OUR COMMITMENT TO OUR CUSTOMERS 5 KHAN BANK AT A GLANCE 6 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS 7

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1 ANNUAL REPORT 2015

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3 CONTENTS OUR COMMITMENT TO OUR CUSTOMERS 5 KHAN BANK AT A GLANCE 6 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS 7 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER 8 HIGHLIGHTS OF KHAN BANK AWARDS 11 CORPORATE GOVERNANCE 12 SHAREHOLDERS 12 BOARD OF DIRECTORS 14 EXECUTIVE MANAGEMENT 16 FINANCIAL HIGHLIGHTS 17 RETAIL BANKING 19 SMALL AND MEDIUM ENTERPRISE (SME) BANKING 21 WHOLESALE BANKING 23 BUSINESS DEVELOPMENT 24 TREASURY AND INVESTMENT BANKING 27 RISK MANAGEMENT 32 INFORMATION TECHNOLOGY 37 COMPLIANCE 38 INTERNAL AUDIT 39 HUMAN RESOURCES 40 CORPORATE SOCIAL RESPONSIBILITY 41 FINANCIAL STATEMENTS

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5 OUR COMMITMENT TO OUR CUSTOMERS Since its establishment, Khan Bank has been committed to transparency, openness, and fairness, which serve as the foundation of our success and which benefit society. All our activities are guided by these principles, and they remain our key commitment to our customers. Khan Bank values and respects our customers. We adhere to internationally accepted policies on confidentiality and transparency. 5

6 Annual report 2015 KHAN BANK AT A GLANCE Khan Bank was established in 1991 as the Agricultural Cooperative Bank, following the dissolution of the former State Bank of Mongolia. The Bank assumed control of most of the assets and businesses of State Bank in rural Mongolia. Although the Bank was privately owned, its business remained heavily influenced by the government, and in 1999 it was placed into receivership by the Bank of Mongolia (BoM). In 2000, under World Bank guidance, a restructuring plan was developed. The Government of Mongolia assumed ownership and recapitalized the Bank, and an external management team, funded by the United States Agency for International Development, was brought in to implement the plan. In 2003 the Bank was successfully privatized through international tender. Sawada Holdings Co., Ltd., the Bank s majority shareholder, acquired 100% of the shares and subsequently sold 40% of the shares to Tavan Bogd Trade Ltd. International Finance Corporation became a shareholder in In 2006 the Bank s name was officially changed to Khan Bank LLC. Today, the Bank operates throughout all of Mongolia, with branches in Ulaanbaatar and rural Mongolia, and an office in every province capital, soum center, and border point. Through this extensive network, the Bank provides comprehensive banking services to individuals, small and medium-sized enterprises (SMEs), and corporate customers. The Bank is a major provider of payment services, including salaries, pensions, social welfare payments, and remittances. Card services are provided to over 1.8 million customers. Continued investment in technology has resulted in access to online banking at all branches and extensive ATM network covering Ulaanbaatar, province capitals, and major soum centers as well as nationwide access to Internet, Mobile and Smart Phone banking. In addition to a full range of loan and deposit products, the Bank provides foreign exchange, trade finance, cash management, and international payment services to its commercial customers: SMEs, corporate, and institutional. 6

7 MESSAGE FROM THE CHAIRMAN OF THE BOARD HIDEO SAWADA Chairman, Board of Directors I am pleased to present Khan Bank s 2015 annual report. Thanks to our customers continued support and the dedication and hard work of Khan Bank s staff, the Bank has reported record earnings this year in an otherwise challenging environment. The continued slump in commodity prices, copper and coal in particular, as well as the slow-down in China s economy negatively affected Mongolia in 2015; with GDP growth reduced for the year accompanied by a steep decline in foreign direct investment and continued pressure on the tugrik. Increased unemployment, lower demand, and a lack of liquidity in the markets has affected all of our customers. On a positive note, in December 2015, Oyu Tolgoi LLC signed a USD 4.4 billion project finance facility with a syndicate of international financial institutions and commercial banks for the start of the underground development of the mine in 2016, which when completed is expected to account for 30% of Mongolia s GDP. Against this backdrop, Khan Bank is managing its business prudently, maintaining our focus on our core businesses, monitoring risk, and ensuring we are well capitalized and liquid. This has positioned us well to manage the downturn and to be ready for growth as the economy recovers. I am pleased to announce that John Bell has succeeded Norihiko Kato as CEO, effective April Mr. Kato is stepping down after overseeing five years of record performance at the Bank. On behalf of the Board, I would like to express our thanks to him for his achievements and his deep commitment to the Bank and its employees. Mr. Bell comes to the Bank with extensive retail banking and financial service experience in Central and Eastern Europe. We are delighted to have him on board as the Bank and the industry head into a period of substantial change, technological advancement, and competition. My thanks again to our customers, the communities we serve, our partners, and our employees for their continued support. As we celebrate the Bank s 25th anniversary in 2016, we look forward to continued strong growth and performance over the coming years. HIDEO SAWADA Chairman of the Board 7

8 Annual report 2015 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER JOHN BELL Chief Executive Officer In 2015, Mongolia s GDP growth slowed to 2.3% with continued low commodity prices, minimal foreign direct investment, and continued depreciation of the currency (MNT). The government s budget deficit continued. Though the trade balance was positive with smaller turnover, the current account deficit continued, and foreign currency reserves stayed low. In January 2015, with inflation at 11% at year end 2014, the Central Bank of Mongolia (BoM) increased the policy rate from 12.0% to 13.0%. Most of BoM s policy credit programs were terminated, and money supply decreased. The inflation rate came down to a mere 1.9% at the end of In this difficult business environment, Khan Bank reported net profit after tax (NPAT) of MNT billion, an 12.1% increase over Return on assets (ROA) rose from 2.3% to 2.4%. Return on equity (ROE) decreased from 28.3% to 23.7%. Khan Bank s loan portfolio totaled MNT 3.0 trillion at year end, unchanged from the prior year. The lack of growth in loans reflects the economic downturn and risk averse lending policy of the Bank. Asset quality continued to be a challenge for the banking sector. Non performing loans (NPLs) as a percentage of the loan portfolio increased from 2.5% to 4.6% at year end 2015, versus 7.1% for the sector overall. The Bank takes a conservative approach to maintain its loan loss reserves at adequate level. We added MNT 52.2 billion to the loan loss reserves in 2015, with NPL coverage ratio remaining at a strong 82.0%. Total funding declined slightly from MNT 4.4 trillion to MNT 4.3 trillion due to a small decline in deposits. The Bank successfully raised USD million from international financial institutions while repaying USD 96.7 million in The combination of IFI borrowing in USD and long term currency swaps with BoM contributed to maintaining our MNT liquidity ratio at a level of about 25% throughout the year. 8

