Notes which are a structured product as defined in the Securities and Futures
Ordinance (Cap. 571) of Hong Kong) other than (i) to professional investors as defined in the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance,
or (ii) in other circumstances which do not result in the document being a prospectus as defined
in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public
within the meaning of that Ordinance; and

(b)

it has not issued, or had in its possession for the purposes of issue, and will not issue or have in its
possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement,
invitation or document relating to the Notes which is directed at, or the contents of which are likely
to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities
laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only
to persons outside Hong Kong or only to professional investors as defined in the Securities and
Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance.

Republic of Korea
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that the Notes have not been and will not be registered under the Financial
Investment Services and Capital Markets Act (Act No. 8635, as amended). Each Dealer represents and
agrees, and each new Dealer further appointed under the Programme will be required to represent and
agree, that it has not offered, delivered or sold directly or indirectly any Notes in Korea or to, or for the
account or benefit of, any resident of Korea (as such term is defined in the Foreign Exchange Transaction
Regulation (Act No. 5550, as amended)), except as otherwise permitted under applicable Korean laws and
regulations. Each Dealer undertakes to ensure that any securities dealer to which it sells Notes confirms
that it is purchasing such Notes as principal and agrees with such Dealer that it will comply with the
restrictions described above.
Republic of the Philippines
Under Republic Act No. 8799, known as the Securities Regulation Code (the Code), and its
implementing rules, securities, such as the Notes, are not permitted to be sold or offered for sale or
distribution within the Philippines unless such securities are approved for registration by the Philippine
SEC or are otherwise exempt securities under Section 9 of the Code or sold pursuant to an exempt
transaction under Section 10 of the Code.
The Notes will only be offered in the Philippines to qualified buyers under an exempt transaction pursuant
to section 10.1(l) of the Code. A confirmation of exemption from the Philippine SEC that the offer and sale
of the Notes in the Philippines qualifies as an exempt transaction under the Code is not required to be, and
has not been, obtained.
The Notes have not been registered with the Philippine SEC under the Code, any future offer or sale
thereof is subject to registration requirements under the Code unless such offer or sale qualifies as an
exempt transaction.
Peoples Republic of China
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that neither it nor any of its affiliates has offered or sold or will offer or
sell any of the Notes in the Peoples Republic of China (excluding Hong Kong, Macau and Taiwan) as part
of the initial distribution of Notes.

146

Singapore
This Information Memorandum has not been registered as a prospectus with the Monetary Authority of
Singapore under the Securities and Futures Act, Chapter 289 of Singapore (the Securities and Futures
Act) and the Notes will be offered pursuant to exemptions under the Securities and Futures Act.
Accordingly, the Notes may not be offered or sold or made the subject of an invitation for subscription or
purchase, nor may this Information Memorandum or any other document or material in connection with
the offer or sale or invitation for subscription or purchase of such Notes be circulated or distributed,
whether directly or indirectly, to the public or any member of the public in Singapore other than (a) to an
institutional investor or other person falling within Section 274 of the Securities and Futures Act, (b) to
a relevant person, under Section 275 (1) of the Securities and Futures Act, or any person pursuant to
Section 275 (1A) of the Securities and Futures Act, and in accordance with the conditions specified in
Section 275 of the Securities and Futures Act, or (c) pursuant to, and in accordance with the conditions
of, any other applicable provision of the Securities and Futures Act. Where the Notes are subscribed or
purchased under Section 275 of the Securities and Futures Act by a relevant person which is:
(a)

a corporation (which is not an accredited investor (as defined in Section 4A of the Securities and
Futures Act)) the sole business of which is to hold investments and the entire share capital of which
is owned by one or more individuals, each of whom is an accredited investor; or

(b)

a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and
each beneficiary is an individual who is an accredited investor; or

(c)

securities (as defined in Section 239(1) of the Securities and Futures Act) of that corporation or the
beneficiaries rights and interest (howsoever described) in that trust shall not be transferable for 6
months after that corporation or that trust has acquired the Notes pursuant to an offer under Section
275 of the Securities and Futures Act except:
(i)

to an institutional investor or to a relevant person defined in Section 275(2) of the Securities


and Futures Act or to any person arising from an offer referred to in Section 275(1A) or Section
276(4)(i)(B) of the Securities and Futures Act; or

(ii)

where no consideration is or will be given for the transfer; or

(iii) where the transfer is by operation of law; or


(iv) pursuant to Section 276(7) of the Securities and Futures Act.
Taiwan
The offer of Notes has not been and will not be registered with the Financial Supervisory Commission of
Taiwan pursuant to relevant securities laws and regulations and may not be sold, issued or offered within
Taiwan through a public offering or in a circumstance which constitutes an offer within the meaning of the
Securities and Exchange Act of Taiwan that requires a registration or approval of the Financial Supervisory
Commission of Taiwan. No person or entity in Taiwan has been authorised to offer, sell, give advice
regarding or otherwise intermediate the offering and sale of the Notes in Taiwan.
The Russian Federation
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that it has not offered or sold or otherwise transferred and will not offer
or sell or otherwise transfer as part of their initial distribution or at any time thereafter any Note to or for
the benefit of any persons (including legal entities) resident, incorporated, established or having their usual
residence in the Russian Federation or to any person located within the territory of the Russian Federation
unless and to the extent otherwise permitted under Russian law.
Information set forth in this Information Memorandum is not an offer, or an invitation to make offers, to
sell, exchange or otherwise transfer, the Notes in the Russian Federation or to or for the benefit of any
Russian person or entity.

147

The Notes may not be sold or offered to or for the benefit of any person (including legal entities) that are
resident, incorporated, established or having their usual residence in the Russian Federation or to any
person located within the territory of the Russian Federation unless and to the extent otherwise permitted
under Russian law; it being understood and agreed that the Dealers may distribute Information
Memorandum to qualified investors (as defined under Russian law) in the Russian Federation in a manner
that does not constitute an advertisement (as defined in Russian law) of Notes and may sell Notes to
Russian qualified investors in a manner that does not constitute placement or public circulation of the
Notes in the Russian Federation (as defined in Russian law).
Since neither the issuance of the Notes nor a Russian securities prospectus in respect of the Notes has been
registered, or is intended to be registered, with the Federal Service for Financial Markets of the Russian
Federation, the Notes are not eligible for initial offering or public circulation in the Russian Federation.
Mongolia
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be
required to represent and agree, that neither it nor any of its affiliates has offered or sold or will offer or
sell any of the Notes in the territory of Mongolia.
General
Each Dealer has represented and agreed that it will (to the best of its knowledge and belief) comply with
all applicable securities laws and regulations in force in any jurisdiction in which it purchases, offers, sells
or delivers Notes or possesses or distributes this Information Memorandum and will obtain any consent,
approval or permission required by it for the purchase, offer, sale or delivery by it of Notes under the laws
and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases,
offers, sales or deliveries and neither the Issuer, the Trustee and any other Dealer shall have any
responsibility therefore.
None of the Issuer, the Guarantor, the Trustee and any of the Dealers represents that Notes may at any time
lawfully be sold in compliance with any applicable registration or other requirements in any jurisdiction,
or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating any such
sale.
With regard to each Tranche, the relevant Dealer will be required to comply with any additional restrictions
as the Issuer and the relevant Dealer shall agree and as shall be set out in the applicable Pricing
Supplement.

148

GENERAL INFORMATION
Authorisation
The establishment of the Programme and the initial issue of Notes was duly authorised by a resolution of
the shareholders of the Bank dated 28 December 2006 and a resolution of the Representative Governing
Board of the Bank dated 19 September 2006. Further updates of the Programme and the issue of further
Notes thereunder were duly authorised by a resolution of the shareholders of the Bank dated 30 April 2008
and a resolution of the Representative Governing Board dated 4 April 2008 as well as a resolution of the
Representative Governing Board dated 7 October 2010.
This update of the Programme and the issue of further Notes thereunder was duly authorised by
shareholder resolution no. 2 dated 30 March 2012 and by a resolution of the Board on 12 April 2012.
Listing of Notes on the SGX-ST
Application has been made and approval in-principle has been granted for the listing and quotation of
Notes that may be issued pursuant to the Programme and which are agreed at or prior to the time of issue
thereof to be so listed and quoted on the SGX-ST. Permission to list such Notes will be granted when such
Notes have been admitted to the Official List of the SGX-ST. The Notes may also be listed on such other
or further stock exchange(s) as may be agreed between the Issuer and the relevant Dealer in relation to each
Series. If the application to the SGX-ST to list a particular series of Notes is approved, such Notes listed
on the SGX-ST will be traded on the SGX-ST in a minimum board lot size of S$200,000 (or its equivalent
in another currency).
For so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, the Bank will
appoint and maintain a paying and transfer agent in Singapore if any Global Note is exchanged for
definitive Notes.
Documents Available
For the period of 12 months following the date of this Information Memorandum and, for so long as any
Note remains outstanding and listed on the SGX-ST, copies of the following documents will, when
published, be available from the registered office of the Bank and from the specified office of the Trustee
and the Principal Paying Agent for the time being in Hong Kong:
(a)

the constitutional documents of the Bank;

(b)

the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2011, together with the independent auditors audit reports;

(c)

the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2010, together with the independent auditors audit reports;

(d)

the consolidated audited financial statements of the Bank as at and for the year ended 31 December
2009, together with independent auditors audit reports;

(e)

the Trust Deed, the Agency Agreement and the forms of the Global Notes, the Notes in definitive
form, the Receipts, the Coupons and the Talons;

(f)

a copy of this Information Memorandum; and

(g)

any future information memoranda, offering circulars, prospectuses and supplements including
Pricing Supplements (save that a Pricing Supplement relating to an unlisted Note will only be
available for inspection by a holder of such Note and such holder must produce evidence satisfactory
to the Bank and the Principal Paying Agent as to its holding of Notes and identity) to this Information
Memorandum and any other documents incorporated herein or therein by reference.

Clearing Systems
The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg (which are
the entities in charge of keeping the records). The appropriate Common Code and ISIN for each Tranche
of Notes allocated by Euroclear and Clearstream, Luxembourg will be specified in the applicable Pricing
Supplement. If the Notes are to clear through an additional or alternative clearing system the appropriate
information will be specified in the applicable Pricing Supplement.

149

Conditions for Determining Price


The price and amount of Notes to be issued under the Programme will be determined by the Bank and the
relevant Dealer at the time of issue in accordance with then prevailing market conditions.
Significant or Material Change
There has been no significant change in the financial or trading position of the Bank and its subsidiaries
nor has there been any material adverse change in the financial position or prospects of the Bank and its
subsidiaries since 31 December 2011.
Litigation
Except to the extent disclosed elsewhere in this Information Memorandum, neither the Bank nor any of its
subsidiaries is, nor has been, involved in any governmental, legal or arbitration proceedings (including any
such proceedings which are pending or threatened of which the Bank is aware) in the 12 months preceding
the date of this document which may have or have in such period had a significant effect on the financial
position or profitability of the Bank and its subsidiaries.
Auditors
The auditors of the Bank are KPMG Samjong Accounting Corp., independent chartered accountants, who
have audited the Banks financial statements, without qualification, in accordance with IFRS for 2009,
2010 and 2011.
Dealers Transacting with the Bank
The Dealers and their affiliates have engaged, and may in the future engage, in investment banking and/or
commercial banking transactions with, and may provide services to the Bank and its affiliates in the
ordinary course of business.

150

INDEX TO FINANCIAL STATEMENTS


Page
Audited consolidated financial statements as of and for the year ended 31 December 2011
and 2010
Statement by Director and Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Independent Auditors Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Audited consolidated financial statements as of and for the year ended 31 December 2010
and 2009
Statement by Director and Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-66
Independent Auditors Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67
Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-69
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-70
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-71
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-72
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-74

F-1

F-2

F-3

F-4

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Financial Position
31 December 2011 and 2010

Note

2011
MNT000

2010
MNT000

Assets
Cash and due from banks
Investment securities
Investment in an associate
Loans and advances, net
Bills purchased under resale agreements
Subordinated loans
Property and equipment, net
Intangible assets, net
Foreclosed real properties, net
Other assets

4
5
6
7
8
9
10
11
12
13

474,964,634
347,770,318
2,275,956
1,123,331,907
36,966,114
7,000,000
79,144,992
433,398
579,190
17,573,180

553,467,811
260,735,448
464,466,630
7,000,000
19,811,084
655,894
977,345
31,765,857

2,090,039,689

1,338,880,069

14

1,277,295,962

919,944,749

15
16
17

35,063,555
171,484,469
174,380,516
1,501,188
207,134,041
41,693,522
42,071,592

53,584,874
50,678,147
1,481,974
173,280,281
31,218,538
20,398,957

1,950,624,845

1,250,587,520

6,610,113
7,392,191
(6,001,872)
18,702,066
3,736,050
108,976,296

6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841

139,414,844

88,292,549

2,090,039,689

1,338,880,069

Total assets

Liabilities and Shareholders Equity


Liabilities:
Deposits from customers
Deposits and placements by banks
and other financial institutions
Bills sold under repurchase agreements
Borrowings
Current taxes payable
Debt securities issued
Subordinated debt securities issued
Other liabilities

18
19
20

Total liabilities
Shareholders equity:
Share capital
Share premium
Treasury shares
Revaluation reserves
Unrealised gain on available-for-sale financial assets
Retained earnings

21
22
10
5

Total shareholders equity


Total liabilities and shareholders equity

See accompanying notes to consolidated financial statements.


5

F-5

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Comprehensive Income
For the years ended 31 December 2011 and 2010

Note
Interest income
Interest expense

23
24

2011
MNT000

2010
MNT000

143,500,481
(95,359,061)

89,212,736
(60,062,936)

48,141,420

29,149,800

12,134,233
14,176,216

6,852,031
9,277,305

Net non-interest income

26,310,449

16,129,336

Operating income

74,451,869

45,279,136

(20,071,451)
74,955
(3,070,865)

(18,578,760)
(1,725,360)

51,384,508

24,975,016

(9,282,677)

(4,277,777)

42,101,831

20,697,239

3,736,050
5,284,414

9,020,464

51,122,295

20,697,239

Net interest income


Net fees and commission income
Other operating income, net

25
26

Operating expenses
Share of profit of an associate
Impairment losses

27
6
28

Profit before tax


Income tax expense

30

Net profit for the year

Other comprehensive income for the year:


Gain on change in valuation of
available-for-sale financial assets
Revaluation gain on property and equipment

5
10

Total comprehensive income

See accompanying notes to consolidated financial statements.


6

F-6

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Changes in Equity
For the years ended 31 December 2011 and 2010

Unrealised
gain on
available-for-

Note

1 January 2010

Share

Share

Treasury

Revaluation

sale financial

capital

premium

shares

reserves

assets

earnings

Total

MNT000

MNT000

MNT000

MNT000

MNT000

MNT000

MNT000

(6,456,232)

13,683,324

45,911,554

67,140,950

6,610,113

7,392,191

Retained

20,697,239

20,697,239

22

454,360

454,360

10

(265,048)

265,048

31 December 2010

6,610,113

7,392,191

(6,001,872)

13,418,276

66,873,841

88,292,549

1 January 2011

6,610,113

7,392,191

(6,001,872)

13,418,276

66,873,841

88,292,549

42,101,831

42,101,831

Net profit for the year


Sale of treasury shares
Amount transferred to
retained earnings

Net profit for the year


Gain on change in
valuation of
available-for-sale
financial assets
Revaluation gain

3,736,050

3,736,050

10

5,284,414

5,284,414

10

(624)

624

6,610,113

7,392,191

(6,001,872)

18,702,066

3,736,050

108,976,296

139,414,844

Amount transferred to
retained earnings

31 December 2011

See accompanying notes to consolidated financial statements.


