THE DEVELOPMENT BANK OF MONGOLIA

ANNUAL REPORT 2013 2 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

TABLE OF CONTENTS

MISSION

VISION

Message FROM THE CHAIRMAN OF THE BOARD OF Directors message from the chief executive officer economic OVERVIEW

Banking and Finance sector overview

INTERNATIONAL DEVELOPMENT BANKS

THE INSTITUTION’S DEVELOPMENT

CORPORATE GOVERNANCE

BOARD OF Directors

Organisation STRUCTURE

CHRONOLOGY

FINANCIAL INDICATORS

Business OPERATION

CREDIT and financing OPERATIONS

FUNDING OPERATIONS

BUSINESS COOPERATION

RISK MANAGEMENT

INDEPENDENT AUDITOR’S REPORT

The Development Bank of Mongolia - Annual Report 2013 3 To be a leading institution investigating financial solutions Mission which ensure and diversify sustainable economic development in multiple sectors, support manufacturing of value added products, and consolidate and implement the country’s development policies.

4 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

To make Mongolia a developed country Vision ranking high in competitiveness and economic strength.

The Development Bank of Mongolia - Annual Report 2013 5 Message FROM THE CHAIRMAN OF THE BOARD OF Directors

By successfully raising low-cost funds from the international markets and by financing projects which accelerate the country’s development, the Development Bank of Mongolia has expanded its operations and succeeded in strengthening its position for future stability and success. This is a result of the efforts of the Bank’s employees, customers and cooperating entities.

During the reporting period, the Bank financed MNT2,179.6 billion for major projects and programmes, and placed MNT652.3 billion with commercial banks. As a result, the Bank’s total assets reached MNT3,230.9 billion. In order to enhance the Bank’s lending capacity, we increased the shareholder equity by MNT50.0 billion during the reporting period, thereby resulting in a shareholder equity of MNT123.3 billion and a total equity of MNT143.9 billion.

The Development Bank of Mongolia operates to increase its economic strength by further enhancing its financial capacity through conducting operations in accordance with the law. This includes the financing of strategically- significant projects, issuance of securities in its own name, fund raising, and financial consultancy services.

The operations of the Development Bank of Mongolia will be fair, transparent and always open to the public.

Thanks and best wishes to our colleagues and customers who share our aim to promote Mongolia’s continuing development and prosperity!

THE DEVELOPMENT BANK OF MONGOLIA IS A NATION- WIDE FINANCIAL INSTITUTION WHOSE AIM IS TO PROVIDE MEDIUM- AND LONG-TERM FINANCING TO MAJOR PROJECTS WHICH SUPPORT ECONOMIC DEVELOPMENT.

SHINEBAATAR B.

CHAIRMAN OF THE BOARD OF DIRECTORS

6 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA message from the chief executive officer

Dear customers and cooperating entities, It is my pleasure to present the report of the Development Bank of Mongolia for 2013. In the past year (2013) there was a 32.8% decrease in the sale price of our country’s export coal and a 54% decrease in foreign direct investment. These factors slowed economic growth. However, in 2013, economic growth was 11.7% as a result of a 20.7% increase in mining production, a 66.5% increase in construction and a 17% increase in commerce. During the reporting period, there was an increase in the Development Bank’s loan portfolio of MNT1,686.6 billion, a figure which is greater than investments by the state’s general budget funds. The Development Bank’s lending to strategically-significant sectors, including roads, railway, mining, processing, power plants, infrastructure, housing and transport, will continue to serve as leverage for the country’s accelerating development in the near and ongoing future. At the end of the reporting period, the Development Bank’s total assets were MNT3,230.9 billion, which equals 18.4% of our country’s gross domestic product. Our Bank’s pre-tax profit was MNT35.1 billion and we paid the state MNT17.7 billion in income tax. The Development Bank’s foreign cooperation expanded in 2013 – we signed memorandum of understanding with the Japan Bank for International Cooperation and the China Development Bank. We issued “Samurai bonds” in Japanese financial market, and reached an agreement to obtain financing from the China Development Bank. Here at the Development Bank, we have sincere and genuine aspirations for the development of Mongolia, and work with determination and tenacity to ensure our country’s brighter future. Sincere regards and great success to our customers and organisations, both foreign and domestic, who cooperate with the Development Bank of Mongolia!

MUNKHBAT N. chief executive officer

The Development Bank of Mongolia - Annual Report 2013 7 ECONOMIC OVERVIEW

Real GDP growth (%) ECONOMIC GROWTH

17.5% The 2013 preliminary performance estimations are that Mongolia’s nominal gross domestic product (GDP) reached MNT17,600.0 billion. 12.4% GDP consisted of revenues from the agricultural (14.4%), industrial 11.7% (26.6%), construction (2.6%) and service (44%) sectors as well as taxation income (12.4%). 6.4% Although real GDP growth reached 11.7%, slightly slower compared to the previous year, the two-digit number increase was mainly achieved thanks to the growth in the agricultural, mining, construction and 2010 2011 2012 2013 trade sectors. Source: The National Statistical Office Whereas copper concentrate production associated with the Oyutolgoi pit’s commissioning into operation and mining activities The state budget balance was 517.9 thousand tons in 2012, it reached 803.0 thousand tons in 2013. In addition, oil and petroleum production grew from 3.6 million barrels The amount of revenue and aid Expenditure and repayable net loans to 5.1 million barrels, this also had a positive impact on our industrial Balance sector growth. In 2013, the construction sector’s actual value rose by 66.5% as a result of MNT477.0 billion of road work and MNT399.5 billion 6,178 5,928 5,994 of housing construction work. 4,958 4,997 4,468

3,081 3,122 THE STATE BUDGET

Total revenue and aid of Mongolia’s general budget reached MNT5,927.6 billion, rising by 19.6%, and total expenditure and repayable net loans In billion reached MNT6,178.0 billion, rising by 3.1%, whereby the state’s general 529 250 MNT 1,036 budget deficit was MNT250.4 billion, a 4.1-fold decrease compared to 2010 2011 2012 2013 the previous year.

Source: The National Statistical Office

Money supply MONEY SUPPLY Money supply volume Annual growth At the end of 2013, М2 money supply reached MNT9,461.0 billion, growing by 24.2% compared to the beginning of the year. 9,461 62.5% 7,617 Although the price of our country’s main export mineral products decreased and foreign direct investment reduced, the domestic 6,412 37.0% economy was restored thanks to the expansion policies implemented 4,682 24.2% by the Government and the Mongolbank as well as the funds raised in 18.8% the international financial markets. Accordingly, money supply growth accelerated compared to the previous year.

In billion MNT 2010 2011 2012 2013 Source: Mongolbank

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INFLATION Inflation measured by the CPI

The level of inflation measured by the consumer price index (CPI) was 14.0% 13.0% 12.5% in 2013, a slight decrease nationwide compared to the previous 12.5% year. Price increases of flour and flour products (16.2%), milk and dairy 10.2% products (20%), fruits (16.2%), non-alcoholic drinks (16.3%), the clothing, textile and shoe category (17.6%) and education services (27.2%) were the main factors affecting inflation. As the vast majority of Mongolia’s total consumption is composed of imports, the weakening of the MNT exchange rate against foreign currencies in the second-half of 2013 exerted substantial pressure on our country. 2010 2011 2012 2013 The year of 2013 was rather specific one in terms of budgetary and Source: The National Statistical Office monetary policies. The Government of Mongolia and the Mongolbank are jointly implementing a “Price stabilisation programme” comprised of five sub-programmes in order to reduce the supply-caused inflation pressure.

Foreign trade balance

Export Import FOREIGN TRADE 6,738 Balance 6,598 6,355 Mongolia’s foreign trade turnover totaled USD10,627.4 million in 2013, 4,818 falling by 4.5% compared to the previous year. Total exports were 4,385 USD4,272.7 million, a decrease of 2.6%, and total imports were USD6,354.7 4,273 3,200 million, a decrease of 5.7%. This resulted in a foreign trade deficit which 2,909 dropped to USD2,082.0 million.

In 2013, the sale price of our country’s coal fell by 32.8% resulting in In million coal exports of USD1,100.0 million, a 41% decrease compared to the 292 1,781 2,082 USD 2,354 previous year. Copper concentrate exports rose by 13.2%, iron ore 2010 2011 2012 2013 exports by 22.9%, crude oil and petroleum exports by 53.4% and gold Source: The National Statistical Office exports increased by 2.5 times. There was a 15.6% fall in machinery and mechanical equipment imports and a 21.3% decrease in vehicle imports. These strongly affected the overall decline in imports.

Foreign direct investment

4,715 FOREIGN DIRECT INVESTMENT 4,452

The foreign direct investment flowing into Mongolia in 2013 was USD2,047.0 million, decreasing by 54% compared to the previous year. The decline of the main performance indicators, which included export coal and foreign direct investment led to a scarcity of foreign currencies in Mongolia. As a result, the MNT rate weakened against other foreign 2,047 1,691 currencies. For example, the official rate of the American dollar (which is the main foreign currency for payment clearing and settlement) was In million MNT1,392 at the beginning of the year, but by the year-end this had USD increased by 19.2% to MNT1,659. 2010 2011 2012 2013 Source: Mongolbank

The Development Bank of Mongolia - Annual Report 2013 9 BANKING AND FINANCIAL SECTOR OVERVIEW

Commercial banks’ total assets BANKING SECTOR

total assets At the end of the reporting period, total assets of the commercial total assets / GDP banks had reached MNT20,883.7 billion, growing by 74.1% (MNT8,891.5 20,884 119.0% billion) compared to the previous year. This led to a 119% growth in the total assets to GDP ratio in 2013 compared to the 85.6% growth in 2012. 85.6% 84.5% 74.2% During the reporting period, the total balance in the banks’ current 11,992 and savings accounts reached MNT10,026.6 billion, rising by 26.8% 9,372 compared to the previous year. Funding sources of the commercial 6,246 banks increased via the “Price stabilisation programme” and the Development Bank’s financing. Thereby, their loan balance reached In billion MNT MNT10,764.2 billion rising by 54% (MNT3,773.6 billion) compared to the previous year. This led to a 107.4% increase in the banks’ loan to 2010 2011 2012 2013 funding sources ratio in 2013 whereas it was 88.4% in 2012. Source: Mongolbank

As per economic sector classification, the commercial banks’ loan Commercial banks’ loan balance per portfolios consist of 16.5% real assets, 16.3% trade, 13.6% construction economic sector and 12.4% mining.

Real assets 18% of total loans granted to the mining sector, 12.9% of total loans 16.5% Trade granted to the manufacturing, 1% of loans granted to real assets Construction 29.0% businesses and 3% of loans granted to the construction sector were Mining Processing classified as nonperforming loans, meaning that 5.3% of the entire loan 16.3% Agriculture portfolio was classified as nonperforming loans. Other 2.1% At the end of the reporting period, the banks’ equity reached 10.1% 13.6% MNT1,323.8 billion rising by 34.3% (MNT338.0 billion) compared to the 12.4% previous year. Source: Mongolbank

stock market The stock market capitalization During the reporting period, annual turn over was MNT97.6 billion 2,169 of 65.8 million shares in 134 companies via a total of 254 daily trades. 10,000 bonds were traded for MNT1.0 billion via transactions in the 1,800 secondary market for Government bonds, totalling MNT98.6 billion of securities. Compared to the previous year, the total trade value 1,671 decreased by 32.6%, i.e., MNT47.1 billion.

1,374 At the end of the reporting period, the stock market capitalization in total was MNT1,670.5 billion, falling by 7.2% compared to the previous In billion year. The TOP 20 index, the parameter indicating stock market MNT development, was 16,301.8 falling by 8% compared to the figure of 2010 2011 2012 2013 17,714.5 at the end of last year. Source: The Mongolian Stock Exchange

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INSURANCE MARKET The total asset of insurance companies

During the reporting period, the total asset of seventeen companies 126 operating in the insurance market reached MNT126,.4 billion, rising by 17.5% (MNT18.8 billion) compared to the previous year. 108

At the end of 2013, total income from insurance premiums reached 81 MNT93.9 billion, rising by 18.9% compared to the previous year. However, net profit was MNT5.3 billion, falling by 35.4% (MNT2.9 billion) compared 57 to the previous year.

In billion MNT 2010 2011 2012 2013 NON-BANK FINANCIAL INSTITUTIONS Source: The Financial Regulatory Commission

263 licensed non-bank financial institutions operated with a total asset of MNT381.1 billion as of the end of 2013 – this represents a growth of 51.2% (MNT129.0 billion) compared to the previous year. The total asset of non-bank In 2013, net profit after tax reached MNT29.8 billion, which is a rise of financial institutions 60.6% (MNT11.3 billion) compared to the previous year. 381

252 205

CREDIT UNIONS 129

During the reporting period, a total of 141 credit unions licensed by In billion the Financial Regulatory Commission conducted savings and credit MNT operations. 2010 2011 2012 2013 Source: The Financial Regulatory Commission The total asset of credit unions reached MNT73.8 billion during the reporting period, rising by 9% (MNT6.1 billion).

The total asset of credit unions

74 68 62

49

In billion MNT 2010 2011 2012 2013 Source: The Financial Regulatory Commission

The Development Bank of Mongolia - Annual Report 2013 11 THE DEVELOPMENT BANK OF MONGOLIA

12 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

INTERNATIONAL DEVELOPMENT BANKS

WHAT IS A DEVELOPMENT BANK? A development bank is a financial institution responsible for developing socio-economic development objectives of a given country, and its role is to grant loans to government related programs.

TYPES OF DEVELOPMENT

Policy bank – government owned financial institution which supports economic development policy and planing.

Special-purpose financial institution – an entity that has a specific organisational structure and duties such as: small and medium-enterprise development, agricultural intensification, infrastructure development, environmental protection, housing etc.

“Universal” bank – a type of bank that concurrently grants multiple types of financing in addition to development policy financing.

“Commercial” development bank – a bank that operates under commercial principles and supports government based economic development programs.

THE DEVELOPMENT BANK OF MONGOLIA

In Mongolia, domestic commercial banks have a relatively high cost and impose limits on the maximum amount of loans being granted. Thus, financing opportunities for major projects which support economic development have been limited. Recently, as the foreign trade balance of Mongolia has been in deficit, and infrastructure development has been relatively weak, it was necessary to establish a Development Bank.

On 20 July 2010, the Government of Mongolia issued resolution to establish the Development Bank of Mongolia. Following that, on 10 February 2011, the Parliament of Mongolia enacted the “Law on the Development Bank of Mongolia”, stipulating that the Development Bank will be a state-owned for-profit legal entity with the specific functions of conducting activities aimed at financing major projects and programmes for thelomg term development of Mongolia.

The Development Bank of Mongolia - Annual Report 2013 13 THE INSTITUTION’S DEVELOPMENT CORPORATE GOVERNANCE

As stipulated in the “Law on the Development Bank of Mongolia”, the highest management authority of the Development Bank is its Shareholders’ Meeting or, during its out-of-session periods, the Board of Directors (the BoD); the Government of Mongolia will be the Development Bank’s shareholder and exercise its full powers at Shareholders’ meetings.

The Development Bank’s BoD, consisting of eight members appointed by the Government of Mongolia, exercises its full powers. The BoD’s three independent members are nominated by the Mongolbank, the Mongolian National Chamber of Commerce and Industry and the Mongolian Bankers Association, and are appointed by the Government. The BoD will have internal audit, nomination and remuneration subcommittees. The independent members act as members of the subcommittees.

On 30 August 2011, a triple management contract was entered into by and between the Development Bank of Mongolia, the Korea Development Bank and the Management Team. In accordance with the contract, a joint management team from the development banks performed the executive management duties. Based on Government Resolution No.192 dated 25 May 2013 and in connection with the stabilisation of the Development Bank’s operations, the management contract was terminated by BoD Resolution No.44 dated 16 July 2013 thereby the Mongolian party was vested with the full executive management powers of the Development Bank of Mongolia on a 100%–basis. This BoD decision transferred full powers to Munkhbat Nanjid from Kim Jung Jin, the former Executive Director.

The executive management team of the Development Bank of Mongolia manages and organises the Bank’s day-to-day activities within the scope of the powers set forth in the Bank’s Charter and by a contract entered into with the BoD. The team reports to the BOM.

The executive management team determines the structure and organisation of the Bank’s committees. The Executive Management Committee, the Credit Committee and the Assets and Liabilities Management Committee work efficiently, overseeing the Bank’s business operations and ensuring the corporate governance norms.

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The Development Bank of Mongolia - Annual Report 2013 15 THE BOARD OF Directors

Shinebaatar Begzsuren Boldbaatar Danzannorov Lkhagvasuren Byadran Batzaya Baasandorj State Secretary to Head of the Economic Executive Director of the State Secretary to Ministry of Economic Cooperation, Loan Mongolian Deposit Ministry of Road and Development and Assistance Policy Insurance Corporation Transportation Department of the Ministry of Economic Development

Bayanmunkh Myagmarsuren Otgochuluu Chuluuntseren Naidalaa Badrakh Nergui Chuluunbat Head of the Heavy Industry Head of the Strategic General Secretary Head of the Consolidated Policy Implementation Policy and Planning and Executive Director Policy, Planning and Department of the Ministry Department of the of the Mongolian Coordination Department of Industry and Agriculture Ministry of Mining Bankers Association of the Mongolian National Chamber of Commerce and Industry

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ORGANIzATIONal STRUCTURE

THE SHAREHOLDERS’ MEETING (The Government Of Mongolia)

Nomination Subcommittee Board of Directors Secretary to the BoD

Remuneration Subcommittee Chief Executive Officer Executive Management Committee

Internal Audit Subcommittee Assets and Liabilities Management Committee

Credit Committee Chief Deputy Director

Assets and Liabilities Credit Department Risk Management Monitoring and Management Department Department Administrative Department nit nit Accounting and Reporting and Division Accounting Division Technology Information U Development and Resources Human Administration U Division Legal Social-Benefit Project Financing and ProjectFinancing Social-Benefit Division Analysis Division Partnership & Private Public Division Co-Finance Division Risk Financial Risks Division Operational Treasury Management Division Management Treasury Division Banking Correspondent Division Finance Corporate Funding Division Funding Division Planning and Strategy

Expert’s Counsel Research Unit Public Relations Unit

The Development Bank approved its corporate and organizational structure based on its fundamental objectives and in conformity with the daily-expanding scope of its business operations, and economic and market demands via BoD Resolution No.54 dated 24 December 2012.

At the end of the reporting year, the Development Bank operated with four departments, thirteen divisions, five offices and a total of 74 employees.

The Development Bank of Mongolia - Annual Report 2013 17 CHRONOLOGY

21 March 2012 The Development Bank of 6 August 2012 Mongolia successfully issued The Development Bank of USD580 million-bonds. The Mongolia granted its first financing Bank organised meetings with to road projects. In accordance investors in Hong Kong, Singapore with Government Resolutions and London, the world financial Nos.47, 110, 106, 336, 124 and 105 12 May 2011 market centres, and for the first dated 2012, the Development The official opening of time via open subscription, traded Bank granted MNT202.5 billion the Development Bank of 5-year bonds of USD580 million in in total to road projects in 2012, Mongolia took place and its value at an interest rate of 5.75% enabling the commencement of operations commenced. in the international markets. construction of 1,280 km of roads.

30 August 2011 15 June 2012 5 October 2012 The Development Bank of The Development Bank of Under Government Mongolia and the Korea Mongolia granted financing to Resolution No.148 dated Development Bank entered into a the “housing-purpose soft loan 2012, USD100.0 million “Management contract”. An open project”. Under Government financing was granted to international bid was announced Resolution No.55 dated 2012 “Erdenes Tavantolgoi” JSC. by the State Property Committee and for the programme “Project The project’s activities will for competitive selection of an for granting housing-purpose lead to the development experienced team to implement soft loans to citizens at an of the mining, energy and the executive management of the interest rate of up to 6% per other economic sectors. Development Bank of Mongolia annum”, the Development Bank resulting in the selection of of Mongolia granted MNT50.0 the Korea Development Bank. billion to the State Bank in 2012. It was decided that the Bank’s executive management would be implemented by a joint team from the Development Bank of Mongolia and the Korea Development Bank that had been selected through the international bid.

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18 May 2013 18 November 2013 Government Resolution No.180 From 18 November 2013 to 1 February 31 December 2012 dated 18 May 2013 approved the 2014, jointly with the Bloomberg The Development Bank of finance of a togrog equivalent of Television Singapore, the Development Mongolia received an award up to USD14.0 million required for Bank of Mongolia organised an from the Bloomberg Television implementation of the project advertising campaign “Inside Mongolia”. Mongolia. During the closing “Housing construction industrial This aimed at raising Mongolia’s ceremony of the economic complex–1” within the scope of the international reputation, introducing to forum of Mongolia 2012, the medium-term target programme the investment environment and creating Bloomberg Television granted its “New Development” and the work a positive impression with investors. “Best Debut Bond” award to the to provide citizens with housing Within the scope of this work, 90-second Development Bank team that had by way of entering into a direct short editorial broadcasts for investors successfully issued the bonds, loan contract in 2013 and financing covering five topics and 30-second guaranteed by the Government through the Development commercials were cast. These resulted in of Mongolia, in the international Bank from the capital raised via over 2,887,500 comments being received markets for the first time. Government securities trading. via the www.bloomberg.com website.