9 Capital adequacy remains strong. With good profitability and less loan growth, total capital adequacy ratio (CAR) increased from 17. 2% to 22.6%. The Bank s Tier 1 ratio increased from 11.1% to 15.6%. We increased statutory capital from MNT 33.0 billion to MNT 52.8 billion in December 2015 under BoM s new regulations. With Moody s credit rating B2, Khan Bank is Mongolia s only privately owned financial institution with a credit rating matching the sovereign. The Bank completed several important strategic steps in The Bank implemented a new card processing system which extends the functionality of card products into new areas. Additionally, we introduced 285 cash recycling ATMs to the market (200 more cash recycling ATMs in 2016), which now account for 44% of our network of total 652 ATMs. These ATMs have been well received by our customers, and they are part of the Bank s strategy to expand its product delivery channels through technology and to improve customer service across the entire Bank. The Bank continued its contribution to Mongolia s social development by supporting many programs in health, education, the environment and culture through the Khan Bank Foundation. For the fifth year, the Foundation supported the National Campaign against Cancer. The medical team of the National Cancer Center visited communities in many provinces to diagnose and treat cancer, and Khan Bank employees volunteered to promote cancer awareness and good health practices. In April 2016, I succeeded Norihiko Kato as CEO of the Bank. Mr. Kato departs having guided the Bank over the past five years of record performance. I am personally grateful to him for his support during the transition. I would also like to thank Khan Bank s customers, employees, and all other stakeholders for their continued confidence in the Bank. John Bell Chief Executive Officer 9

10 Annual report 2015 HIGHLIGHTS 2015 Khan Bank introduced 285 modern cash recycling ATMs for the first time in Mongolia. The total number of Khan Bank ATMs reached 650. In order to provide more convenient and efficient banking services to its customers, Khan Bank opened sixty technologically advanced 24/7 Express Banking Centers in Ulaanbaatar, Darkhan, and Orkhon. The Bank strengthened its financial capacity by raising USD 185 million long-term funding from international financial institutions and microfinance institutions. With the aim of helping its customers increase their financial security and providing them with opportunities to ease their financial burdens, Khan Bank conducted the Thank You Campaign 2015 and awarded 42 customers. We completed one of our largest IT system projects: the replacement of our card system. With its implementation, we expect to to bring our card products up to true global standards. Khan Bank was Mongolia s first recipient of a Payment Card Industry Data Security Standard (PCI DSS) Version 3.1 certificate. The Khan Bank Foundation implemented the National Campaign Against Cancer for the 5th year and screened a total of 20,555 individuals for cancer diseases. 10

11 KHAN BANK AWARDS The Banker, the international banking and finance magazine headquartered in London, named Khan Bank The Bank of the Year 2015 in Mongolia. Global Banking & Finance Review named Khan Bank The Best Retail Bank Mongolia 2015 acknowledging its reliable and solid financial position, programs, and projects implemented in order to support its customers and to offer wide access to a variety of banking services. Capital Finance International magazine named Khan Bank The Best SME Bank Mongolia The Ministry of Population Development and Social Protection, National Social Insurance Council, and Social Insurance General Office named Khan Bank The National Top Employer - Best Social Insurance Premium Payer in 2015 for its valuable contributions to the country s development. The Customs General Administration and General Department of Taxation named Khan Bank The TOP Taxpaying Company of 2015 in recognition of Khan Bank s valuable contributions to the state budget, and presented a certificate and trophy for the highest award of the nation s tax authority. 11

12 Annual report 2015 CORPORATE GOVERNANCE Khan Bank defines corporate governance as a set of structures and processes for the direction and control of companies, involving a set of relationships between the Bank s shareholders, board, executive bodies and other stakeholders for the purpose of creating long-term stakeholder value. Khan Bank gives considerable importance to proper corporate governance practices. The Bank recognizes the rights of all stakeholders as established by laws and regulations, and encourages co-operation between the Bank and stakeholders in creating a sustainable and financially sound enterprise. SHAREHOLDERS Ownership % Sawada Holdings Co Ltd (Tokyo, Japan) 41.30% H.S. International (Asia) Ltd (Hong Kong) 13.10% Tavan Bogd Trade Co Ltd (Ulaanbaatar, Mongolia) 22.96% D. Khulan (Ulaanbaatar, Mongolia) 13.32% International Finance Corporation 9.32% % Sawada Holdings Co, Ltd. (SHD) is a publicly listed financial holding company (8699: Tokyo Stock Exchange). The company was founded in 1958, and is engaged in securities trading and brokerage, banking (including Khan Bank), real estate, casualty insurance, venture capital, and other investment and financial services through its group companies. 12

13 SHD has been the majority shareholder of Khan Bank since March 2003, when it acquired 100% of Khan Bank through privatization of the Bank via an international tender. In July 2003 SHD sold 40% of its shares to Tavan Bogd Trade Co., Ltd. In 2008 the company transferred a portion of its shares to its wholly owned Hong Kong subsidiary, H.S. International (Asia) Limited. Directly and indirectly through H.S. International, SHD owns 54.40% of Khan Bank. Hideo Sawada, Khan Bank s Chairman, owned 26.1% of SHD as of December 31, Tavan Bogd Trade Co., Ltd (TBT) is the flagship company of the Tavan Bogd group of companies. Founded in 1995 and headquartered in Ulaanbaatar, TBT and its subsidiaries and affiliates are engaged in trade and services, manufacturing, tourism and hospitality, mining equipment supply, and banking. Well known TBT businesses include Gobi Cashmere, Ulaanbaatar Flour, and Kempinski Hotel Khan Palace. TBT is also an official distributor of Toyota, Volkswagen, Toto, Bridgestone, Xerox and franchisee of KFC and Pizza Hut. TBT has ranked in the Mongolian Chamber of Commerce s Top 150 Enterprises for the past 14 years. TBT is privately owned. Khan Bank s board member Ts. Baatarsaikhan is a founder, majority shareholder and President of Tavan Bogd Group. TBT has been a shareholder of Khan Bank since July D. Khulan is a founder, shareholder, and Executive Vice President of the Tavan Bogd Group. A Mongolian citizen, she has been a member of the Bank s Board of Directors since 2003, and a Khan Bank shareholder since International Finance Corporation (IFC), a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries. Established in 1956, IFC is owned by 184 member countries, a group that collectively determines its policies. IFC operates in more than 100 developing countries including Mongolia. IFC has been a shareholder of Khan Bank since The IFC also provides trade facilities and loans to Khan Bank, including senior and subordinated term debt, as well as technical assistance. 13