7

F-7

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Cash Flows
For the years ended 31 December 2011 and 2010

Note
Cash flows from operating activities:
Net profit
Adjustments for:
Depreciation and amortisation
Share of profit of an associate
Net interest income
Income tax expense
Gain on disposition of property and equipment
Property and equipment written off
Impairment losses

10, 11, 27
6
23, 24
30
27
28

Operating profit before changes in operating


assets and liabilities
Increase in loans and advances
7
Decrease (increase) in other assets (*)
13
Increase in deposits from customers
14
Increase (decrease) in deposits and placements by banks
and other financial institutions
15
Increase (decrease) in other liabilities (*)
20
Increase in minimum regulatory reserve requirement
with Bank of Mongolia
4, 32
32
Decrease in short-term deposits
Interest received
Interest paid
Income taxes paid
Net cash flows provided by (used in) operating activities
Cash flows from investing activities:
Purchase of investment securities
Net sale (purchase) of bills purchased under resale
agreements
Purchase of property and equipment
Purchase of intangible assets
Proceeds from disposal of foreclosed real properties
Proceeds from disposal of property and equipment
Purchase of investment in an associate

2011
MNT000

2010
MNT000

42,101,831

20,697,239

2,218,699
(74,955)
(48,141,420)
9,282,677
(351)
302
3,070,865

2,473,750
-(29,149,800)
4,277,777
-2,258
1,725,360

8,457,648

26,584

(662,841,490)
18,129,030
357,351,213

(58,393,449)
(12,448,853)
340,421,971

(18,521,319)
14,656,679

22,115,633
(184,550)

(119,348,252)
2,949,865
141,516,264
(87,418,713)
(9,263,463)

(18,535,546)
16,640,593
81,795,098
(57,256,310)
(4,139,389)

(354,332,538)

310,041,782

(85,431,472)

(168,891,248)

8
10
11
12
10
6

(36,966,114)
(56,033,312)
(264,336)
1,283,019
252,000
(2,000,001)

799,556
(1,233,200)
(358,878)
819,716
889,720
-

(179,160,216)

(167,974,334)

Net cash flows used in investing activities

*Represents fluctuation of other assets and other liabilities other than changes in accrued interest receivables
and accrued interest payables, respectively.

See accompanying notes to consolidated financial statements.


8

F-8

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Cash Flows, continued
For the years ended 31 December 2011 and 2010
2011
MNT000

2010
MNT000

123,702,369
171,484,469
32,962,459
10,441,893
--

(2,623,846)
-113,475,566
31,214,570
454,360

Net cash flows provided by financing activities

338,591,190

142,520,650

Net increase (decrease) in cash and cash equivalents

(194,901,564)

284,588,098

Cash and cash equivalents at beginning of year

498,188,028

213,599,930

303,286,464

498,188,028

Note
Cash flows from financing activities:
Net proceeds from (repayments of) borrowings
Proceeds from bills sold under repurchase agreements
Proceeds from debt securities issued
Proceeds from subordinated debt securities issued
Disposal of treasury shares

17
16
18
19
22

Cash and cash equivalents at end of year

32

See accompanying notes to consolidated financial statements.

F-9

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010
1

Organisation and business


Trade and Development Bank of Mongolia LLC (the Bank) is a Mongolian domiciled limited liability
company, incorporated in accordance with the Company Law of Mongolia. The Bank was given a special
permission to conduct banking activities by Decree No.3/149 issued by the President of Bank of Mongolia
(BOM) on 29 May 1993 in accordance with the Banking Law of Mongolia, and License No.8 was
renewed by BOM on 27 February 2002.
Pursuant to the aforementioned resolutions, license and charter, the Bank conducts banking activities such
as cash savings, lending, handling and settlements of cash transfers, foreign currency transactions and
other banking activities through its 22 branches and 20 settlement centers.
The Bank established TDB Capital LLC (TDBC or the Subsidiary), a wholly owned subsidiary, on 14
August 2008. TDBC is a Mongolian domiciled limited liability company incorporated in accordance with the
Company Law of Mongolia and may be engaged in financial services activities within the parameters set
forth in the Company Law, Civil Law and Law of Security Market of Mongolia and other relevant laws and
regulations and those activities include, but are not limited to, brokerage and underwriting services to
various customers. The accompanying consolidated financial statements as at and for the years ended 31
December 2011 and 2010 comprise the Bank and its subsidiary (together the Group).
The direct parent company of the Group is Globull Investment and Development SCA (Globull), owns a
65.83% interest in the Group and is incorporated in Luxembourg. Globull is wholly owned by US Global
Investment LLC (US Global), which is incorporated in the United States of America. US Global is a
consortium owned by Central Asia Mining LLC and Mr. Erdenebileg Doljin (the current Chairman of the
Group), and it had directly owned approximately 6.38% of the Group prior to 2010. During 2010, the Group
sold 30,700 treasury shares (or 0.93% interest) out of its total 314,577 treasury shares to US Global. As a
result, US Globals ownership in the Group directly and indirectly through Globull amounted to
approximately 73.14% as of 31 December 2011 and 2010. In addition, approximately 18.27% of the
Groups total outstanding ordinary shares are owned by various individuals as of 31 December 2011 and
2010.
In February 2012, the Group sold 157,862 treasury shares, representing approximately 4.78% of the total
issued and outstanding ordinary shares, to a private investor.

10

F-10

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010
2

Basis of preparation
Statement of compliance
The accompanying financial statements are consolidated financial statements that have been prepared in
accordance with International Financial Reporting Standards (IFRS) as modified by the BOM guidelines.
The major items that are not in compliance with IFRS include the following, and the details are included in
the corresponding notes:
z
z

Allowance for loan loss reserves, receivables, letters of credit, unused credit
commitments and foreclosed properties
Accounting for deferred tax

The consolidated financial statements were authorised for issue by the Board of Directors on 22 March
2012.
Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except for the following:
z
z
z

Derivative financial instruments are measured at fair value


Available-for-sale financial assets are measured at fair value
Certain property and equipment are measured at fair value subsequent to acquisition

Functional and presentation currency


These consolidated financial statements are presented in Mongolian Togrog (MNT), rounded to the
nearest thousand. MNT is the Groups functional currency.
Use of estimates and judgments
The preparation of the consolidated financial statements requires management to make judgments,
estimates and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised and in any future periods affected.
Significant areas of estimation uncertainty and critical judgments of the Group in applying accounting
policies that have the most significant effect on the amounts recognised in the consolidated financial
statements are allowance for loan losses and valuation of financial instruments.

11

F-11

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010
2

Basis of preparation (continued)


New accounting standards adopted
(i)

Improvements to IFRS 2010 Amendments to IFRS 3 Business Combination


The Group has adopted improvements to IFRS 2010 Amendments to IFRS 3 Business Combination,
effective 1 January 2010. The amendments 1) clarify that contingent consideration arising in a
business combination previously accounted for in accordance with IFRS 3 (2004) that remains
outstanding at the adoption date of IFRS 3 (2008) continues to be accounted for in accordance with
IFRS 3 (2004), 2) limit the accounting policy choice to measure non-controlling interests upon initial
recognition at fair value or at the non-controlling interests proportionate share of the acquirees
identifiable net assets to instruments that give rise to a present ownership interest and that currently
entitle the holder to a share of net assets in the event of liquidation; and 3) expand the current
guidance on the attribution of the market-based measure of an acquirers share-based payment
awards issued in exchange for acquiree awards between consideration transferred and postcombination compensation cost when an acquirer is obliged to replace the acquirees existing awards
to encompass voluntarily replaced unexpired acquire awards. The Groups adoption of amendments to
IFRS 3 did not have any impact to the Groups consolidated financial statements.

(ii)

Improvements to IFRS 2010 Amendments to IAS 27 Consolidated and Separate Financial


Statements
The Group has adopted Amendments to IAS 27 Consolidated and Separate Financial Statements,
effective 1 January 2010. The amendments require the effects of all transactions with non-controlling
interests to be recorded in equity if there is no change in control. Transactions resulting in a loss of
control result in a gain or loss being recognised in profit or loss. The gain or loss includes a
remeasurement to fair value of any retained equity interest in the investee. In addition, all items of
consideration transferred by the acquirer are measured and recognised at fair value, including
contingent consideration as of the acquisition date. Transaction costs incurred by the acquirer in
connection with the business combination do not form part of the cost of transaction but are
expensed as incurred unless they relate to the issuance of debt or equity securities, in which case
they are accounted for under IAS 39 Financial Instruments: Recognition and Measurement. The
Groups adoption of amendments to IAS 27 did not have any impact to the Groups consolidated
financial statements.

(iii) Improvements to IFRS 2011 IAS 24 Related Party Disclosures


The Group has adopted Revised IAS 24 Related Party Disclosures, effective 1 January 2011. The
objective of IAS 24 is to ensure that the entitys financial statements contain the disclosures
necessary to draw attention to the possibility that its financial position and profits or loss may have
been affected by the existence of related parties and by transactions and outstanding balances with
such parties. The Groups adoption of IAS 24 did not have any impact to the Groups consolidated
financial statements.

12

F-12

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies


The accounting policies set out below have been consistently applied by the Group and are consistent with
those used in previous years other than new accounting policies adopted by the Group in the current year.
Basis of consolidation
(i) Subsidiary
A subsidiary is an entity controlled by the Group and the financial statements of each subsidiary are
included in the consolidated financial statements from the date that control commences until the date that
control ceases.
(ii) Investment in an associate
Associates are entities in which the Group has significant influence, but not control, over the financial and
operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50%
of the voting power of another entity.
Investment in an associate is accounted for using the equity method and is recognised initially at cost. The
consolidated financial statements include the Groups share of the income and expenses and equity
movements of an associate, after adjustments to align the accounting policies with those of the Group,
from the date that significant influence commences until the date that significant influence ceases. When
the Groups share of losses exceeds its interest in an equity accounted investee, the carrying amount of
that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is
discontinued except to the extent that the Group has an obligation or has made payments on behalf of the
investee.
(iii) Transactions eliminated on consolidation
Intra-group balances, transactions, and any unrealised income and expenses arising from intra-group
transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising
from transactions with associates are eliminated against the investment to the extent of the Groups
interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to
the extent that there is no evidence of impairment.
Foreign currency transactions
Transactions in foreign currencies are translated to MNT at the foreign exchange rate ruling at the date of
the transaction. Monetary assets and liabilities denominated in foreign currencies, which are stated at
historical cost, are retranslated to MNT at the foreign exchange rate ruling at the consolidated statement of
financial position date. Foreign exchange differences arising on translation are recognised in the
consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured
in terms of historical cost in foreign currencies are translated using the exchange rate at the date of the
transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair
value are translated to MNT at foreign exchange rates ruling at the dates that the fair values were
determined.
Financial instruments
(i) Classification
Financial assets and financial liabilities held for trading include debt securities, equity securities and
securities acquired and held by the Group for short-term trading purposes. Changes in fair value are
recognized in profit or loss.
13

F-13

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Financial instruments (continued)
(i)

Classification (continued)
Derivatives recorded at fair value through profit or loss include certain derivative contracts that are not
designated as effective hedging instruments. All trading derivatives in a net receivable position
(positive fair value), as well as options purchased, are reported as trading assets. All trading
derivatives in a net payable position (negative fair value), as well as options written, are reported as
trading liabilities.
Financial assets or financial liabilities at fair value through profit or loss include those financial assets
and financial liabilities designated at initial recognition because 1) such designation eliminates or
significantly reduces an accounting mismatch; or 2) respective financial assets and financial liabilities
are part of a group of financial assets, liabilities or both and their performance is evaluated on a fair
value basis in accordance with a documented risk management or investment strategy; or 3) the
embedded derivative does not meet the separation criteria. Financial assets and financial liabilities at
fair value through profit or loss are recorded at fair value and changes in fair value are recorded in the
current operations.
Originated loans and receivables are loans and receivables created by the Group providing money to a
debtor other than those created with the intention of short-term trading. Originated loans and
receivables comprise loans and advances to customers and are reported net of an allowances to
reflect the estimated recoverable amounts. The allowance is estimated in accordance with the
Regulations on Asset Classification and Provisioning, jointly approved by the President of BOM and
the Ministry of Finance.
Held-to-maturity assets are non-derivative assets with fixed or determinable payments and fixed
maturity that the Group has the intent and ability to hold to maturity, and are not designated at fair
value through profit or loss or as available-for-sale. This includes certain investment securities held by
the Group.
Available-for-sale assets are financial assets that are neither held for trading purposes, nor held to
maturity.

(ii)

Initial recognition
A financial asset or financial liability is measured initially at fair value plus transaction costs that are
directly attributable to its acquisition or issue.

14

F-14

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Financial instruments (continued)
(iii)

Subsequent measurement
Subsequent to initial recognition, all financial assets and liabilities held for trading, derivatives
recorded at fair value through profit or loss, financial assets and liabilities at fair value through profit or
loss and available-for-sale assets are measured at fair value, except that any instrument that does not
have a quoted market price in an active market and whose fair value cannot be reliably measured is
stated at cost, including transaction costs, less impairment losses. Gains and losses arising from
changes in the fair value of trading instruments and available-for-sale assets are recognised in the
profit or loss and directly in equity, respectively.
All non-trading financial liabilities, originated loans and receivables and held-to-maturity asset are
measured at amortised cost less impairment losses where applicable. Amortised cost is calculated on
the effective interest rate method. Premiums and discounts, including initial transaction costs, are
included in the carrying amount of the related instrument and amortised based on the effective
interest rate of the instrument.

Derecognition of financial assets and liabilities


(i)

Financial assets
A financial asset is considered for derecognition when the contractual rights to the cash flows from
the financial asset expire, or the Group has either transferred the contractual right to receive the cash
flows from that asset, or has assumed an obligation to pay those cash flows to one or more
recipients, subject to certain criteria, or if it transfers substantially all the risks and rewards of
ownership.
The Group enters into transactions in which it transfers previously recognised financial assets but
retains substantially all the associated risks and rewards of those assets. In transactions in which
substantially all the risks and rewards of ownership of a financial asset are neither retained nor
transferred, the Group derecognises the transferred asset if control over that asset (i.e. the practical
ability to sell the transferred asset) is relinquished. The rights and obligations retained in the transfer
are recognised separately as assets and liabilities, as appropriate. If control over the asset is retained,
the Group continues to recognise the asset to the extent of its continuing involvement, which is
determined by the extent to which it remains exposed to changes in the value of the financial asset
transferred.
The derecognition criteria are also applied to the transfer of part of an asset, rather than the asset as a
whole, or to a group of similar financial assets in their entirety, when applicable. If transferring a part
of an asset, such part must be a specifically identified cash flow, a fully proportionate share of the
asset, or a fully proportionate share of a specifically-identified cash flow.