7 May 2013 9 September 2013 With the intensive economic growth of During the official visit of Mongolia, the number of air passengers Altankhuyag N., Prime Minister recently rose sharply. In connection with of Mongolia, in Japan on 9–12 this, and looking to reduce its operational September 2013, the Bank costs and improve its service terms, MIAT signed a “Memorandum of JSC (Mongolian Civil Aviation Corporation) Understanding” with the Japan purchased an aircraft of В767–300ЕR model Bank for International Cooperation in May 2013. This purchase is of significant (JBIC), which led to Mongolia’s importance in supporting Mongolia’s aviation successful launch of fund raising industry development by increasing MIAT in yen in Japan’s capital market. JSC’s operational effectiveness. With the aircraft purchase, MIAT JSC is planning to expand its future flight routes, including additional flights to two USA coasts and some European cities. Considering the significance of this purchase, the Development Bank of Mongolia lent in total USD83.9 million including USD5.3 million toward the aircraft’s advance payment on 20 June 2012 and a bridge loan of USD78.5 million on 7 May 2013 toward the principal payment, in accordance with Government Resolution No.137.

The Development Bank of Mongolia - Annual Report 2013 19 FINANCIAL INDICATORS

On 31 December 2013, the total asset of the Development Bank was MNT3,230.9 billion growing by 3.6 times (MNT2,342.7 billion), compared to the end of the previous year. This was mainly due to the growth in net loans and advances by MNT1,686.0 billion.

The Development Bank issued and traded USD580.0 million-bonds at an interest rate of 5.75% and 5 year–term in 2012, whereas it borrowed MNT1,987.2 billion from the Government in 2013. The Government financed this loan with funds from the issue of Chinggis bonds which are repayable in 2018 and 2022. These led to a sharp increase in the Development Bank’s creditworthiness, resulting in net loans and advances of MNT2,179.6 billion as of the end of the reporting period.

Total asset Loans and advances

3,230.9 2,179.6

493.6 888.1 76.9

In billion In billion MNT MNT 2011 2012 2013 2011 2012 2013

Total equity Net profit after tax

143.9 26.9

67.0 -0.6 49.1 -5.7 In billion MNT In billion MNT 2011 2012 2013 2011 2012 2013

Looking to expand the Development Bank’s operations, the Government (the shareholder) increased the statutory fund by MNT50.0 billion during the reporting period. This resulted in a total equity of MNT143.9 billion, which is a 2.1–fold increase compared to the previous year. During the reporting period, the Development Bank operated with net interest income of MNT42.0 billion, and expenses of MNT6.2 billion in impairment, MNT4.6 billion in operating costs.

The Development Bank’s capital adequacy ratio was 12.8% at the end of 2013, which is 5.5 points lower compared to the previous year and a two-fold increase compared to the performance indicators related to the year of 2011. At the end of the reporting period, total assets consisted of net loans and advances (67.5%) and funds deposited with commercial banks (20.2%). The total liabilities consisted of borrowing (funds from the issue of Chinggis bonds) provided by the Government (64.4%), bond (31.5%) and other sources (4.1%).

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Composition of the total asset Composition of the total fund sources

Loans and advances Funds from the issue Banking deposits 0.6% of Chinggis bonds 4.1% 11.7% Cash and cash The Development equivalents Bank’s bond Others Others 31.5% 20.2% IN TOTAL 3,320.9 IN TOTAL 3,087.0 Billion MNT Billion MNT 64.4%

67.5%

Within the scope of the resolution enacted by the Government of Mongolia regarding the financing through the Development Bank, loans have been granted to the road, railway, manufacturing, mining, power plant, aviation and infrastructure investment sectors as well as housing finance and small- and medium-enterprise development funds, on terms whereby they are repayable from the state’s budget, and also from proceeds of the projects. Such financing was granted to projects in implementation within the scope of the economic development policies, including export increase and import substitution.

Loan portfolio, per sector Loan portfolio, per policy category

Roads Within the scope Mining 3.1% of the export 5.3% 4.2% Railway 4.4% increase and import Agriculture and 4.4% substitution policies 30.7% light industry Financing aimed 24.5% 37.1% Construction 5.6% at the capital city’s materials IN TOTAL 2,179.6 socio-economic IN TOTAL 2,179.6 5.7% Power plants Billion MNT development Billion MNT Infrastructure Within the scope Housing finance of the rural Housing 12.4% socio-economic construction 16.0% development Other sectors policies 13.5% 33.1% Other policy categories

CERTAIN FINANCIAL RATIOS

By investing in economically beneficial projects, the Development Bank’s profitability is continuously enhanced. The Bank’s operations have been normal while maintaining its capital adequacy ratio at an appropriate level.

Return on equity (ROE) Return on assets (ROA) Net interest margin (NIM) Capital adequacy ratio (CAR)

18.7% 18.3% 12.8% 8.9%

3.0% 2.4% 0.8% -1.2% -0.8% -0.6% -0.2%

-8.5% 2011 2012 2013 2011 2012 2013 2011 2012 2013 2011 2012 2013

The Development Bank of Mongolia - Annual Report 2013 21 THREE–YEAR FINANCIAL INDICATORS

Statement of financial position (in billion MNT) 2013 2012 2011 Total Asset 3,230.9 888.1 76.9 Cash and cash equivalents 379.5 216.5 75.8 Bank deposits 652.3 168.9 0.0 Loans and advances 2,179.6 493.6 0.0 Other asset 6.0 2.3 0.0 Current income tax prepayment 3.8 0.0 0.0 Property and equipment 0.6 0.2 0.2 Intangible assets 0.8 0.7 0.8 Deferred tax assets 8.2 5.9 0.0 Liabilities 3,087.0 821.1 27.8 Customer accounts 16.3 0.0 0.0 Other liabilities 0.4 0.5 1.1 Current income tax payable 0.0 3.3 0.0 Due to other banks 111.0 0.0 0.0 Bonds 972.1 817.3 26.6 Borrowings 1,987.2 0.0 0.0 Equity 143.9 67.0 49.1 Contributed capital 123.3 73.3 49.7 Retained earnings 20.6 (6.3) (0.6) Total liabilities and equity 3,230.9 888.1 76.9

Statement of profit or loss and other comprehensive income (in billion MNT) 2013 2012 2011 Interest income 131.1 12.9 0.3 Interest expenses (89.1) (13.7) (0.1) Net interest income/(expenses) 42.0 (0.8) 0.1 Provision for loan impairment (6.2) - - Net interest income after provision for loan impairment 35.8 (0.8) 0.1 Gains less losses from trading in foreign currencies 2.0 0.0 - Foreign exchange rate translation gains less losses 1.9 (5.8) 0.0 Administrative and other operating expenses (4.6) (1.7) (0.7) Profit/(loss) before tax 35.1 (8.3) (0.6) Income tax (expenses)/benefit (8.2) 2.6 - Profit/(loss) for the year 26.9 (5.7) (0.6)

Certain financial ratios 2013 2012 2011 Return on equity (RОЕ) 18.7% -8.5% -1.2% Return on assets (РОA) 0.8% -0.6% -0.8% Net interest margin (NIМ) 2.4% -0.2% 3.0% Capital adequacy ratio (САR) 12.8% 18.3% 8.9%

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The Development Bank of Mongolia - Annual Report 2013 23 BUSINESS OPERATION cREDIT AND FINANCING OPERATIONS

The Development Bank grants loans to strategically-significant projects including roads, railway, manufacturing, mining, power plants, aviation, infrastructure, housing finance and small and medium enterprises in accordance with Mongolia’s economic development policies.

At the end of 2012, the Bank’s total loan portfolio was MNT489.7 billion, whereas by the end of 2013 it was MNT2,184.0 billion, a rise of MNT1,694.3 billion, i.e., 4.4 times compared to the end of the previous year. 37% of the total loan portfolio, i.e., MNT814.0 billion loans are repayable from the state’s budget and 63%, i.e., MNT1,370.0 billion loans are repayable from proceeds of the projects.

According to the economic sector category, 32.0% of the loan portfolio was granted to the road sector, 16.0% to mining production, 12.0% to manufacturing equipment financing, 12.0% to railway, 6.0% to construction materials, 6.0% to power plants, 4.0% to the infrastructure sector, 4.0% to housing loans, 3.1% to housing construction and 4.9% to other sectors.

24 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

The Development Bank’s total loans and advances, in billion MNT (as of 31 December 2013) Funds from the issue The Development Total financing of Chinggis bonds Bank’s resources Repayable from the state’s budget revenues 491.8 322.1 813.8 Roads 350.1 319.4 669.5 The “Street” project 47.9 - 47.9 Infrastructure 93.7 2.7 96.4 Repayable from proceeds of the projects 620.9 749.2 1,370.1 Power plants 4.0 119.2 123.1 Railway 258.3 37.2 295.5 Housing finance - 96.6 96.6 Sainshand industrial complex - 3.3 3.3 SME Development Fund - 36.2 36.2 Aviation 4.7 - 4.7 Mining - 348.6 348.6 Housing construction 60.0 6.7 66.7 Agriculture and light industry 270.7 - 270.7 Construction materials 23.2 101.3 124.5 Total 1,112.6 1,071.3 2,184.0

As per the fund source category and loans granted by the Development Bank with its own resources, 30.9% of the loan portfolio went to Erdenes Tavantolgoi JSC, 29.8% to road projects, 11.1% to power plant projects, 9.5% to manufacturing of construction materials, 9.0% to housing loans and 3.5% to railway projects. The loans from the funds from the issue of Chinggis bonds financed road projects (35.8%), agriculture and light industry (24.3%), railway projects (23.2%), infrastructure projects (8.4%) and housing construction projects (5.4%).

Projects financed with the Development Projects financed with loan sources from the Gov- Bank’s own resources ernment (funds from the issue of Chinggis bonds)

Erdenes Tavantolgoi Roads Roads Agriculture and light industry Power plants Railway Manufacturing of construction materials Infrastructure Housing loan finance Housing construction Railway Others Others

6.2% 7.2% 3.5% 5.4% 9.0% 30.9% 31.5% 8.4%

9.5% IN TOTAL 1,071.3 IN TOTAL 1,112.6 billion MNT billion MNT

11.1% 23.2%

24.3% 29.8%

37.1% of the total loan portfolio was granted in accordance with the Government policies to support export and substitute import, 33.1% pursuant to the capital city’s socio-economic development policies, 24.5% under the policies in relation to the socio-economic development in rural areas and 5.3% for other purposes.

The Development Bank of Mongolia - Annual Report 2013 25 FINANCED PROJECTS AND PROGRAMMES (IN THREE MAIN LINES OF BUSINESS)

CHINGGIS BONDS: 266.6 Projects and programmes financed in accordance with the export promotion Increase the coal export from the Increase the export of and import substitution policies Tavantolgoi deposit wet iron ore concentrate

IN TOTAL 690.6 Approved Granted Approved BILLION MNT 892.1 556.4 44.6

CHINGGIS BONDS: 437.1

Financing aimed at the capital city’s Create new power and heat Increase the housing supply socio-economic development sources in the capital city

IN TOTAL

757.5 Approved Granted Approved Granted BILLION MNT 258.9 181.5 234.5 110.7

CHINGGIS BONDS: 385.4 Financing aimed at the socio-economic Support stable employment Connect the rural areas to development in rural areas in rural areas domestic and foreign markets

IN TOTAL 578.4 Approved Granted Approved Granted BILLION MNT 45.3 43.9 846.9 534.0

26 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

(As of 31 December 2013) The Development Bank: 424.0

Increase the export of Substitute the import of Substitute the import of processed non-mineral resources construction materials and industrial products

Approved Granted Approved Granted Approved Granted 33.0 26.6 143.9 106.8 56.2 0.8

The Development Bank: 320.4

Improve housing ownership capability Support stable employment Prioritise road traffic jam, air pollution of medium-income individuals in the capital city and smoke-related problems

Approved Granted Approved Granted Approved Granted 90.0 80.0 275.4 263.3 417.8 122.0

The Development Bank: 193.0

Support urbanisation in rural areas

THE DEVELOPMENT BANK OF MONGOLIA Approved Granted GRANTS FINANCING TO PROJECTS AND 82.2 0.5 PROGRAMMES BASED ON THEIR ACTUAL WORK PROGRESS.

The Development Bank of Mongolia - Annual Report 2013 27 ROADS

Depending on Mongolia’s specifics such as its geographical location, sparse population settlement and landlocked situation, it is necessary to expand good-quality road networks in order to meet its long-term development objectives, and support the regional socio-economic development.

A medium-term programme “New Development” was approved by Parliament Resolution No.36 dated 25 June 2010. In accordance with the programme’s objectives to bring the urban planning, energy, engineering infrastructure and road networks to an international standard, a goal was set to build 5,572 km of new roads by 2016, thereby increasing the road networks. Within the framework of the activities to achieve the aforementioned objectives, the Government of Mongolia implemented road projects aiming to connect the centres of Bayankhongor, Khuvsgul, Dornod, Umnugovi, Dundgovi and Dornogovi provinces to the capital city in 2013. It approved the finance for five province-projects (except Dornogovi) through the Development Bank with a total of MNT570.0 billion, using fundings from the Chinggis bonds. In 2013, the centres of Bayankhongor and Dundgovi provinces were fully connected to the capital city via hard-paved roads. At the end of the reporting period, Khuvsgul province’s road construction work completion was at 75%, Dornod province’s was at 61% and Dundgovi–Umnugovi road construction’s was at 73%. The plan is to commission the roads into operation within the third quarter of 2014.

The Development Bank’s concurrent financing for a monitoring consultancy company as for each road project it financed has had significant impact on the quality control improvement in addition to increasing the effectiveness of the investment and financing.

27 rural road construction projects were financed through the Development Bank, using funds from the issue of Chinggis bonds, i.e., the capital raised through Government securities trading. As of 31 December 2013, MNT339.4 billion was granted to rural road construction projects and in total MNT10.7 billion to fourteen monitoring consultancy service projects. In accordance with the approval to grant in total MNT570.0 billion to rural road projects, 61.0% of the total financing, i.e., MNT350.1 billion was granted as of the end of the reporting period. The table below demonstrates the approved budgets, granted financing and work completion for each project or programme in implementation:

Detailed list of the rural road projects ROUTE km Government Contract value Granted Granting % Road-work Resolution (in billion (in billion completion MNT) MNT) (%) Arvaikheer–Bayankhongor 107 45.5 45.5 44.3 97% 100% Zamiin–Uud 11 31.7 31.5 26.4 84% 100% Ulaangom–Khyargas Lake 100 37.4 37.4 32.9 88% 97% Ulaanbaatar–Mandalgovi 204 72.4 72.4 56.8 78% 100% Mankhan–Darvi 100 21.5 21.5 17.1 80% 95% Bayankhongor–Altai 128 35.7 35.7 30.2 85% 100% Murun–Tarialan 165 82.6 82.6 59.3 72% 75% Khujirt–Tuvkhun Temple–Ulaan Tsutgalan 90 3.2 3.2 3.1 97% 5% Mandalgovi–Dalanzadgad 296 137.3 137.3 96.7 70% 73% Naranbulag–Ulaangom 90 49.5 49.5 33.6 68% 70% Tosontsengel–Uliastai 67 38.5 38.3 17.3 45% 57.5% Undurkhaan–Choibalsan 238 133.5 133.5 42.5 32% 61% Undurkhaan–Baruun–Urt 178 87.8 87.8 43.4 49% 42% Tsakhir–Tosontsengel 127 62.9 62.9 17.9 28% 15% Khalzanburgedei–Solongotin Davaa 100 46.4 46.0 13.9 30% 0% Total 2,001 885.7 885.0 535.4 60% 68%

The Development Bank financed the road construction work totalled of 1,800 km in 2013, which is, in terms of the construction work volume, a figure 4.8% higher than the total of 1,712 km of hard-paved roads that were constructed Mongolia-wide in the eight-year period between 2005–2012.

The Development Bank of Mongolia financed by own resources for four rural road construction projects and during the reporting period MNT41.3 billion was lent. In total of MNT3.2 billion was granted to monitoring consultancy and drawing and design projects, which equals to 8% of the loans granted to construction projects.

28 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

Rural road

The Development Bank financed total of MNT44.6 billion to rural road projects with its own resources and the funds from the issue of medium-term Euro bonds.

Within the scope of financing for Ulaanbaatar road projects, MNT34.9 billion was granted to seventeen road construction and refurbishment projects, MNT2.4 billion to four monitoring consultancy service projects and MNT300 million to drawing and design projects.

Detailed list of the capital city road projects ROUTE km Government Contract value Granted Granting % Road-work Resolution (in billion (in billion completion MNT) MNT) (%) Sukhbaatar Avenue 2 3.3 3.3 3.1 94% 100% “Dari–Ekh” road 1.1 1.1 1.1 0.9 82% 100% Railway Station–Railway Depot Junction 1 1.7 1.7 1.5 87% 100% Extension of the “Constitution Street” road 0.3 1.5 1.5 1.4 94% 100% Refurbishment of Selbe River’s pair bridge 116 2.0 2.0 1.9 95% 100% Bayanzurkh Bureau–Yarmag Bridge 17.6 26.0 24.4 15.2 62% 60% Zuun Durvun Zam’s junction– 4.5 12.5 12.5 11.6 92% 100% Chuluun-Ovoo Construction of a multi–level crossing 30.8 30.8 6.2 20% 5% at the Zuun Durvun Zam’s junction Sapporo Round–Tavan Shar 3.2 7.2 7.2 6.8 95% 100% МТ Petrol Station–End of 1.9 3.5 3.5 3.3 95% 100% the “Doloon Buudal” Olympics Committee’s southern junction– 1.3 1.5 1.5 1.4 96% 100% The Agriculture University junction “Khasbaatar Street” road 2.3 3.5 3.5 3.3 95% 100% Trade Union Street–Bayankhoshuu 3.4 4.5 4.5 3.7 83% 100% Narantuul Market’s southern front 2 3.4 3.0 2.8 94% 100% junction–Chuluun-Ovoot Gandhi Street –Ajilchdin Street 4 6.6 5.7 7.6 135% 100% Refurbishment of Ajilchdin Street and 35 1.2 1.2 0.5 45% 70% Dund River’s lower bridge Ard Ayush Avenue–Tolgoit 6 6.7 - - 0% 0% Total 50.6 117.0 107.6 71.3 66% 90%

The Development Bank of Mongolia - Annual Report 2013 29 RURAL ROAD PROJECTS IN IMPLEMENTATION WITH THE DEVELOPMENT BANK’S FINANCING IN 2013 (in billion MNT)

90 km Ulaangom – 67 km Tosontsengel Naranbulag road – Uliastai road Budgeted costs: 49.5 Budgeted costs: 38.2 Khankh Khandgait

Ulaanbaishint Ereentsav Baga-Ilenkh Artssuuri Khatgal Zelter Altanbulag Tsagaannuur Ulaangom Naranbulag Tushig Chuluunkhoroo Teshig Ulikhan Bayantes Tsagaan-Uul Murun Sukhbaatar Ulgii Tarialan Durgun Darkhan Bayan-Uul Khavirga Tolbo Songgino Tosontsengel Numrug Dayan Myangad Erdenet Norovlin Khovd Telmen Tariat Bulgan Uliastai Undur-Ulaan Bayan-Ovoo Arshaan Mankhan Durvuljin Tsakhir Buregkhangai Lun Ulaanbaatar Nalaikh Choibalsan Darvi Tsagaankhairkhan Batsengel Undurkhaan Zuunmod Baganuur Munkhkhaan Tsetserleg Rashaant Bagakhangai Gurvanbulag Kharkhorin Bulgan Delger Galuut Baruun-Urt Эрдэнэцагаан Uyench Tugrug Buutsagaan Bayankhongor Altai Бичигт Airag Bugat Arvaikheer Choir Nariinteel Bogd Mandalgovi Burgastai

Bayanleg Sainshand Tsogt-Ovoo Erdene

Tsogtsetsii Zamiin-Uud Gurvantes Dalanzadgad

Shiveekhuren Gashuun-Sukhait

100 km Mankhan 100 km Ulaangom 128 km Altai – 107 km Arvaikheer – – Darvi road – Khyargas road Bayankhongor road Bayankhongor road Budgeted costs: 42.9 Budget costs: 45.0 Budgeted costs: 54.4 Budgeted costs: 45.4

30 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

100 km Khanzanburgedei 127.1 km Tsakhir – 165.3 km Murun 238.4 km Undurkhaan – Solongot road Tosontsengel road – Tarialan road – Choibalsan road Budgeted costs: 46.4 Budgeted costs: 62.9 Budgeted costs: 82.6 Budgeted costs: 111.3 Khankh Khandgait

Ulaanbaishint Ereentsav Baga-Ilenkh Artssuuri Khatgal Zelter Altanbulag Tsagaannuur Ulaangom Naranbulag Tushig Chuluunkhoroo Teshig Ulikhan Bayantes Tsagaan-Uul Murun Sukhbaatar Ulgii Tarialan Durgun Darkhan Bayan-Uul Khavirga Tolbo Songgino Tosontsengel Numrug Dayan Myangad Erdenet Norovlin Khovd Telmen Tariat Bulgan Uliastai Undur-Ulaan Bayan-Ovoo Arshaan Mankhan Durvuljin Tsakhir Buregkhangai Lun Ulaanbaatar Nalaikh Choibalsan Darvi Tsagaankhairkhan Batsengel Undurkhaan Zuunmod Baganuur Munkhkhaan Tsetserleg Rashaant Bagakhangai Gurvanbulag Kharkhorin Bulgan Delger Galuut Baruun-Urt Эрдэнэцагаан Uyench Tugrug Buutsagaan Bayankhongor Altai Бичигт Airag Bugat Arvaikheer Choir Nariinteel Bogd Mandalgovi Burgastai

Bayanleg Sainshand Tsogt-Ovoo Erdene Projects in implementation Tsogtsetsii Projects completed as end of 2013 Zamiin-Uud Gurvantes Dalanzadgad

Shiveekhuren Gashuun-Sukhait

104 km Ulaanbaatar 296 km Mandalgovi – 177.9 km Undurkhaan – Mandalgovi road Dalanzadgad road – Munkhkhaan – Budgeted costs: 49.1 Budgeted costs: 137.3 Baruun urt road Budgeted costs: 87.8

The Development Bank of Mongolia - Annual Report 2013 31 A junction that was refurbished within the scope of the “Street” project

THE “STREET” PROJECT

Government Resolution No.81 dated 7 March 2013 approved the implementation of projects to repair and refurbish road junctions, build new roads and streets, and increase the accessibility of the road networks within the scope of the “Street” project.