14 Annual report 2015 BOARD OF DIRECTORS Khan Bank s Board of Directors (BoD) has a wealth of experience in financial services, blending local expertise and understanding with knowledge and experience in international markets. The Board of Khan Bank currently consists of seven members who are elected on an annual basis by Khan Bank s shareholders. Hideo Sawada, President and CEO of Sawada Holdings Co., Ltd. Chairman of the Board of Directors since Japanese citizenship. Yoshiaki Mishima, Director of Sawada Holdings Co., Ltd. Member of the Board since Japanese citizenship. Ts. Baatarsaikhan, President of Tavan Bogd Group. Member of the Board since Mongolian citizenship. D. Khulan, Executive Vice President of Tavan Bogd Group. Member of the Board since Mongolian citizenship. Jemal-ud-din Kassum, IFC Consultant. Member of the Board since USA citizenship. Robert Dressen, Senior Banking & Finance Advisor to Development Alternatives Inc. (Bethesda Maryland, USA). Member of the Board since He was appointed as an Independent Director in April USA citizenship. D.Molomjamts, Senior Advisor to the Board of the International Investment Bank (Moscow, Russia). Member of the Board since 2011, elected an Independent Board Member. Mongolian citizenship. The Board of Directors meets monthly, including two in-person meetings in Ulaanbaatar and ten conference calls. To enhance the overall effectiveness of the Board by ensuring focus, oversight, and monitoring of sensitive areas, the Board has created three committees: AUDIT COMMITTEE The Audit Committee oversees accounting and internal audit matters and performs related duties as described in its charter. The Audit Committee reviews the Bank s financial position and makes recommendations on a myriad of financial matters, including assessing the integrity and effectiveness of accounting methods, compliance, and other control systems. The Audit Committee serves to ensure that all processes within Khan Bank are undertaken with the greatest consideration for profitability, accountability, and transparency. RISK MANAGEMENT COMMITTEE The Risk Management Committee reviews overall potential risk exposure and makes appropriate recommendations upon the measurement, quantification, limitation, and amelioration of diverse elements of risk encountered in the operations and business of the Bank. GOVERNANCE AND REMUNERATION COMMITTEE The Governance and Remuneration Committee assists the Board in fulfilling its oversight responsibilities related to corporate governance and remuneration matters. The corporate governance of the Bank is periodically updated in line with the best practices of good governance and the requirements of the BoM. The committee is also responsible for reviewing and recommending to the Board of Directors the appointment of new directors and senior management, as well as all aspects of their remuneration and compensation packages. 14

15 HIDEO SAWADA Chairman of the Board of Directors, President and CEO of Sawada Holdings Co. Ltd TS. BAATARSAIKHAN Board member, President of Tavan Bogd Group YOSHIAKI MISHIMA Board member, Director of Sawada Holdings Co. Ltd D. KHULAN Board member, Executive Vice President of Tavan Bogd Group JEMAL-UD-DIN KASSUM Board member, IFC Consultant ROBERT DRESSEN D.MOLOMJAMTS Board member, Board member, Senior Banking & Finance Advisor Senior Advisor to the Board of the to Development Alternatives Inc. International Investment Bank 15

16 Annual report 2015 EXECUTIVE MANAGEMENT JOHN BELL Chief Executive Officer T. JAVKHLAN Senior Director of Retail Banking R. MUNKHTUYA First Deputy CEO ARVIND JOSHI Director of Information Technology G. MUNKHBAYAR Director of Finance J. GANBAT Director of Branch Management 16 N. OYUNKHAND Deputy CEO, Chief Credit Officer D. ENKHBAATAR Director of Internal Audit M. CHANTSALMAA Corporate Secretary B. ERDENEDELGER Director of Treasury and Investment Banking N. TUVSHINJARGAL Director of Operations

17 FINANCIAL HIGHLIGHTS Despite the slowdown of the Mongolian economy in 2015, Khan Bank maintained its leading position in the Mongolian banking system with its strong financial indicators. In the reporting year, Khan Bank achieved the following remarkable accomplishments, meeting all prudential ratios specified by the BoM, and ensuring its leadership in the market. PROFITABILITY Net profit after tax came in at MNT billion, a 12.1% increase over Higher interest income was partially offset by increased loan loss provisioning. Costs increased but at a lower rate than interest income. At the end of the year, ROA was 2.4%, while ROE was 23.7%, slight declines from CAPITAL Total capital, which includes equity and subordinated debt, increased MNT billion or 20.4% to MNT billion. The Bank s strong earnings were principally responsible for the increase. New subordinated debt totalled MNT 10 billion. Tier 1 capital adequacy (tier 1 capital as a percentage of risk weighted assets) was 15.6% versus the minimum prudential ratio requirement of 9.0%. Total capital adequacy was 22.6% versus the minimum prudential requirement of 14.0%. Net Profit After Tax Total Capital 121 (MNT billions) 788 (MNT billions) TOTAL ASSETS AND LIQUIDITY Total assets 5,116 5,117 Total assets increased MNT 1.1 billion to reach MNT 5.1 trillions in 2015, representing 24% of total banking system assets. Liquidity, measured as liquid assets, was 43.1%, in line with 2014 s 43.5% and minimum prudential requirement of 25.0%. 2,236 2,796 4,801 (MNT billions) 17

18 Annual report 2015 FUNDING Total funding was MNT 4.3 billion, or MNT billion below This was mainly related to the transfer of mortgage loans to Mongolian Mortgage Corporation and the repayment of mortgage loan funds to the Bank of Mongolia. Total funding 1,975 2,438 4,300 4,427 4,292 Seventy percent of the total deposits came from deposits from customers, which increased by billion MNT (9.5%) compared to the previous year s end. (MNT billions) LOANS The loan portfolio declined slightly reflective of the slowdown in the Mongolian economy. Loan market share on the other hand was up from 25% in 2014 to 27% in Total loans 1,394 1,758 2,489 3,036 3,030 (MNT billions) KHAN BANK MARKET SHARE Total Assets Total Capital Total Loans Total Deposits Profit After Tax 24% 24% 24% 24% 24% Branches ATMs POS Card Holders 24% 24% 24% 24% Khan Bank Other banks 18

19 RETAIL BANKING In 2015 Khan Bank focused on automating its services and providing more E-Banking services and products to its customers. The Bank s projects and programs implemented to support individuals and customers, as well as our loan portfolio in Retail Banking operations, have been recognized by international organizations, and Khan Bank was awarded Best Retail Bank of Mongolia LOANS AND DEPOSITS Retail Banking s deposits increased 8.4%, or MNT 193 billion, reaching MNT 2.5 trillion. In 2015, retail loans decreased by 3.5%, or MNT 82.4 billion, to MNT 2.3 trillion. As of year-end 2015, the loan portfolio was composed of consumer loans (67%), business loans (25%), and agriculture and herder s loans (8%). Retail Deposits Retail Loans 2,306 2,499 Agriculture Business Consumer 1,538 1,530 2,204 1, (MNT billions) (MNT billions) 19