(ii) Financial liabilities


A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expires. If an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of the existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new liability,
and the difference in the respective carrying amounts is recognised in the consolidated statements of
comprehensive income.

15

F-15

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and unrestricted due from banks and other financial
institutions with original maturities of less than three months, which are subject to insignificant risk of
changes in fair value, and are used by the Group in the management of short-term commitments.
Property and equipment
(i)

Recognition and subsequent measurement


The initial cost of an item of property and equipment comprises its purchase price, including import
duties, non-refundable purchase taxes and any directly attributable costs of bringing the asset to its
working condition and location for its intended use. After recognition as an asset, property and
equipment whose fair value can be measured reliably are carried at a revalued amount, being its fair
value at the date of revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Expenditure incurred after property and equipment has been put into
operation, such as repairs and maintenance and overhaul costs, are normally charged to income in the
year in which the costs are incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits expected to be obtained from
the use of an item of property and equipment beyond its originally assessed standard of performance,
the expenditure is capitalised as an additional cost of property and equipment.
The Group revalues its property and equipment to ensure that the fair value of revalued assets does
not differ materially from its carrying amount. Surpluses arising from revaluation are dealt with in the
revaluation reserve in equity. Any deficit arising is offset against the revaluation reserve to the extent
of a previous increase for the same asset. In all other cases, a decrease in carrying amount is charged
to profit or loss as an impairment.

(ii)

Depreciation
Depreciation is charged to profit or loss on a straight-line basis over the estimated useful life of each
item of property and equipment. The estimated useful lives of property and equipment are as follows:


   


40 years
10 years
3-5 years

Construction-in-progress
Construction-in-progress represents the cost of construction of new buildings and premises, which have
not been fully completed or installed. No depreciation is provided for construction-in-progress during the
period of construction.
Intangible assets
(i)

Acquired intangible assets


Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and
any impairment losses.

16

F-16

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Intangible assets (continued)
(ii)

Amortisation
Amortisation is charged to the consolidated statements of comprehensive income on a straight-line
basis over the estimated useful lives of intangible assets unless such lives are indefinite. The
estimated useful life of intangible assets is as follows:
    

3 years

Impairment
The carrying amounts of the Group's assets are reviewed at each reporting date to determine whether
there is any indication of impairment. If such an indication exists, the asset's recoverable amount is
estimated.
(i)

Originated loans and advances


Loans and advances are presented net of allowances for uncollectability. Allowances are made
against the carrying amount of loans and advances that are identified as being potentially impaired,
based on regular reviews of outstanding balances, to reduce these loans and advances to their
recoverable amount in accordance with Regulations on Asset Classification and Provisioning jointly
approved by the President of BOM and Ministry of Finance (BOM Provisioning Guidelines). Increases
in the allowance account are recognised in profit or loss. When a loan is known to be uncollectible, all
the necessary legal procedures have been completed and the final loss has been determined, the loan
is written off directly.
In accordance with the BOM Provisioning Guidelines, the Group is required to determine the quality of
loans and advances based on their qualitative factor and time characteristics in classifying them and
determining provisions. Such a model classifies the Groups loans and establishes allowances for
loan losses at the rates of 0%, 5%, 25%, 50% and 100%, based on credit classification categories of
performing, in arrears, substandard, doubtful and loss, respectively. Under IFRS, impairment or
uncollectibility of financial assets measured at amortized cost shall be measured at the difference
between the carrying amount and the net present value of future cash flows discounted at the
financial assets original effective interest rate.
Qualitative characteristics taken into consideration for determining credit classification include
completeness of loan file, financial indicators of the borrower, value of the collateral and previous
rescheduling of the loan, etc.
When a subsequent event causes the amount of impairment loss to decrease, the decrease in
impairment loss is reversed through profit or loss.

17

F-17

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Impairment (continued)
(ii)

Assets other than loans and advances and cash and cash equivalents
The Group assesses at each reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is required, the
Group estimates the recoverable amount of the respective asset. The recoverable amount is the
higher of the asset's or cash generating units fair value less costs to sell and value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. For an asset that does not generate cash inflows largely independent of
those from other assets, the recoverable amount is determined for the cash-generating unit to which
the asset belongs. An impairment loss is recognised whenever the carrying amount of an asset or its
cash-generating unit exceeds its recoverable amount. Impairment is recognised as loss of current
operation in the consolidated statements of comprehensive income.
An impairment loss is reversed if there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised. All reversals of impairment are
recognised as profit in the consolidated statements of comprehensive income.

Repurchase agreements
The Group enters into purchase (sale) of investments under agreements to resell (repurchase) substantially
identical investments at a certain date in the future at a fixed price. Investments purchased subject to
commitments to resell them at future dates are not recognised on the consolidated statements of financial
position. The amounts paid are recognised in loans to either banks or customers. The receivables are
shown as collateralised by the underlying security. Investments sold under repurchase agreements
continue to be recognised in the consolidated statement of financial position and are measured in
accordance with the accounting policy for either assets held for trading or available-for-sale as appropriate.
The proceeds from the sale of the investments are reported as liabilities to either banks or customers. The
difference between the sale and repurchase considerations is treated as interest income or expense and is
accrued over the period of the agreement using the effective interest method.
Share capital
(i)

Ordinary shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issuance of
ordinary shares and share options are recognised as a deduction from equity, net of taxes.

(ii)

Treasury shares
When share capital recognised as equity is repurchased, the amount of the consideration paid, which
includes directly attributable costs, is net of any tax effects, and is recognised as a deduction from
equity. Repurchased shares are classified as treasury shares and are presented as a deduction from
total equity. When treasury shares are sold or reissued subsequently, the amount received is
recognised as an increase in equity, and the resulting surplus or deficit on the transaction is
transferred to / from retained earnings.

18

F-18

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Provisions
A provision is recognised in the consolidated statements of financial position when the Group has a legal or
constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits
will be required to settle the obligation. If the effect is material, provisions are determined by discounting
the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value
of money and, where appropriate, the risks specific to the liability.
Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may
earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of
the Groups other components. All operating segments operating results are regularly reviewed by the
Companys chief operating decision maker (CODM) to make decisions about resources to be allocated to
the segment and assess its performance and for which discrete financial information is available.
Revenue
(i)

Interest income
Interest income and expense is recognised in the consolidated statements of comprehensive income
as it accrues, taking into account the effective yield of the asset or liability. Interest income and
expense include the amortisation of any discount or premium or other differences between the
carrying amount of an interest bearing instrument and its amount at maturity calculated on an
effective interest rate basis except that the Group does not amortize loan originating costs and fees
on an effective interest rate basis but rather recognises them immediately in current operations.

(ii)

Fee and commission income


Fee and commission income is charged to customers for the financial services provided. Fee and
commission income is recognised when the corresponding service is provided.

(iii) Rental income


Rental income from leased property is recognised in the consolidated statements of comprehensive
income on a straight-line basis over the term of the lease. Lease incentives granted are recognised
as an integral part of the total rental income.
Operating lease payments
Payments made under operating leases are recognised in the consolidated statements of comprehensive
income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the
consolidated statements of comprehensive income as a deduction to the total rental expenses over the
term of the lease.

19

F-19

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


Income tax
Income tax expense is comprised of current tax only.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using the
tax rates enacted or substantially enacted at the reporting date and any adjustment to tax payable in
respect of previous years.
The Ministry of Finance issued a regulation on deferred tax differences in May 2010. However, the
Taxation Office of Mongolia has not implemented the regulation yet and deferred tax issues have not been
incorporated in the Tax Methodology yet due to unfamiliarity of the deferred tax accounting among
companies, including commercial banks, as well as the tax authorities. Substantial implementation efforts
such as issuance of calculation methodologies, training and discussions with practitioners are required for
smooth adoption. BOM is planning to issue guidelines for commercial banks on the calculation of deferred
tax assets and liabilities and recognises that current accounting practices for deferred taxes by commercial
banks does not comply with IFRS.
Employee benefits
The Group does not provide severance benefits to its employees except for providing the employers
portion in accordance with statutory social insurance payments to the State Social Insurance Scheme.
Contributions made by the Group are recognised as an expense in the consolidated statements of
comprehensive income as incurred.
Dividends
Dividends are recognised as a liability in the period in which they are declared.
New standards and interpretations not yet adopted
A number of new IFRS, amendments to IFRS and interpretations are not yet effective for the year ended
31 December 2011, and have not been applied in preparing the accompanying consolidated financial
statements:


The amendments to IFRS 7 Disclosures Transfers of Financial Assets as well as the accounting
pronouncements IFRS 9 and IFRS 9R Financial Instruments will be relevant to the Group but were
not effective as of 31 December 2011 and therefore have not been applied in preparing these
consolidated financial statements. The Group is currently evaluating the potential impact that the
adoption of these new accounting pronouncements will have on its consolidated financial
statements.

In June 2011, the IASB issued amendments to IAS 1 Presentation of Financial Statements to
require companies to group together items within other comprehensive income (OCI) that may
be reclassified to the statement of income. The amendments also reaffirm existing requirements
that items in OCI and profit or loss should be presented as either a single statement or two
separate statements. The amendments are effective for annual periods beginning on or after 1
July 2012, with earlier application permitted. The Group is currently evaluating the potential
impact that the adoption of the amendments will have on presentation of its consolidated financial
statements.

20

F-20

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Significant accounting policies (continued)


New standards and interpretations not yet adopted (continued)


In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, IFRS 12 Disclosures of Interests in Other Entities, a revised version of IAS 27
Separate Financial Statements which has been amended for the issuance of IFRS 10 but retains
the current guidance for separate financial statements, and a revised version of IAS 28
Investment in Associates and Joint Ventures which has been amended for conforming changes
based on the issuance of IFRS 10 and IFRS 11.
Each of the standards are effective for annual periods beginning on or after 1 January 2013, with
earlier application permitted as long as each of the other standards are also early applied.
However, entities are permitted to include any of the disclosure requirements in IFRS 12 into their
consolidated financial statements without early adopting IFRS 12. The Group is currently
evaluating the potential impact that the adoption of the standards will have on its consolidated
financial statements.

In May 2011, the IASB issued IFRS 13 Fair Value Measurement which establishes a single source
of guidance for fair value measurement under IFRS. IFRS 13 provides a revised definition of fair
value and guidance on how it should be applied where its use is already required or permitted by
other standards within IFRS and introduces more comprehensive disclosure requirements on fair
value measurement. IFRS 13 is effective for annual periods beginning on or after 1 January 2013,
with earlier application permitted. The Group is currently evaluating the potential impact that the
adoption of the standard will have on its consolidated financial statements.

21

F-21

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Cash and due from banks


2011
MNT000
Cash on hand
Deposits and placements with banks and
other financial institutions
Balances with BOM (*)
Deposits with BOM

2010
MNT000

50,082,881

35,987,964

168,120,730
256,761,023
-

286,797,880
79,820,367
150,861,600

474,964,634

553,467,811

* At 31 December 2011, BOM requires that a minimum 11% of average customer deposits for two
weeks (5% at 31 December 2010) must be maintained with BOM. In relation to the daily requirement,
the Group also should maintain no less than 50% of the required reserve amount at the end of each day.
At 31 December 2011 and 2010, the required reserve amount was MNT 168,064,650 thousand and
MNT 48,716,398 thousand, respectively.

Investment securities
2011
MNT000
Available-for-sale investment securities
Unquoted equity securities, at cost (*1)
Equity securities, at fair value (*2)
BOM treasury bills (*3)

Held-to-maturity investment securities


BOM treasury bills
Government bonds
Asset-backed securities (*)

2010
MNT000

17,639,412
24,846,858
199,298,305
241,784,575

1,596,562
1,596,562

103,332,743
2,653,000
105,985,743

222,266,870
33,121,016
3,751,000
259,138,886

347,770,318

260,735,448

* Mainly represents notes issued by Mongolian Mortgage Corporation LLC (MMC)


(*1) Unquoted equity securities represent investments made in unlisted private companies and are
recorded at cost as there is no quoted market price in active markets and their fair value cannot be reliably
measured.
The Group also holds a common stock call option which allows the Group to purchase an additional 10% of
the total issued and outstanding common shares of an existing investee at an exercise price of USD
10,000,000 through June 2014. The option is classified and accounted for as a derivative financial
instrument. The Groups investment in such equity securities does not have a quoted market price in active
markets and their fair value cannot be reliably measured. Accordingly, the option has been recorded at cost
which is deemed to be nil as of 31 December 2011.

22

F-22

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Investment securities (continued)


(*2) During 2011, the Group acquired equity securities of an investee and classified them as available-forsale investment. As of 31 December 2011, an unrealised gain of MNT 3,736,050 thousand arising from
changes in the fair value of such investment was recognised directly in equity as other comprehensive
income. The level within the fair value hierarchy in which the fair value measurement of such equity
securities fall is Level 3 at 31 December 2011.
(*3) The Group classified BOM treasury bills as available-for-sale investment securities beginning from
January 1, 2011 as the Group has positive intent to sell them before maturity. As of 31 December 2011,
the fair value of BOM treasury bills approximated their carrying value, resulting in no unrealised gain or loss.
The level within the fair value hierarchy in which the fair value measurement of BOM treasury bills falls is
Level 2 at 31 December 2011.
At 31 December 2011 and 2010, MNT 109,316,012 thousand and MNT 32,370,578 thousand of investment
securities are expected to be sold in more than 12 months after the reporting date.

Investment in an associate
2011
MNT000
Investment in MMC

2,275,956

2010
MNT000

9
-

In 2009, the Group made a MNT 201,000 thousand investment acquiring approximately a 9.1% equity
interest in MMC, which was previously included in investment securities as of 31 December 2010. MMC
is currently engaged in acquiring mortgage loans issued by commercial banks and securitizing these
mortgages by issuing mortgage backed securities. The Group made an additional investment of MNT
2,000,001 thousand on 4 August 2011. As a result of this transaction, the Groups ownership interest in
MMC increased to approximately 31.6%. Effective 4 August 2011, the Group accounts for the investment
in MMC under the equity method and recognised its share of profit of MMC of MNT 74,955 thousand in
2011. In applying the equity method, the Group used the financial information of MMC as of 30 June 2011
with adjustments made for the effects of any significant transactions or events occurring between 30 June
2011 and 4 August 2011, since the financial information of MMC as of the date of the additional acquisition
of equity interest was unavailable.