During the reporting period, a total of MNT47.9 billion was granted through the Development Bank to the road and junction design and drawing, monitoring consultancy services and construction projects in implementation within this project, using funds from the issue of Chinggis bonds.

The construction of eighteen junctions and two roads were completed in 2013 amongst the work to refurbish 33 junctions in total within the “Street” project. Techno–economic feasibility studies of two highway roads to be constructed in Ulaanbaatar are complete; first financing was granted for the work of detailed engineering design and drawing of the highway road to be constructed along the Tuul river dam.

The “Street” project has multiple socio-economic benefits. It saves individuals’ time and money, reduces air pollution and soil contamination, improves land usage and management, creates new job opportunities. It also increases the sufficiency of social services through increasing the accessibility of the road networks, creating new street-road networks, and resolving ger districts’ engineering infrastructure as a whole. The indirect socio-economic benefits of the eighteen junctions and two roads that were expanded and refurbished within the scope of the project in 2013 are MNT20.0 billion per annum.

32 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

A part of the infrastructure of Ulaanbaatar

INFRASTRUCTURE

Within the scope of the medium–term target programme “New Development”, Government Resolution No.118 dated 2013 approved the implementation of 92 projects for engineering infrastructure buildings and facilities as well as line and pipeline networks of residential towns to be constructed in Ulaanbaatar and rural areas. Financing of up to MNT200.0 billion for these projects involving MNT416.8 billion-costs in total has been funded by the capital raised through Government securities trading.

In June 2013, the Ministry of Economic Development entered into a “Contract regarding the financing of projects with funds from the issue of Government bonds, and arrangement of repayments” with a value of MNT198.7 billion with the project’s client – the Construction and Urban Development Ministry, and the Ministry of Energy. Upon conducting relevant studies regarding the project and the contractor selected by the Project Management Committee, the Bank resolved financing for 38 projects involving MNT224.7 billion. It entered into work performance contracts for 34 projects involving MNT210.6 billion costs, and granted MNT95.0 billion financing for conducting work and project units’ operating costs, resulting in a loan balance of MNT93.8 billion at the end of the year.

Out of thirty-eight projects, for which contracts for conducting work were entered into, thirty-one projects are being implemented in eleven locations, with 67.5% progress at the end of the reporting period. As of now, five projects are complete and about to be accepted by the State Commissioning Authority. As for six of the projects, their completion is above 90%.

Implementation of the engineering infrastructure, lines and pipelines network projects will enable the creation of residential towns and micro-districts for 78,304 households, schools with a capacity for 70,920 students, kindergartens with a capacity for 18,225 children, hospitals with a capacity for conducting medical examinations of 10,480 people and 16,450 jobs in 1,210.4 ha–areas in seven locations in the capital city. In addition, it will enable the construction of housing for 5,142 households, schools for 2,880 students and kindergartens for 4,400 children in 459.02 ha areas, and so on, in eight re-planned locations in the ger district zones.

The Development Bank of Mongolia - Annual Report 2013 33 New Railway

NEW RAILWAY

As approved by Government Resolutions Nos.121, 93 and 161 dated 2012 and Resolutions Nos.28, 82 and 55 dated 2013 to grant the togrog equivalents of USD200.0 million required for financing the first phase of the “New Railway” project, the Development Bank granted USD156.1 million in 2013 for the project to construct 267 km of the Ukhaa–Khudag– Gashuunsukhait railroad. With this project’s implementation, it is possible to reduce transportation expenses by 50% compared to road transport. It will increase our competitiveness in coal and provide for the development of stations and villages along with the railways. Also, as tasked to grant togrog equivalent of USD55.0 million, which constitute the financing for costs of the project’s preparation operations, the Development Bank granted USD22.5 million in 2013 for 267 km of the Ukhaa–Khudag–Gashuunsukhait railroad.

With the commissioning of the Tavantolgoi–Gashuunsukhait railroad in 2016, it will be possible to transport a total of 30.0 million tons of coal to be exported from the Tavantolgoi mine at a lower cost. Also, it will be connected to the railway towns of Sainshand and Choibalsan through railways to be constructed to the east of Tavantolgoi, and to the border points on the east.

This project’s implementation will increase the competitiveness in coal by reducing transport expenses by 50% compared to road transport, developing stations and villages along the railway and connecting to the border points via railway.

34 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

A pit of “Erdenes Tavantolgoi” JSC

“ERDENES TAVANTOLGOI” JSC

As approved by Government Resolutions Nos.148 dated 2012 to grant USD200.0 million financing to “Erdenes Tavantolgoi” JSC for the purpose of supporting the activities of the strategically-significant mining sector project,U SD100.0 million was granted in 2012 and once more in 2013.

With the project’s implementation, the mining production capacity will increase and product costs will decrease, thereby improving the mine’s operation and enabling it to operate profitably. Financing granted by the Development Bank of Mongolia to “Erdenes Tavantolgoi” JSC twice reduced the company’s interest expenses.

The Development Bank of Mongolia - Annual Report 2013 35 THE TAVANTOLGOI POWER PLANT

Government Resolutions Nos.80 and 261 dated 2013 approved the granting of USD50.0 million for preparation work to enable the commencement of the Tavantolgoi power plant project. USD1.9 million was granted in 2013 for the project unit’s operating costs, research and analysis work, and consultants’ fees through the Development Bank, using the funds raised via Government securities trading.

The Tavantolgoi power plant will have a 450 megawatt–capacity and its main consumer will be the Oyutolgoi project. The Tavantolgoi power plant project team is working with plans to select project investors through competitive selection in 2014, raise the funds necessary for the project’s implementation, commence construction work in 2015, and commission the power plant into operation in 2017.

With the Tavantolgoi power plant’s commissioning, value-added products will be manufactured using thermal coal from the Erdenes Tavantolgoi and Ukhaa Khudag mines. This will meet energy demands of the development projects in implementation as well as those planned to be implemented in the southern zone with domestic sources. Also, domestic energy supply for the Oyutolgoi project in lieu of the current import purchase will be enabled. The connecting of the power plant to the central grid will support a reduction in the nationwide energy shortage, instigate new environment– friendly technology, enhance the ability of domestic personnel and create new job opportunities.

THE EG RIVER HYDROELECTRIC PLANT

Government Resolution No.375 dated 2013 allowed the granting of the finance required for implementing the Eg river hydroelectric plant project in the first phase from the balance of the funds allocated to the Tavantolgoi power plant project, and accordingly, the Development Bank granted USD491.7 thousand in 2013 for the project unit’s operating costs.

The project team is working to complete the project’s preparation work within 2014, commence the project’s construction and assembly work in 2015 and commission the hydroelectric plant into operation in 2019–2020.

The Eg river hydroelectric plant’s commissioning will improve the composition of energy sources, enabling Mongolia to have a regime adjustment and emergency backup capacity, thereby achieving diversification in terms of the power regime. In addition, Mongolia will be free from energy dependency and reduce electricity import. Furthermore, it will be able to retain USD10,000,000-cash flow in Mongolia, which is paid annually to the power grid of the Federation of Russia.

36 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

Extension of the Thermal Power Plant III EXPANSION OF THE THERMAL POWER PLANT III

As tasked by Government Resolution No.142 to grant USD 35.0 million financing for expanding the capacity of the Thermal Power Plant III by 50 megawatts, the Development Bank granted a total of USD28.0 million in 2013 based on the project’s work progress.

“Hu Nan”, an industrial equipment assembly company of the PRC was selected as the project’s contractor to conduct work including the manufacturing and assembly of a 50 megawatt–turbine, newly constructing a cooling tower, power connection, installing boilers’ electric fittings, renovating water pumps, replacing water transmission pipelines, and undertaking associated works.

The extension to the Thermal Power Plant III will be commissioned into operation in May 2014 whereby the power plant’s electricity generation will reach 186 megawatts, heat production will reach 585 Gcal/h, and 1 kWh-electricity generation costs will reduce from MNT74.7 to MNT36, which will be significant in contributing to the supply for Mongolia’s central power grid and the ever-increasing electricity and heat demands in Ulaanbaatar.

EXPANSION OF THE Thermal Power Plant IV

As tasked by Government Resolutions Nos.99 and 119 dated 2012 to grant USD70.0 million financing for expanding the capacity of the Thermal Power Plant IV by 100 megawatts, the Development Bank granted USD1,9 million in 2012 and USD42.1 million in 2013 based on the project’s work progress.

The capacity of the Thermal Power Plant IV will be increased by installing a 120 megawatt–capacity turbine of Т-120/130– 130–8МO model of the Ural’s Turbine Factory of the Federation of Russia.

The Thermal Power Plant IV expansion project will be completed in November 2014 thereby increasing the power generation by over 500,000,000 kW.h and heat generation by 400,000 Gcal/h, which are volumes sufficient enough to cover over 10% of the current consumption, i.e., the growth of consumption in the next two years.

THE AMGALAN THERMAL POWER PLANT

As approved by Government Resolution No.155 dated 2013 to issue a guarantee for a USD75,9 million-payment on behalf of the Ministry of Economic Development and the Ministry of Finance for implementing the project to construct a heating plant with a 300 Gcal/H–capacity in Amgalan, the Development Bank issued the guarantee. The Amgalan Thermal Power Plant will have a 348 megawatt–capacity and provide the east zone of Ulaanbaatar with heat energy.

The Amgalan Thermal Power Plant will be commissioned into operation in December 2014, and connected to the reliable heat source of the east zone of Ulaanbaatar thereby improving the operation of the capital city’s heat supply system. In addition, the connecting of the east zone of Ulaanbaatar to the heat sources will open possibilities to build residences in the zone.

The Development Bank of Mongolia - Annual Report 2013 37 THE STATE HOUSING CORPORATION’S RESIDENTIAL MICRO-DISTRICT “BUYANT–UKHAA I”

The Development Bank resolved the granting of MNT72.0 billion loan to “State Housing Corporation”, a state-owned enterprise, for its project to construct 1,764–household residences, i.e., “Buyant–Ukhaa I” residential micro- district for the purpose of providing individuals with affordable housing within the framework of Government Resolution No.263 dated 2013, and granted MNT60.0 billion loans during the reporting period.

A partnership of major national construction companies is carrying out the construction work; in the first phase, nine buildings for 567 households have been commissioned into operation, and sales have started.

THE 189–HOUSEHOLD RESIDENTIAL BUILDING IN THE HOUSING FINANCE CORPORATION’S (HFC) MICRO-DISTRICT “BUYANT–UKHAA”

Although the HFC submitted a loan application satisfying the prerequisites under a loan contract entered into in 2012, the Government resolution which served as a basis for the contract had become ineffective. However, upon re-conducting studies regarding the project, the Bank deemed it possible to grant loans from its own capital and lent MNT1.5 billion. The State Housing Corporation borrowed MNT60.0 billion from the Development Bank, implemented the work to construct the Buyant–Ukhaa residential complex micro-district, and commissioned nine buildings for 567 households into operation in the first phase.

With the land and engineering infrastructure being resolved by the state, the contractor companies were able to construct buildings at low costs thereby enabling individuals of target groups to purchase at a price 40% cheaper than the market price, i.e., MNT1.28 million per square metre.

38 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

The residential micro-district “Buyant–Ukhaa I”

THE 1,152–HOUSEHOLD RESIDENTIAL MICRO-DISTRICT ADJACENT TO THE YARMAG BRIDGE

MNT6.8 billion financing was granted for the construction of five residential buildings for 576 households in the first phase out of a total of ten buildings of the project “1,152–household residential micro-district in 10 ha–areas located adjacent to the Yarmag Bridge, i.e., ‘Viva City’ town” within the scope of the medium-term programme “New Development”.

Тhe project’s implementation will create comfortable and pleasant living environments, and furthermore will be significant in reducing soil contamination and air pollution in Ulaanbaatar.

THE “NEW YARMAG” RESIDENTIAL MICRO-DISTRICT AND INFRASTRUCTURE

The Development Bank was allowed by Government Resolution No.246 dated 2011 to issue a guarantee to the Export– Import Bank of the PRC for the purpose of raising funds required for the construction of the 3,955–household residential complex micro-district “New Yarmag” within the scope of the programmes “New Development” and “100,000-household residences”. Within the framework of the Resolution, the Development Bank issued a guarantee for USD83.9 million in 2012 for phase one of the loans to be granted by the Export–Import Bank. “New Yarmag Housing Project” LLC, the project implementer, entered into a contract to borrow from the Export–Import Bank.

This project is of paramount importance in implementing the medium-term target programme “New Development” and the Government Action Plan as well as in providing individuals with housing, enabling soft loans for housing purposes and decelerating the population density in central areas of the capital city.

HOUSING LOANS TO BE GRANTED TO LOW- OR MEDIUM-INCOME INDIVIDUALS AT AN INTEREST RATE OF 6% PER ANNUM

The loans were granted based on a MNT50.0 billion–financing contract entered into with the Ministry of Finance and the State Bank in 2012 for financing the programme to grant housing loans to low or middle-income households at an interest rate of 6% per annum, within the framework of the medium-term target programme “New Development”, Parliament Resolution No.36 dated 2010 and Government Resolutions Nos.138 and 341 dated 2011; additional MNT30.0 billion–loans were granted in 2013.

Тhis financing is significant in creating comfortable and pleasant living environments for low- or medium-income households and enabling them to purchase housing. Within the scope of the project, soft loans for housing purposes were granted to in total 1,868 families.

The Development Bank of Mongolia - Annual Report 2013 39 Extension of the plant of “Khutul Cement–Lime” SOJSC

THE KHUTUL CEMENT AND LIME PLANT

A USD61.3 million loan was granted to “Basement” LLC in 2012 for its plant expansion project to update the cement manufacturing capacity to 1,000,000 tons per year. This is achieved by changing line two of the clinker manufacturing technology for cement production at the plant of “Khutul Cement–Lime” SOJSC to a dry method of production. This loan is within the scope of the medium-term target programme “New Development”.

The plant’s assembly and equipment installation work were completed and a trial production was successful in 2013. As per the plan, the plant will be commissioned into operation in April 2014.

In the last four years, Mongolia imported 58–86% of its total cement consumption resulting in outflow in the amount of approximately USD400.0 million only for cement purchases. As a result of this project’s implementation, Mongolia will manufacture 1,000,000 tons of cement per year and supply 40% of the increasing domestic cement demands, which makes it a project of high strategic significance.

40 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

The Housing construction industrial complex–1

THE PROJECT “HOUSING CONSTRUCTION INDUSTRIAL COMPLEX–1”

Within the framework of the medium–term target programme “New Development” and the work to provide households with housing, it was decided by Government Resolution No.180 dated 2013 to grant USD14.0 million to “Erel” LLC for the “Housing construction industrial complex–1” project that conforms to European standards. The funds were raised through Government securities trading. The Development Bank conducted studies regarding the project and granted USD14.0 million loans in accordance with the applicable regulations and procedures.

Studies were conducted regarding obtaining the remaining finances via export loans and/or financing the project, of which total costs are USD43.2 million, jointly with foreign banks and/or financial institutions. A financing scheme was determined jointly with the “Соmmerzbank”, “UniCredit” and “Standard Chartered” banks, resulting in a solution to cooperate with the “Соmmerzbank” of the Federal Republic of Germany. We reviewed “Basic Loan Agreement” and “Individual Loan Agreement” drafts delivered by the bank and sent our comments thereon. We are working toward borrowing a total of EUR13.2 million from the Соmmerzbank as an export loan and sub-lend it to “Erel” LLC.

With implementation of the project “Housing production plant–1”, “Erel” LLC will conduct its activities throughout four quarters a year and supply concrete components at low costs, which take a high percentage in construction costs thereby impacting the property price stabilisation. With the project it is possible to manufacture and supply 150.0 thousand m3 of precast products per annum, i.e., building blocks which would be sufficient for 5,000-household residences, or schools, kindergartens, hospitals and cultural and public buildings and facilities equal thereto.

The Development Bank of Mongolia - Annual Report 2013 41 The Baganuur Mine PROJECT TO EXPAND “BAGANUUR” JSC’S CAPACITY

As approved by Government Resolutions Nos.10 and 283 dated 2013 to grant in total MNT18.6 billion financing for implementation of the project to purchase equipment and expand the coal crushing and loading facility for the purpose of increasing the Baganuur mine’s capacity, MNT18.3 billion was granted in 2013.

Using the Development Bank’s loan sources, Baganuur JSC purchased eight machines for coal and soil transport and a bulldozer; implementation of the project to expand its coal crushing and loading facility has been underway since September 2013. The coal crushing and loading facility extension will be commissioned into operation in January 2014.

The Baganuur mine was unable to operate at its full capacity due to its outdated equipment, lagging behind in terms of soil stripping of 13.0 million cubic metres in total. With the purchase of the coal and soil transport machinery, coal production rose by 10% and soil stripping by 11%.

With the coal crushing and loading facility’s commissioning, coal crushing and loading capacity will reach 4.5 million tons per year and a continuous coal supply to heating plants and ger district households will be enabled. In addition, it will become possible to implement projects to construct a coal liquefaction plant as well as a power plant in reliance of the Baganuur mine. sainshand industrial complex

Government Resolution No.76 dated 2013 approved the finance of MNT14.1 billion required in 2013 for legal consultancy and general project consultancy services, environmental and social impact assessment and the work to prepare a new settled zone’s partial plan. These are necessary preparation works for commencing the industrial complex “Sainshand”’s construction, the Development Bank granted MNT3.3 billion in 2013 based on the project’s work progress.

The construction of the project’s entire infrastructure includes the roads, railway, a cargo transfer-loading facility, a 450 megawatt-capacity power plant, a water supply and wastewater treatment facility, an air purification facility, communication and heat lines and pipelines.

Construction of the project’s entire infrastructure will serve as a basis for creating a new settled zone and building plants in Bagh 1 of Sainshand soum. Locating the plants in the same area will create an industrial zone and jobs for 2,700 individuals, enabling business entities to work as suppliers or subcontractors, thereby increasing employment and export products.

42 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

Aircraft of “Boeing 767–300ЕR” model FINANCING FOR MIAT JSC’S AIRCRAFT PURCHASE

The Development Bank was approved by Government Resolutions Nos.137 and 383 dated 2013 to grant financing of up to USD115.0 million to MIAT JSC for its purchase of an aircraft of “Boeing 737–300ЕR” model.

Considering the significance of this purchase, the Development Bank granted from its own resources USD5.3 million for the aircraft’s advance payment in 2012, and a bridge loan of USD84.2 million for the principal payment in 2013 using funds from the issue of Chinggis bonds in accordance with Government Resolution No.137. The bridge loan has been transferred as low-cost long-term financing sources of the Ex-Im Bank of the USA, resulting in a USD2.9 million balance of the amount financed with the Chinggis bond funds.

Upon the updating of its aircraft fleet, MIAT JSC has conducted studies looking to run direct flights to destinations including Bangkok (in winter), Singapore, Ereen, Shanghai and Almaty in the near future. The Company is also planning to run direct flights to the USA if a contract is entered into with the Government of the USA.

This purchase is of vital importance in supporting Mongolia’s aviation sector development in that it will increase MIAT JSC’s operational efficiency, enhance its service terms and update the aircraft fleet with additions.

The Development Bank of Mongolia - Annual Report 2013 43 Greenhouse farming PROJECTS FOR FIVE AGRICULTURE AND LIGHT INDUSTRY SECTORS

The Development Bank was approved to lend in total USD172.0 million for a period of 4.5 years as an advance payment equal to one third of the equipment financing under Government Resolutions Nos.126 and 141 dated 2013.

Jointly with the Ministry of Industry and Agriculture, and Golomt Bank, a five-sector sub-financing contract was entered into for the purpose of supporting the domestic manufacturing, increasing job opportunities, manufacturing value-added export products and increasing Mongolia’s foreign currency reserves, and accordingly MNT269.0 billion was granted to Golomt Bank. During the reporting period, Golomt Bank received applications from 189 companies in total and decided to grant MNT91.6 billion loans to 51 borrowers. Out of 51 approved loans, MNT44.5 billion in total was sub-lent to 36 companies.

Financing for equipment updating is significant in the further processing of wool, cashmere and sewn products. It enables the domestic manufacturing of final products thereby meeting domestic demands and allowing export. As for dairy production, it helps increase milk production and reduce the import of dried milk. The utilisation of greenhouse farming will enhance the supply of food for the population and reduce vegetable import.

THE SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT

Jointly with the Small and Medium Enterprise Development Fund of the Labour Ministry and through nine commercial banks, the Development Bank granted MNT36.5 billion project loans to 62 small- and medium-enterprise-borrowers engaged in business in the sectors including livestock husbandry, agriculture, light industry and foodstuff industry, construction, trade and services.

The soft loan granting to small and medium enterprises for expanding their farms and factories is significant in increasing job opportunities, securing the level of the population’s livelihood, diversifying income sources, and increasing the contribution from small and medium enterprises to the country’s economy.