20 Annual report 2015 RETAIL BANKING SOCIAL SERVICE PAYMENTS The Bank is engaged in long-standing collaboration to deliver public services to the Mongolian people at no cost, including the disbursement of pensions, social welfare payments, and children s welfare allowances. Over 43% of Mongolian pensioners, more than 150,000 people, receive monthly pension payments through Khan Bank. Over half of all students and 35%, or 360,000 children, receive monthly stipends or social welfare payments through the Bank. 24/7 EXPRESS BANKING CENTERS Khan Bank introduced ATMs to its operations in 2007, and the number of machines across Mongolia has reached 650. The Bank s cash recycling ATMs are the first ATMs in Mongolia to enable customers to deposit or withdraw up to MNT 5 million (250 banknotes) at one time, with a wide range of options to make cash deposit and withdrawal transactions, all types of payments and settlements, and to make internet banking transactions. These machines are the first technologically advanced ATMs in Mongolia with touch screen functions. Khan Bank opened a total of 60 self-service Express Banking Centers in more densely populated areas in Ulaanbaatar and other provinces to provide local residents with 24/7 banking services using Khan Bank payment cards. CAMPAIGNS During the reporting period, a three-month Thank You Campaign was organized to raise awareness about the significance of savings and to support customers in saving a portion of their income on a regular basis. The Bank awarded prizes to 42 customers who took part in the campaign. The Fun Summer Trip program was also organized to raise awareness about the benefits of savings among the younger generation, and to provide support for their future. Five children were selected to visit Nairamdal Camp, and 5 customers were awarded a trip to Hong Kong Disneyland and Ocean Park Hong Kong. MORTGAGE PROGRAM 20 Khan Bank is committed to the implementation of Mongolian economic, social, and development policies, and maintains steadfast cooperation with public organizations to deliver substantial projects and programs dedicated to the people. For the second consecutive year, the Bank was involved in the 8% mortgage program implemented by the Government of Mongolia, BoM, and Mongolian Mortgage Corporation (MIK). The Bank accepts mortgage loan applications at its branches and disburses loans after credit analysis and approval. Within the framework of the low interest loan program, Khan Bank disbursed MNT billion in mortgage loans to 3,280 qualifying borrowers in The Bank sells these loans in tranches to MIK, which purchased the mortgages through issuance of senior (90%) and junior (10%) residential mortgage-backed securities (RMBS). Khan Bank then transfers the senior RMBS to BoM, and in return, receives funding for further disbursement of mortgages, ensuring the continued implementation of the government s affordable housing initiative. The Bank retains the junior RMBS which absorb the first loss, if any, if MIK defaults on its bonds.

21 SMALL AND MEDIUM ENTERPRISE (SME) BANKING Sustainable and flexible support to SMEs is an important investment in the future development of the country. In this respect, Khan Bank has carried out a number of activities aimed at SMEs. Through its SME Centers, Khan Bank provides comprehensive banking and financial services to SME customers tailored to their needs. In addition to delivering banking services in a comfortable environment, SME Centers provide consultancy and assistance to customers for expanding their business, raising investment and managing their finances, in successfully developing our partnership. In this regard, we implement multiple projects to benefit SMEs while offering flexible loan conditions, as acquiring a loan is the primary tool for funding business expansion. Moreover, the Bank continues its involvement in and support for special purpose project loans which are funded by the Government, international organizations, and major domestic companies. These loans have a positive impact on creating economic diversification in a sustainable manner, benefiting micro and small business entrepreneurs, new employment and other objectives. In 2015, Khan Bank disbursed loans totaling MNT 31.9 billion to 2,087 companies and individuals under 15 different loan programs. Programs implemented in 2015 are summarized as follows: EXPORT PROMOTION AND IMPORT SUBSTITUTION PROJECT LOANS Khan Bank concluded an On-Lending Agreement with the Development Bank of Mongolia in 2013 to support export promotion and import substitution. program. In 2014, Khan Bank approved and disbursed MNT 2 billion loans to qualifying businesses and indiviuals. In 2015, the Bank approved and disbursed MNT 2.9 billion under this program. In 2015, the Bank entered into an On-Lending Agreement with Development Bank of Mongolia and the Small Medium Enterprise Development Fund (SMEDF) to foster export promotion, import substitution, and new employment within the Government s promotion of industrialization. Under this program, Khan Bank has disbursed MNT 11.7 billion loans to 123 borrowers. SOFT WORKING CAPITAL LOAN TO PROMOTE CASHMERE PRODUCTION AND INCREASE EXPORT Under the Regulation for Implementing Cashmere Production and Export Promotion Measures, the Government of Mongolia disbursed soft working capital loans through Khan Bank to cashmere producers with the purpose to support cashmere production, export promoting raw material processing, cashmere production, increase export and employment. 21

22 Annual report 2015 SMALL AND MEDIUM ENTERPRISE (SME) BANKING TWO-STEP-LOAN PROJECT FOR SME DEVELOPMENT AND ENVIRONMENTAL PROTECTION (JICA) Two-Step-Loan Project for SME Development and Environmental Protection is being implemented with a soft loan from the Japanese Government. The first step commenced in September 2006, and the second step commenced in March As the most active implementing bank in Mongolia, has disbursed MNT 41.1 billion and USD 3.1 million loans to 168 entities since the project began. This includes MNT 6.6 billion disbursed to 18 borrowers in MONGOLIAN SUSTAINABLE ENERGY FINANCING FACILITY (MONSEFF) PROJECT LOAN In order to support the financing for sustainable enery investment in trade and industrialisation sector of Mongolia, the European Bank for Reconstrction and Development (EBRD) initiated Mongolian Sustainable Energy Financing Facility and commenced disbursement of MONSEFF project loans. EBRD and Khan Bank concluded a loan agreement for the program on 20 November, The project loan shall be used to finance a project dedicated for promoting energy efficient consumption in the business operation of entities, save energy, support the utilization of renewable energy, upgrade of equipments and production line of enterprises. EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD) RISK SHARING PROGRAM Khan Bank concluded a Cooperation Agreement with the EBRD on 30 June, Under this program, EBRD will participate in up to 50% of the risk in Khan Bank loans on a funded and unfunded basis. This program gives Khan Bank access to EBRD expertise, funding and guarantees for its regular lending as well as strategically important larger-scale projects. CREDIT GUARANTEE FUND Upon a cooperation agreement between Khan Bank and the Mongolian Credit Guarantee Fund (CGF) established on 4 June, 2013, the Bank is jointly implementing the credit guarantee program provided by CGF. CGF offers credit guarantees to SMEs that are applying for MNT business loan at Khan Bank but may be unable to satisfy collateral requirements. Implementation of this program allows SMEs to receive guarantees for the lack of sound collateral. As of 31 December, 2015, guarantees were issued for loans totaling MNT 13.2 billion to 54 borrowers. 22