23

F-23

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

Loans and advances

Loans and advances to customers


Loans to executives, directors and staffs
Allowance for loan losses
Net loans and advances

2011
MNT000

2010
MNT000

1,131,816,506
9,435,210
1,141,251,716

473,923,449
4,547,005
478,470,454

(17,919,809)

(14,003,824)

1,123,331,907

464,466,630

Movements in the allowance for loan losses during the year are as follows:
2011
MNT000

2010
MNT000

At 1 January
Charge for the year
Written back/recoveries
Written off
Effect of foreign currency movements

14,003,824
5,228,218
(1,252,005)
(60,228)
-

15,122,602
1,915,443
(1,750,743)
(1,285,655)
2,177

At 31 December

17,919,809

14,003,824

At 31 December 2011 and 2010, MNT 556,851,619 thousand and MNT 261,131,278 thousand of loans and
advances are expected to be recovered in more than 12 months after the reporting date.
Transfers of mortgage portfolios
In 2008, the Group transferred its mortgage loans with carrying amounts of MNT 404,864,410 or USD
294,334 to MMC in exchange for cash. In 2009, the Group transferred another pool of mortgage loans with
carrying amounts of MNT 4,700,819,887 in exchange for the bonds issued by MMC. There were no
mortgage portfolios transferred to MMC during 2011 and 2010.
The loans were transferred on a recourse basis and do not qualify for derecognition criteria for financial
assets since significant risks and rewards were not transferred to MMC. Accordingly, the Group accounted
for these transactions as collateralized financing for which the balance at 31 December 2011 and 2010
amounted to MNT 2,197,608 thousand and MNT 3,537,518 thousand, respectively.

Bills purchased under resale agreements

Contract party
Ulaanbaatar City Bank
(UB City Bank)

Ss

Purchase
date
30 Dec 2011

Maturity
2 Jan 2012

Interest
rate
11%

2011
MNT000
36,966,114

2010
MNT000 9
-

In 2011 the Group entered into reverse repurchase agreements with UB City Bank where the Group
purchased BOM treasury bills under resale agreements at MNT 37,000,000 thousand at maturity. The
purchased securities are collateralized for the receivables pertaining to the respective agreements.
9

Subordinated loans
24

F-24

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

2011
MNT000
UB City Bank
Capitron Bank

2010
MNT000

4,000,000
3,000,000

4,000,000
3,000,000

7,000,000

7,000,000

The loan to UB City Bank bears fixed interest of 8% per annum and is to be repaid in full on 25 September
2012. The loan to Capitron Bank bears interest of 12% at 31 December 2011 (12.5% at 31 December 2010)
per annum and is to be repaid in full on 14 August 2014.

10

Property and equipment


Property and equipment as of 31 December 2011 and 2010 were as follows:
31 December 2011
(In MNT000)

Buildings

Office
equipment and
motor vehicles

Computers
and others

Constructionin-progress

Total

At cost/revaluation
At cost
At revaluation

4,698,701
12,580,623

3,218,568
602,389

3,985,043
235,264

336,651
-

12,238,963
13,418,276

At 1 January 2011

17,279,324

3,820,957

4,220,307

336,651

25,657,239

1,472,719
(275,208)
95,783
5,140,509

1,037,127
-

1,434,721
(330)
-

52,088,745
(95,783)
-

56,033,312
(275,208)
(330)
5,140,509

At 31 December 2011

23,713,127

4,858,084

5,654,698

52,329,613

86,555,522

Representing items at:


Cost
Revaluation

5,848,714
17,864,413

4,255,695
602,389

5,419,434
235,264

52,329,613
-

67,853,456
18,702,066

23,713,127

4,858,084

5,654,698

52,329,613

86,555,522

1,281,970
637,531
(23,559)
(143,905)

1,614,474
412,534
-

2,949,711
681,802
(28)
-

5,846,155
1,731,867
(23,559)
(28)
(143,905)

At 31 December 2011

1,752,037

2,027,008

3,631,485

7,410,530

Carrying amounts
At 31 December 2011

21,961,090

2,831,076

2,023,213

52,329,613

79,144,992

Additions
Disposals
Write offs
Transfers
Revaluation surplus

Accumulated depreciation
At 1 January 2011
Charge for the year
Disposals
Write-offs
Revaluation surplus

25

F-25

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

10

Property and equipment (continued)


31 December 2010
(In MNT000)

Buildings
At cost/valuation
At cost
At revaluation

Office
equipment and
motor vehicles

Computers
and others

Constructionin-progress

Total

4,434,388
12,833,875

2,843,562
613,532

3,666,331
235,917

1,077,229
-

12,021,510
13,683,324

17,268,263

3,457,094

3,902,248

1,077,229

25,704,834

(800,884)
811,945

467,416
(10,000)
(272,622)
179,069

272,277
(197,289)
243,071

493,507
(1,234,085)

At 31 December 2010

17,279,324

3,820,957

4,220,307

336,651

25,657,239

Representing items at:


Cost
Revaluation

4,698,701
12,580,623

3,218,568
602,389

3,985,043
235,264

336,651
-

12,238,963
13,418,276

17,279,324

3,820,957

4,220,307

336,651

25,657,239

478,932
849,746
(46,708)
-

1,378,837
381,732
(5,700)
(140,395)

2,407,156
738,569
(196,014)

4,264,925
1,970,047
(52,408)
(336,409)

At 31 December 2010

1,281,970

1,614,474

2,949,711

5,846,155

Carrying amounts
At 31 December 2010

15,997,354

2,206,483

1,270,596

336,651

19,811,084

At 1 January 2010
Additions
Disposals
Write-offs
Transfers

Accumulated depreciation
At 1 January 2010
Charge for the year
Disposals
Write-offs

1,233,200
(810,884)
(469,911)
-

The Group disposed of an apartment unit and one of its branch buildings in 2011 and 2010, respectively,
both of which were revalued in 2008. Revaluation surplus of MNT 624 and MNT 265,048 which was
allocated to each of the property in 2008 were released into retained earnings in 2011 and 2010 upon
disposal, respectively.
Construction-in-progress account primarily represents costs for construction of the Groups office building
in Ulaanbaatar, Mongolia. The construction of the Groups office building commenced during the second
quarter of 2011 and is expected to be completed during the fourth quarter of 2012. There were no
capitalized borrowing costs related to the acquisition of property and equipment during 2011 and 2010.

26

F-26

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

10

Property and equipment (continued)


Details of the latest valuation of buildings appraised by an independent professional valuation company are
as follows:
Date of valuation
31 October 2008
31 December 2011

Description of property

Valuation amount

Buildings
Buildings

Basis of valuation

17,076,514
21,961,090

Market value
Market value

If the revalued property and equipment had been carried at historical cost less accumulated depreciation,
the carrying amounts of the revalued assets that would have been included in the consolidated financial
statements as of 31 December 2011 and 2010 would be as follows:
2011
MNT000
Buildings
Office equipment and motor vehicles

11

3,833,704
89,009

2010
MNT000

2,619,962
118,679

Intangible assets
2011
MNT000

9 999998

2010
MNT000

Cost
At 1 January
Additions

2,517,126
264,336

2,158,248
358,878

At 31 December

2,781,462

2,517,126

Amortisation
At 1 January
Amortisation charge for the year

1,861,232
486,832

1,357,529
503,703

At 31 December

2,348,064

1,861,232

433,398

655,894

Carrying amounts
At 31 December
Intangible assets consist of only purchased software.

27

F-27

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

12

Foreclosed real properties


2011
MNT000
Industrial buildings
Apartment buildings
Less: Allowances

2010
MNT000

26,500
812,269
(259,579)

420,799
1,777,779
(1,221,233)

579,190

977,345

Properties acquired through foreclosure are initially recognised at fair value, recorded as foreclosed
properties and are held for sale. The allowance is subsequently estimated in accordance with the
Regulations on Asset Classification and Provisioning, jointly approved by the President of BOM and Ministry
of Finance. Such a model classifies the Groups foreclosed properties based on time characteristics and
makes allowances at the rates of 0%, 5%, 25%, 50% and 100% for credit classification categories of
performing, in arrears, substandard, doubtful and loss, respectively. During 2011 and 2010, an allowance of
MNT 884,864 thousand and MNT 694,945 thousand were written back upon disposition of foreclosed real
properties, respectively, and foreclosed real properties amounting to MNT 82,157 thousand and MNT
375,138 thousand, respectively, were written off against impairment losses.

13

Other assets
2011
MNT000
Precious metals
Accrued interest receivables
Prepayments(*)
Inventory supplies
Other receivables, net

2010
MNT000

31,151
14,929,123
936,201
490,954
1,185,751

31,151
11,013,254
18,591,792
471,859
1,657,801

17,573,180

31,765,857

(*) Included in prepayments as of 31 December 2010 were USD 3,000,000 million (MNT 3,502,950
thousand) related to the Groups investment in UB City Bank for acquiring 800 shares or 10% of the total
outstanding shares of UB City Bank, and a deposit of USD 11,000,000 made for construction of the Groups
office building. These were reclassified to investment securities and construction-in-progress in property
and equipment during 2011, respectively.
Other receivables are presented net of impairment losses amounting to MNT 2,156,497,138 and MNT
2,176,980,635 as of 31 December 2011 and 2010, respectively.

28

F-28

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

14

Deposits from customers

Current accounts
Savings deposits
Time deposits
Other deposits

2011
MNT000

2010
MNT000

524,418,099
206,263,343
534,258,396
12,356,124

343,163,179
112,323,575
452,065,821
12,392,174

1,277,295,962

919,944,749

Current accounts and other deposits generally bear no interest. However, for depositors maintaining
current account balances above the prescribed limit, interest is provided at rates of approximately 1.5% and
3.4% (2010: 1.0% and 3.0%) per annum for foreign and local currency accounts, respectively.
Foreign and local currency savings deposits bear interest at a rate of approximately 1.9% and 6.3% (2010:
2.4% and 6.0%), respectively.
Foreign and local currency time deposits bear interest at a rate of approximately 6.5% and 12.3% (2010:
5.1% and 12.0%), respectively.

15

Deposits and placements by banks and other financial institutions


2011
MNT000
Current accounts deposits:
Foreign currency deposits
Local currency deposits
Foreign currency cheques for selling
Deposits from banks

16

2010
MNT000

12,361,181
99,390
249,214
22,353,770

53,507,922
783
76,169
-

35,063,555

53,584,874

Bills sold under repurchase agreements

Contract party

Ss

Sold
date

Maturity

Interest
rate

2011
MNT000

2010
MNT000

9
BOM
BOM
BOM

28 Dec 2011
28 Dec 2011
30 Dec 2011

2 Jan 2012
3 Jan 2012
2 Jan 2012

16.25%
16.25%
16.25%

66,816,502
39,314,997
65,352,970

171,484,469

In 2011 the Group entered into repurchase agreements with BOM where the Group sold BOM treasury
bills under repurchase agreements at an aggregate amount of MNT 177,000,000 thousand at various
maturities. The securities sold are collateralized for the payables pertaining to the respective agreements.

29

F-29

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings
2011
MNT000
Kreditanstalt fuer Wiederaufbau
World Bank
Asian Development Bank
International Development Association
Export-Import Bank of Korea
VTB Bank Austria
Export-Import Bank of Republic of China
Japan International Cooperation Agency
Atlantic Forfaitierungs AG
Russian Agricultural Bank
SME Project Fund from MoF
Commerzbank AG
Industrial and Commercial Bank of China
ING Bank
Baoshang Bank
MMC

2010
MNT000

3,457,600
6,674,634
1,139,259
750,880
18,094,576
50,548,594
148,118
6,640,131
3,265,411
74,217,691
2,228,909
740,110
848,337
3,428,658
2,197,608

2,792,307
5,484,868
118,068
691,118
5,539,417
11,314,620
50,287
1,592,081
2,357,213
11,085,650
6,115,000
3,537,518

174,380,516

50,678,147

Kreditanstalt fuer Wiederaufbau (KfW)


In 2002, the Group entered into a Loan and Financing Agreement with KfW, under which the Group can
borrow up to EUR 4,345,981 from KfW via BOM as a Programme-Executing Agency for mainly providing
financing to various small and medium customers at preferential interest rates. The outstanding KfW loan
amounted to EUR 1,913,702 and EUR 1,662,117 at 31 December 2011 and 2010, respectively. The loan
matures in June 2042 and bears interest at a fixed rate of 1.25% per annum, of which 0.75% is payable to
KfW and 0.50% to BOM. Principal repayment is on a semi-annual basis, and the repayment dates for this
loan vary in accordance with the tenor of loans granted to the various borrowers.
World Bank
2011
MNT000
Loan I
Loan II

2010
MNT000

80,498
6,594,136

122,761
5,362,107

6,674,634

5,484,868

Loan I
In 2003, the Group entered into the Project Agreement with World Bank under the World Bank
Training Program via the Ministry of Finance for the purpose of financing the Group's implementation
of institutional development programme, including credit management system renewal, staff training,
provision of equipment and consultants' services. The outstanding World Bank loan under this
program amounted to USD 57,648 and USD 97,648 at 31 December 2011 and 2010, respectively. The
loan bears interest at a fixed rate of 2% per annum. The loan is repayable semi-annually until final
repayment due in December 2024.

30

F-30

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings (continued)
Loan II
Loan Il comprises the following loans:
(a)

In 2006, the Group entered into the TDB Subsidiary Loan Agreement with World Bank, under which
the Group can borrow up to USD 4,000,000 from the World Bank via the Ministry of Finance to
finance the Second Private Sector Development Project through the provision of sub-loans. The
outstanding World Bank USD loan amounted to USD 2,897,219 and USD 2,789,280 at 31 December
2011 and 2010, respectively. The loan bears interest at six-month London Inter-Bank Offering Rate
(LIBOR) USD rate plus a margin of 1% per annum (1.48% at 31 December 2011). The repayment
dates for this loan vary in accordance to the tenor of loans granted to the various borrowers.

(b)

Under the TDB Subsidiary Loan Agreement as described in (a) above, the Group can also borrow
amounts in various currencies including in Togrog up to Special Drawing Rights (SDR) 6,250,000 from
the World Bank via the Ministry of Finance to finance specific investment projects through the
provision of sub-loans. The outstanding World Bank MNT loan amounted to approximately MNT 2,178
million and MNT 1,603 million at 31 December 2011 and 2010, respectively. The loan bears interest at
a rate equal to the average rate for MNT demand deposits published by BOM for the preceding
twelve months (6.33% at 31 December 2011). The repayment dates for this loan vary in accordance
with the tenor of loans granted to the various borrowers.

(c)

In 2006, the Group obtained a USD loan in the amount of USD 300,000 from the World Bank under
the World Bank Training Program loan via the Ministry of Finance for the purpose of financing the
Group's implementation of institutional development program, including staff training in the areas of
credit analysis and risk assessment and risk-based internal auditing. The outstanding World Bank loan
under this program amounted to USD 265,212 and USD 200,830 at 31 December 2011 and 2010,
respectively. The loan bears interest at a fixed rate of 2% per annum. The loan is repayable semiannually until final repayment due in May 2025.

Asian Development Bank ("ADB")


ADB Loan is comprised of the following loans:
(a)

In 1999, the Group obtained a USD loan in the amount of USD 134,164 from ADB via BOM to
upgrade the Groups accounting information system. The outstanding loan amounted to USD 89,442
and USD 93,915 at 31 December 2011 and 2010, respectively. The loan matures in 2031 and bears
interest at a fixed rate of 2% per annum and is repayable in 30 annual installments which commenced
in 2002.