THE CENTRAL GEOLOGICAL LABORATORY

It has been decided to grant MNT980.0 million -loans to the Central Geological Laboratory for its purchase of the key equipment thereby increasing its capacity. A bid for the equipment purchase has been announced; financing will be granted upon entering into loan and pledge contracts after a contractor is selected.

The update to the Central Geological Laboratory’s equipment will enable increasing the capacity of the national professional entity accredited internationally, and conducting tests and analyses domestically at an internationally recognised high- quality level.

44 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

FUNDING OPERATIONS

The Development Bank is under duty to raise funds, to a certain extent, for financing major projects and programmes for the development of Mongolia. Through cooperation with financial institutions of international repute, the Bank successfully raised the required funds in 2013.

INDUSTRIAL BONDS (SAMURAI BONDS):

In 2013 the Development Bank of Mongolia launched the successful trading of JPY30.0 billion -bonds termed for 10 years guaranteed by the Government of Mongolia and the Japan Bank for International Cooperation (JBIC) to Japanese investors, further strengthening its success with the 2011 medium-term Euro bonds. The guarantee issuance by the Japan Bank for International Cooperation (Rating: S&P/Moody’s – AA-/Aa3) for 95% of the principal and interest payments for the industrial bonds of the Development Bank of Mongolia enabled fixing the coupon interest of the Development Bank bonds at 1.52% per annum, i.e., at a relatively lower rate than the interest rate of other country bonds.

Bond issuer The Development Bank of Mongolia

Bond issuance date 25 December 2013

Guarantor The Ministry of Finance on behalf of the Government of The Development Mongolia, and the Japan Bank for International Cooperation Bank’s JPY30.0 billion Total amount JPY30.0 billion industrial bonds Maturity 10 years Coupon interest 1.52% per annum (fixed) Bond issuance purposes Support the industrial sector Underwriter Investment banks Daiwa Securities Co. Ltd. Nomura Securities Co. Ltd. Legal consultant entity International law firm “Shimazaki”

FINANCING BY US-EXIM:

The Development Bank granted in total USD83.9 million, which is bridge financing and an advance required for the payment of an aircraft of “Boeing–767– 300ЕR” model to be purchased by “MIAT” SOJSC from “Boeing” company of the USA, in the first phase, within the scope of the Mongolian Government’s Action Plan for 2012–2016 and the state policies in relation to the civil aviation sector for the period until 2020. Also, the Bank jointly organised the re-financing using long-term funds guaranteed by the “Ex-Im” bank of the USA.

FINANCING BY COMMERZBANK:

Financing equal up to EUR13.1 million was granted to “Erel” LLC in 2013, which was required for implementing the project “Housing construction industrial complex–1” within the scope of the medium–term target programme “New Development” and the work to provide individuals with housing. “Erel” LLC entered into a contract for purchasing EUR17.3 million equipment for the housing construction industrial complex from “Еbawe” company of Germany. The Development Bank granted 30% of the equipment financing, and it was decided to obtain the remaining 70% financing from the Commerzbank of Germany for a 5–year–term with an export loan guarantee from “Еuler Hermes”, and sub-lend it to “Erel” LLC through the Development Bank.

Amount of the financing EUR13.1 million Financing term 60 months Loan interest 6–month EURIBOR+1.90%

The Development Bank of Mongolia - Annual Report 2013 45 BUSINESS COOPERATION

INTERNATIONAL COOPERATION

The Development Bank, in accordance with its functions and duties, works proactively operating in a close link with international financial institutions and development financing organisations, establishing partner relationships, executing cooperation memoranda as well as joining relevant associations.

Since its incorporation in 2011, the Development Bank has established relationships with several organisations from the continents of Africa, America, Asia and Europe, and signed cooperation memoranda. It has also joined three associations that conduct similar activities. Going forward, the Development Bank is working toward strengthening and expanding these relationships and links.

THE BLOOMBERG TELEVISION

We organised an advertising campaign Questionnaire responses from participants “Inside Mongolia” for a short period jointly who saw the advertisement broadcasts: with the Bloomberg Television Singapore aimed at raising Mongolia’s reputation, Interest in Gained more introducing the investment environment and improving investors’ investing information in Mongolia regarding Liked the attitude towards Mongolia. increased Mongolia advertisement

Within the scope of this work, professional commercials and short 79% 80% 81% documentaries were prepared for investors covering the subjects: growth of Mongolia’s economy, the political stability of the country, investment environment, international relations and mineral resources policies; and broadcasted them about 4,900 times worldwide through the Bloomberg Television channels in Asia, Australia, Europe and North America.

As a result of these activities, over 2,887,500 comments were received through the website www.blооmberg.com. In addition, advertisement work was organised through websites of international repute including www.blооmberg.com and www.businessweek.com.

Participants who saw the advertisement broadcasts were of opinion that the most important factor for Mongolia to attract international investors is its political stability, and they expressed interest in getting to know more about Mongolia.

46 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

MEMORANDA OF UNDERSTANDING

24 August 2011:

THE CHINA EXIM BANK

The Development Bank of Mongolia signed a Memorandum of Understanding with the China EXIM bank, agreeing to support the development of diplomatic relationships between the two countries, and the finance for major projects that will have strong positive impact on Mongolia’s economy.

“GAUFF ENGINEERING” COMPANY OF THE FEDERAL REPUBLIC OF GERMANY

The Development Bank of Mongolia signed a Memorandum of Understanding with “Gauff engineering” company of the Federal Republic of Germany (GAUFF Engineering) agreeing upon to jointly organise training sessions and seminars covering topics such as “Technical matters of road projects” and “Infrastructure financing”.

6 December 2011:

THE KUWAIT INVESTMENT AUTHORITY

The Development Bank of Mongolia signed a Memorandum of Understanding with the Кuwait Investment Authority agreeing upon to cooperate in investing in Mongolia in strategically-significant projects such as mineral resources, banking and financial services, railway and so on.

THE KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT

The Development Bank of Mongolia signed a Memorandum of Understanding with the Kuwait Fund for Arab Economic Development agreeing upon to grant soft loans to projects which play a leading role in Mongolia’s development and whose techno-economic feasibility studies are completed.

12 March 2012:

Sumitomo Mitsui Banking Corporation

A Memorandum of Understanding has been signed between the Development Bank of Mongolia and “Sumitomo Mitsui Banking Corporation” (SМВС) of Japan agreeing upon to cooperate in financing major infrastructure, mining and development projects that will accelerate Mongolia’s economic development.

21 March 2012:

СНINA DEVELOPMENT BANK

The Development Bank of Mongolia and China Development Bank entered into a cooperation contract agreeing upon to jointly grant loans to road, construction and housing projects to be implemented in rural areas as well as the capital city in Mongolia, and implement other projects under consensus by both parties.

The Development Bank of Mongolia - Annual Report 2013 47 1 May 2012:

EXPORT-IMPORT BANK OF THE UNITED STATES

The Development Bank of Mongolia signed a Memorandum of Understanding with the U.S. Ex-Im bank, resulting in the opening of opportunities to get the USA’s advanced techniques and technology via low-interest long-term financing, and fund strategically-significant major projects and programmes. The Ex-Im Bank expressed cooperation interest in supporting the mining and infrastructure sectors that are the basis of expedient development of Mongolia’s economy, inter alia, the railway and road transport, aviation, energy, housing and processing industries.

10 October 2012:

THE GREATER TUMEN INITIATIVE

The Development Bank of Mongolia signed a Memorandum of Understanding with the “Ex-Im Banks Association” of Northeast Asia (Greater Tumen Initiative) to cooperate in intensifying Northeast Asia’s economic policies, enhancing economic bases and foundations, and expanding technical cooperation.

12 September 2013:

JAPAN BANK FOR INTERNATIONAL COOPERATION (JBIC)

The Development Bank of Mongolia signed a Memorandum of Understanding with the Japan Bank for International Cooperation. The parties agreed upon, within the scope of the Memorandum, to share information regarding projects that can make considerable contribution to expanding foreign trade and businesses between Mongolia and Japan, exchange opinions regarding the Development Bank’s foreign financing operations such as industrial bonds, foreign borrowing and bond issuance in international markets, based on reciprocal understanding between the Governments of Mongolia and Japan.

25 December 2013:

CHINA DEVELOPMENT BANK

The Development Bank of Mongolia signed a Cooperation Memorandum with the China Development Bank looking to finance the expansion of the Combined heat and power plant III, expansion of the “Zamin–Uud” border point’s road and x-ray control area and the Amgalan heating plant as well as other projects in accordance with consensus by both parties.

THE BANKS AND SECURITIES COMPANIES COOPERATED IN THE ISSUANCE OF THE INDUSTRIAL BOND “SAMURAI”:

When trading the bonds in Japan’s capital market, with the guarantee from the Government of Mongolia and the Japan Bank for International Cooperation, and raising JPY30,000,000,000-funds, the Development Bank of Mongolia cooperated with “Daiwa Securities” and “Nomura Securities” as underwriters, with the international law firm “Shimazaki” as an international legal consultant, and with “Mizuho bank” as an issuing agent, a paying agent and an administrative agent as well as a commissioned company for bondholders.

48 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

BRIEF INTRODUCTION TO THE DEVELOPMENT BANK’S MEMBERSHIP ORGANISATIONS

In 2013, the Development Bank joined the following institutions, looking to establish relationships with organisations that conduct similar activities, expand cooperation, exchange data, information and opinions, and strengthen its capacity, as well as cooperated and actively participated in organising pertinent events.

GREATER TUMEN INITIATIVE (GTI)

The Bank signed a Cooperation Memorandum with the intergovernmental cooperation programme “Greater Tumen Initiative”. The programme’s purpose is to render support to its member countries in their active participation in world trade and financial markets. Within the scope of the programme, the PRC, Mongolia, the Republic of Korea and the Federation of Russia jointly organise meetings on an annual basis under the auspices of the United Nations Development Programme (UNDP). The Development Bank organised the 14th forum meeting of the programme “Greater Tumen Initiative” in Ulaanbaatar on 29–31 October 2013 inviting and with attendances of over 100 representatives from international organisations including the UN, World Bank and Asian Development Bank, in addition to the member countries. At the consultancy meeting, legal status of the programme “Greater Tumen initiative” was agreed upon, the project implementation was evaluated, and budgets and plans for 2014 as well as projects and programmes to be implemented going forward were discussed and approved.

ASSOCIATION OF DEVELOPMENT FINANCING INSTITUTIONS IN ASIA AND THE PACIFIC (ADFIAP)

The “Association of Development Financing Institutions in Asia and the Pacific” (ADFIAP) of international repute is a joint association of development banks and other financial institutions in Asian and the Pacific countries, and currently operates with 121 member organisations from 45 countries in total. Although incorporated only recently, the Development Bank joined the ADFIAP and participated in organising the Association’s 36thmeeting, which successfully took place under the name “Development Institution, and Trade and Industry Chamber” in Ulaanbaatar, the capital city of Mongolia, in 2013, in which the meeting participants made presentations and held discussions covering the topics: supporting small and medium businesses and the level of their development, financing and governance; green investment in the infrastructure and energy sectors.

MONGOLIAN BANKERS ASSOCIATION

As an institution operating in the banking and financial sector and making substantial contribution, the Development Bank joined the “Mongolian Bankers Association” as a member, exchanged opinions regarding how to expand cooperation with national commercial banks as well as representative offices of international banks operating in Mongolia, and actively participated in pertinent activities.

The Development Bank of Mongolia - Annual Report 2013 49 RISK MANAGEMENT

In 2013 the Development Bank improved its risk management framework in accordance with the “Law on the Development Bank of Mongolia”, the risk management policies,regulations and within approved risk limits and criteria parameters. . With close cooperation with the Board of Directors (BoD), the Executive Management Committee, the Credit Committee, the Asset and Liability Committee, the Risk Management Committee and the Risk Management Department together implemented sound risk management strategies consistent with the internal and external factors.

The BoD, responsible for approving the Bank’s risk management policies and strategies, oversees whether the Bank operates within the accepted risk limits and criteria. The Executive Management Committee and other management-level committees exercise bank-wide monitoring of the credit risk, impacts from internal and external factors, an adequacy of the loan loss reserve and the implementation of the relevant policies and regulations.

In order to ensure the stability of the Bank, the Risk Management Department developed necessary regulations, guidelines, information system required for sound risk management framework based on best international risk management practices with close cooperation of the other departments. In addition, the Risk Management Department established risk management culture within the Bank by introducing daily risk management processes including credit risk reviewing, risk reporting, and risk monitoring. The Risk Management Department also provided professional advice and guidance regarding dealing with uncertain or stressed conditions, overcoming financial depression, financial discipline and protection against potential risks to its costumers.

The Development Bank of Mongolia considers credit risk, market risk, liquidity risk and operational risk as main potential risks it would face, and established sound risk management framework to identify, measure, review, report and control these risks.

LOAN RISKS

As of end of 2013, the total loan outstanding and advances of the Development Bank of Mongolia are MNT2,185.8 a 4.4-fold rise compared to the previous year. Of which 60.4 percent are to be repaid from the state budget, thus, considered as risk-free. Neither past due or impaired loans cover 94 percent of the total loans, past due but not impaired loans take 0.2 percent and impaired loans take 5.8 percent thereof during the reporting period, an amount of MNT6,2 billion is reserved as loan loss reserve fund. As of end of 2013, the total amount of loans granted to five largest borrowers of the Bank was MNT1,078.7 billion which takes 49 percent of the total loans and advances.

The positive results of 2013 including high performance of the Bank’s loan operation, increased profitability, and good loan portfolio quality, directly derived from feasible loan terms to borrowers, and the Executive management team’s successful implementation of credit risk management strategies.

According to the credit policy approved by the BoD, the Credit Committee has the authority to approve transactions with a total amount of up to MNT 5.0 billion. Any requests with higher amounts need to be approved by the BoD. In accordance with the Law on Development Bank of Mongolia, credit risk review report is prepared by the Risk Management Department for each loan proposal to be discussed by the Credit Committee.

As stipulated in the Law on Development Bank of Mongolia, the total value of loans, and loan equivalent assets provided by the Bank shall not exceed the amount equal to 50 times of the Bank’s equity capital. The Credit Policy also states that the amount of total loan outstanding must not exceed 80 percent of the total asset. In 2013, the Development Bank of Mongolia operated within these restrictions. Also, the Bank established provision for impaired loans as of end of 2013, in accordance with IFRS.

50 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENt BANK OF MONGOLIA

MARKET RISKS

In order to manage interest risk and exchange rate risk, the Development Bank of Mongolia implements prudential ratios and limits based on the macroeconomic conditions, and operates within these limits. In the reporting year, during which deceleration of the foreign currency inflow into the economy and increased payment balance pressure caused circumstances for the Mongolian togrog rate weakening against the American dollar.

Increased decline in foreign currency inflow and pressure on the balance of payment resulted in the depreciation of domestic currency MNT. Therefore, in order to prevent foreign exchange loss the Bank made a special agreement with the Government of Mongolia that the government bears foreign exchange loss from MNT loans.

LIQUIDITY RISKS

In order to manage interest risk and exchange rate risk, the Development Bank of Mongolia implements prudential ratios and limits based on the macroeconomic conditions, and operates within these limits. In the reporting year, during which deceleration of the foreign currency inflow into the economy and increased payment balance pressure caused circumstances for the Mongolian togrog rate weakening against the American dollar.

Increased decline in foreign currency inflow and pressure on the balance of payment resulted in the depreciation of domestic currency MNT. Therefore, in order to prevent foreign exchange loss the Bank made a special agreement with the Government of Mongolia that the government bears foreign exchange loss from MNT loans.

OPERATIONAL RISKS

Since its establishment in 2011, the Bank’s operational scope has continuously expanded. To ensure operational stability of the Bank, in 2013, the Risk Management Department developed relevant policies, regulations, procedures, and guidelines which are necessary for identifying, monitoring, preventing operational risk, analyzing circumstances, and implementing a reporting system. In 2013, the Development Bank of Mongolia specifically focused on improving its risk management framework through giving the following areas high priority based on operational characteristics, structure and scope of the Bank.

• Ensure the Bank’s operations consistent with the Law on the Development Bank of Mongolia, as well as other legislative acts, and conduct risk assessment; • Human resources risk assessment, general assessment of operational risks, and primary and re-training of personnel; • Identifying risks in procurement activities, as well as supplier risks; and assessment of legal risks in agreements and contracts; • Improve internal audit function, develop user access matrix to enhance monitoring function in the Bank’s core system • Improve information technology structure to develop sound management information system • Information confidentiality, workplace safety

The Development Bank of Mongolia - Annual Report 2013 51 Since 2014 ...

twice

2013.12.31

audited twice

2012.12.31

2011.12. 31

The Development Bank’s financial statements and reports are verified by auditing each year and it is found 2011.05.12 that the Bank committed Launched its operations no violation or breach, and its loan financing is ensured with collateral and guarantees, in excess of the applicable requirements.

52 The Development Bank of Mongolia - Annual Report 2013 THE DEVELOPMENT BANK OF MONGOLIA

International Financial Reporting Standards Financial Statements and Independent Auditor’s Report 31 December 2013

53

Contents

INDEPENDENT AUDITOR’S REPORT

FINANCIAL STATEMENTS

Statement of Financial Position Statement of Profit or Loss and Other Comprehensive Income Statement of Changes in Equity Statement of Cash Flows

NOTES TO THE FINANCIAL STATEMENTS

1. corporate Information And Operating Environment 2. Financial Reporting Framework And Basis For Preparation And Presentation 3. Significant Accounting Policies 4. critical Accounting Judgements And Key Sources Of Estimation Uncertainty 5. Application Of New And Revised International Financial Reporting Standards 6. cash And Cash Equivalents 7. Bank Deposits 8. loans And Advances 9. other Assets 10. property And Equipment 11. Intangibles Assets 12. customer Accounts And Other Liabilities 13. due To Other Banks 14. Bonds 15. Borrowings 16. related Party Transactions 17. contributed Capital 18. Interest Income 19. Interest Expense 20. Foreign Exchange Gains Less Losses 21. administrative And Other Expenses 22. Income Taxes 23. Financial Risk Management 24. presentation Of Financial Instruments By Measurement Category 25. Fair Values Of Financial Assets And Liabilities 26. commitments And Contingencies 27. Segment Reporting 28. post Balance Sheet Events

55 INDEPENDENT AUDITOR’S REPORT To the Shareholders and Board of Directors of Development Bank of Mongolia. We have audited the accompanying financial statements of Development Bank of Mongolia (the “Bank”), which comprise the statement of financial position as at 31 December 2013 and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from financial misstatenent, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance over whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinions on the effectiveness of the entity’s internal control. An audit also inlcudes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying financial statement present fairly, in all material respects, the financial position of the Banks as at 31 December 2013, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Signed by

Bayarmaa Davaa Executive Director PricewaterhouseCoopers Audit LLC

Approved by

Matthew Pottle Managing partner 14 March 2014 Ulaanbaatar, Mongolia

PricewaterhouseCoopers Audit LLC, Central Tower Office Building, Suite 601, Floor 6, Great Chinggis Khaan’s Square 2, SBD-8, Ulaanbaatar 14200, Mongolia T: +976 70009089, F: +976 (11) 322068, www. pwc.com/mn

56 Development Bank of Mongolia Statement of Financial Position As at 31 December 2013

In thousands of MNT Note 31 December 2013 31 December 1 January 2012 2012 (Restated) (Restated) Assets Cash and cash equivalents 6 379,461,233 216,468,206 75,817,745 Bank deposits 7 652,338,027 168,924,490 - Loans and advances 8 2,179,590,302 493,555,967 - Other assets 9 6,036,490 2,285,515 3,667 Current income tax prepayment 3,846,446 - - Property and equipment 10 583,037 234,558 182,563 Intangible assets 11 777,485 726,688 811,286 Deferred tax assets 22 8,236,534 5,940,360 44,933 Total assets 3,230,869,554 888,135,784 76,860,194 Liabilities Customer accounts 12 16,278,742 6,960 - Other liabilities 12 373,841 505,689 1,139,593 Current income tax payable - 3,313,560 - Due to other banks 13 111,041,307 - - Bonds 14 972,107,029 817,317,727 26,622,791 Borrowings 15 1,987,189,199 - - Total liabilities 3,086,990,118 821,143,936 27,762,384 Equity Contributed capital 17 123,300,000 73,300,000 49,700,000 Retained earnings 20,579,436 (6,308,152) (602,190) Total equity 143,879,436 66,991,848 49,097,810 Total liabilities and equity 3,230,869,554 888,135,784 76,860,194

Approved for issue and signed on behalf of the Executive management on 14 March 2014

Munkhbat Nanjid Tuyachimeg Sevjid Chief Executive Officer Acting Head of Accounting Division Development Bank of Mongolia Development Bank of Mongolia

The accompanying notes are an integral part of these financial statements.