23 WHOLESALE BANKING The Wholesale Banking Department (WBD) delivers a full range of customized banking products and services to the Bank s larger corporate customers. At the end of 2015, WBD accounted for 21% of the Bank s total credit exposure and 9% of its total deposits which are managed by 35 relationship managers. WBD s customers include construction, trade, agriculture, food production, petroleum import, mining, group and holding companies, international institutions, liaison offices, embassies, and government agencies. WBD products include loans, deposits, payments, foreign exchange and cash management. Additionally, WBD offers retail banking products and services geared toward the employees of our corporate customers. Mortgage loans, salary loans, and consumer leasing for employees of corporate customers are in high demand. COMMERCIAL AND PROJECT LOANS In addition to lending loans through its own resources, WBD has provided project loans to several national producers in partnership with the Government of Mongolia, BoM, and Development Bank of Mongolia under programs for stabilizing the prices of key commodities, and for increasing the nation s exports and supporting the manufacturing of products to substitute imported goods. WBD has also successfully delivered co-financing by cooperating with international financial institutions and international development banks, particularly European Bank of Reconstruction and Development. TRADE FINANCE In 2015, WBD provided triple the trade financing than it had in previous years. We are increasing the amount of trade financing issued as Khan Bank s partnership with international financial institutions expands. As a result, we permit our customers to reduce their financial risk and overhead costs by providing financial tools and concessionary loans with more favorable terms, lower costs, and flexible payment conditions. MULTI- PURPOSE CREDIT FACILITY WBD has commenced issuing a credit facility for corporate customers with month terms and matched to their financial capacity and needs. Under the credit facility, customers have immediate access to working capital in multiple currencies, trade finance tools such as letters of credit and collection services, guarantees and trade finance loans. Khan Bank allows customers to monitor the use of their credit facilities. It helps customers save time and cost, improves their financial management, and sustains business continuity. 23

24 Annual report 2015 BUSINESS DEVELOPMENT COMPOUND INTEREST DEMAND DEPOSIT To meet customer needs, Khan Bank has introduced a demand deposit that calculates compound interest and deposits it monthly. Through this account, customers can enjoy an increased effective interest rate, receive an international UnionPay card for the account, and sign up for E-Banking services, which permits customers to check account balances and complete transactions, both intra and interbank, online or via mobile phone instead of visiting the bank. PENSION FUND Khan Bank has introduced pension savings for our corporate customers to help them to support their most valuable resource, employees, and to provide them with a stable and satisfactory workplace. Through the service, if employees deposit a certain amount of savings, employers will make a matching deposit to the same account. Employees are able to withdraw their savings after a certain period of time. CORPORATE TERM DEPOSIT 24 The annual interest rate of the corporate term deposit was increased in order to meet our corporate customers needs and to improve our competitiveness.

25 BUSINESS DEVELOPMENT PRODUCT PACKAGES Khan Bank launched the following product packages designed to meet various needs of customers, offering complex banking services to improve customer service, as well as providing product and service updates easily. Governmental Organization Package In order to improve the continuity and compliance of our deposit, loan, and e-banking services for governmental organizations, this product package has been introduced for employers and employees. The designated customer for this package is governmental organizations. Construction Industry Entrepreneur Package This package is designated for construction industry entrepreneurs, construction goods and material suppliers, and customers who are interested in real estate investments to improve their cooperation and to consolidate related services available at branches and sub-branches. Education Package In order to provide banking services suiting education sector needs, a product package for schools, employers, students and their parents has been introduced. The target customer of the package is private schools. Herder Package This package is designed for herders, to provide them with loans, deposits, e-banking products and services in order to help the target customer become more familiar with financial products and become accustomed to their use. CASH COLLECTION CARD This is a card product designed to collect the daily cash income of small and medium-sized enterprises, individuals, and big chain companies at cash recycling ATMs to cutting back on the need for teller transactions and to reduce cash handling risks. The card is for deposit transactions only, and unable to make other transactions. Individuals and corporate customers with the card are not required to visit bank branches in order to deposit daily cash income to their accounts, and there is no risk of compromising an account holder s private information or confidentiality. T/UNIONPAY DUAL CARD The T/UnionPay Dual Card is a card product jointly issued by UnionPay, an international card network, and Khan Bank. It enables customers to make transactions abroad using their domestic T account card. Customers traveling to foreign countries are typically required to purchase foreign currency to use abroad or to open an international USD account for deposit and debit card use. But, the T/UP Dual Card allows customers to deposit MNT to their account and to make transactions when traveling to Asian countries in other currencies. 25

26 Annual report 2015 BUSINESS DEVELOPMENT E-BILLING SERVICE We provided the opportunity for local customers to enroll for our e-billing service and to view their bills and make payments online, to take advantage of our Smart Phone Banking and Telephone Banking services, as well as to have payment for their bills automatically deducted from their account by adding authorization for local electricity companies. In order to reduce the workload of our tellers and payment processing companies, we added features for payment processing companies to add bills, download payment and billing information, and to request reports from the system. As for individual customers, we made it possible to add, edit, cancel, and prioritize utility payments, as well as set automatic payment dates or make a payment manually by using Smart Phone Banking and Telephone Banking services. INTERNET BANKING SERVICE A savings deposit service has been added to Internet Banking. Customers can now deposit savings by transferring funds from an account connected to Internet Banking to any other account in a specified amount, frequency, and time. TELEPHONE BANKING SERVICE Utility payment has been added to Telephone Banking. Electricity, mobile phone, and TV prepaid package bills can be paid for or monitored via this service at anytime and anywhere. Card deactivation is now also available in English. SMART PHONE BANKING SERVICE Utility bills can be paid or monitored at anytime and anywhere on a smart phone through the newly added e-billing Service. Fees and commissions for Social Insurance have been added to the payment menu. SMART ALERT SERVICE At the request of our customers, Smart Alert Service is now available with options for withdrawal or deposit for all transactions. CASH WITHDRAWALS FROM THE BANK OF INNER MONGOLIA UnionPay cardholders are provided with the opportunity to use the widest card network in Asia and China. This year, UnionPay cardholders are able to withdraw large amounts of cash through in-person teller transactions at branches of the Bank of Inner Mongolia, without having to find ATMs and without any potential risk. 26