(b)

In 2011, the Group entered into a Finance Agreement with ADB, under which the Group can borrow
up to USD 11,000,000 from ADB via the Ministry of Finance to provide loans exclusively to customers
who need to finance the cost of goods, works, and consulting services required to carry out Value
Chain Development (VCD) subprojects. The outstanding USD loan amounted to USD 85,482 at 31
December 2011. The loan matures in June 2018 and bears interest at a fixed rate of 9% per annum.
The repayment dates for this loan vary in accordance to the tenor of loans granted to the various
borrowers.

(c)

Under the Finance Agreement as described in (b) above, the Group can also borrow amounts in
Togrog. The outstanding MNT loan amounted to approximately MNT 895,000 thousand as of 31
December 2011.

31

F-31

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings (continued)
International Development Association ("IDA")
In 1998, the Group obtained a USD loan in the amount of USD 600,000 from IDA to finance the Twinning
Agreement with Norwegian Banking Resources Ltd. ("NBR"), under which NBR had transferred operational
knowhow and technical skills to the Group. The outstanding IDA loan amounted to USD 537,737 and USD
549,737 at 31 December 2011 and 2010, respectively. The loan bears interest at a fixed rate of 1% per
annum. Principal repayments commenced in August 2007 with the final repayment due in February 2037.
Export-Import Bank of Korea ("KEXIM")
In 2004, the Group entered into the Comprehensive Interbank Export Credit Agreement with KEXIM under
which the Group can borrow up to USD 2,000,000 for relending purposes to finance customers who
purchase goods from Korean exporters. Effective April 2011, the maximum amount of facility increased to
USD 20,000,000. The outstanding borrowings under this line of credit agreement amounted to USD
12,958,297 and USD 4,406,225 at 31 December 2011 and 2010, respectively. This line of credit expires in
July 2012, and the interest of this particular loan varies with each drawdown, which is determined by
KEXIM. The Group shall repay KEXIM the principal amount of each disbursement on the last day of each
financing period.
VTB Bank (Austria) AG (VTB)

Risk Participation I
Risk Participation II
Risk Participation III
Risk Participation IV
Risk Participation V

2011
MNT000

2010
MNT000 9

1,675,644
20,945,550
13,963,700
13,963,700

7,543,080
3,771,540
-

50,548,594

11,314,620

The Group and VTB entered into various participation agreements, under which the VTB loans were
extended to other borrowers. Under these participation agreements, VTB is at its sole risk and has no right
of recourse against the Group for any loss it incurs as a result of default by the borrower. These loans bear
interest at fixed rates ranging from 8% to 9% per annum.
Export-Import Bank of Republic of China ("TEXIM")
In 2004, the Group entered into a line of credit agreement with TEXIM under which the Group could borrow
up to USD 6,000,000 for relending purposes to finance customers who purchase machinery and other
manufactured goods produced in Taiwan. The outstanding borrowings under this line of credit agreement
amounted to USD 106,073 and USD 40,000 at 31 December 2011 and 2010, respectively. This line of
credit was extended to January 2013.

32

F-32

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings (continued)
Japan International Cooperation Agency (JICA)
JICA (formerly Japan Bank for International Cooperation) Loan comprises the following loans:
(a) In 2006, the Group entered into a Loan Financing Agreement with JICA, under which the Group can
borrow USD or MNT up to the amount equivalent to JPY 2,981,000,000 from JICA via the Ministry of
Finance which was channelled to various borrowers for the purpose of Small and Medium-Scaled
Enterprises ("SME") Development or Environmental Protection. The outstanding USD loan amounted to
USD 377,000 and USD 192,400 at 31 December 2011 and 2010, respectively. The loan matures in
March 2019 and bears interest at six-month LIBOR USD rate plus a margin of 1% per annum (1.4% at
31 December 2011). The maturity dates for this loan vary in accordance with the tenor of loans granted
to the various borrowers.
(b) Under the Loan Financing Agreement as described in (a) above, the outstanding MNT loan amounted to
approximately MNT 1,179 million and MNT 1,350 million at 31 December 2011 and 2010, respectively.
The MNT loan bears interest at a rate equal to the average rate for MNT demand deposits published by
BOM for the preceding twelve months (4% at 31 December 2011).
(c) In 2011, the Group entered into another Loan Financing Agreement with JICA, under which the Group
can borrow USD or MNT up to the amount equivalent to JPY 5,000,000,000 from JICA via the Ministry
of Finance which was channelled to various borrowers for the second phase of developing SME or
environment projection. The outstanding MNT loan amounted to approximately MNT 4,935 million at
31 December 2011. The loan matures in March 2020 and bears interest at a rate equal to the average
rate for MNT demand deposits published by BOM for the preceding twelve months (4% at 31
December 2011). The maturity dates for this loan vary in accordance with the tenor of loans granted to
the various borrowers.

Atlantic Forfaitierungs AG (AF)


In 2009, the Group entered into a Facility Agreement with AF for the purpose of relending to customers
participating in a plantation support fund. In 2011, the Group renewed the Facility Agreement, under which
the Group can borrow up to USD 2,338,500. The outstanding USD loan amounted to USD 2,338,500 and
USD 1,875,000 at 31 December 2011 and 2010, respectively. The loan matures in May 2013. Interest is
payable on a semi-annual basis, and principle repayment is due at maturity.
Russian Agricultural Bank (RHSB)
In 2009, the Group entered into a line of credit agreement with RHSB under which the Group can borrow
up to USD 25,000,000 for relending purpose. The outstanding borrowings under this credit facility
amounted to USD nil and USD 8,817,870 at 31 December 2011 and 2010, respectively. This credit facility
expires in August 2012.

33

F-33

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings (continued)
SME Project Fund MoF
SME Project Fund MoF comprises the following loans:
(a) In 2009, the Group entered into a credit facility loan agreement with the Ministry of Food, Agriculture
and Light Industry for the purpose of SME development. The Ministry of Food, Agriculture and Light
Industry budgeted MNT 30 billion for this facility which is available to all Mongolian commercial banks
with no specific set amount allocated to individual banks. In 2010 and 2011, the Group renewed this
facility agreement, and the aggregate budget increased to MNT 60 billion and MNT 150 billion,
respectively. This credit facility expires in June 2016 and bears interest at a fixed rate of 7.0% per
annum (9.6% at 31 December 2010) with varying repayment dates depending on the draw date. The
outstanding borrowings under this credit facility amounted to approximately MNT 20,471 million and
MNT 6,115 million at 31 December 2011 and 2010, respectively.
(b) In October 2011, the Group signed the second credit facility agreement with the Ministry of Food,
Agriculture and Light Industry for the purpose of Wool and Cashmere sector development. The
Ministry of Food, Agriculture and Light Industry budgeted MNT 150 billion for this facility. This credit
facility agreement expires in October 2016 and bears interest at a fixed rate of 7.0% per annum with
varying repayment dates depending on the draw date. The outstanding borrowings under this credit
facility amounted to approximately MNT 53,747 million at 31 December 2011.
Commerzbank AG
In 2011, the Group entered into an Uncommitted Bilateral Trade Finance Facility Master Agreement with
Commerzbank AG for the purpose of relending to customers to finance import and export transactions. The
amount and currency of each drawdown, the applicable interest rate, disbursement date, repayment date
and certain other terms and conditions of each drawdown shall be agreed upon by the Group and the
customer on a case by case basis. Under this facility agreement, the Group has outstanding loans of EUR
444,824 and USD 1,020,660 at 31 December 2011, maturing in July and December 2012, respectively.
Industrial and Commercial Bank of China (ICBC)
In 2011, the Group obtained a USD loan in the amount of USD 530,024 from ICBC to promote imports from
China. This loan matures in March 2012 and bears interest as defined by the Central Bank of China on a
case by case basis.
ING Bank
In 2011, the Group obtained a USD loan in the amount of USD 607,530 from ING Bank for relending
purposes. This loan matures in November 2012.

34

F-34

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

17

Borrowings (continued)
Baoshang Bank
The Group entered into various facility agreements with Baoshang Bank, under which the Baoshang Bank
loans were extended to other borrowers. At 31 December 2011, the Group has the following loans under
this facility:
(a) The Group obtained a USD loan totaling USD 2,333,682 which was extended to various corporate
customers. The repayment dates for this loan vary in accordance with the tenor of loans granted to the
various borrowers.
(b) The Group obtained a CNY loan in the amount of CNY 766,932. This facility expires in November 2012.
MMC
The Group transferred certain mortgage portfolios to MMC in prior years on a recourse basis and
determined that the transfer did not qualify for derecognition criteria for financial assets since significant
risks and rewards were not transferred to MMC. Accordingly, the Group accounted for these transactions
as collateralized financing. See note 7 for further details of the transactions. There were no mortgage
portfolios transferred to MMC during 2011 and 2010.

18

Debt securities issued


2011
MNT000
Debt securities issued, at amortized cost

207,134,041

2010
MNT000 (
173,280,281

On 5 January 2007, the Group launched a Euro Medium Term Note ("EMTN") Programme under which USD
75 million was issued on 22 January 2007 at a price of 98.176%. These bonds bear interest at 8.625% per
annum payable semi-annually. The principal was paid off on 22 January 2010.
On 25 October 2010, the Group issued USD 150,000,000 senior notes due on 25 October 2013 at a price
of 99.353% under its USD 300,000,000 EMTN Programme which was launched on 9 October 2010. These
bonds bear interest at 8.5% per annum payable semi-annually. The Group is also obligated to bear
withholding tax of 5% of the amount of interest expenses paid to the investors on its senior notes in
accordance with the double tax treaty between Mongolia and Singapore, and these additional cash
outflows effectively increase actual interest rates for the notes.
In November 2010, the Group repurchased USD 10,000,000 of its senior notes which was treated as a
redemption of debt securities. The related redemption loss of MNT 280,589 thousand was recognised in
2010. From July through December 2011, the Group reissued its senior notes totalling USD 10,000,000,
which were bought back during 2010.
During 2011 and 2010, the respective debt securities accreted by 891,301 thousand and MNT 165,159
thousand, respectively, using the effective interest method.

35

F-35

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

19

Subordinated debt securities issued

Subordinated debt, at amortized cost

2011
MNT000

2010
MNT000 9

41,693,522

31,218,538

On 16 November 2010, the Group issued USD 25,000,000 subordinated notes due on 17 November 2015
at a price of 99.999% under its USD 300,000,000 EMTN Programme which was launched on 9 October
2010. These bonds bear interest at 12.5% per annum payable semi-annually. On 24 May 2011, the Group
additionally issued USD 5,000,000 subordinated notes due on 25 May 2016 at face value. These bonds
bear interest at 11.0% per annum payable semi-annually. The Group is also obligated to bear withholding
tax of 5% of the amount of interest expenses paid to the investors on its subordinated notes in accordance
with the double tax treaty between Mongolia and Singapore, and these additional cash outflows effectively
increase actual interest rates for the notes. The above liabilities will, in the event of the winding-up of the
Bank, be subordinated to the claims of depositors and all other creditors of the issuer. During 2011 and
2010, the subordinated debt securities accreted by MNT 33,091 thousand and MNT 3,968 thousand,
respectively, using the effective interest method.

20

Other liabilities
2011
MNT000
Accrued interest payables
Delay on clearing settlement
Other payables
Dividends payable

21

2010
MNT000

23,199,760
14,215,203
4,290,684
365,945

16,183,804
711,906
3,137,302
365,945

42,071,592

20,398,957

Share capital

00000

Number of ordinary shares


2011
0
2010

2011
MNT000

2010
MNT000 .

At 1 January
Issued during the year

3,305,056
-

3,305,056
-

6,610,113
-

6,610,113
-

At 31 December

3,305,056

3,305,056

6,610,113

6,610,113

At 31 December 2011 and 2010, 3,305,056 shares were issued and outstanding out of the total 4,000,000
authorized shares. All issued shares were fully paid and have a par value of MNT 2,000.

36

F-36

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

22

Treasury shares
2011
MNT000

2010
MNT000

At 1 January
Sale of treasury shares

6,001,872
-

6,456,232
(454,360)

At 31 December

6,001,872

6,001,872

On 21 December 2010, the Group sold 30,700 treasury shares out of the total 314,577 treasury shares at
MNT 14,800 per share to US Global. The outstanding treasury shares at 31 December 2011 and 2010
were 283,877 shares, representing approximately 8.59% of the total issued and outstanding ordinary
shares.
In February 2012, the Group sold 157,862 treasury shares, representing approximately 4.78% of the total
issued and outstanding ordinary shares, to a private investor.

23

Interest income
2011
MNT000
Loans and advances
Investment securities
Deposits and placements with banks and other
financial institutions
Bills purchased under resale agreements
Subordinated loans

24

2010
MNT000

108,869,075
29,252,203

68,749,442
15,445,848

4,559,357
133,183
686,663

4,278,640
20,826
717,980

143,500,481

89,212,736

Interest expense
2011
MNT000
Deposits
Borrowings
Bills sold under repurchase agreements
Debt securities issued
Subordinated debt securities issued

37

F-37

2010
MNT000

68,489,599
4,059,540
1,128,593
17,052,569
4,628,760

50,654,319
4,090,307
189,165
4,603,135
526,010

95,359,061

60,062,936

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

25

Net fees and commission income


2011
MNT000

2010
MNT000

Fees and commission income


Wire transfer
Card service
Loan related service
Others
Total fee and commission income

3,742,399
3,385,622
5,575,020
543,779

2,568,171
2,207,594
2,756,699
434,039

13,246,820

7,966,503

915,184
197,403

961,604
152,868

1,112,587

1,114,472

12,134,233

6,852,031

Fees and commission expenses


Card service expense
Others
Total fees and commission expenses
Net fees and commission income

26

Other operating income, net


2011
MNT000
Foreign exchange gain, net
Precious metal trading gain, net
Debt securities redemption loss
Other

38

F-38

2010
MNT000

13,339,291
705,834
131,091

9,434,706
84,495
(280,589)
38,693

14,176,216

9,277,305

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

27

Operating expenses
2011
MNT000
Staff costs
Technical assistance and foreign bank remittance fees
Depreciation on property and equipment (note 10)
Amortisation on intangible assets (note 11)
Write-off of property and equipment
Professional fees
Insurance
Advertising and public relations
Rental expenses
Business travel expenses
Cash handling
Stationary and supplies
Communication
Training expenses
Utilities
Repairs and maintenance
Security
Meals and entertainment
Transportation
IT maintenance
Others (*)

2010
MNT000

8,939,306
720,837
1,731,867
486,832
302
393,122
166,598
1,114,943
1,700,901
623,795
499,742
505,928
678,238
129,794
239,790
439,098
96,956
247,317
219,940
608,708
527,437

7,749,108
415,777
1,970,047
503,703
2,258
555,537
632,195
1,306,091
1,158,818
680,462
350,184
393,178
600,325
118,642
221,754
172,626
189,313
317,152
215,522
520,018
506,050

20,071,451

18,578,760

* Included in other operating expenses are costs incurred for loan collections, cleaning and other
miscellaneous administrative expenses.