57 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Statement of Profit or Loss and Other Comprehensive Income Year ended 31 December 2013

In thousands of MNT Note Year ended 31 Year ended 31 December December 2013 2012 (Restated) Interest income 18 131,059,558 12,878,274 Interest expense 19 (89,057,610) (13,695,488) Net interest income/(expense) 42,001,948 (817,214) Provision for loan impairment 8 (6,224,792) - Net interest income/(expense) after 35,777,156 (817,214) provision for loan impairment Gains less losses from trading in foreign currencies 2,000,002 4,060 Foreign exchange translation gains less losses 20 1,913,578 (5,771,355) Administrative and other operating expenses 21 (4,593,890) (1,703,320) Profit/(loss) before tax 35,096,846 (8,287,829) Income tax (expenses)/benefit 22 (8,209,258) 2,581,867 Profit/(loss) for the year 26,887,588 (5,705,962) Total comprehensive income/(loss) for the year 26,887,588 (5,705,962)

Statement of Changes in Equity Year ended 31 December 2013

In thousands of MNT Note Contributed Retained earnings Total equity capital Balance at 1 January 2012 17 49,700,000 (602,190) 49,097,810 Loss for the year - (5,705,962) (5,705,962) Total comprehensive loss - (5,705,962) (5,705,962) Contributed capital for the year 17 23,600,000 - 23,600,000 Balance at 31 December 2012 17 73,300,000 (6,308,152) 66,991,848 Profit for the year - 26,887,588 26,887,588 Total comprehensive income - 26,887,588 26,887,588 Contributed capital for the year 17 50,000,000 - 50,000,000 Balance at 31 December 2013 17 123,300,000 20,579,436 143,879,436

58 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Statement of Cash Flows Year ended 31 December 2013

In thousands of MNT Year ended 31 Year ended 31 December December 2013 2012 (Restated) Cash flows from operating activities Profit/(loss) before tax 35,096,846 (8,287,829) Adjustments to: Depreciation, amortization 203,986 149,868 Provision for loan impairment 6,224,792 - FX translation (gain)/loss -Unrealized 372,892 34,913,681 Property and equipment written off 2,087 - Interest income (131,059,558) (12,878,274) Interest expense 89,057,610 13,695,488 Realised FX loss from financing activities 23,325,423 - Cash flows from operating activities before 23,224,078 27,592,934 changes in operating assets and liabilities Net increase in bank deposits (475,005,213) (160,282,560) Net increase in loans and advances to customers (1,496,584,570) (492,228,742) Net increase in other assets (821,833) (2,281,848) Net increase in customer accounts 16,270,435 7,013 Net increase in due to other banks 113,686,530 - Net increase/(decrease) in other liabilities (131,848) (633,905) Net cash used in operating activities before tax and interest (1,819,362,422) (627,827,108) Income taxes paid (17,665,438) - Interest received 95,391,193 28,062,104 Interest paid (85,571,417) (24,846,075) Net cash used in operating activities (1,827,208,084) (624,611,079)

59 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Statement of Cash Flows Year ended 31 December 2013

In thousands of MNT Year ended 31 Year ended 31 December December 2013 2012 (Restated) Net cash used in operating activities (1,827,208,084) (624,611,079) Cash flows used in investing activities Purchase of property and equipment (457,310) (117,265) Purchase of intangible assets (148,038) - Net cash used in investing activities (605,348) (117,265) Cash flows from financing activities Increase of contributed capital 50,000,000 23,600,000 Proceeds from borrowings 1,964,069,754 - Proceeds from bonds 112,613,993 769,717,076 Repayment of bonds (135,939,416) (28,019,600) Net cash from financing activities 1,990,744,332 765,297,476 Effect of exchange rate changes on cash and cash equivalents 62,127 81,328 Net increase in cash and cash equivalents 162,993,027 140,650,461 Cash and cash equivalents at the beginning of the year 216,468,206 75,817,745 Cash and cash equivalents at the end of the year 379,461,233 216,468,206

60 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

1. CORPORATE INFORMATION AND OPERATING ENVIRONMENT

The Development Bank of Mongolia (‘the Bank’) is a Government-owned, policy-oriented statutory financial institution established on 25 March 2011 pursuant to the Resolution No. 195 dated 20 July 2010 issued by the Government of Mongolia and under the Law on Development Bank of Mongolia passed by the Parliament on 10 February 2011. The Bank was registered with the Legal Entity Registration Office of theG eneral Authority for State Registration and is the only policy bank in Mongolia. The Bank conducts its business under the direct supervision of the Cabinet, which is the highest institution of Government administration in Mongolia, and is regulated, principally, by the Law on Development Bank of Mongolia. The Bank commenced its operations in May 2011. The Government of Mongolia is the Bank’s sole shareholder. In May and December 2011, the Government contributed MNT 16.7 billion and MNT 33.0 billion, respectively, in cash to the Bank’s capital. In 2012, the Government contributed a further MNT 23.6 billion and as at 31 December 2012, the Bank’s share capital was MNT 73.3 billion. The Government has contributed a further MNT 10.0 billion, MNT 5.0 billion and MNT 35.0 billion in July, August and September 2013, respectively, to the Bank’s capital and as at 31 December 2013, the Bank’s share capital was MNT 123.3 billion. In accordance with Article 21.1 of the Law on Development Bank of Mongolia, Parliament determines the source of equity financing that the Government can provide to the Bank and determines the limits of loan guarantees to be provided by the Government. The Bank is not subject to the rules and regulations issued by the Bank of Mongolia in relation to commercial banks. The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Until July 2013, the executive management of the Bank had been carried out by a joint team from the Bank and the Korean Development Bank. In July 2013, the Management Agreement with the Korean Development Bank was changed to the Advisory Agreement, and the Bank is managed solely by Mongolian nationals appointed by its Board of Directors. The Bank had an average of 74 employees during the year ended 31 December 2013 (2012: 43). The Bank’s principal place of business is: Max Tower Building 2-3rd floor, Juulchin Street 4/4 Ulaanbaatar 15170, Mongolia. These financial statements are presented in Mongolian Tugriks (“MNT”), unless otherwise stated. These financial statements were approved for issue by the Executive management of the Bank on 14 March 2014.

Operating Environment of the Bank Mongolia displays many characteristics of an emerging market including relatively high inflation and interest rates. After recording steady growth in 2010 and 2011, the Mongolian economy has shown signs of a slowdown in 2012 and 2013 due to declining global commodities prices, concerns over slowing growth in China and changes to the Mongolian Foreign Investment Law in 2012 which have slowed inbound foreign investment into the country. On 3 October 2013, the Mongolian parliament passed the Law on Investment and the Law on Implementation of the Law on Investment (effective from 1N ovember 2013). Following the issuance of the new laws, the Law of Mongolia on Foreign Investment and the Strategic Entities Foreign Investment Law (SEFIL) were cancelled. The purpose of the Law on Investment is to protect the legitimate rights and interests of the investors in the territory of Mongolia, establish the common legal guarantee for investment, support investment, stabilise tax environment, determine the powers of the state organisations, and rights and obligations of the investor and regulate other relations concerning investments. The tax and customs legislation in Mongolia is subject to varying interpretations and frequent changes (refer to Note 26). The future economic performance of Mongolia is tied to the continuing demand from China and continuing high global prices for commodities as well as dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government together with tax, legal regulatory and political developments. The international sovereign debt crisis, stock market volatility and other risks could have a negative effect on the Mongolian financial and corporate sector.M anagement determined impairment provisions by considering the economic situation and outlook at the end of the reporting period. Provisions for loans are determined using the ‘incurred loss’

61 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

model required by the applicable accounting standards. These standards require recognition of impairment losses for receivables that arose from past events and prohibit recognition of impairment losses that could arise from future events, no matter how likely those future events are. Management is unable to predict all developments, which could have an impact on the Mongolian economy, and consequently what effect, if any, they could have on the future financial position of the Bank. Management believes it is taking all the necessary measures to support the sustainability and development of the Bank’s business.

2. FINANCIAL REPORTING FRAMEWORK AND BASIS FOR PREPARATION AND PRESENTATION

Basis of Preparation and Presentation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value. The principal accounting policies applied in the preparation of these financial statements are set out below.T hese policies have been consistently applied to all the periods presented, unless otherwise stated.

Functional Currency These financial statements are presented inM ongolian tugriks (‘MNT’) the currency of the primary economic environment in which the Bank operates and the Bank’s functional currency.

Amendments of the financial statements after issue The Bank’s management has the power to amend the financial statements after issue.

Restatements The following retrospective restatements have been made in these financial statements: • Accrued Interest Receivable and Accrued Interest Payable. ‘Accrued Interest Receivable’ and ‘Accrued Interest Payable’ were previously reported as separate line items in the Statement of Financial Position for the year ended 31 December 2012, while they are integral to measurement of the related assets and liabilities at amortized cost according to the Bank’s accounting policies. They have therefore been reclassified within ‘Loans and advances’, ‘Bank Deposits’, ‘Cash and cash equivalents’ and ‘Bonds’ in these financial statements. A‘ ccrued Interest receivables’ on bank deposits of MNT 2,350 million as at 31 December 2012 has been restated to ‘Bank Deposits’ in the amount of MNT 1,872 million and to ‘Cash and cash equivalents’ in the amount of MNT 478 million. Accrued Interest receivables’ on loans and advances of MNT 6,771 million as at 31 December 2012 has been restated to ‘Loans and advances’. ‘Accrued Interest receivables’ on bank deposits of MNT 108 million as at 1 January 2012 has been restated to ‘Cash and cash equivalents’. ‘Accrued Interest payables’ on bonds of MNT 12,896 million as at 31 December 2012 has been restated to ‘Bonds’. ‘Accrued Interest payables’ on bonds of MNT 102 million as at 1 January 2012 has been restated to ‘Bonds’. This restatement has no impact on the Statement of Profit or Loss and Other Comprehensive Income while its impact on the Statement of Financial Position as of 31 December 2012 is presented below on pages 13-14.

62 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

• Unearned Income and Non-Interest income. Management has reconsidered the accounting for ‘Unearned Income’ previously reported within ‘Accounts and Other Liabilities’ and ‘Non-interest income’ which represented loan origination fees. These two items were presented as separate line items in the Statement of Financial Position and the Statement of Profit or Loss and Other Comprehensive Income, respectively, for the year ended 31 December 2012. They are reported within ‘Loans and advances’ and ‘Interest Income’ in these financial statements. ‘Other liabilities’ and ‘Loans and advances’ have been reduced by MNT 590 million. This restatement’s impact on the Statement of Profit or Loss and Other Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below on pages 13-14. • Deposits from Borrowers. Management has reconsidered the accounting for ‘Deposits from Borrowers’ previously shown within ‘Accounts and Other Liabilities’. These amounts represented conditional loan commitments. This was presented as a separate line in the Statement of Financial Position for the year ended 31 December 2012. Following the reassessment of the nature of this deposit amounting to MNT 2,330 million, has now been presented off balance sheet as undrawn commitments with the corresponding amount removed from ‘Loans and Advances’. This restatement has no impact on the Statement of Profit or Loss and Other Comprehensive Income while its impact on the Statement of Financial Position as of 31 December 2012 is presented below on pages 13-14. • Previously recorded Interest Income: In 2013, the management performed a detailed analysis of the nature of certain transactions with the Government and their accounting treatment in accordance with IFRS. As a result of this analysis, management concluded that cash contributions received from the Government in the amount of MNT 23,957 million in 2012 represented Government support with regard to the guarantee issued by the Ministry of Finance and the Bank’s repayment of notes issued under Euro Medium Term Notes Programme, and therefore meet the definition of a government grant under IAS 20. As a result, the related amount is recognised as a reduction in the related ‘Interest Expense’ in these financial statements. Related amounts were recognised as interest income in IFRS financial statements for the year ended 31 December 2012. This restatement has no impact on the Statement of Financial Position as of 31 December 2012, while its impact on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012 is presented below on pages 13-14. • Change in Deferred Tax Rate: In 2013, the management performed a detailed analysis of its deferred tax calculation and its future tax rate. As a result of this analysis and on the basis of forecasts management concluded that the Bank will incur tax at a rate of 25%. The Bank had previously used 10% to calculate deferred tax. The related deferred tax asset and income tax expense for 2012 have been restated in these financial statements. Related amount of MNT 2,475 million was recognised in ‘Deferred tax assets’ on the Statement of Financial Position as of 31 December 2012 and in ‘Income tax expense’ on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012. This restatement’s impact on the Statement of Profit or Loss and Other Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below on pages 13-14. • Recognition of income tax charge: In 2013, the management performed a detailed analysis of its current income tax return for 2012. As a result of this analysis management concluded that the Bank will incur a current tax charge of MNT 3,314 million for the year ending 31 December 2012. This amount has been recognised within ‘Current income tax payable’ and ‘Income tax expenses’. This restatement’s impact on the Statement of Profit orL oss and Other Comprehensive Income and on the Statement of Financial Position as of 31 December 2012 is presented below on pages 13-14. • Bank Deposits. Management has reconsidered the presentation of ‘Bank Deposits’ amounting to MNT 9,000 million as at 1 January 2012 which represented cash. As a result of this analysis management concluded that this amount should be restated to ‘Cash and cash equivalents’. This restatement has been reflected in the 1 January 2012 Statement of Financial Position comparatives shown on page 3.

Reclassifications • Operating expenses. In 2013, the management performed a detailed analysis of its presentation of operating expenses. As a result of this analysis management concluded that ‘Operating Expenses” should be split to show ‘Foreign exchange translation gains less losses’ and ‘Gains less losses from trading in foreign currencies’ separately on the Statement of

63 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Profit or Loss and Other Comprehensive Income. Of MNT 5,771 million reclassified from ‘Operating Expenses’ MNT 5,767 million was reclassified to ‘Foreign exchange translation gains less losses’ and MNT 4 million was reclassified to ‘Gains less losses from trading in foreign currencies’. This reclassification has no impact on the Statement of Financial Position as of 31 December 2012, while its impact on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012 is shown below on pages 13-14. • Other Assets and ‘Foreign exchange translation gains less losses’. In 2013, the management performed a detailed analysis of nature of certain transactions with the Government and their accounting treatment in accordance with IFRS. As a result of this analysis, management concluded that receivables due from the Ministry of Finance, presented within ‘Other Assets”, in the amount of MNT 2,168 million meets the definition of a government grant under IAS 20. The grant amount is recognised in the related expense to which the grant relates to namely the ‘Foreign exchange translation gains less losses’ in these financial statements.T his was previously treated as an embedded derivative and recorded within ‘Operating Expenses’ in the 31 December 2012 financial statements.T his reclassification has no impact on the Statement of Financial Position as of 31 December 2012, and no impact on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012. • Net investment in time deposits. In 2013, the management performed a detailed analysis of nature certain transactions and their accounting presentation in accordance with IFRS. As a result of this analysis, management concluded that ‘Net investment in time deposits’ amounting to MNT 158,410 million and its related interest amounting to MNT 3,275 million, presented within the investing activities section of the Statement of Cash Flows should be presented within the operating activities section of the Statement of Cash Flows. This reclassification has no impact on the Statement of Financial Position as of 31 December 2012, and no impact on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012. The reclassifications have no impact on the Statement of Financial Position.

64 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The impact of the above restatements on the Statement of Financial Position as of 31 December 2012 is presented below.

In thousands of MNT Year ended Restatements Note Year ended 31 December 2012 31 December (as previously reported) 2012 (restated) Assets Cash and cash equivalents 215,990,270 477,936 6 216,468,206 Bank deposits 167,052,000 1,872,490 7 168,924,490 Loans and advances 489,704,568 3,851,399 8 493,555,967 Accrued interest receivables 9,121,272 (9,121,272) 8 - Other assets 2,285,515 - 9 2,285,515 Property and equipment 234,558 - 10 234,558 Intangible assets 726,688 - 11 726,688 Deferred tax assets 3,465,282 2,475,078 22 5,940,360 Total assets 888,580,153 (444,369) 888,135,784 Liabilities Customer accounts 6,960 - 12 6,960 Other liabilities 3,425,136 (2,919,447) 12 505,689 Current income tax payable - 3,313,560 22 3,313,560 Accrued interest payables 12,896,260 (12,896,260) 14 - Bonds 804,421,467 12,896,260 14 817,317,727 Total liabilities 820,749,823 394,113 821,143,936 Equity Share capital 73,300,000 - 17 73,300,000 Retained earnings (5,469,670) (838,482) (6,308,152) Total equity 67,830,330 (838,482) 66,991,848 Total liabilities and equity 888,580,153 (444,369) 888,135,784

65 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The impact of the above reclassification and restatements on the Statement of Profit or Loss and Other Comprehensive Income as of 31 December 2012 is presented below.

In thousands of MNT Year ended Restatements Reclassi- Note Year ended 31 December 2012 fication 31 December (as previously 2012 (adjusted) reported) Interest income 36,787,338 (23,909,064) - 18 12,878,274 Interest expense (37,652,609) 23,957,121 - 19 (13,695,488) Net interest expense (865,271) 48,057 - (817,214) Non-interest income 48,057 (48,057) - - Gains less losses from trading - - 4,060 4,060 in foreign currencies Foreign exchange translation - - (5,771,355) 20 (5,771,355) gains less losses Administrative and other (7,470,614) - 5,767,295 21 (1,703,320) operating expenses Loss before tax (8,287,829) - - (8,287,829) Income tax benefit 3,420,349 (838,482) - 22 2,581,867 Loss for the year (4,867,480) (838,482) - (5,705,962) Total comprehensive loss for the year (4,867,480) (838,482) - (5,705,962)

66 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The impact of the above reclassification and restatements on the Statement of Cash Flows as of 31 December 2012 is presented below.

In thousands of MNT Year ended Restatements Reclassi-fication Note Year ended 31 December 2012 31 December (as previously 2012 (Restated) reported) Cash flows from operating activities Profit/(loss) before tax (4,867,480) - (3,420,349) (8,287,829) Adjustments to: - Income tax expense (3,420,349) - 3,420,349 - Depreciation, amortization 149,868 - - 149,868 FX translation (gain)/ 34,913,681 - - 20 34,913,681 loss -Unrealized Interest income (36,787,338) 23,909,064 - 18 (12,878,274) Interest expense 37,652,609 (23,957,121) - 19 13,695,488 Cash flows from operating 27,640,991 (48,057) - 27,592,934 activities before changes in operating assets and liabilities Net increase in bank deposits - - (160,282,560) 6 (160,282,560) Net increase in loans and (488,377,343) (3,851,399) - 8 (492,228,742) advances to customers Net increase in other assets (2,281,848) - - 9 (2,281,848) Net increase in customer accounts - - 7,013 12 7,013 Net increase/(decrease) 2,292,555 (2,919,447) (7,013) 12 (633,905) in other liabilities Net cash used in operating (460,725,645) (6,818,903) (160,282,560) (627,827,108) activities before tax and interest Interest received 24,786,520 - 3,275,584 28,062,104 Interest paid (24,846,075) - - (24,846,075) Net cash used in (460,785,200) (6,818,903) (157,006,976) (624,611,079) operating activities

67 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

In thousands of MNT Year ended Restatements Reclassi-fication Note Year ended 31 December 2012 31 December (as previously 2012 reported) (Restated) Net cash used in operating activities (460,785,200) (6,818,903) (157,006,976) (624,611,079) Cash flows used in investing activities Purchase of property and equipment (117,265) - - 10 (117,265) Net investment in time deposit (158,410,070) (1,872,490) 160,282,560 7 - Interest received 3,275,584 - (3,275,584) 18 - Net cash used in investing activities (155,251,751) (1,872,490) 157,006,976 (117,265) Cash flows from financing activities Increase of contributed capital 23,600,000 - - 17 23,600,000 Proceeds from bonds 769,717,076 - - 14 769,717,076 Repayment of bonds (28,019,600) - - 14 (28,019,600) Net cash from financing activities 765,297,476 - - 765,297,476 Effect of exchange rate changes 20,232 61,096 - 81,328 on cash and cash equivalents Net increase in cash and 149,280,758 (8,630,297) - 140,650,461 cash equivalents Cash and cash equivalents at 66,709,512 9,108,233 - 6 75,817,745 the beginning of the year Cash and cash equivalents 215,990,270 477,936 - 6 216,468,206 at the end of the year

68 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

3. SIGNIFICANT ACCOUNTING POLICIES

Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below. Fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs).T ransfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position. The effective interest method. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest reprising date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.

69 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date on which the Bank commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include all interbank placements with original maturities of less than 90 days. Funds restricted for a period of more than 90 days on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Bank Deposits. Bank deposit are recorded when the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: • any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; • the borrower experiences a significant financial difficulty as evidenced by the borrower’s financial information that the Bank obtains; • the borrower considers bankruptcy or a financial reorganisation; • there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or • the value of collateral significantly decreases as a result of deteriorating market conditions. Future cash flows in a group of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods, and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms.T he renegotiated asset is then derecognized and a new asset is recognized at its fair value only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference between the present values of the original cash flows and the new expected cash flows. Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset.T he calculation of the present value of the estimated future cash flows of

70 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Allowances are made against the carrying amount of loans and advances that are identified as being impaired, based on regular reviews of outstanding balances, in accordance with International Financial Reporting Standards and provisioning approved by the Chief executive director of the Bank. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. Prepayments. Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are charged to profit or loss as they are consumed in operations or expire with the passage of time. Property and Equipment. Property and equipment are initially measured at cost. At the end of each reporting period, property and equipment are measured at cost less any subsequent accumulated depreciation, amortization and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows: • IT Equipment - 3 years • Furniture and fixture - 10 years • Vehicles - 10 years Derecognition of property and equipment. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Intangible Assets. Intangible assets that are acquired by the Bank with finite useful lives are initially measured at cost. At the end of each reporting period items of intangible assets acquired are measured at cost less accumulated amortization and accumulated impairment losses. Cost includes purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates and any directly attributable cost of preparing the intangible asset for its intended use. Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognized in profit or loss as incurred. Amortization for intangible asset with finite useful life is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.T he estimated useful lives are as follows: • Software - 10 years • Licence - 1 years Derecognition of intangible assets. An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.