27 TREASURY AND INVESTMENT BANKING LIQUIDITY Khan Bank consistently complied with BoM s prudential cash reserve requirement ratio of 12% and the liquidity ratio of 25% throughout the financial year. According to the Board approved risk appetite statement, ALCO manages liquidity with a minimum 5% buffer for an overall liquidity prudential ratio of 25%, or the maintenance of overall liquidity over 30%. Since March 2014, Khan Bank has been executing long term (>1 year) USD/MNT swap transactions with BoM to manage its foreign currency liquidity more efficiently. These transactions enable the Bank to convert its newly raised USD liquidity into MNT and to disburse loans in local currency, which enables KB to hedge its foreign currency risk for both the Bank and its customers. The long-term funding also plays an important role in managing the maturity mismatch of assets and liabilities. As required by its international lenders, the Bank also monitors liquidity coverage under Basel III s Net Stable Funding Ratio and has comfortably complied with it. MONEY MARKETS The Bank manages its excess liquidity by investing in low-risk, high liquidity, interest earning assets such as placement in BoM bills, government securities, and short term deposits in both the local and international interbank markets. The Bank continously maintained a leading position in the Mongolian money markets with a market share of 15.5% in BoM bills and 30.4% in government securities transactions at the end of In 2015, Khan Bank earned a total of MNT billion MNT in investment income from placement at the BoM and in government securities, an increase of 44.2% from the previous year. FOREX ACTIVITIES Khan Bank accounts for about 30% of market share in the foreign exchange (FX) market by delivering quality and timely FX services to its customers through its network. Khan Bank actively enters into short and long-term swap transactions with BoM and commercial banks in order to hedge the Bank s FX position and to access to liquidity. The Bank has also started offering short-term FX derivatives to our customers to manage their FX risk. 27

28 Annual report 2015 TREASURY AND INVESTMENT BANKING GOLD TRADING Khan Bank began purchasing physical gold from gold mining companies and individuals in March Trading for the year totaled 32,000 troy ounces of gold. We have opened a paper gold account with an international bank to hedge our gold position and to be ready to export physical gold as we prepared necessary documents this year. CORRESPONDENT BANKING Khan Bank maintains correspondent banking relationships with 25 banks through accounts denominated in 13 different currencies. Additionally, the Bank has credit lines totaling USD 300 million from over 70 international banks, further strengthening cooperation in foreign exchange and trade finance, and thereby assisting in transferring liquidity from the international interbank market. INTERNATIONAL REMITTANCES In 2015, Khan Bank, in its efforts to increase its spectrum of international remittances, managed to negotiate and maintain favorable terms in its cooperation with correspondent banks. Consequently, the Bank was able to maintain its competitiveness in fees and charges associated with international remittance. The Bank was able to successfully defend its market share in international remittance business through its efforts to bring international remittance services closer to its clients by establishing specialized branches and sub-branches despite the economic slowdown. TRADE FINANCE In 2015, notwithstanding the overall decrease in foreign trade turnover, Khan Bank successfully reached targeted growth in its trade finance portfolio through on-lending of funds attracted on flexible terms from the international market to its customers with strict alignment with their cash flow cycle and effective mitigation of risks associated with foreign trade. The Bank continues to provide its customers with comprehensive trade solutions to assist them in significantly lowering their costs for imported goods while maintaining clear control of foreign trade risks. These include refinancing of documentary credits, post-import financing based on trade documents, and medium to long-term financing in cooperation with foreign export credit agency s (ECAs). Additionally, the Bank provides guarantees, letters of credit, standby LC s, and counter guarantees to its customers in various strategic industries such as mining, construction, manufacturing projects, and wholesale operators, by assisting them in cooperating with large international companies with a view to mitigate risks associated with foreign trade. 28

29 TREASURY AND INVESTMENT BANKING INVESTMENT BANKING In 2015, the Bank strengthened its financial capacity by raising long-term funding USD 185 million from international financial institutions and micro finance institutions (MFIs). Despite the current economic downturn, the lenders have retained their confidence in the Bank and continued to provide their support in terms of funding and technical assistance. In November 2015, the Bank concluded a USD 70 million funding package with European Bank for Reconstruction and Development (EBRD). It will be used for supporting micro, small, and medium-sized enterprises playing important roles in the economy s development by developing a value chain financing model in the business cycle, and financing energy efficient projects. From this funding, USD 20 million will supporting the cross border trade finance businesses of the Bank s customers. Netherlands Development Finance Company (FMO), owned wholly by the Dutch government, arranged its second syndicated deal of USD 35 million for Khan Bank, which consisted of senior loan of USD 25 million and five year subordinated debt of USD 10 million. The Bank continued its collaboration with BlueOrchard Finance, responsability Investments, and Symbiotics Group, and obtained an additional USD 54 million in funding from these MFIs, the proceeds from which were used to finance the micro and SME sector. Thanks to long term swaps with BoM, the Bank managed the newly raised funding by converting it into local currency, with the swap maturities matched to the underlying loan maturities. A year end 2015, the long-term funding raised by IFIs and MFIs accounted for 24% of the total liabilities of the Bank. Additionally, Sawada Holdings Co., Ltd., Khan Bank s majority shareholder, along with affiliated companies H.I.S. Co., Ltd. and H.I.S. U.S.A Holding, Inc., provided long-term funding of USD 70 million in a senior loan and subordinated debt to finance ongoing business operations and to strengthen the Bank s capital base. Besides raising funds for the Bank, the Investment Banking Department (IBD) offers financial intermediary and advisory services to our corporate clients by raising funds from the international capital market. In 2015, the first transaction was successfully concluded. Moreover, Investment Banking Department prepares and delivers daily domestic and international capital market updates and market research to our customers. 29

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32 Annual report 2015 RISK MANAGEMENT The objective of risk management is to provide an environment to run banking business in a powerful, effective, and confident manner by means of definition, prediction, assessment, reporting, and monitoring potential risks at all levels of banking. The department is dedicated to identifying factors affecting risk, establishing procedures to manage and prevent risks, developing methodology, and determining risk management policies and procedures. Khan Bank has been introducing internationally accepted risk management standards, guidance, and criteria in order to further improve its risk management framework. In 2015, the Bank started to introduce ISO 31000:2009 Risk Management Principles and Guidance Standards step by step in order to implement integrated corporate risk management. Khan Bank manages and controls liquidity risk, credit risk, market risk, operational risk, legal and compliance risk, information security risk, and other potential risks within the scope of its risk management. Under its risk management objectives, the Bank implements its risk management in the following manner: BOARD RISK MANAGEMENT COMMITTEE The Board Risk Management Committee (BRMC) supports the fulfillment of obligations in relation to managing liquidity risk, credit risk, market risk, operational risk, legal and compliance risk, information security risk, and other types of risks. The BRMC holds its scheduled meetings according to the committee charter and regularly reviews the Bank s Risk Committee operations and decisions in order to implement the Bank s risk management policy in an optimal manner, and makes appropriate recommendations and risk limitations upon assessing the Bank s risk management framework and its progress. The committee reviews action plans for the Bank s top risks and conducts plan assessments to report their findings to the Board of Directors. In order to protect the interests of the Bank s stakeholders (clients, depositors, shareholders, and employees) and to reach the Bank s business objectives during the overall slowdown of the country s economy and the unfavorable impact of macro indicators on the banking industry, the Bank s Board of Directors approves a risk appetite statement for the given year and ensures its implementation in banking operations. 32