28

Impairment losses
2011
MNT000
Impairment losses for loans, net
Increase in (reversal of) impairment losses for
other assets and foreclosed real properties, net

29

2010
MNT000

(3,976,213)

(164,700)

905,348

(1,560,660)

(3,070,865)

(1,725,360)

Leases
The Group leases some of its branch offices and computers under various lease agreements. Minimum
lease commitments under the non-cancellable operating lease agreements with initial terms of one year or
more at 31 December 2011 and 2010 were as follows:
2011
2010
MNT000
9
MNT000
Within a year
1 year 5 years
Thereafter

39

F-39

1,504,534
2,514,774
-

1,206,228
1,157,313
-

4,019,308

2,363,541

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

30

Income tax expense


Recognised in the consolidated statements of
comprehensive income:
2011
MNT000
Income tax expense current year
Income tax expense prior year adjustment

2010
MNT000

9,212,154
70,523

4,277,777
-

9,282,677

4,277,777

Reconciliation of effective tax expense:


2011
MNT000

2010
MNT000

Profit before tax

51,384,508

24,975,016

Tax at statutory income tax rate of 25%


Tax effect of non-deductible expense
Tax effect of non-taxable income
Tax effect of progressive tax rate of 10%
on the portion of taxable profits up to MNT 3 billion
Adjustment of prior year tax return
Other

12,846,127
161,476
(3,262,224)

6,243,754
948,923
(2,458,300)

(450,000)
70,523
(83,225)

(450,000)
(6,600)

9,282,677

4,277,777

Income tax expense

According to Mongolian Tax Laws, the Group is required to pay the Government Income Tax at the rate of
10% of the portion of taxable profit up to MNT 3 billion and 25% of the portion of taxable profits in excess
of MNT 3 billion.

31

Dividends
There were no dividends declared for the years ended 31 December 2011 and 2010.

32

Cash and cash equivalents


Cash and cash equivalents in the consolidated statements of cash flows include cash on hand and
unrestricted due from banks and other financial institutions with original maturities of less than three
months. Cash and cash equivalents reported in the consolidated statements of cash flows for the years
ended 31 December 2011 and 2010 were as follows:
2011
MNT000

2010
MNT000

Cash and due from banks (note 4)

474,964,634

553,467,811

Due from other financial institutions


Minimum regulatory reserve requirement with BOM

(3,613,520)
(168,064,650)

(6,563,385)
(48,716,398)

Cash and cash equivalents

303,286,464

498,188,028

40

F-40

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

33

Segment reporting
Segment information is presented in respect of the Group's business segments. The primary format,
operating segments, is based on the Group's management and internal reporting structure.
Operating segments pay to and receive interest from the Treasury on an arm's length basis to reflect the
allocation of capital and funding costs.
Segment capital expenditure is the total cost incurred during the period to acquire property and equipment,
and intangible assets other than goodwill.
Operating segments
The Group comprises the following main operating segments:


Corporate Banking

Includes loans, deposits and other transactions and balances with


corporate customers.

SME Banking

Includes loans, deposits and other transactions and balances with SME
customers. The Group classifies a business customer as SME where the
level of financing it provides to a customer is between USD $100,000 to
USD $500,000 rather than the classification on the size of the business
itself.

Retail Banking

Includes loans, deposits and other transactions and balances with retail
customers and card customers.

Investment and
International Banking

Includes the Group's trading and corporate finance activities.

Treasury

Undertakes the Group's funding and centralised risk management


activities through borrowings, issues of debt securities, use of derivatives
for risk management purposes and investing in assets such as short-term
placements and corporate and government debt securities. Operates the
Group's funds management activities.

Others

Includes Headquarter operations and central shared services operation


that manages the Group's premises and certain corporate costs.

41

F-41

F-42

Segment reporting (continued)

466,326

Capital expenditures

Depreciation and amortisation

Total liabilities

Unallocated liabilities

Segment liabilities

Segment assets

2,893

(3,288)

52,094,869

52,094,869

775,630,552

64

(518)

61,634,782
-

42

2,359,699

(989,623)

1,248,114,379

1,248,114,379

330,662,265

664

(1,609)

210,640,758

210,640,758

1,083,675

1,887,330

2,893

(13,605)

259,473,325

259,473,325

424,457,667

(6,472,866)

(661,189)

(5,811,677)

(29,237,322)

(1,580,696)

113,753

24,892,588

Treasury

53,931,435

(1,210,056)

180,301,514

1,501,186

178,800,328

496,570,748

(10,252,709)

126,085

74,955

(9,642,025)

(811,724)

5,121,482

416,750

246,361

(6,596,317)

Other

51,384,508

(3,070,865)

74,955

(20,071,451)

74,451,869

14,176,216

12,134,233

48,141,420

Total

56,297,648

(2,218,699)

1,950,624,845

1,501,186

1,949,123,659

2,090,039,689

(9,282,677)

32,956,710

(294,844)

2,182,174

18,574,891

8,029

(16,400,746)

Investment and
International
Banking

42,101,831

3,915,684

531,090

(8,903,392)

41,329,012

49,541,926

14,871,915

7,445,015

(30,529,844)

Retail
Banking

Income tax expense

29,350,359

Profit (loss) before tax

296,948

(42,646)

3,661,382

(2,475,150)

1,921

128,093

6,006,518

SME
Banking

Net profit for the year

(4,024,988)

(Allowance for) reversal of impairment losses

(527,355)

Operating expenses

Share of profit of an associate

33,902,702

Total segment revenue (expenses)

(41,525,827)

Other operating income (expenses)

Intersegment revenue (expenses)

4,192,982

70,769,221

Corporate
Banking

Net fees and commission income

Net interest income (expenses)

Segment results
External revenue

As at and for the year ended 31 December 2011

(In MNT000)

33

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

F-43

Segment reporting (continued)

Capital expenditures

Depreciation and amortisation

Total liabilities

Unallocated liabilities

Segment liabilities

Segment assets

1,593

(2,796)

19,304,243

19,304,243

368,880,416

1,680

(869)

18,888,908
-

43

155,531

(1,067,756)

817,987,675

817,987,675

106,574,231

176,095,265

176,095,265

1,083,675

1,304

(20,994)

160,461,217

160,461,217

593,867,694

(635,759)

(523,717)

(112,042)

(16,022,722)

1,224,630

92,939

14,593,111

Treasury

1,431,970

(1,381,335)

76,739,120

1,481,974

75,257,146

249,585,145

(18,617,105)

(1,278,328)

(10,716,642)

(6,622,135)

(3,913,650)

1,406,528

197,389

(4,312,402)

Other

24,975,016

(1,725,360)

(18,578,760)

45,279,136

9,277,305

6,852,031

29,149,800

Total

1,592,078

(2,473,750)

1,250,587,520

1,481,974

1,249,105,546

1,338,880,069

(4,277,777)

(41,899)

(156,106)

114,207

3,175,821

16,612

(3,078,226)

Investment and
International Banking

20,697,239

18,840,387

788,847

(6,686,539)

24,738,079

46,456,472

6,649,719

4,304,446

(32,672,558)

Retail
Banking

Net profit for the year

1,858,812

535,826

(174,843)

1,497,829

(1,709,034)

20,459

81,289

3,105,115

SME
Banking

Income tax expense

23,570,580

Profit (loss) before tax

(320,913)
(1,771,705)

Operating expenses

(Allowance for) reversal of impairment losses

25,663,198

Total segment revenue (expenses)

(27,986,887)

(24,031)

Other operating income (expenses)

Intersegment revenue (expenses)

2,159,356

51,514,760

Corporate
Banking

Net fees and commission income

Net interest income (expenses)

Segment results
External revenue

As at and for the year ended 31 December 2010

(In MNT000)

33

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

34

Significant transactions and balances with related parties


The following entities are considered as related parties of the Group:


UB City Bank

The Group holds a 10% equity interest in UB City Bank as of 31


December 2011. In addition, the Groups chairman is a member of the
board of directors of UB City Bank.

Capitron Bank

Certain key management of the Group is the major shareholder of


Capitron Bank.

MMC

The Group holds approximately 31.6% equity interest in MMC as of 31


December 2011. (note 6)

The Groups executive officers and their immediate relatives are also considered as the Groups related
parties.
Significant transactions and balances with related parties as of 31 December 2011 and 2010 and for the
years then ended were as follows:
2011
2010
MNT000 9
MNT000
UB City Bank:
During the year ended 31 December
Interest income
Interest expense
Fees and commission income
Fees and commission expenses
As at 31 December
Deposits and placements with banks
and other financial institutions
Deposits and placements by banks
and other financial institutions
Subordinated loans (note 9)
Bills purchased under resale agreements (note 8)

4,283,319
(201,616)
15,000
(19)

3,455,202
(300,791)
-

70,721,544

20,397,401

1,272,336
4,000,000
36,996,114

4,119,866
4,000,000
-

593,764
(3,845)

525,816
(42,900)

578,403
3,000,000

70,214
3,000,000

480,845
(434,084)

627,078
(657,262)

2,653,000
2,197,608

3,751,000
3,537,518

Capitron Bank:
During the year ended 31 December
Interest income
Interest expense
As at 31 December
Deposits and placements by banks
and other financial institutions
Subordinated loans (note 9)
MMC:
During the year ended 31 December
Interest income
Interest expense
As at 31 December
Asset-backed securities (note 5)
Borrowings (note 17)

44

F-44

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

34

Significant transactions and balances with related parties (continued)

2011
MNT000

2010
MNT000 9

Executive officers:
During the year ended 31 December
Interest income
As at 31 December
Loans to executive officers

209,186

123,326

3,092,463

1,215,070

The loans to executive officers are included in loans and advances of the Group. Interest rates charged on
mortgage loans extended to executive officers are less than would be charged in an arms length
transaction. The mortgages granted are secured by the properties of the respective borrowers.
Total remuneration and employees benefit paid to the executive officers and directors for the years ended
31 December 2011 and 2010 amounted to MNT 2,458,660 thousand and MNT 1,647,874 thousand,
respectively.

45

F-45

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

35. Categories of financial instruments


The carrying amounts of the categories of financial assets and financial liabilities as of 31 December 2011
and 2010 are summarized as follows:
(In MNT000)

As at 31 December 2011

Held-tomaturity
investments
Financial assets
Cash and due from banks
Investment securities
Loan and advances
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)

Financial liabilities
Deposits from customers
Deposits and placements of
banks and other financial
institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)

Financial
liabilities
measured
at amortised
cost

Availablefor-sale
financial
assets

Loans and
receivables

Total

105,985,743
-

474,964,634
1,123,331,907

241,784,575
-

474,964,634
347,770,318
1,123,331,907

36,966,114
7,000,000
16,114,874

36,966,114
7,000,000
16,114,874

105,985,743

1,658,377,529

241,784,575

2,006,147,847

1,277,295,962

1,277,295,962

35,063,555

35,063,555

171,484,469
174,380,516
207,134,041

171,484,469
174,380,516
207,134,041

41,693,522
41,984,986

41,693,522
41,984,986

1,949,037,051

1,949,037,051

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

46

F-46

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

35. Categories of financial instruments (continued)


(In MNT000)

As at 31 December 2010

Held-tomaturity
investments
Financial assets
Cash and due from banks
Investment securities
Loan and advances
Subordinated loans
Other assets (*)

Financial liabilities
Deposits from customers
Deposits and placements of
banks and other financial
institutions
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)

Financial
liabilities
measured
at amortised
cost

Availablefor-sale
financial
assets

Loans and
receivables

Total

259,138,886
-

553,467,811
464,466,630
7,000,000
12,671,055

1,596,562
-

553,467,811
260,735,448
464,466,630
7,000,000
12,671,055

259,138,886

1,037,605,496

1,596,562

1,298,340,944

919,944,749

919,944,749

53,584,874
50,678,147
173,280,281

53,584,874
50,678,147
173,280,281

31,218,538
20,379,678

31,218,538
20,379,678

1,249,086,267

1,249,086,267

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

47

F-47

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

35. Categories of financial instruments (continued)


Net gains (losses) by financial instruments categories for the years ended 31 December 2011 and 2010 are
as follows:
(In MNT000)

For the year ended 31 December 2011

Interest
income

Fees and
commission
income

Interest
expenses

Held-to-maturity
investments
5,177,140
Loans and receivables
114,248,278
Available-for-sale
financial assets
24,075,063
Financial liabilities measured
at amortised cost
- (95,359,061)
143,500,481 (95,359,061)

Other
operating
income

Net
gains
(losses)

Impairment
losses

5,575,020

15,904

5,575,020

15,904

Other
comprehensive
income

5,177,140
(3,976,213) 115,847,085
-

24,090,967

3,736,050

- (95,359,061)

(3,976,213)

49,756,131

3,736,050

For the year ended 31 December 2010

Interest
income

Held-to-maturity
investments
Loans and receivables
Financial liabilities measured
at amortised cost

Fees and
commission
income

Interest
expenses

15,445,848
73,766,888

Other
operating
income

Impairment
losses

2,756,699

2,985
-

- (60,062,936)

89,212,736 (60,062,936)

2,756,699

2,985

48

F-48

Net
gains
(losses)

(164,700)

Other
comprehensive
income

15,448,833
76,358,887

- (60,062,936)

(164,700)

31,744,784

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management


(a) Introduction and overview
The Group has exposure to the following risks from its use of financial instruments:
 s
 s
 
This note provides information about the Group's exposure to each of the above risks, the Group's
objectives, policies and processes for measuring and managing risk, and the Group's management of
capital.
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Groups risk
management framework. The Board has established the Asset and Liability Committee (ALCO) and
Credit Committee, which are responsible for developing and monitoring the Groups risk management
policies in their specified areas.
The Groups risk management policies are established to identify and analyse the risks faced by the
Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk
management policies and systems are reviewed regularly to reflect changes in market conditions,
products and services offered. The Group, through its training and management standards and
procedures, aims to develop a disciplined and constructive control environment, in which all employees
understand their roles and obligations.
The Groups Representative Governing Board (RGB) is responsible for monitoring compliance with
the Groups risk management policies and procedures, and for reviewing the adequacy of the risk
management framework in relation to the risks faced by the Group. The RGB is assisted in these
functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk
management controls and procedures, the results of which are reported to the RGB.

49

F-49

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(b) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument
fails to meet its contractual obligations, and arises principally from the Groups loans and advances and
investment securities.
Management of credit risk
The Board of Directors has delegated responsibility for the management of credit risk to its Credit
Committee. Each branch is required to implement the Groups credit policies and procedures, with
credit approval authorities delegated from the Groups Credit Committee. Each branch is responsible for
the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its
portfolios, including those subject to central approval.
Regular audits of branches and credit processes are undertaken by Internal Audit.
An analysis of the net amounts of loans and investment securities with respective allowances at the
reporting date was shown below.
(In MNT000)

Loans and advances


2010
2011

Investment securities
2011
2010 .

Carrying amount

1,123,331,907

464,466,630

347,770,318

260,735,448

Neither past due nor impaired


Individually impaired
In arrears*
Non-qualitative loans:
a) Substandard
b) Doubtful
c) Loss

1,107,176,325

441,840,494

347,770,318

260,735,448

5,893,671

16,904,372

602,764
20,209,044
7,369,912

3,677,058
7,618,378
8,430,152

1,141,251,716
(17,919,809)

478,470,454
(14,003,824)

1,123,331,907

464,466,630

347,770,318

260,735,448

Gross amount
Allowance
Net carrying amount

*Loans included in this classification are those for which contractual interest or principal payments are
past due, but the Group believes that impairment is not appropriate based on the level of security
/collateral available and/or the stage of collection of amounts owed to the Group.