71 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Impairment of Tangible and Intangible Assets. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment or intangible assets. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Bonds and Borrowings. Debt securities representing bonds issued and borrowings are stated at amortised cost. If the Bank purchases its own debt securities in issue, they are removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains arising from retirement of debt. Ordinary shares. As at 31 December 2013, the Government of Mongolia had paid in capital contributions to the Bank, but no share certificates had been issued. Income tax. Income tax has been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits or losses for the current and prior periods.T axable profits or losses are based on estimates if the financial statements are authorised prior to filing relevant tax returns.T axes other than on income are recorded within administrative and other operating expenses. Deferred income tax. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Provisions, Contingent Liabilities and Contingent Assets Provisions. Provisions are recognized when the Bank has a present obligation, either legal or constructive, as a result of a past event, it is probable that the Bank will be required to settle the obligation through an outflow of resources embodying economic benefits, and the amount of the obligation can be estimated reliably. The amount of the provision recognized is the best estimate of the consideration required to settle the present obligation at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation. A provision is measured using the cash flows estimated to settle the present obligation; its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that a transfer of economic benefits will be required to settle the obligation, the provision is reversed.

72 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Contingent Liabilities and Assets. Contingent liabilities and assets are not recognized because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent liabilities are disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are disclosed only an inflow of economic benefits is probable. Credit related commitments. From time to time, the Bank enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortized balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. In cases where the fees are charged periodically in respect of an outstanding commitment, they are recognized as revenue on a time proportion basis over the respective commitment period.

Employee Benefits Short-term benefits. The Bank recognizes a liability net of amounts already paid and an expense for services rendered by employees during the reporting period. A liability is also recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. Long-term benefits. The Bank has provided funding to 3rd party banks in order for them to provide its Employees with cheaper mortgage and salary loans. The cost of this scheme has been booked as a prepayment and will be expensed through the Statement of Profit or Loss and Other Comprehensive Income over the life-time of the loan scheme. Post-employment benefits.T he Bank does not have any pension arrangements separate from the defined contributions state pension system of Mongolia, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense is charged to the Statement of Profit or Loss and Other Comprehensive Incomes in the period the related salaries and wages are payable. Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective interest method.T his method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Bank to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the

73 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

resulting loan shortly after origination. The Bank does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset’s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, and which are earned on execution of the underlying transaction, are recorded on its completion. Government grants. Grants from the government are recognised at their fair value, where there is reasonable assurance that the grant will be received, and that the Bank will comply with all attached conditions. Government grants are deferred, and recognised in the Statement of Profit or Loss and Other Comprehensive Income over the period necessary to match them with the costs they are intended to compensate. The Bank has opted to recognise its government grants as a reduction of the related expense. If part, or all, of a grant becomes repayable to the government, the repayment is first matched against any remaining deferred income set up for that grant. If this is insufficient, the remainder is expensed immediately.

Foreign Currency Foreign currency transactions. Transactions in currencies other than the MNT are recorded at the foreign exchange rates prevailing on the date of the transactions. At the end of each reporting period, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the foreign exchange rates prevailing at the end of the reporting period. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the foreign exchange rates prevailing at the date the fair value was determined. Gains and losses arising on retranslation are included in profit or loss for the year. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are not retranslated.

Related Party Transactions A related party transaction is a transfer of resources, services or obligations between the Bank and a related party, regardless of whether a price is charged. A person or a close member of that person’s family is related to the Bank if that person: • has control or joint control over the Bank or • has significant influence over the Bank or • is a member of the key management personnel of the Bank or of a parent of the Bank An entity is related to the Bank if any of the following conditions apply: • the entity and the Bank are members of the same group which means that each parent, subsidiary and fellow subsidiary is related to the others; • one entity is an associate or joint venture of the other entity or an associate or joint venture of a member of a group of which the other entity is a member; • both entities are joint ventures of the same third party; • one entity is a joint venture of a third entity and the other entity is an associate of the third entity; • the entity is a post-employment benefit plan for the benefit of employees of either the Bank or an entity related to the Bank;

74 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

• the entity is controlled or jointly controlled by a person who is a related party as identified above; and • A person that has control or joint control over the reporting entity has significant influence over the entity or is a member of the key management personnel of the entity or of a parent of the entity. Due to the nature of the Bank and its role as a policy bank almost all loans and transactions are with related parties. The Bank applies the exemption from the disclosure of individually insignificant transactions with government related parties as allowed under IAS 24, paragraph 25.

4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Bank’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on the historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.T he estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Key Sources of Estimation Uncertainty. The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of each reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Determining the carrying value of employee prepayments. Management has concluded that the interest rate for the deposit to State bank of MNT 850 million and to Golomt bank of MNT 150 million is at below market interest rates. Based on available information on comparable transactions, management made judgement that the policy rate of the Bank of Mongolia of 10.5% p.a. represents reasonable approximation of market interest rate on MNT funding. As a result, related prepayment was recognized at its fair value at initial recognition of MNT 776,352 thousand. The loss on initial recognition (i.e. the difference between nominal value of this deposit and its fair value) represents salary prepayments in accordance with IFRS requirements. Management has concluded that it is appropriate to recognize the cost of the scheme over the lifetime of the deposit. Refer to Note 9 for further details. Determining the level of loan loss provisioning. The purpose of the Bank is to provide financing to development projects in the Mongolia. As a result, the projects are often of a social infrastructure nature and may not have a clearly defined stand- alone profit-oriented cash flow sufficient to demonstrate a long-term ability to repay the development loan. However, for substantially all loans a guarantee is provided by the Government, and this is considered when assessing whether there is a risk of loss on any particular loan. Management does not believe any loan impairment assessment is required on loans where guarantees have been received from the Government. No collective loan loss provision calculation is performed by the Bank as management assess that given the structure of the loan portfolio and the guarantees received from Government any loss given default “LGD” on the guaranteed loans would be zero. Given the close involvement of the Government, the Bank and the underlying projects the Bank finances, management assess that there are no losses incurred but not reported in respect of the guaranteed loans affecting the Bank.T he level of Government guarantees and other collateral is disclosed in Note 8. Any changes in the assessment of recoverability of guarantees would impact the profit or loss of the Bank. The Bank regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in profit or loss for the year, the Bank makes judgements as to whether there is any observable data indicating

75 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio.T his evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in the Bank, or national or local economic conditions that correlate with defaults on assets of the Bank. Management uses estimates based on credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows.T he methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss experience compared to the loss estimates used would result in an increase or decrease in loan impairment losses of MNT 663 million (2012: MNT 0 million), respectively. Impairment losses for individually significant loans are based on estimates of discounted future cash flows of the individual loans, taking into account repayments and realisation of any assets held as collateral against the loans. Determining the treatment of Government Grant Schemes. Management has concluded that it is a recipient of two grant schemes described in Note 18, Note 19 and Note 20 in the year ended 31 December 2012 and year ended 31 December 2013 amounting to MNT 24 billion and MNT 4 billion respectively. Determining whether the transaction falls within the scope of IAS 20 requires judgement. The definition of government grants includes transfers to an entity, subject to certain conditions placed on the operating activities of the entity. However, it excludes government assistance which cannot be distinguished from normal trading transactions of the entity and transactions which constitute “government participation in the ownership of the entity”. Management has concluded that the two schemes fall within the scope of IAS 20. Management has also concluded that the receivable due from Government at each reporting date was reasonably assured to be received. Determining the treatment of Ministry MNT to USD loan conversion. On the 27 December 2013 the bank signed an amendment to its loan agreements with different Ministries and the Ministry of Finance to convert its MNT loans to the Ministries into USD loans on the 30 December 2013. Previously these loans were denominated in Mongolian tugriks and as part of the original agreement the Ministry of Finance agreed to cover any movement in the MNT loans compared to a theoretical USD loan as described in Note 20. A total of MNT 356 billion was converted into USD 252 million using the original FX rates at origination date of each loan. The conversion has no impact on retained earnings and results in a decrease in the receivable from the Ministry of Finance of MNT 61 billion and corresponding increase in ‘Loans and receivables’. Determining whether the transaction meets the de-recognition criteria in IAS 39 requires judgement. Management has concluded that the conversion of its MNT loans and corresponding receivable from the Ministry of Finance does not represent substantial modification in terms but a clarification of the original intention of the loan contract and hence the derecognition criteria under IAS 39 are not met. Initial recognition of borrowings and loans at below market rates. During 2013, the Bank has obtained financing directly from the Government of Mongolia. These funds are denominated in MNT and obtained at an interest rate of 4.7917%, which is lower than rates at which the Bank could source the funds from other lenders at Mongolian market. Based on available information on comparable transactions, management made judgment that the policy rate of the Bank of Mongolia represents the best approximation of market interest rate on MNT funding for banks (10.5%). As a result of such financing, the Bank is able to advance funds to target customers as determined by the Government, at advantageous rates of approximately 8% p.a. The Bank has little or no discretionary rights in determining interest rates on issued loans should it continue to wish receiving cheap financing from the Government. Management has considered whether gains or losses should arise on initial recognition of such instruments. Management’s judgement is that these funds and the related lending are at market rates and no initial recognition gains or losses should arise. In making this judgement management considers that these instruments are a separate market segment (i.e. the Bank operates in a separate principal market) and that they fall in level 2 of the fair value measurement hierarchy. Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits, and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable.T he future taxable profits and the amount of tax benefits that are probable in the future are based on a medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances taking into account the Bank’s actual profitability during 2013.M anagement has concluded that it will be able to recover its deferred tax asset including tax losses and is likely to incur tax at the rate of 25%.

76 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

5. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

The following new standards and interpretations became effective for the Bank from 1 January 2013: IFRS 10 “Consolidated Financial Statements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Standard did not have any material impact on the Bank’s financial statements. IFRS 11 “Joint Arrangements” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities—Non-Monetary Contributions by Ventures”. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Standard did not have any material impact on the Bank’s financial statements. IFRS 12 “Disclosure of Interests in Other Entities” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements previously found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarized financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Standard did not have any material impact on the Bank’s financial statements. IFRS 13 “Fair Value Measurement” (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013) improved consistency and reduced complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs The Standard did not have any material impact on the Bank’s financial statements, except for additional disclosures. IAS 27 “Separate Financial Statements” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013) was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements.T he guidance on control and consolidated financial statements was replaced by IFRS 10 “Consolidated Financial Statements”. The Standard did not have any material impact on the Bank’s financial statements. IAS 28 “Investments in Associates and Joint Ventures” (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The Standard did not have any material impact on the Bank’s financial statements. Amendments to IAS 1 “Presentation of Financial Statements” (issued in June 2011, effective for annual periods beginning on or after 1 July 2013) changed the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to “statement of profit or loss and other comprehensive income”.T he amended standard but did not have any impact on the financial statements.

77 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Amended IAS 19 “Employee Benefits” (issued in June 2011, effective for periods beginning on or after 1 January 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits.T he standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The Standard did not have any material impact on the Bank’s financial statements. “Disclosures - Offsetting Financial Assets and Financial Liabilities” - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off.T he Standard did not have any material impact on the Bank’s financial statements. Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 “Borrowing costs”, retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 now requires disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual financial statements.T he Standard did not have any material impact on the Bank’s financial statements. “Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12” (issued in June 2012 and effective for annual periods beginning 1 January 2013). The amendments clarify the transition guidance in IFRS 10 “Consolidated Financial Statements”. Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”, by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied.T he Standard did not have any material impact on the Bank’s financial statements. Other revised standards and interpretations: IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”, considers when and how to account for the benefits arising from the stripping activity in mining industry.T he interpretation did not have an impact on the Bank’s financial statements. Amendments to IFRS 1 “First-time adoption of International Financial Reporting Standards - Government Loans”, which were issued in March 2012 and are effective for annual periods beginning 1 January 2013, give first-time adopters of IFRSs relief from full retrospective application of accounting requirements for loans from government at below market rates. The amendment is not relevant to the Bank.

New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later, and which the Bank has not early adopted. IFRS 9 “Financial Instruments: Classification and Measurement”. Key features of the standard issued in November 2009 and amended in October 2010, December 2011 and November 2013 are:

78 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

• Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. • An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss. • All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss.T here is to be no recycling of fair value gains and losses to profit or loss.T his election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. • Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. • Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November 2013 removed its mandatory effective date, thus making application of the standard voluntary. The Bank does not intend to adopt the existing version of IFRS 9. “Offsetting Financial Assets and Financial Liabilities” - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria.T his includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. The Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Bank. “Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities” (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity’s investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The Bank does not expect the amendment to have any impact on its financial statements. IFRIC 21 – “Levies” (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax.T he obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy.T he fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Bank does not expect the amendment to have any impact on its financial statements.

79 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Amendments to IAS 36 – “Recoverable amount disclosures for non-financial assets” (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment.T he Bank is currently assessing the impact of the amendments on the disclosures in its financial statements. Amendments to IAS 39 – “Novation of Derivatives and Continuation of Hedge Accounting” issued in June 2013 and effective for annual periods beginning 1 January 2014). The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met.T he Bank does not expect the amendment to have any impact on its financial statements. Amendments to IAS 19 – “Defined benefit plans:E mployee contributions” (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The amendment is not expected to have any material impact on the Bank’s financial statements. Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards. IFRS 2 was amended to clarify the definition of a ‘vesting condition’ and to define separately ‘performance condition’ and ‘service condition’; The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014. IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non- equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014. IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity’s assets when segment assets are reported. The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (‘the management entity’), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Bank is currently assessing the impact of the amendments on its financial statements. Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under

80 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Bank is currently assessing the impact of the amendments on its financial statements. IFRS 14, Regulatory deferral accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already presents IFRS financial statements is not eligible to apply the standard. The amendment is not expected to have any material impact on the Bank’s financial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank’s financial statements.

6. CASH AND CASH EQUIVALENTS

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Cash on hand 6,589 6,132 Cash at Bank of Mongolia 418,732 31,672,320 Cash at other banks 21,293,060 31,358,100 Short term deposits with local banks 357,742,852 153,431,654 Total cash and cash equivalents 379,461,233 216,468,206

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents are not collateralised. All amounts are classified as neither past due nor impaired.T he interest on the short term deposit ranges from 8%-10.5% p.a. for MNT and 3.0% p.a. for USD deposits for the year ended 31 December 2013 (in 2012: from 8.0%-11.5% p.a. for MNT and 4.5%-6.5% p.a. for USD). Cash at Bank of Mongolia and other banks and short term deposits with local banks with original maturities of less than three months represent balances with Mongolian banks and the Bank of Mongolia. The credit quality of cash and cash equivalents balances may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31 December 2013 and 31 December 2012 was as follows.

81 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

In thousands of MNT 31 December 2013 31 December 2012 (Restated)

Neither past due nor impaired Central Bank of Mongolia - B1 Rated 418,732 31,672,320 B1 rated 208,905,738 80,940,815 Unrated 170,130,174 103,848,939 Total cash and cash equivalents, 379,454,644 216,462,074 excluding cash on hand

The unrated balance relates to commercial banks in Mongolia, which have not been rated by any rating agency. Financial condition of these commercial banks is regularly monitored by the Bank. Based on the reputation of these banks on the Mongolian market and other available information (including financial information), management believes that counterparty risk is low and related amounts are fully recoverable.

7. BANK DEPOSITS

The Bank deposits consist of term deposits at the local banks with different maturities (over three months but less than a year) and interest rate ranges between 8.5%-12.0% p.a. for MNT deposits and 5.0%-5.4% p.a. for USD deposits. The credit quality of term deposits may be summarised based on Standard and Poor’s ratings or equivalents of Moody’s and/or Fitch ratings. The credit quality at 31 December 2013 and 31 December 2012 was as follows:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) B1 rated - 140,712,501 Unrated - 28,211,989 Total bank deposits - 168,924,490

The unrated balance relates to commercial banks in Mongolia, which have not been rated by any rating agency. Financial condition of these commercial banks is regularly monitored by the Bank. Based on the reputation of these banks on the Mongolian market and other available information (including financial information), management believes that counterparty risk is low and related amounts are fully recoverable.

82 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

8. LOANS AND ADVANCES

Loans and advances as of 31 December 2013 and 31 December 2012 consist of the following:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Loans and advances to be repaid by the State budget 1,357,341,398 256,159,934 Loans and advances to be repaid by the Corporates 828,473,696 237,396,033 Total gross loans and advances 2,185,815,094 493,555,967 Less: Provision for loan impairment (6,224,792) - Total net amount of loans and advances 2,179,590,302 493,555,967

At 31 December 2013, MNT 1,937,970 million of loans and advances are expected to be recovered more than 12 months after the period end (2012: MNT 418,202 million). Loans and advances given to projects to be repaid from the State budget refers to socially beneficial projects that do not create cash flows of their own which covers areas such as, improvement of rural and city roads, civil engineering construction, extension and improvement of power and heat plant, building of a new railways and mortgage financing through commercial banks for middle income families and individuals. Interest and principal repayment as well as any resulting foreign exchange rate gain/loss is guaranteed and repaid by the Government of Mongolia in line with the State budget every year. Loans and advances given to corporate projects are to be repaid from the project’s or borrower’s future cash flow generation and the bank also holds collateral. The Bank provides lending to corporate projects which the Government considers priority commercial activities (air transport development, support of mining industry, railway, infrastructure, Small and Medium Enterprises (SME), housing and manufacturing projects). The Government of Mongolia issued a resolution No.319 dated on the 10 September 2013 to improve operations of state owned companies. In line with this resolution, necessary work has been organized to convert the Bank’s loan issued to Erdenes Tavan Tolgoi LLC to the equity of the borrower. The structure and conversion are in development and the transaction has not yet been finalized. On the 27 December 2013 the bank signed an amendment to its loan agreements with different Ministries and the Ministry of Finance to convert it’s MNT denominated loans to the Ministries into USD denominated loans on the 30 December 2013. Previously these loans were denominated in Mongolian tugriks and as part of the original agreement the Ministry of Finance agreed to cover any movement in the MNT loans compared to a theoretical USD loan issued on the same day. This foreign exchange movement receivable from the Ministry of Finance was previously recorded as a Government Grant (refer to Note 9). A total of MNT 356 billion Ministry loans were converted into USD 252 million using the original FX rates at origination date of each loan. The conversion has no impact on Statement of Profit orL oss and Other Comprehensive Income and results in a decrease in the receivable from the Ministry of Finance of MNT 61.3 billion and corresponding increase in ‘Loans and receivables’. Please refer to Note 20. The analysis by credit quality of loans outstanding at 31 December 2013 is as follows:

83 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

In thousands of MNT Loans and advances Loans and advances Total to be repaid by the to be repaid by State budget the Corporates Neither past due nor impaired: - Performing loan 1,321,250,545 733,423,880 2,054,674,425 Total neither past due nor impaired 1,321,250,545 733,423,880 2,054,674,425 Past due but not impaired: - less than 30 days overdue - 4,778,921 4,778,921 Total past due but not impaired loans - 4,778,921 4,778,921 Individually determined to be Impaired - 126,361,748 126,361,748 loans but not past due Total impaired loans - 126,361,748 126,361,748 Less: Provision for loan impairment - (6,224,792) (6,224,792) Total net amount of loans and advances 1,321,250,545 858,339,757 2,179,590,302

All loans repaid by the State budget have the same credit rating as the Government of Mongolia, B1. All corporate entities are unrated. The Management believes that all neither past due nor impaired loans are performing loans. As at 31 December 2013 the aggregated amount of the top 5 largest borrowers is MNT 1,078,746 million (31 December 2012: MNT 394,898 million) or 49% of total loans and advances (31 December 2012: 80%). Analysis by credit quality of loans outstanding at 31 December 2012 (restated) is as follows:

In thousands of MNT Loans and advances to be Loans and advances to be Total repaid by the State budget repaid by the Corporates Neither past due nor impaired: - Performing loan 256,215,623 237,340,344 493,555,967 Total loans and advances 256,215,623 237,340,344 493,555,967

The primary factors that the Bank considers in determining whether a loan in the collective category is impaired are its overdue status and realisability of related collateral, if any. The Bank considers specific impairment triggering events, future cash flows and realisability of related collateral to assess the loan impairment. As a result, the Bank presents above analysis of the loans to be impaired. Past due, but not impaired loans primarily include collateralised loans where the fair value of collateral covers the overdue interest and principal repayments. The amount reported as past due but not impaired is the whole balance of such loans, not only the individual instalments that are past due. Movements in the provision for loan impairment during 2013 (during 2012 is nil) are as follows:

In thousands of MNT Loans and advances to be Loans and advances to be Total repaid by the State budget repaid by the Corporates Provision for loan impairment - - - at 1 January 2013 Additional provision during the year - 6,224,792 6,224,792

84 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Provision for loan impairment - 6,224,792 6,224,792 at 31 December 2013 The financial effect of collateral is presented by disclosing collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and other credit enhancements are less than the carrying value of the asset (“under-collateralised assets”). Information about collateral as at 31 December 2013 is as follows:

In thousands of MNT Loans and advances Loans and advances Total to be repaid by the to be repaid by State budget the Corporates Loans collateralized by: - Government guarantees 1,321,250,545 339,160,662 1,660,411,207 - Commercial bank guarantees - 308,836,172 308,836,172 - Plant, property and equipment - 216,567,715 216,567,715 Total Loans and Advances (before impairment) 1,321,250,545 864,564,549 2,185,815,094

Guarantee collateral values above are recorded at the lower of the carrying amount of the loan or collateral taken. Information about collateral as at 31 December 2012 is as follows:

In thousands of MNT Loans and advances Loans and advances Total to be repaid by the to be repaid by State budget the Corporates Loans collateralized by: - Government guarantees 256,215,623 141,512,394 397,728,017 - Commercial bank guarantees - 1,923,000 1,923,000 - Plant, property and equipment - 93,904,950 93,904,950 Total Loans and Advances 256,215,623 237,340,344 493,555,967

The financial effect of collateral at 31 December 2013:

In thousands of MNT Over-collateralised assets as Over-collateralised assets as at 31 December 2013 at 31 December 2012 Carrying value Value of Carrying value Value of of the assets collateral of the assets collateral loans and advances collateralized by: - Government guarantees 1,660,411,207 1,660,411,207 397,728,017 397,728,017 - Commercial bank guarantees 308,836,172 308,836,172 1,923,000 1,923,000 - Plant, property and equipment 210,342,923 217,677,467 93,904,950 132,485,968 Total value 2,179,590,302 2,186,924,846 493,555,967 532,136,985

Guarantee collateral values above are recorded at the lower of the carrying amount of the loan or collateral taken. Economic sector risk concentrations within the loan portfolio are as follows:

85 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Amount % Amount % - Power plant 127,700,433 6% 2,774,321 1% - Manufacturing 440,446,405 20% 88,440,238 18% - Railway 301,953,037 14% - - - Road 690,416,375 32% 202,183,795 41% - Utility 94,614,203 4% 427,860 0% - Construction 67,364,832 3% - - - Mortgage 101,318,012 5% 50,773,958 10% - Mining 357,222,876 16% 141,512,394 29% - Transportation 4,778,921 0% 7,443,401 2% Total Loans and Advances (before impairment) 2,185,815,094 100% 493,555,967 100%

9. OTHER ASSETS

In thousands of MNT 31 December 2013 31 December 2012 Receivable from Ministry of Finance 5,097,610 2,168,468 Other receivables 530 251 Prepaid employee benefit 746,160 - Other prepayments 182,832 114,283 Supply materials 9,358 2,513 Total other assets 6,036,490 2,285,515

The receivables from the Ministry of Finance are due to the SME loan agreement between the Ministry of Food and Agriculture, the Ministry of Finance and the Bank in the form of a Government Grant. In August 2012, the SME loan agreement between the Ministry of Food and Agriculture, the Ministry of Finance and the Bank made in MNT. As part of the agreement the Ministry of Finance has agreed to cover any movement in the MNT loans compared to a USD loan. The loan is therefore converted into USD at the date of disbursement and settlement. Any resulting foreign exchange loss will be reimbursed by the Ministry of Finance in the form of a Government Grant. As of 31 December 2013, this amounted to MNT 5,098 million. Up until the 27 December 2013 there were a number of other loans under this Government Grant Scheme. Following an amendment to convert the loans in USD they are no longer included. Please refer to Note 4 for details. The amount of receivables from Ministry of Finance on the above loan is variable depending on MNT/USD exchange rate movements. Should the MNT appreciate in value against USD the receivable from Ministry of Finance would decrease with the movement being expensed in the profit and loss. MNT 4,740 million of the MNT 5,098 million is non-current. Please refer to note 8 for more details. In line with other banks in Mongolia, the Bank offers its employees reduced rates on Mortgage loans. The Bank has arranged this benefit by providing to State bank 0% interest funding of MNT 850 million for a period of 15 years and by

86 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

providing a deposit to Golomt bank at 2% p.a. for period of 20 years who in turn issue loans to the bank’s employees at reduced rates. This scheme began in June 2013 with a MNT 1 billion deposit with State bank but later minor changes have made in December 2013 to share this scheme across State Bank and Golomt Bank. The initial cost of this employee benefit of MNT 776 million is amortised over the duration of the scheme. MNT 694 million of the MNT 746 million is non-current. All ‘Other receivables’, ‘prepayments’ and ‘supply materials’ are current assets.

10. PROPERTY AND EQUIPMENT

Movements in the carrying amounts of the Bank’s property and equipment are as follows:

In thousands of MNT Note Equipment Furniture and Vehicle at cost Total property at cost fixtures at cost and equipment Cost at 1 January 2012 140,609 71,970 - 212,579 Accumulated depreciation (25,607) (4,409) - (30,016) Carrying amount at 1 January 2012 115,002 67,561 182,563 Additions 7,240 - 110,025 117,265 Depreciation charge 21 (47,070) (7,197) (11,003) (65,270) Carrying amount at 31 December 2012 75,172 60,364 99,022 234,558 Cost at 31 December 2012 147,849 71,970 110,025 329,844 Accumulated depreciation (72,677) (11,606) (11,003) (95,286) Carrying amount at 31 December 2012 75,172 60,364 99,022 234,558 Additions 149,131 71,679 236,500 457,310 Depreciation charge 21 (74,931) (10,881) (20,932) (106,744) Write-off at cost (5,964) - - (5,964) Write-off accumulated depreciation 3,877 - - 3,877 Carrying amount at 31 December 2013 147,285 121,162 314,590 583,037 Cost at 31 December 2013 291,016 143,649 346,525 781,190 Accumulated depreciation (143,731) (22,487) (31,935) (198,153) Carrying amount at 31 December 2013 147,285 121,162 314,590 583,037

87 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

11. INTANGIBLES ASSETS

Intangible assets relate to purchased banking software systems. The carrying amounts of the Bank’s intangible assets are as follows:

In thousands of MNT Note Software License Total Cost at 1 January 2012 838,487 2,246 840,733 Accumulated amortization (27,950) (1,497) (29,447) Carrying amount at 1 January 2012 810,537 749 811,286 Additions - - - Amortization charge 21 (83,849) (749) (84,598) Carrying amount at 31 December 2012 726,688 - 726,688 Cost at 31 December 2012 838,487 2,246 840,733 Accumulated amortization (111,799) (2,246) (114,045) Carrying amount at 31 December 2012 726,688 - 726,688 Additions 23,191 124,847 148,038 Amortization charge 21 (85,270) (11,972) (97,242) Disposal at cost - (2,246) (2,246) Disposal of accumulated amortization - 2,246 2,246 Carrying amount at 31 December 2013 664,610 112,875 777,485 Cost at 31 December 2013 861,678 124,847 986,525 Accumulated amortization (197,068) (11,972) (209,040) Carrying amount at 31 December 2013 664,610 112,875 777,485

The Bank amortises the intangible assets over 3 years for the tax purposes. There was disposal MNT 2.25 million of intangible assets during the period ended of 2013 which was a fully amortized license. Management believes that there is no indication of an impairment loss.

88 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

12. CUSTOMER ACCOUNTS AND OTHER LIABILITIES

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Customer accounts 16,278,742 6,960 Total customer accounts 16,278,742 6,960 Payable to the Government - 344,012 Other liabilities 373,841 161,677 Total other liabilities 373,841 505,689 Total other liabilities and customer accounts 16,652,583 512,649

No interest is paid on these customer current accounts. As at 31 December 2013 customer current accounts consist of 11 accounts (2012: 1). Economic sector risk concentrations within the customer accounts are as follows:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Customer accounts 16,278,742 6,960 Total customer accounts 16,278,742 6,960 Payable to the Government - 344,012 Other liabilities 373,841 161,677 Total other liabilities 373,841 505,689 Total other liabilities and customer accounts 16,652,583 512,649

13. DUE TO OTHER BANKS

The local banks deposits consist of term deposits at the Bank with under three months maturities at interest rates of 8.5% p.a. for MNT deposits and 6.0% p.a. for USD deposits.

89 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

14. BONDS

This account is composed of:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Bond issued to international market 972,107,029 817,317,727 Total issued bond 972,107,029 817,317,727

The Bank has established a USD 600 million Euro Medium Term Notes Programme in November 2011 that allows it to issue notes denominated in any currency agreed between the Bank and the dealer. The Ministry of Finance irrevocably and unconditionally guarantees the interest and principal payment of all amounts in respect of the notes. On 9 December 2011, an initial series of notes was issued amounting to USD 20 million with a fixed interest rate of 6.0% and 1 year maturity. The Bank fully repaid these notes in December 2012. The Bank issued a second series of notes in March 2012 amounting to USD 580 million with fixed interest rate 5.75% and a 5 year maturity. In May 2013, the Bank issued a USD 78.55 million bond with a fixed interest rate of 7.5% for the duration of 232 days to a local commercial bank. The Bank fully repaid these notes in December 2013. Bond issuance costs are amortised over the period of the notes. Please refer to Note 23 liquidity disclosures for a breakdown of the Bond into current and non-current amounts.

15. BORROWINGS

The Bank has received a loan from the Government of Mongolia in order to further fund projects and programs. The Government has provided this funding from proceeds of the Chinggis Bond. Interest is charged at 4.7917% p.a. on this loan. One third of this funding has a 5 year maturity ending January 2018 and two thirds of this funding have a 10 year maturity ending December 2022.

16. RELATED PARTY TRANSACTIONS

Related parties and transactions with related parties are assessed in accordance with IAS 24 “Related Party Disclosures”. As discussed in Note 1, the Bank is 100% owned by the Government of Mongolia and its operations include the financing of projects within Mongolia, which include projects undertaken by governmental entities. Accordingly, the Bank enters into

90 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

numerous transactions with related parties as a result of its ownership by the Government. According to IAS 24 “Related Party Disclosures” other related parties of the Bank comprise national companies and other organisations controlled, jointly controlled or under significant influence of the Government.

Assets and Transactions with Related Parties An analysis of the Bank’s assets (excluding loans) held by related parties and transactions with related parties is disclosed as follows:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Statement of Statement of Statement of Statement of Financial Comprehensive Financial Comprehensive Position Income Position Income Receivables from Ministry of Finance 5,097,610 68,330,733 2,168,468 2,168,468 Current account with Bank of Mongolia 418,732 - 31,672,320 - Current account with State bank 12,862,872 11,234 - - Time deposits with State bank 110,000,000 2,059,027 - - Current account with Saving bank - 4,935 21,761,643 50,637 Time deposits with Saving bank - 2,439,236 34,853,753 61,957 Deposit with State bank for 850,000 - - - employee benefit: - Prepaid employee benefit (634,236) (25,663) - - Borrowings 1,987,189,199 (31,168,154) - - Amount of transaction with related 2,115,784,177 41,651,348 90,456,184 2,281,062 parties (excluding loans)

Current accounts with the Bank of Mongolia and State Bank on the same terms and basis as the Bank’s other current accounts and deposits. Bank of Mongolia current accounts earn 0% interest and 5.6% p.a. interest is earned on the State Bank current accounts. The interest on the State Bank short term deposit (under three months) ranges from 9.2%-10.4% p.a. for MNT and is 3.0% p.a. for USD deposits. The interest on time deposits which are over three months but less than a year ranges from 9.7%- 9.9% p.a. for MNT deposits. As discussed in Note 9 the receivable from the Ministry of Finance is due to the Project Financing Agreements between the Ministry of Finance and Government Project implementation bodies (Ministry of Roads Transport Construction and Urban Development and State Governor Administration, Ministry of Foods and Agriculture of Mongolia) and the Bank in the form of a Government Grant. The Development Bank of Mongolia offers its employees reduced rates on Mortgage loans as referred to in Note 9. The Bank has arranged this benefit by providing 0% interest funding to the State Bank of MNT 850 million for a period of 15 years who in turn issue loans to the Bank’s employees at reduced rates. The initial cost of this employee benefit was MNT 660 million of which MNT 634 million remains on the Statement of Financial Position as a prepayment. The deposit was therefore recorded at initiation of the scheme within the Statement of Financial Position at a value of MNT 202 million by discounting the deposit by 10.5%. Please refer to Note 4. For borrowings please refer to Note 15.

91 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Loans to Related Parties An analysis of the Bank loans to related parties is disclosed as follows:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Statement of Statement of Statement of Statement of Financial Comprehensive Financial Comprehensive Position Income Position Income To be repaid by the State budget: 1,321,250,545 46,793,594 256,215,623 1,257,554 - The Ministries 831,822,771 28,804,927 202,611,655 - - State Bank 101,318,012 4,730,430 50,773,958 1,198,125 - 4th Power Station SOSC 76,187,348 3,138,873 2,774,321 3,740 - Tavan tolgoi power plant 3,268,982 121,182 - - - Egiin gol power plant 3,177,633 18,145 - - - Mongolian Railway SOSC 301,953,037 8,458,556 - - - SME Development Fund 156,337 1,493,230 55,689 55,689 - Sainshand industrial park 3,366,426 28,251 - - To be repaid by the Corporates : 458,752,906 32,712,609 150,878,795 2,799,924 - MIAT Airlines SC 4,778,921 8,269,672 7,443,401 297,523 - Erdenes Tavan Tolgoi SC 339,160,662 22,461,325 141,512,394 2,502,401 - Baganuur SOSC 18,062,214 1,128,390 - - - State Housing Corporation SOC 60,660,257 853,222 - - - SME Development Fund 36,090,853 - 1,923,000 - Total loans to related parties 1,780,003,452 79,506,204 407,094,418 4,057,478

Loans provided to the above related parties are provided on the same terms and basis as loans provided to non-related entities with interest rates between 6.75% - 9.6% p.a. for MNT and 5.125% - 9.5% p.a. for USD loans and advances with maturities of between one and five years. The remuneration and employee benefit paid to the executive officers, directors and members of Board for the period ended 31 December 2013 and 31 December 2012 amounted to MNT 468 million and MNT 231 million respectively.

Guarantees Received The Bank is the recipient of a number of guarantees from the Government of Mongolia. On the lending side most loans are guaranteed by the Ministry of Finance. Please refer to Note 8 for further details on the borrowing side the Bank has a Bond issued on the Singapore stock exchange on which the Ministry of Finance irrevocably and unconditionally guarantees the interest and principal payment of all amounts in respect of the bond notes. Please refer to Note 14.

Guarantees Given The Bank has given a guarantee to the Export-Import Bank of China on behalf of “New Yarmag Housing Projects LLC” amounting to USD 84 million (equivalent to MNT 138.7 billion) on the 13th September 2012. To date the Export-Import Bank of China has not yet provided any funding to the New Yarmag Housing Project. The bank will earn a 2% fee when funds are provided to “New Yarmag”.

92 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

17. CONTRIBUTED CAPITAL

In accordance with the Law on Development Bank of Mongolia, the Bank’s contributed capital consists of a contribution from the Government of Mongolia and other sources as specified in the Law on Development Bank of Mongolia. No shares have been issued. In May and December 2011, the Government contributed MNT 16.7 billion and MNT 33.0 billion, respectively in cash to the Bank’s capital. An additional contribution amounting to MNT 23.6 billion was received in December 2012. The Government of Mongolia has contributed a further MNT 10.0 billion, MNT 5.0 billion and MNT 35.0 billion in July, August and September 2013, respectively, to the Bank’s capital.

In thousands of MNT Year ended 31 Year ended 31 December 2013 December 2012 Authorized: Contributed capital 123,300,000 73,300,000 Paid: at 1 January , 73,300,000 49,700,000 Contribution during the year 50,000,000 23,600,000 Total contributed capital 123,300,000 73,300,000

18. INTEREST INCOME

In thousands of MNT Year ended 31 Year ended 31 December 2013 December 2012 Deposits and placements at banks 37,036,192 5,335,614 Loans and advances 94,023,366 7,542,660 Total interest income 131,059,558 12,878,274

Interest Income on loans determined to be impaired but not past due amounted to MNT 138,479 thousand (2012: nil)

93 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

19. INTEREST EXPENSE

In thousands of MNT Year ended 31 Year ended 31 December 2013 December 2012 Due to other banks 569,775 - Bond issued to international market 51,823,121 13,695,488 Bond issued to local commercial bank 5,496,561 - Borrowings 31,168,154 - Total interest expense 89,057,610 13,695,488

Under the Government Grant scheme the Ministry of Finance agreed to provide funding to pay the interest on the Euro Medium Term Notes Programme until such time as the Bank is in an operational position to fund the interest payments from its own sources. This amounted to MNT 23,957 million for 2012. This payment has been netted off against Interest Expense (bond issued to international market) in accordance with IAS 20. From October 2012 the Bank was considered to be in operational position to fund the interest itself and no further payments from Government are expected.

20. FOREIGN EXCHANGE GAINS LESS LOSSES

Included with the Foreign exchange gain less losses is an amount of MNT 5,098 million due from the Ministry of Finance under the Government Grant scheme in relation to the SME loan disclosed in Note 9 (2012: MNT 2,168 million). On the 27 December 2013 the bank signed an amendment to its loan agreements with different Ministries and the Ministry of Finance to convert its MNT loans to the Ministries into USD loans on the 30 December 2013. Previously these loans had been part of the same Government Scheme described above. The conversion results in a decrease in the receivable from Ministry of Finance of MNT 61.3 billion and corresponding increase in ‘Loans and advances’. As both the unrealised gains on USD loans and the Government Grant scheme receivable disclosed in Note 9 are recorded within ‘Foreign exchange translation gains less losses’ there is no impact of this amendment on ‘Foreign exchange translation gains less losses’.

94 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

21. ADMINISTRATIVE AND OTHER EXPENSES

Included in employee cost and benefit account is the contribution to the state pension fund of MNT 151.4 million for the period ended 31 December 2013 (31 December 2012: MNT 57.5 million).

In thousands of MNT Note Year ended 31 Year ended 31 December 2013 December 2012 Employee cost and benefit 2,383,736 1,010,328 Advertising 793,073 7,889 Rental costs 251,744 217 Audit and other professional services 231,958 243,522 Depreciation and amortization 10, 11 203,986 149,868 IT and software 169,093 39,702 Business travel and event 158,894 48,769 Communication and Stationeries 122,050 69,771 Training cost 102,230 29,518 Others 100,573 42,858 Utilities, security and maintenance 35,814 45,042 Fuel and Transportation expense 34,983 13,701 Insurance cost 3,669 2,135 Loss from fixed assets writte off 2,087 - Total operating expenses 4,593,890 1,703,320

22. INCOME TAXES

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

In thousands of MNT Year ended 31 Year ended 31 December December 2013 2012 (restated) Current income tax charge 10,505,432 3,313,560 Deferred tax (benefit) (2,296,174) (5,895,427) Income tax expense/ (benefit) for the period 8,209,258 (2,581,867)

The Bank provides for income taxes on the basis of income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purposes. The income tax rate for profits of the Bank is 10% for the first MNT 3.0 billion of taxable income, and 25% on the excess of taxable income over MNT 3.0 billion in accordance with Mongolian tax legislation.

95 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

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

In thousands of MNT Year ended 31 Year ended 31 December December 2013 2012 (restated)

Profit/(loss) before tax 35,096,846 (8,287,829) Theoretical tax charge at statutory 8,774,212 (2,071,957) rate (2013: 25%; 2012: 25%) Tax effect of items which are not deductible or assessable for taxation purposes: - Profit subject to lower tax rate (450,000) (450,000) - Expenses not deductible for tax purposes 42,775 7,490 Estimation difference of deferred tax - (67,400) Utilisation of unrecognised tax loss carry forward (157,729) - Income tax expense/ (benefit) for the period 8,209,258 (2,581,867)

Differences between IFRS and statutory taxation regulations in Mongolia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. There are no further unrecognized tax losses. Tax losses can be carried forward for the next two years and are deductible up to 50% of the taxable income of that year in accordance with Mongolian legislation. In order to utilise tax losses the Bank must subject itself to a voluntary tax audit. Please refer to Note 26. Deferred tax asset (liability) was recognized for deductible or taxable timing differences resulting from the revaluation of foreign currency denominated monetary assets and liabilities and differing amortisation rates between the tax authorities and the Bank. 1 January 2013 to 31 December 2013

In thousands of MNT Opening Recognised in Closing balance profit or loss balance Deferred tax (liabilities)/assets in relation to: Deposits (2,091,211) 1,320,091 (771,120) Loans and advances (408,815) (42,457,514) (42,866,329) Other Assets (542,117) 542,117 - Intangibles (65,215) (48,912) (114,127) Customer accounts (13) 350 337 Due to other banks - (745,383) (745,383) Bond 9,047,731 37,905,564 46,953,295 Borrowings - 5,779,861 5,779,861 Deferred tax asset 5,940,360 2,296,174 8,236,534

96 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

1 January 2013 to 31 December 2013

In thousands of Mongolian Tugriks Opening Recognised in Closing balance profit or loss balance Deferred tax (liabilities)/assets in relation to: Deposits - (2,091,211) (2,091,211) Loans and advances - (408,815) (408,815) Other Assets - (542,117) (542,117) Intangibles (6,522) (58,693) (65,215) Customer accounts - (13) (13) Bond 51,455 8,996,276 9,047,731 Deferred tax asset 44,933 5,895,427 5,940,360

23. FINANCIAL RISK MANAGEMENT

Introduction and overview The Bank has exposure to the following risks: • credit risk • market risk • liquidity risks This note presents information about the Bank’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk.

Risk management policies and procedures The Bank’s risk management policies aim to identify, analyze and manage the risks it faces, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice. The Board of Directors of the Bank has overall responsibility for the oversight of the risk management framework for the Bank, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures. The Board of Directors of the Bank is responsible for monitoring and implementation of risk mitigation measures and making sure that the Bank operates within the established risk parameters. The Head of the Risk Department of the Bank is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. Credit, market and liquidity risks both at portfolio and transactional levels are managed and controlled through Credit Committee, Asset and Liability Management Committee, and Risk Management Committee.

97 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Board of Directors The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles that establish the objectives guiding the Bank’s activities and implement the necessary policies and procedures. The risk strategy, including all significant risk policies, is approved and periodically reviewed by the Board of Directors. Executive Committee is responsible for conducting the Bank’s daily operations consistent with the Development Bank Law of Mongolia, Company Law and other related laws and regulations.