33 RISK MANAGEMENT RISK COMMITTEE The Risk Committee (RC) regularly monitors the Bank s main operations in line with its risk management policy, risk appetite level and limit set by the BRMC. The committee reports the outcomes of its implementation to the BRMC, determines the Bank s top risks, takes action to mitigate risks, approves procedure, guidance related to risk management, and monitors its implementation. In order to specifically manage and control certain risks, the Risk Committee has established the following committees: Operational Risk Sub-Committee Information Technology and Information Security Sub-Committee Card Risk Sub-Committee Branch Operational Risk Sub-Committee The RC has approved committee procedures and works to ensure procedure implementation. The procedures include regulations such as regular meeting schedules, planning for risk mitigation action in relevant risk areas and the monitoring of plan implementation. RISK TEAM The Risk Team consists of the Credit Policy Regulation Department, Credit Risk Department, Operational and Market Risk Department, and the Special Assets Department. These departments are responsible for ensuring the implementation and monitoring of policy and procedures related to risk, providing support to risk management of business units, being the link between participants in risk management, providing consolidated risk information, and organizing the operations of the Risk Committee. 33

34 Annual report 2015 RISK MANAGEMENT CREDIT RISK MANAGEMENT The Bank s risk appetite level, or credit risk appetite, is renewed by the Board on an annual basis. As stated in the risk appetite statement, the Credit Risk Department manages credit risk with a comprehensive approach to determine, assess, monitor, take action, and prevent potential risk to the loan portfolio. In 2015, the concentration risk of the loan portfolio was mitigated as a result of setting limits and restriciting exposure to risky sectors in line with economic conditions. The amount of non-performing loans was maintained below the banking sector s average in 2015, as a result of regular analysis on loan portfolio quality covenants, stress tests, scenario analysis, and improved loan monitoring operations. Khan Bank determines its credit risk management policy not only in line with the bank s business strategy targets, but also in line with international guidance, and ensuring that standard requirements are implemented regularly. The Bank uses loan impairment assessment models and standards to calculate loan loss provisions by coordinating historic statistical indicators for loan loss with economic factor impact. Khan Bank has been improving its environmentally friendly and sustainable finance policies and principles since the introduction of such policies and principles in The Bank is regarded as an industry leader with its active leadership in operations, policy, and experience with the introduction and implementation of sustainable finance principles to operations, which are now being implemented by the banking sector of Mongolia. LIQUIDITY RISK MANAGEMENT Khan Bank ensures the prudential ratios and liquidity requirements set by BoM and international financial institutions. Furthermore, our maturity gap reports and multivariant liquidity stress test results are reported to the Assets and Liabilities Committee (ALCO) for decision making. Under implementation of international risk management standards and improvement of the system, the Bank has started improving its liquidity risk management and ensuring compliance with standards, which will ensure that liquidity risk management complies with international norms and will improve decision making and planning even further. 34

35 RISK MANAGEMENT MARKET RISK MANAGEMENT 1. Foreign Exchange Rate Risk Within the scope of FX risk management, Khan Bank ensures prudential ratios set by the BoM and measures FX risk internally by value-at-risk (VaR). ALCO approves limits on deals with the BoM, foreign and local banks, and customers using FX spot and derivatives, the stop loss limit of total deals, and revaluation on a quarterly basis. An additional module relating to limit control has been introduced to trading software in order to establish conditions to monitor the implementation of the above mentioned limits automatically. 2. Interest Rate Risk Within the scope of interest rate risk management, Khan Bank reports interest-sensitive assets and its liabilities maturity gap to ALCO on a regular basis and manages interest rate risk. The Bank calculates the actual value of total financial assets and liabilities on a quarterly basis and uses that data for internal operations. The Bank has approved a procedure for interest rate risk measurement and management, which was developed based on the guidelines and recommendations of the BoM and the Basel Committee. Interest rate measurement reports and limitations are prepared and regularly reported to ALCO in accordance with procedure. OPERATIONAL RISK MANAGEMENT Operational risk refers to loss incurred due to unsuitable, unsound, or inadequate internal banking operations, individual and information technology systems, and external factors. Units have been managing risk by defining & assessing potential risk which may occur during a regular interval, and planning and implementing actions to mitigate risk in accordance with the Bank s Unit Risk Assessment Procedure in order to manage and monitor operational risk optimally. Some particular kinds of operational risks are managed by being transferred to a third party under the Risk Transfer Strategy, which is a type of risk mitigation action. The Bank is also insured by bankers blanket bonds and public liability insurance, which are provided through international insurance services. To improve operational risk management of the Bank, in compliance with international standards, Branch Operational Risk Committee Procedure has been updated for operational risk classification and unit risk management and put in place. The Risk Sub- Committee (operational) has started implementing the monitoring of unit operational risk management. 35

36 Annual report 2015 RISK MANAGEMENT LEGAL AND COMPLIANCE RISK MANAGEMENT Legal risk refers to the Bank s breaches of a clause or clauses which are reflected in laws and regulations, failure to fulfill obligations of agreements made with customers and other parties, release of a decision that has severely violated employee rights in an employment relationship, failure to fulfill legal requirements of state organizations, and/or becoming involved in any dispute which may be resolved by a court decision. Compliance risk refers to the potential risks of liabilities which may be imposed by banking law or the decisions of authorized organizations, and significant financial loss or reputational loss due to the failure to follow laws, regulations or public principles, norms or guidelines approved by a regulatory organization, or the failure of a bank employee to follow ethics or internal procedure. Khan Bank has started developing risk measurement and management procedures based on the international standards and guidelines of Basel Committee in order to improve its legal and compliance risk management system. INFORMATION SECURITY RISK MANAGEMENT Information security risk refers to loss suffered by the Bank due to potential threats based on the strength of information assets. This includes, but is not limited to, Information technology. Khan Bank ensures that risks are maintained at the approved risk appetite level by providing training for all employees on what an information asset is and how to protect its privacy, integrity, and availability, as well as defining and taking relevant action on potential risk in accordance with the Bank s information security risk management policy. The Risk Sub-Committee meeting on Information Technology and Information Security is held on a monthly basis, according to procedure, and reviews information technology risks determined by units or inspections, as well as the assessment of actions taken on information security risks. 36