50

F-50

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(b) Credit risk (continued)
Impaired loans and securities
Impaired loans and securities are loans and securities for which objective evidence demonstrates that a
loss event has occurred after the initial recognition of the assets and that the loss event has an impact
on the future cash flows of the assets that can be estimated reliably.
Set out below is an analysis of the gross and net (after allowances for loan losses) amounts of
individually impaired assets by classifications.

2011
MNT000

Gross
In arrears
Substandard
Doubtful
Loss

Net

2010
MNT000

Fair value of
collateral

Gross

Net

Fair value of
collateral

5,893,671 5,598,987
602,764
452,073
20,209,044 10,104,522
7,369,912
-

9,201,702
835,869
25,649,350
14,088,045

16,904,372
3,677,058
7,618,378
8,430,152

16,059,153
2,757,793
3,809,189
-

18,821,035
7,941,407
10,171,200
18,797,633

34,075,391 16,155,582

49,774,966

36,629,960

22,626,135

55,731,275

The Group holds collateral against loans and advances to customers in the form of mortgage interests
over property, other registered securities over assets, and guarantees. Collateral generally is not held
over loans and advances to banks except when securities are held as part of reverse repurchase and
securities borrowing activities. Collateral usually is not held against investment securities, and no such
collateral was held at 31 December 2011 or 2010.
During 2011 and 2010, trade activity and foreign investment inflows related to mining increased
dramatically and the countrys foreign exchange reserves reached record levels. However, there has
been pickup in the inflation rate which could adversely affect the economic recovery and growth rate.
The ultimate collectability of the loans is subject to a number of factors, including the successful
performance of the debtors under various restructuring plans in place or in process of negotiation and
their ability to perform on loan and debt obligations given the status of the Mongolian economy and the
potential continuation of adverse trends or other unfavorable developments. Consequently, it is
reasonably possible that adjustments could be made to the reserves for impaired loans and to the
carrying amount of investments in the near term in amounts that may be material to the Groups
consolidated financial statements.

51

F-51

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(b) Credit risk (continued)
The Group monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk
at the reporting date is shown below:
2011
MNT000
Agriculture
Mining and quarrying
Manufacturing
Petrol import and trade
Corporate-trading
Construction
Electricity and thermal energy
Hotel, restaurant and tourism
Financial services
Transportation
Health
Education
Mortgage
Payment card
Saving collateralized
Others
Total

2010
MNT000

26,142,458
245,635,697
133,488,634
82,917,312
188,765,060
114,972,883
1,654,294
16,828,971
4,824,841
32,484,016
1,167,209
1,862,323
145,761,610
76,100,447
9,696,934
41,029,218

19,469,628
73,163,350
73,666,141
47,721,926
69,706,606
71,830,777
430,250
885,811
250,085
2,700,793
2,416,299
763,115
37,002,717
30,362,475
17,940,526
16,156,131

1,123,331,907

464,466,630

As stipulated in the Banking Law of Mongolia, the total value of loans, loan equivalent assets and
guarantees provided to one person or group of related persons shall not exceed 20% of the total equity
of the Group. The maximum value of loans, loan equivalent assets and guarantees provided to a
shareholder, the chairman, a member of the Representative Governing Board, an executive director or a
bank officer or any related person thereof shall not exceed 5% of the capital of the bank, and the their
total amount shall not exceed 20% of the capital of the Group respectively. The criteria for
concentration of loan as at 31 December 2011 are as follows:
Suitable ratios 31 December 2011

Description
The loan and guarantee given to one borrower
The loan and guarantee given to the single related party
Total loans and guarantees given to the related parties

52

F-52

<Eq 20%
<Eq 5%
<Eq 20%

19.28%
0.14%
5.26%

Violation
None
None
None

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial
liabilities. The Groups approach to managing liquidity is to ensure, as far as possible, that it will always
have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the Groups reputation.
The Group is exposed to frequent calls on its available cash resources from current deposits, maturing
deposits and loan drawdowns. The Groups ALCO sets limits on the minimum proportion of maturing
funds available to cover such cash outflows and on the minimum level of interbank and other borrowing
facilities that should be in place to cover withdrawals at unexpected levels of demand.
Exposure to liquidity risk
The key measure used by the Group for managing liquidity risk is the ratio of liquid assets to total
liabilities, which is in line with the liquidity ratio described in Banking Law of Mongolia. For this purpose
liquid assets are considered as including cash and cash equivalents, central bank bills, current accounts
and deposits placed with BOM and other domestic and foreign banks less clearing delay. Details of the
reported ratio of net liquid assets to deposits from customers/banks at the reporting date were as
follows:

At 31 December

53

F-53

2011

2010

43%

67%

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(c) Liquidity risk (continued)
The following table provides an analysis of the financial assets and liabilities of the Group into relevant
maturity groupings based on the remaining periods to repayment:
(In MNT000)
As at 31 December 2011

Less than
three
months

Three to six
months

Six months One to five


to one year
years

Over five
years

Total

Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with BOM
Investment securities
Loans and advances
Bills purchased under resale
agreements

Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements by
banks and other financial
Institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Issued financial guarantee
contracts
Unrecognised loan
commitments

Net financial assets/(liabilities)

50,082,881

164,507,210
256,761,023
190,288,320
157,193,922

3,613,520
4,935,000
142,224,407

36,966,114
11,071,193
866,870,663

50,082,881

43,230,986
66,829,742
270,585,048 423,227,062

42,486,270
130,101,468

168,120,730
256,761,023
347,770,318
1,123,331,907

238,663
151,011,590

4,000,000
3,000,000
1,605,223
3,080,805
319,421,257 496,137,609

118,990
172,706,728

36,966,114
7,000,000
16,114,874
2,006,147,847

1,003,029,541

104,920,628

130,060,162

39,285,631

1,277,295,962

12,806,845

13,222,910

9,033,800

35,063,555

171,484,469
9,488,089
-

2,536,009
-

33,011,844
-

116,573,536
207,134,041

12,771,038
-

171,484,469
174,380,516
207,134,041

23,845,440

1,540,471

3,066,030

41,693,522
13,422,653

110,392

41,693,522
41,984,986

98,373,660

98,373,660

131,121,269
1,450,149,313

122,220,018

175,171,836

418,109,383

12,881,430

131,121,269
2,178,531,980

(583,278,650)

28,791,572

144,249,421

78,028,226

159,825,298

(172,384,133)

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

54

F-54

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(c) Liquidity risk (continued)
(In MNT000)
As at 31 December 2010

Less than
three
months

Three to six
months

Six months One to five


to one year
years

Over five
years

Total

Financial assets
Cash on hand
Deposits and placements with
banks and other financial
institutions
Balances with BOM
Deposits with BOM
Investment securities
Loans and advances

Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placements by
banks and other financial
Institutions
Borrowings
Debt securities issued
Subordinated debt securities
issued
Other liabilities (**)
Issued financial guarantee
contracts
Unrecognised loan
commitments

Net financial assets/(liabilities)

35,987,964

285,957,895
79,820,367
150,861,600
222,527,870
92,332,037
9,779,482
877,267,215

35,987,964

268,000
55,221,671
2,440
55,492,111

839,985
5,569,000
30,774,016
118,710,644 175,998,480
7,000,000
112,633
2,641,651
125,232,262 216,414,147

1,596,562
22,203,798
134,849
23,935,209

286,797,880
79,820,367
150,861,600
260,735,448
464,466,630
7,000,000
12,671,055
1,298,340,944

602,396,176

82,131,265

219,566,200

15,851,108

919,944,749

53,584,874
8,656,916
-

727,550
-

6,571,988
-

28,312,092
173,280,281

6,409,601
-

53,584,874
50,678,147
173,280,281

7,701,692

978,270

3,196,945

31,218,538
8,160,104

342,667

31,218,538
20,379,678

73,427,994

73,427,994

45,236,892
791,004,544

83,837,085

229,335,133

256,822,123

6,752,268

45,236,892
1,367,751,153

(28,344,974) (104,102,871)

(40,407,976)

17,182,941

(69,410,209)

86,262,671

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

55

F-55

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 2010

36

Financial risk management (continued)


(d) Market risks
Market risk is the risk that changes in market prices, such as interest rate and foreign exchange rates
will affect the Groups income or the value of its holdings of financial instruments. The objective of
market risk management is to manage and control market risk exposures within acceptable parameters,
while optimising the return on risk.
Management of market risks
The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on
its financial position and cash flows. Interest rate risk is measured by the extent to which changes in
market interest rates impact margins and net income. To the extent the term structure of interest
bearing assets differs from that of liabilities, net of interest income will increase or decrease as a result
of movements in interest rates.
Interest rate risk is managed by increasing or decreasing positions within limits specified by the Groups
management. These limits restrict the potential effect of movements in interest rates on interest
margin and on the value of interest sensitive assets and liabilities.
Overall authority for market risk is vested with the ALCO.
Exposure to interest rate risks
The principal risk to which the Groups financial assets and liabilities are exposed is the risk of loss from
fluctuations in the future cash flows or fair values of financial instrument because of a change in market
interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by
having pre-approved limits for repricing bands. A summary of the Groups interest rate gap position on
its financial assets and liabilities are as follows:

56

F-56

F-57

Effective
Interest rate

1,949,037,051

57

408,680,633

54,791,831

35,063,555
171,484,469
174,380,516
207,134,041
41,693,522
41,984,986

4.00
16.25
4.14
9.84
13.58
-

57,110,796

12,806,845
41,984,986

1,277,295,962

5.99

(733,073,949)

1,184,002,099

171,484,469
9,488,089
-

1,003,029,541

450,928,150

463,472,464

2,006,147,847
-

66,479,794
190,288,320
157,193,922
36,966,114
-

98,027,416
256,761,023
42,486,270
16,114,874

168,120,730
256,761,023
347,770,318
1,123,331,907
36,966,114
7,000,000
16,114,874

Less than
three months

50,082,881

Non-interest
sensitive

50,082,881

Total

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

Net financial assets/(liabilities)

Financial liabilities
Deposits from customers
Deposits and placements by banks
and other financial institutions
Bills sold under repurchase agreements
Borrowings
Debt securities issued
Subordinated debt securities issued
Other liabilities (**)

Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
2.18
Balances with BOM
Investment securities
10.21
Loans and advances
13.28
Bills purchased under resale agreements11.00
Subordinated loan
9.71
Other assets (*)
-

(In MNT000)

As at 31 December 2011

(d) Market risks (continued)

36 Financial risk management (continued)

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010

30,093,380

120,679,547

13,222,910
2,536,009
-

104,920,628

150,772,927

3,613,520
4,935,000
142,224,407
-

Three to six
months

145,710,228

172,105,806

9,033,800
33,011,844
-

130,060,162

317,816,034

43,230,986
270,585,048
4,000,000
-

Six months
to one year

88,370,074

404,686,730

116,573,536
207,134,041
41,693,522
-

39,285,631

493,056,804

66,829,742
423,227,062
3,000,000
-

One to five
years

117,330,430

12,771,038

12,771,038
-

130,101,468

130,101,468
-

Over five
years

F-58

36

130,075,948

1,298,340,944

1,249,086,267

58

56,111,396

73,964,552

53,584,874
50,678,147
173,280,281
31,218,538
20,379,678

6.87
9.81
13.78
-

49,254,677

53,584,874
20,379,678

919,944,749

6.54

79,820,367
1,596,562
12,671,055

286,797,880
79,820,367
150,861,600
260,735,448
464,466,630
7,000,000
12,671,055

0.77
0.09
9.47
14.51
9.93
-

35,987,964

Non-interest
sensitive

35,987,964

Total

Effective
Interest rate

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.

Net financial assets/(liabilities)

Financial liabilities
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Debt securities issued
Subordinated debt securities issued
Other liabilities (**)

Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Balances with BOM
Deposits with BOM
Investment securities
Loans and advances
Subordinated loan
Other assets (*)

(In MNT000)

As at 31 December 2010

(d) Market risks (continued)

Financial risk management (continued)

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010

140,626,310

611,053,092

8,656,916
-

602,396,176

751,679,402

285,957,895
150,861,600
222,527,870
92,332,037
-

Less than
three months

(27,369,144)

82,858,815

727,550
-

82,131,265

55,489,671

268,000
55,221,671
-

Three to six
months

(101,018,559)

226,138,188

6,571,988
-

219,566,200

125,119,629

839,985
5,569,000
118,710,644
-

Six months
to one year

(34,889,523)

248,662,019

28,312,092
173,280,281
31,218,538
-

15,851,108

213,772,496

30,774,016
175,998,480
7,000,000
-

One to five
years

15,794,197

6,409,601

6,409,601
-

22,203,798

22,203,798
-

Over five
years

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
36

Financial risk management (continued)


(d) Market risks (continued)
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the
sensitivity of the Groups financial assets and liabilities to various standard and non-standard interest rate
scenarios. An analysis of the Groups sensitivity to a 100 basis point (bp) increase or decrease in market
interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position)
is as follows:
100 bp parallel
100 bp parallel
increase
decrease
MNT000
9
MNT000
Sensitivity of projected net interest income
2011
At 31 December

(5,862,038)

5,862,038

2010
At 31 December

806,877

(806,877)

59

F-59

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
36

Financial risk management (continued)


(d) Market risks (continued)
Exposure to foreign exchange rate risks
The Group is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial
position and cash flows. The Groups management sets limits on the level of exposure by currencies (primarily USD)
and in total. These limits also comply with the minimum requirements set by BOM.

(In MNT000)
2011
Foreign
MNT
denominated currencies
Financial assets
Cash on hand
Deposits and placements with
banks and other financial
instruments
Balances and deposits with
the BOM
Investment securities
Loan and advances
Bills purchased under resale
agreements

Subordinated loans
Other assets (*)
Financial liabilities
Deposits from customers
Deposits and placement by
bank and other financial
institutions
Bills sold under repurchase
agreements

Borrowings
Debt securities issued
Subordinated debt
Other liabilities (**)

Net financial assets/(liabilities)

21,715,130

MNT
denominated

Total

28,367,751

50,082,881

31,294,094 136,826,636

Total

21,302,792

35,987,964

168,120,730

13,363,860 273,434,020

286,797,880

103,966,754 152,794,269
347,770,318
502,295,898 621,036,009

256,761,023
347,770,318
1,123,331,907

36,131,526 194,550,441
260,735,448
200,209,626 264,257,004

230,681,967
260,735,448
464,466,630

36,966,114
7,000,000
9,569,447
6,545,427
1,060,577,755 945,570,092

36,966,114
7,000,000
16,114,874
2,006,147,847

7,000,000
7,000,000
7,346,519
5,324,536
12,671,055
539,472,151 758,868,793 1,298,340,944

755,270,967 522,024,995

1,277,295,962

440,274,228 479,670,521

242,032

34,821,523

35,063,555

171,484,469
85,539,860 88,840,656
- 207,134,041
- 41,693,522
22,696,568 19,288,418
1,035,233,896 913,803,155

171,484,469
174,380,516
207,134,041
41,693,522
41,984,986
1,949,037,051

25,343,859

31,766,937

57,110,796

14,685,172

2010
Foreign
currencies

27,033

53,557,841

919,944,749

53,584,874

12,505,774 38,172,373
50,678,147
- 173,280,281
173,280,281
- 31,218,538
31,218,538
13,317,694
7,061,984
20,379,678
466,124,729 782,961,538 1,249,086,267
73,347,422 (24,092,745)

49,254,677

(*) Prepayments, precious metal and inventory supplies were excluded.


