(GS) The Goldman Sachs Group Invests in Mongolian Bank

On Thursday, Reuters reported that New York-based The Goldman Sachs Group Inc. (GS) has agreed to purchase 4.8% stake in Mongolia’s Trade and Development Bank. The terms of the deal were not disclosed.

Founded in 1990, Trade & Development Bank was the first lending bank in Mongolia. In 2004, Asian Development Bank and International Finance Corp. have invested $11 million in the bank. As of September 2011, the bank had $1.3 billion worth of assets. Under the new Dodd-Frank rules, Goldman’s stake in the bank was restricted to 4.8%, as any investment exceeding 4.99% would require a particular exemption from the US Federal Reserve.

In December 2010, Moody’s Investors Service, a credit rating arm of Moody’s Corporation (MCO) raised Trade & Development Bank’s outlook to stable from negative. This upgradation in the outlook was driven by the bank’s improvement in liquidity, capital position and asset quality trend.

In Mongolia, the economy is currently facing liquidity crunch amid government levied policies. The government is trying to curb double-digit inflation by restraining lending. Since November 2011, banks are not in a positon to lend due to lack of funds.

Moreover, the central bank has also raised reserve requirements, which is a bigger restraint in lending for Mongolian banks. Therefore, these banks are looking for foreign investments to meet their capital needs.

Mongolia’s wide mineral deposits have successfully attracted several foreign investors. Therefore, through its minig boom, the country is undergoing an economic revolution

By late 2008, the country faced the global financial crisis and a significant drop in commodity prices had reduced the government revenues. In early 2009, the country emerged from the crisis after reaching a $236 million Stand-by Arrangement with the International Monetary Fund. The banking sector of the country is still recovering from instability that took place during 2008 crisis and the government has started to endorse supervision regulations.

The economy grew 6.1% in 2010 and 9.8% in 2011, mostly based on the strength of commodity exports to nearby countries. Moreover, an investment agreement for the enormous coal mine at Tavan Tolgoi is in progress. The agreemnt is under review by the National Security Council and a final decision is anticipated in 2012.

Amid uncertain global economy, growth in the mining sector and commodity exports have accelerated the development of economy in Mongolia, which in turn attracted investors. In the third quarter of 2011, Mongolia’s economy grew 20.8%. Trade & Development Bank anticipates investment of about $68 billion in new mines, roads and housing within four years in the country.

Goldman is one of those foreign banks who has shown interest in the Mongolian economy. Goldman’s global expertise, experience and financial strength will help development to take place in the Mongolian bank.

We expect more of such investments in the near term. Goldman’s buying stake in the Mongolian bank indicates its plan to gain exposure in a Mongolian economy whose growth is stimulated by the developing resources of the country.

Goldman currently retains its Zacks #3 Rank, which translates to a short-term Hold rating.

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