37 INFORMATION TECHNOLOGY As a leader in the use of technology in Mongolia, Khan Bank has continued to invest in its technology infrastructure while ensuring the growth and continuity of the banking system. Planned availability of key systems was over 99.8% for The year ended with the signing of a Microsoft Enterprise Agreement between Khan Bank and Microsoft which establishes a formal relationship around the licensing of Microsoft products to the Bank, clarity of license discounts, and free upgrades and support for these products over the next 3 years. During 2015, the Khan Bank Disaster Recovery Data Center was awarded Tier II Certification of Design Documents and Tier II Certification of Constructed Facility by the Uptime Institute, confirmation that the disaster recovery data center construction meets the required facility design standards for a Tier II facility. Now, both the primary and disaster recovery data center facilities of Khan Bank have been certified by the Uptime Institute. Khan Bank became the first Bank in this region to implement and comply with the new Payment Card Industry Data Security Standard Version 3.1 (Phase I). The standard is rigorous and additional audits will be performed in subsequent years to extend compliance with PCI-DSS. During 2015, the Bank transferred the VSAT and wireless networks of 130 rural branches to fiber-optic links. Now a total of 343 rural branches are connected using fiber-optic technology. The Bank also introduced new and enhanced capabilities in Some of these are indicated below: Custody: We have implemented a system that allows the bank to support custodian services on behalf of customers. Card System: One of the large technology changes in 2015 was the implementation of a new card processing system for the Bank. The new system extends the functionality of card products into new areas. As part of this implementation, the bank also integrated ATMs with cash handling capability, which allows customers to deposit into and withdraw funds from a single ATM, and the ATM recycles the deposited notes for withdrawal transactions. Credit Scoring: Standard and pre-configured loans are now evaluated using an automated credit scoring capability that was appended to our loan origination system. This allows faster and automated credit decisions based on known customer information and the historical data of the customer. Security Operations Center: The Bank implemented a 24/7 Security Operations Center that monitors a variety of diverse information security risks across the Bank. 37

38 Annual report 2015 COMPLIANCE In order to respect the rights and interests of the Bank s clients and strengthen their trust in the Bank, as well as promote good governance, the Board approved Customer Protection Policy in Also, in order to oversee the financial activities of the Bank according to the laws, international standards, internal rules and procedures, we developed the Independent Audit Policy. In order to thread compliance function in the banking sector on the basis of international best practices, the exchange of views and experiences to assist in the implementation of the Law of Mongolia on Combating Money Laundering and Financing of Terrorism took place during the Compliance Forum in November 11, During the half-day forum, measures were discussed about the draft of Advisory Note on Compliance Policy & Function, which was developed by the Compliance Council of the Mongolian Bankers Association. The advisory note concerns international financial sanctions and providing client tax information to the tax authorities of foreign countries. The forum s paticipants welcomed important information about mutual evaluation of the national system of combating money laundering and financing terrorism of BoM s Financial Information Unit for developing standards for the banking sector. The forum was attended by over 100 representatives from 44 organizations. To develop compliance culture, to improve knowledge about compliance policies and procedures, and to insure the implementation of successfully implemented special training programs, online training material and a compliance program has been prepared to give basic knowledge to the Bank s staff on combating money laundering and terrorist financing. 38

39 HUMAN RESOURCES Khan Bank aims to create a working environment that supports our employees, who are the foundation of our success, with possibilities to grow, develop themselves, and solve their social issues, as well as providing competitive salaries and remuneration in order to enhance the stability and productivity of our employees. In 2015, we also emphasized, initiated, and implemented activities to motivate and enhance the productivity of our employees. In addition, we emphasized the reinforcement of ongoing practices, enhanced the implementation of HR policies and procedures that have been newly developed and revised in previous years, monitored implementation and focused on adhering to information security standards. The following are the procedures and standards which have been newly put into effect: All HR legal acts were revised and updated in line with ISO27001 Information Security standards and thoroughly implemented in our daily operations. The Khan Bank Staff Code of Ethics was revised, reviewed, and renamed Khan Bank s Code of Ethics in The revised code of ethics reflects the principles of the shareholders and Board Directors. Talent Management Policy This was defined with the purpose of focusing on building a pipeline of talent through recruiting, developing, retaining, and deploying high performing and high potential employees who are enthusiastic, engaged, and committed to achieving the Bank s mission, vision, strategic long-term objectives, and to increasing profitability. Human Resources Security Policy Within the framework of human resources (HR) operations risks, we face the need to efficiently manage HR related risks. One of the biggest HR related risks is information security. In order to rationally and efficiently manage it, the Human Resources Security Policy was developed and endorsed. Performance Management and Appraisal Khan Bank has been implementing a new work performance management and appraisal system since 2011, and has been consistently making efforts to review and improve its process. In 2015, the guidance on performance evaluations for non-management positions in Retail Banking - Ulaanbaatar was newly developed and endorsed, and we have successfully put it into practice. 39

40 Annual report 2015 HUMAN RESOURCES NUMBER OF EMPLOYEES At year end 2015, the number of staff was over 5,900, including those on leave. Seventy percent were under the age of 30. HR OPEN HOUSE DAY Our HR Open House Day has been organized every September since The event includes the introduction of updated HR policies and procedures, the promotion of HR services available to all Khan Bank employees, answering HR related questions, giving legal advice, and addressing labor issues. EMPLOYEE TRAINING AND STUDY SCHOLARSHIP PROGRAM Khan Bank encourages its employees to develop their skills and prefessionalism in a variety of ways, which enables successful career development in the future. In 2015, 261 training sessions were organized in cooperation with internal and external trainers, involving 8,663 employees in duplicate numbers. In 2015, the Bank granted foreign MBA scholarships to two employees and domestic bachelor s and master s degreee scholarships to 60 employees, foreign language scholarships to 107 employees, and bachelor s degree scholarships to 83 children of employees. EMPLOYEE SOCIAL ISSUES AND HEALTH The Bank spent 1.2 billion MNT on the social development of employees. This included non-refundable aid, additional pensions for elders, scholarships, HR Open House Day, campaigns, medical check-ups, sports and art competitions, public events, rewards, expenses for sport and other clubs, all for the support and motivation of employees. The Bank also provides mortgage and consumer loans to qualifying employees through special programs. Khan Bank has internally organized sport competitions in seven categories with the participation of 2,000 employees. The Bank also successfully participated in seven sport competitions between commercial banks, and state-wide competitions. The Bank welcomed 2015 with one gold medal, one silver, and one bronze medal. Within the Balanced Life Program, designed to help employees explore and develop opportunities for healthy recreational activities, there are 10 clubs operating with around 400 members at present. 40

41 CORPORATE SOCIAL RESPONSIBILITY Since its establishment, Khan Bank has been committed to business ethics, international standards of social responsibility, and sustainable finance principles. In parallel with its main function to support and donate to the public and implement programs and projects, the Khan Bank Foundation was established in The Foundation plays a leading role in implementing projects, serving as a good example for the industry, and ingraining the principles of social responsibility. Despite a significant decline in Mongolian economic development in 2015, Khan Bank continuously increased its contributions and efforts to support the country s development and investment in social well-being. In 2015, in cooperation with government, non-government organizations, and rural social groups, Khan Bank implemented a total of 25 nationwide and short-term projects through the Khan Bank Foundation. Since 2007, the Bank has invested a total of MNT 2.85 billion through the implementation of more than 280 projects and nationwide programs. Some of the projects and investments implemented in the reporting year are summarized below. 41