(**) Unearned income was excluded.
A ten percent strengthening of the MNT against the USD at 31 December 2011 and 2010 would have increased (decreased)
profit by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain
constant.

Ten percent
strengthening
MNT000
9
2011
At 31 December

(3,176,694)

2010
At 31 December

2,409,275

At ten percent weakening of the MNT against the USD at 31 December 2011 and 2010 would have had the equal but
opposite effect on the above currency to the amounts shown above, on the basis that all other variables remain constant.

60

F-60

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
36

Financial risk management (continued)


(e) Capital Management
BOM sets and monitors capital requirements for the Group as a whole.
The Bank of Mongolia requires the Group to maintain a minimum capital adequacy ratio of 12%, complied
on the basis of total capital and total assets as adjusted for their risk (CAR) and a minimum of 6%
complied on the basis of total tier 1 capital and total assets as adjusted for their risk (TCAR).
Various limits are applied to elements of the capital base. The qualifying tier 2 capital cannot exceed tier 1
capital; and qualifying term subordinated borrowings capital may not exceed 50 percent of tier 1 capital.
Risk-weighted assets are determined according to specified requirements that seek to reflect the varying
levels of risk attached to assets and off-balance sheet exposures.
The Groups policy is to maintain a strong capital base so as to maintain investors, creditors and market
confidence and to sustain future development of the business. The impact of the level of capital on
shareholders return is also recognised and the Group recognises 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 Group has complied with all externally imposed capital requirements throughout the period. There have
been no material changes in the Groups management of capital during the year.

61

F-61

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
36

Financial risk management (continued)


The suitable ratios of the Groups capital adequacy as at 31 December 2011 and 2010, respectively, were
as following:
2011
MNT000
Tier I Capital
Share capital
Share premium
Treasury shares
Retained earnings
Adjustment

Tier II Capital
Revaluation reserve
Unrealised gain on available-for-sale financial assets
Subordinated debt securities issued

Total Tier I and Tier II capital

2010
MNT000

6,610,113
7,392,191
(6,001,872)
108,976,296
116,976,728

6,610,113
7,392,191
(6,001,872)
66,873,841
74,874,273

18,702,066
3,736,050
41,693,522
64,131,638

13,418,276
31,218,538
44,636,814

181,108,366

119,511,087

Breakdown of risk weighted assets as follows:


2011
MNT000
Risk weighted factor (%)
20
35
50
100
150
Foreign currency exposure (*)

2010
MNT000

21,339,512
177,548,559
1,195,358,903
3,170,362
31,766,937

42,476,431
44,116,891
582,218,086
40,874,390
24,108,494

1,429,184,273

733,794,292

Capital ratios
Total regulatory capital expressed as a percentage of
total risk-weighted assets (CAR)

12.67%

16.29%

Total tier I capital expressed as a percentage of riskweighted assets (TCAR)

8.18%

10.20%

On 30 October 2008, BOM revised their capital adequacy prudential ratio calculation by ceasing the
value-at-risk (VaR) method and reverting to the traditional method for the calculation of foreign
currency exposure as part of its risk weighted average assets.

62

F-62

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
37

Fair values of financial assets and liabilities


Determination of fair value and fair value hierarchy
Amendments to IFRS 7 Financial Instruments: Disclosures require enhanced fair value and liquidity
disclosures. In accordance with amendments to IFRS 7, the Group follows the following hierarchy for
determining and disclosing the fair value of financial instruments based on the level of significant inputs
used in measurement.
Level 1: Fair value is based on quoted prices in active markets for identical assets or liabilities
Level 2: The inputs used for fair value measurement are market observable inputs, either directly or
indirectly.
Level 3: Valuation techniques are used to estimate fair value of which significant inputs are not based on
observable market data.
Fair value of financial assets and liabilities not carried at fair value
The Group determines fair values for those financial instruments which are not carried at fair value in the
consolidated financial statements as follows:
(i)

Financial assets and liabilities for which fair value approximates carrying amount

For financial assets and financial liabilities that are liquid or having short term maturity of less than one year,
it is assumed that the carrying amounts approximate to their respective fair value. This assumption is also
applicable to demand deposits, time deposits and variable rate financial instruments, which is principally
due to the fact that the current market rates offered for similar deposit products do not differ significantly
from market rates at inception.
(ii)

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortized cost basis are estimated by
comparing market interest rates when they were first recognised with the current market rates offered for
the similar financial instruments available in Mongolia. For quoted debt issued, the fair values are
measured based on quoted market prices and in case where observable market inputs are not available, a
discounted cash flow model is employed.

63

F-63

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
37

Fair values of financial assets and liabilities (continued)

(In MNT000)
Financial assets
Cash on hand
Deposits and placements with banks
and other financial institutions
Investment securities
Loans and advances to customers
Bills purchased under resale
agreements
Subordinated loans
Other assets (*)

Carrying amount Fair value Carrying amount Fair value


2011
2011
2010
2010
Note
MNT 000
MNT 000
MNT 000
MNT 000

4
4
5
7
8
9
13

50,082,881

50,082,881

35,987,964

35,987,964

424,881,753 424,881,753
347,770,318 347,689,891
1,123,331,907 1,178,452,870

517,479,847
260,735,448
464,466,630

517,479,847
260,680,153
478,965,440

7,000,000
12,671,055

7,000,000
12,671,055

36,966,114
7,000,000
16,114,874

36,966,114
7,000,000
16,114,874

2,006,147,847 2,061,188,383 1,298,340,944 1,312,784,459


Financial liabilities
Deposits from customers
Deposits and placements by banks
and other financial institutions
Bills sold under repurchase
agreements
Borrowings
Debt securities issued
Subordinated debt securities issued
Other liabilities (**)

14

1,277,295,9621,220,954,963

919,944,749

906,916,013

15

35,063,555

35,063,555

53,584,874

53,584,874

16
17
18
19
20

171,484,469
174,380,516
207,134,041
41,693,522
41,984,986

171,484,469
174,380,516
200,563,416
49,190,702
41,984,986

50,678,147
173,280,281
31,218,538
20,379,678

50,678,147
177,113,446
31,822,526
20,379,678

1,949,037,051 1,893,622,607 1,249,086,267 1,240,494,684


(*) Prepayments, precious metal and inventory supplies were excluded.
(**) Unearned income was excluded.

64

F-64

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Notes to Consolidated Financial Statements
31 December 2011 and 31 December 2010
38

Commitment and contingent liabilities


At any time the Group has outstanding commitments to extend credit, these commitments take the form of
undrawn portions of approved loans, credit card limits and overdraft facilities.
The Group provides financial guarantees and letters of credit to guarantee the performance of customers
third parties. These agreements have fixed limits and generally extend for a period of less than one year.
The Group also provides guarantees by acting as settlement agent in securities borrowing and lending
transactions. The contractual amounts of commitments and contingent liabilities are set out in the following
table by category.
The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting
loss that would be recognised at the reporting date if counterparties failed completely to perform as
contracted.
2011
MNT000

As at 31 December
Letters of credit and guarantees
Loan and credit card commitments

98,373,660
131,121,269

2010
MNT000

73,427,994
45,236,892

These commitments and contingent liabilities have off balance-sheet credit risk for which provisions are not
currently made which is a local banking industry practice acknowledged by BOM. A significant portion of
the contingent liabilities and commitments will expire without being advanced in whole or in part.
Accordingly, the amounts do not represent expected future cash flows.

65

F-65

F-66

KPMG Samjong Accounting Corp.


11th Floor, Gangnam Finance Center,
737 Yeoksam-dong
Gangnam-gu, Seoul 135-984
Republic of Korea

Tel. 82-2-2112-0100
Fax. 82-2-2112-0101
www.kr.kpmg.com

Independent Auditors Report

Members
Trade and Development Bank of Mongolia LLC:

We have audited the accompanying cosolidated financial statements of Trade and Development Bank of
Mongolia (the Bank) and its subsidiary (together the Group), which comprise the consolidated statements of
financial position as at 31 December 2010 and 2009, and the consolidated statements of comprehensive income,
changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as modified by Bank of Mongolia guidelines and for
such internal control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with International Standards on Auditing. Those standards require that we
comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In
making those risk assessments, we consider internal control relevant to the entitys preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal
control. An audit also includes evaluating the appropriateness of accounting principles used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.

F-67

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis
for our opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial
position of the Group as at 31 December 2010 and 2009, and of its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards
as modified by Bank of Mongolia guidelines.
Other Matters
This report is made solely to the members of the Bank, as a body, and for no other purpose. We do not assume
responsibility to any other person for the content of this report.

KPMG Samjong Accounting Corp.


18 March 2011
Seoul, Korea

F-68

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Financial Position
31 December 2010 and 2009
2010
MNT000

2009
MNT000

553,467,811
260,735,448
464,466,630
7,000,000
19,811,084
655,894
977,345
31,765,857

266,984,760
90,300,363
406,214,658
799,556
7,000,000
21,439,909
800,719
2,099,347
14,724,800

1,338,880,069

810,364,112

13

919,944,749

579,522,778

14
15

53,584,874
50,678,147
1,481,974
173,280,281
31,218,538
20,398,957

31,469,241
53,301,993
1,343,586
59,639,556
17,946,008

1,250,587,520

743,223,162

6,610,113
7,392,191
(6,001,872)
13,418,276
66,873,841

6,610,113
7,392,191
(6,456,232)
13,683,324
45,911,554

88,292,549

67,140,950

1,338,880,069

810,364,112

Note
Assets
Cash and cash equivalents
Investment securities
Loans and advances, net
Bonds purchased under resale agreements
Subordinated loans
Property and equipment, net
Intangible assets, net
Foreclosed properties, net
Other assets

4
5
6
7
8
9
10
11
12

Total assets

Liabilities and Shareholders equity


Liabilities:
Deposits from customers
Deposits and placements of banks
and other financial institutions
Borrowings
Current tax payables
Debt securities issued
Subordinated debt securities issued
Other liabilities

16
17
18

Total liabilities
Shareholders equity:
Share capital
Share premium
Treasury shares
Revaluation reserves
Retained earnings

19
20
9

Total shareholders equity


Total liabilities and shareholders equity

See accompanying notes to consolidated financial statements.

F-69

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Comprehensive Income
For the years ended 31 December 2010 and 2009

Note
Interest income
Interest expense

21
22

2010
MNT000

2009
MNT000

89,212,736
(60,062,936)

77,313,558
(45,743,365)

29,149,800

31,570,193

6,852,031
9,277,305

6,054,442
6,054,990

Net non-interest income

16,129,336

12,109,432

Operating income

45,279,136

43,679,625

(18,578,760)
(1,725,360)

(17,683,001)
(8,426,289)

24,975,016

17,570,335

(4,277,777)

(2,598,784)

20,697,239

14,971,551

20,697,239

14,971,551

Net interest income


Net fee and commission income
Other operating income

23
24

Operating expenses
Allowance for impairment losses

25
26

Profit before tax


Corporate income tax

27

Net profit for the year

Other comprehensive income, net of income tax


Total comprehensive income

See accompanying notes to consolidated financial statements.

F-70

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Changes in Equity
For the years ended 31 December 2010 and 2009

Note
1 January 2009

Share
capital
MNT000

Share
premium
MNT000

Treasury
shares
MNT000

Revaluation
reserves
MNT000

Retained
earnings
MNT000

Total
MNT000

6,610,113

7,392,191

(6,456,232)

13,683,324

47,268,024

68,497,420

Net profit for the year

14,971,551

14,971,551

Total recognised income


and expense for the
year

14,971,551

14,971,551

- (16,328,021)

(16,328,021)

31 December 2009

6,610,113

7,392,191

(6,456,232)

13,683,324

45,911,554

67,140,950

1 January 2010

6,610,113

7,392,191

(6,456,232)

13,683,324

45,911,554

67,140,950

Net profit for the year

20,697,239

20,697,239

Total recognised income


and expense for the
year

20,697,239

20,697,239

Sale of treasury shares

454,360

454,360

(265,048)

265,048

6,610,113

7,392,191

(6,001,872)

13,418,276

66,873,841

88,292,549

Dividends to equity
holders

Amount transferred to
retained earnings
31 December 2010

28

See accompanying notes to consolidated financial statements.

F-71

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Cash Flows
For the years ended 31 December 2010 and 2009

Note
Cash flows from operating activities:
Net profit
Adjustments for:
Depreciation and amortisation
Net interest income
Income tax expense
Property and equipment written off
Allowance for impairment losses

2010
MNT000

2009
MNT000

20,697,239

14,971,551

2,473,750
(29,149,800)
4,277,777
2,258
1,725,360

2,004,581
(31,570,193)
2,598,784
2,630
8,426,289

26,584

(3,566,358)

Decrease (increase) in loans and advances


Increase in other assets
Increase in deposits from customers
Increase (decrease) in deposits and placements of banks
and other financial institutions
Subordinated loans disbursed
Decrease in other liabilities*
Interest received
Interest paid
Corporate income tax paid

(58,393,449)
(12,448,853)
340,421,971

23,228,088
(2,650,389)
205,052,704

22,115,633
-(184,550)
81,795,098
(57,256,310)
(4,139,389)

(2,008,475)
(3,000,000)
(205,682)
76,949,688
(45,760,347)
(1,731,202)

Net cash flows provided by operating activities

311,936,735

246,308,027

Cash flows from investing activities:


Purchase of investment securities
Proceeds from bonds purchased under resale agreements
Purchase of property and equipment
Purchase of intangible assets
Proceeds from disposal of foreclosed property
Proceeds from disposal of property and equipment
Purchase of unquoted equity securities

(168,704,504)
799,556
(1,233,200)
(358,878)
819,716
889,720
(186,744)

(50,859,226)
(799,223)
(1,169,993)
(246,679)
578,041
-(65,793)

Net cash flows provided by (used in) investing activities

(167,974,334)

(52,562,873)

25

25
26

Operating profit (loss) before changes in operating


assets and liabilities

*Represents fluctuation of other liabilities other than changes in interest payable

See accompanying notes to consolidated financial statements.

F-72

TRADE AND DEVELOPMENT BANK OF MONGOLIA LLC AND ITS SUBSIDIARY


Consolidated Statements of Cash Flows, continued
For the years ended 31 December 2010 and 2009

Note

2010
MNT000

2009
MNT000

Cash flows from financing activities:


Repayment of borrowings
Proceeds from (repayment of) debt securities issued
Repayment of subordinated borrowings
Proceeds from subordinated debt securities