Credit Committee The Credit Committee is responsible directly to the Board of Directors. It is the credit decision making body of the Bank and operates within clearly defined parameters authorised by the Board of Director. The Committee has the following main functions: approval of clearly defined Credit Policies and Procedures and amendments and updates; approval of risk classification and provisioning levels; review of the quality, composition and risk profile of the entire credit portfolio on an ongoing basis; and approval of credit limits applicable in exposures to industrial sectors and geographical regions Assets and Liabilities Committee (‘ALCO’) The ALCO is responsible for providing centralized asset and liability management of the funding, liquidity, foreign currency, maturity and interest rate risks to which the Bank is exposed. The purpose of the ALCO is to set up the asset and liability structure of the Bank’s balance sheet conducive for sustainable growth of the Bank, its profitability and liquidity through comprehensive management of the Bank’s assets and liabilities and monitoring of the liquidity, foreign currency, interest rate and other market risks. The ALCO Committee is chaired by the Chief Executive Officer.

Risk Management Committee The Bank established the Risk Management Committee in October 2013. The Risk Management Committee is an executive management level committee and is not a formally constituted committee of the board of the directors of the Bank. The main duties of the committee are: • Assessment of the Company’s risk profile and key areas of risk in particular; • Recommending to the management and adopting risk assessment and rating procedures; • Examining and determining the sufficiency of the Company’s internal processes for reporting on and managing key risk areas; • Assessing and recommending to the Board acceptable levels of risk; • Development and implementation of a risk management framework and internal control system.

Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances, and deposits in commercial banks. The Bank has developed policies and procedures for the management of credit exposures, including guidelines to limit portfolio concentration and the establishment of a Credit Committee, which actively monitors the Bank’s credit risk. The Bank’s credit policy is reviewed and approved by the Board of Directors. The Bank’s credit policies establish: • Procedures for review and approval of loan/credit applications; • Methodology for the credit assessment of borrowers;

98 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

• Methodology for the evaluation of collateral; • Credit documentation requirements; • Procedures for the ongoing monitoring of loans and other credit exposures. According to the credit policy approved, the Credit Committee has the authority to approve transactions with a total amount of up to MNT 5.0 billion. Any requests with higher amounts need to be approved by the Board of Directors. Credit applications are originated by the Credit Department. Reports produced by the department’s credit analysts are based on a structured analysis focusing on the customer’s business and financial performance.T he Risk Management Department then independently reviews the credit application and the report and a second opinion is given accompanied by a check that credit policy requirements have been met. The Credit Committee reviews the credit application on the basis of submissions by the Credit Department and the Risk Management Department. Individual transactions are also reviewed by the Bank’s Legal and Accounting Division depending on the specific risks and pending final approval of the Credit Committee. The Bank operates in a very specific environment and bears minimal credit risk given the guarantees it receives from the Mongolian Government and over-collateralization of its loan portfolio. The Bank’s maximum exposure to credit risk is set out below. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. Analysis of credit risk by sector of loans and advances outstanding at 31 December 2013 is as follows:

In thousands of MNT Loans and advances Loans and advances Total to be repaid by the to be repaid by State budget the Corporates Neither past due nor impaired: - Power plant 127,700,434 - 127,700,434 - Manufacturing 5,248,484 308,836,172 314,084,656 - Railway 301,953,037 - 301,953,037 - Road 690,416,375 - 690,416,375 - Utility 94,614,203 - 94,614,203 - Construction - 67,364,832 67,364,832 - Mortgage 101,318,012 - 101,318,012 - Mining - 357,222,876 357,222,876 Total neither past due nor impaired 1,321,250,545 733,423,880 2,054,674,425 Past due but not impaired: - Less than 30 days overdue: - - Transportation - 4,778,921 4,778,921 Total past due but not impaired - 4,778,921 4,778,921 Individually determined to be - Impaired loans but not past due: - Manufacturing - 126,361,748 126,361,748 Total impaired loans - 126,361,748 126,361,748 Less: Provision for loan impairment - (6,224,792) (6,224,792) Total net amount of loans and advances 1,321,250,545 858,339,757 2,179,590,302

99 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Analysis of credit risk by sector of loans and advances outstanding at 31 December 2012 is as follows:

In thousands of MNT Loans and advances Loans and advances Total to be repaid by the to be repaid by State budget the Corporates Neither past due nor impaired: - Power plant 2,774,321 - 2,774,321 - Road 202,183,795 - 202,183,795 - Utility 427,860 - 427,860 - Mortgage 50,773,958 - 50,773,958 - Mining - 141,512,394 141,512,394 - Transportation - 7,443,401 7,443,401 - Manufacturing 55,689 88,384,549 88,440,238 Total loans and advances 256,215,623 237,340,344 493,555,967

The Bank monitors concentrations of credit risk by sector. An analysis of concentrations of credit risk at the reporting date is shown on page 35.

Credit-related Commitments Risks The Bank offers guarantees and letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties. The Bank regards guarantees and letters of credit that they carry same credit risk exposures as loans. In other words, when issuing guarantees or letters of credit, the Bank follows the same originating, analyzing, collateral evaluation, reviewing, monitoring, and approval processes as loans. As stipulated in the Law on Development Bank of Mongolia, the total value of loans, and loan equivalent assets provided by the Bank shall not exceed the amount equal to 50 times of the Bank’s equity capital. Total amount of letters of credit, guarantees and securities shall not exceed the amount equal to 50 times of the equity. Above criteria as at 31 December 2013 are as follows:

In thousands of MNT Suitable ratio As at 31 As at 31 December December 2013 2012 (restated) Restriction Actual Restriction Actual limit amount limit amount Total amount of the loan and < EQ 50 times 7,193,971,780 2,831,928,329 3,349,592,380 662,480,457 assets equivalents to loan Total amount of the loan < EQ 50 times 7,193,971,780 264,294,013 3,349,592,380 116,771,542 guarantee and securities

Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: • Fixed asset: Land, Building, factory etc;

100 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

• Movable properties: Vehicles and equipment etc; • Special property rights: Mineral licenses, Project execution right etc., • Time deposits, Securities/Bond and Stocks • Guarantees issued from Government, reputable insurance companies, Development banks and investment bank and commercial banks with overall rating of “Stable” or above. • Assets and revenues generated as a result of performance by borrower and project contractors. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. Loan amount collection through sale of the collateral can take place by the Bank when a borrower notifies their inability to repay the loan and requests to make repayment through its value of the collateral, or the borrower has not made repayment for substantial period after the delivery of Notice and Demand Notice, or has not taken any initiatives to make loan repayment. The proceeds will be used to reduce or repay the outstanding claim. The Bank does not occupy repossessed properties for business use and has no such properties as at 31 December 2013.

Impairment Assessment The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 30 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank monitors the credit quality of loans primarily based on classification of loans according to the Regulation on Asset Classification which is used for impairment provision calculation. In accordance with this regulation, the Bank is required to determine the quality of loans and advances based on their qualitative factors and time characteristics (i.e. delays in repayment). Loans are classified into the following five groups: performing, past due, substandard, doubtful, and loss. For credit risk for off-balance sheet financial instruments, the Bank uses the same credit policies in assuming conditional obligations as it does for on balance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures.

Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities.T he Bank’s 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 Bank’s reputation. The Bank manages each currency liquidity and aggregated liquidity as well. ALCO is responsible for monitoring and controlling liquidity risk to which potential liquidity risks and liquidity analysis reports are submitted on regular basis. The Bank invests the funds in portfolios of liquid assets, in order to be able to respond quickly and efficiently to unforeseen liquidity requirements. Since the Bank does not accept deposits, it does not have any legal obligations to maintain a statutory deposit with the Central Bank of Mongolia. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The liquidity plan and maturity gap report is made by the Bank for each major currency (Over USD 1 million equivalents) as well as an aggregated amount using the cash flow approach.

101 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Exposure to liquidity risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers/ banks. For this purpose net liquid assets are considered as including cash and cash equivalents, central bank bills, current accounts and deposits placed with Bank of Mongolia 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:

31 December 2013 31 December 2012 (restated) Net Liquid Assets 8 101

The table below shows the financial assets and liabilities at 31 December 2013 by their remaining contractual maturity. The amounts of liabilities and assets disclosed in the maturity table are the contractual undiscounted cash flows, gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows. The Bank places short term deposits in commercial banks and deposits are flexible to call back which has comparatively less liquidity risk. With regards to the market risk management, stronger emphasis has been put on managing the liquidity risk and interest rate volatility. Liquidity stress testing has been conducted on a regular basis and presented to Asset and Liability Committee (ALCO). Movements of the interest rate spread have been discussed and analyzed during ALCO meetings. These analyses are performed across all business units and all loans and deposit products

102 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

otal T (373,841) 383,873,413 750,002,881 (16,278,742) (138,747,823) (111,171,976) 3,037,709,829 4,171,586,123 (1,223,939,838) (2,636,140,907) (1,152,452,823) (1,107,519,826) (5,279,105,950) (1,107,519,826) - - evelopment, and any and any evelopment,

As at 31 December 2013 31 December at As years ver five ver evelopment on 30 A prilevelopment 2013. O conomic D ------971,009,513 971,009,513 (1,378,693,198) (407,683,685) (1,378,693,198) (1,107,519,826) conomic D inistry of E

inistry of E five years five ne year to O ne year ------1,829,334,351 1,829,334,351 (1,169,104,575) (437,058,811) (1,097,288,588) (699,836,142) (2,266,393,162)

one year ------ix months to to S ix months inistry and the M of Finance 95,445,385 95,445,385 (47,610,072) (27,582,118) (522,761,941) (502,508,746) (597,954,131) (262,777,330)

months hree to six to hree T ------37,390,772 greement with the M greement 445,442,560 (9,154,654) 482,833,332 239,731,416 (40,733,062) (451,254,924) (491,987,986)

Less than Less - - three months three (373,841) 383,873,413 304,560,321 104,529,808 248,886,070 792,963,542 248,886,070 (16,278,742) (27,582,118) (138,747,823) (249,922,973) (111,171,976) (544,077,473) ther liabilities ash and cash equivalents ustomer accounts ustomer he Bank entered in to a tri-party in to Intermediaryhe Bank entered Financial A oans and advances otal financial assets oan commitments not yet paid oan commitments not yet otal financial liabilities otal cumulative amount amount otal cumulative In thousands of M NT Financial assets Financial C Bank deposits L T Financial liabilities Financial O C uarantees given to the E ntities to given G uarantees L ue to other banks D ue to Borrowings Bonds T N et financial assets/(liabilities) T T to the M financial disbursement plan the Bank submits its project and programs In with the agreement accordance the Bank. to proceeds Bond” “ C hinggis the from funding gap will be transferred

103 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

otal T (6,960) (161,676) 218,612,876 170,270,960 631,220,431 (116,770,960) (314,463,630) (427,636,366) (427,636,366) 1,020,104,267 (1,447,740,633) (1,016,337,408) - -

years ver five ver O ------(427,636,366)

five years five ne year to O ne year ------587,069,683 587,069,683 (116,780,537) (499,621,727) (1,086,691,410) (969,910,873) (427,636,366)

one year ------ix months to to S ix months 25,944,125 25,944,125 71,985,361 (97,895,693) (95,164,836) (121,108,961) (23,213,268)

months hree to six to hree T ------9,117,466 28,573,935 37,691,401 167,150,196 (33,684,711) (56,897,979) (19,206,578) (23,213,268)

Less than Less - - three months three 9,089,157 (6,960) (161,676) 218,612,876 141,697,025 186,356,774 369,399,058 186,356,774 (66,102,689) (116,770,960) (183,042,284) ther liabilities ash and cash equivalents ustomer accounts ustomer he following table provides an analysis of the financial assets and liabilities of the Bank into an analysis of the financial assets and liabilities Bank into table provides he following oans and advances otal financial assets oan commitments not yet paid oan commitments not yet otal cumulative amount amount otal cumulative otal financial liabilities T periods maturity: to based on the remaining maturityrelevant groupings In thousands of M NT assets Financial C Bank deposits L T Financial liabilities Financial O C uarantees given to the E ntities to given G uarantees L Bonds T N et financial assets/(liabilities) T

104 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

otal T o the T - - (373,841) 652,338,027 379,461,233 2,179,590,302 (16,278,742) (972,107,029) (1,238,288,217) (111,041,307) (1,987,189,199) (138,747,823) (1,223,939,838) 3,211,389,562 (1,238,288,217) (4,449,677,779)

years years As at 31 December 2013 31 December at As ver five five ver O ------808,022,437 808,022,437 (352,116,762) (1,160,139,199) (1,238,288,217) (1,160,139,199)

ne to O ne to five years five ------1,101,656,133 (682,177,497) (956,783,630) (827,050,000) 1,101,656,133 (886,171,455) (1,783,833,630)

ix months S ix months ------to one year one year to - 1,692,850 1,692,850 (521,069,091) (522,761,941) (203,993,958) (522,761,941)

months months hree to six to hree ------T 193,887,876 645,142,800 317,075,133 645,142,800 (451,254,924) (451,254,924)

months months ------107,653,942 231,102,407 375,927,331 123,187,257 607,029,738 (110,705,000) (249,922,973) (138,747,823) Less than three than three Less (499,375,796)

sensitive ------on-interest N on-interest 7,195,227 3,533,902 15,533,315 37,116,475 15,533,315 47,845,604 (336,307) (373,841) (15,323,399) (16,278,742) (32,312,289) he objective of market while optimizing market risk manage and control within acceptable parameters, management is to risk exposures T summary of the Bank’s interest rate gap position on its rate A summary interest gaps. rate of the Bank’s monitoring interest risk rate through he Bank principally manages interest T arket risk is the risk that changes in market prices, such as interest rate and foreign exchange rates will affect the Bank’s income or the value of its holdings the Bank’s will affect rates exchange arket risk and foreign is the risk rate that changes in market such as interest prices, and net income. anagement of market impact the extent which changes in market rates by to margins risk risks: rate is measured Interest interest ther liabilities ustomer accounts ustomer ash and cash equivalents otal cumulative amount amount otal cumulative otal financial liabilities oan commitments not yet paid oan commitments not yet oans and advances otal financial assets

T N et financial assets/(liabilities) T Bonds Borrowings ue to other banks D ue to L uarantees given to the E ntities to given G uarantees C O Financial liabilities Financial T L Bank deposits C Financial assets Financial M financial instruments. on risk.the return M in result of movements as a or decrease income will increase net of interest that of liabilities, from bearing assets differs extent the term structure of interest rates. interest follows: as financial assets and liabilities are In thousands of M NT

105 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

otal T - - (6,960) (161,676) 493,555,967 168,924,490 216,468,206 878,948,663 (369,772,289) (817,317,727) (314,463,630) (116,770,960) (369,772,288) (1,248,720,952)

ver ver O five years five ------(369,772,288)

ne to f O ne to ive years years ive ------412,488,106 412,488,106 (511,710,431) (807,418,000) (116,780,537) (369,772,288) (924,198,537)

ix months S ix months ------to one year one year to - 8,502,053 8,502,053 141,938,143 (89,393,640) (97,895,693) (97,895,693)

months months hree to six to hree ------T 9,952,253 15,794,964 27,842,000 43,636,964 231,331,783 (33,684,711) (33,684,711)

Less than Less ------three months months three 50,000,000 159,290,070 139,210,000 152,953,719 221,379,530 (66,102,689) 342,163,719 (116,770,960) (182,873,649)

sensitive - - - - on-interest N on-interest (6,960) 6,770,844 1,872,490 62,089,460 63,514,488 62,089,460 72,157,822 (9,899,727) (161,676) (10,068,363) ther liabilities ustomer accounts ustomer ash and cash equivalents otal cumulative amount amount otal cumulative oan commitments not yet paid oan commitments not yet otal financial liabilities oans and advances otal financial assets T N et financial assets/(liabilities) T Bonds L uarantees given to the E ntities to given G uarantees C O Financial liabilities Financial T L Bank deposits C Financial assets Financial In thousands of M NT

106 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard interest rate scenarios. If interest rates had been 100 bps higher or lower and all other variables were held constant, the Bank’s net income would have resulted as follows:

100 bp parallel 100 bp parallel Sensitivity of projected net interest income 2013 Increase Decrease At 31 December 2013 (12,538,215) 12,538,215 At 31 December 2012 (4,318,617) 4,318,617

The Bank is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.T he Asset and Liability Management Department (ALMD) is responsible for monitoring the Bank’s exchange risk and minimising its exposure. ALMD does this by setting limits on the level of exposure by currency, which are monitored on a frequent basis. The Bank manages its currency risk primarily through assessing the impact of foreign currency exchange rate movements on the Bank’s liquidity and profitability. The table below summarizes the Bank’s exposure to foreign currency exchange rate risk at 31 December 2013:

In thousands of As at 31 December 2013 MNT MNT USD EUR Total Assets Cash and cash equivalents 374,591,094 4,850,309 19,830 379,461,233 Bank deposits 473,572,082 178,765,945 - 652,338,027 Loans and advances 857,930,377 1,321,659,925 - 2,179,590,302 Total financial assets 1,706,093,553 1,505,276,179 19,830 3,211,389,562 Liabilities Other liabilities 373,841 - - 373,841 Customer accounts 10,818,483 5,460,259 - 16,278,742 Due to other banks 28,033,056 83,008,251 - 111,041,307 Borrowings 1,540,765,736 446,423,463 - 1,987,189,199 Bonds - 972,107,029 - 972,107,029 Total financial liabilities 1,579,991,116 1,506,999,002 - 3,086,990,118 Net financial assets /(liabilities) 126,102,437 (1,722,823) 19,830 124,399,444

107 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The table below summarizes the Bank’s exposure to foreign currency exchange rate risk at 31 December 2012:

In thousands of As at 31 December 2012 MNT MNT USD Total Assets Cash and cash equivalents 196,470,142 19,998,064 216,468,206 Bank deposits - 168,924,490 168,924,490 Loans and advances 255,364,302 238,191,665 493,555,967 Total financial assets 451,834,444 427,114,219 878,948,663 Liabilities Other liabilities 161,677 - 161,677 Customer accounts - 6,960 6,960 Due to other banks - - - Borrowings - - - Bonds - 817,317,727 817,317,727 Total financial liabilities 161,677 817,324,687 817,486,364 Net financial assets /(liabilities) 451,672,767 (390,210,468) 61,462,299

The following table presents sensitivities of profit or loss to reasonably possible changes in currency exchange rates applied at the end of the reporting period to the functional currency of the Bank, with all other variables held constant.

In thousands of MNT At 31 December 2013 At 31 December 2012 USD strengthening by 10% (172,282) (39,021,047) USD weakening by 10% 172,282 39,021,047 Euro strengthening by 10% 1,983 - Euro weakening by 10% (1,983) - Total - -

Capital Management The Bank sets and monitors capital requirements for the Bank as a whole. The Bank adopted the standardised approach which is a set of risk measurement techniques proposed under Basel II capital adequacy rules. Credit risk exposure is calculated by risk weighting on and off-balance sheet exposures to credit risk according to broad categories of relative credit risk. Risk-weights are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. Foreign currency exchange risk exposure in a single foreign currency is derived by subtracting the aggregate value of financial liabilities in that foreign currency from the aggregate value of the financial assets in that foreign currency. The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Bank recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

108 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The Government of Mongolia increased the Bank’s capital by further MNT 10.0 billion, MNT 5.0 billion and MNT 35.0 billion in July, August and September 2013, respectively, as at 31 December 2013, the Bank’s capital was MNT 123.3 billion. The ratios of the Bank’s capital adequacy as at 31 December 2013 and 31 December 2012, respectively, were as following:

In thousands of MNT 31 December 2013 31 December 2012 (Restated) Tier I capital: Share capital 123,300,000 73,300,000 Retained earnings 20,579,436 (6,308,152) Total tier I capital 143,879,436 66,991,848 Total regulatory capital/capital base 143,879,436 66,991,848 Risk weighted capital ratio 12.78% 18.31%

The Bank weights all assets where the Government of Mongolia is the counterparty at 0%. The Bank does not have any externally imposed capital requirements.

24. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY

The following table provides a reconciliation of financial assets with measurement categories at 31 December 2013.

In thousands of MNT Loans and receivables Total Assets: Cash and cash equivalents 379,461,233 379,461,233 Bank deposits: 652,338,027 652,338,027 - Short-term placements with other banks with 652,338,027 652,338,027 original maturities of more than three months Loans and advances to customers: 2,179,590,302 2,179,590,302 - Loans to the Ministries 1,321,250,545 1,321,250,545 - Loans to the Corporate entities 858,339,757 858,339,757 Total financial assets 3,211,389,562 3,211,389,562

109 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The following table provides a reconciliation of financial assets with measurement categories at 31 December 2012 (restated).

In thousands of MNT Loans and receivables Total Assets: Cash and cash equivalents 216,468,206 216,468,206 Bank deposits: 168,924,490 168,924,490 - Short-term placements with other banks with 168,924,490 168,924,490 original maturities of more than three months Loans and advances to customers 493,555,967 493,555,967 - Loans to the Ministries 256,215,623 256,215,623 - Loans to the Corporate entities 237,340,344 237,340,344 Total financial assets 878,948,663 878,948,663

As of 31 December 2013 and 31 December 2012 all of the Bank’s financial liabilities were carried at amortised cost.

25. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Determination of fair value and fair value hierarchy Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. The Bank’s principal financial instruments comprise of cash on hand and in bank, deposits, loans and advances, other current assets, accounts and other payables and borrowings. The management considers that the carrying amounts of financial assets and liabilities recognized in the financial statements approximate their fair value except for the Bank’s bond.

Fair Values of Financial Assets and Liabilities The Bank has no financial assets or liabilities carried at fair value i.e. all of the Bank’s financial assets and liabilities are carried at amortised cost. The Bank determines fair values for those financial instruments as follows: (i) Financial assets and liabilities for which fair value approximates carrying amount For financial assets and financial liabilities that are liquid or have short term maturity of less than one year, carrying amounts approximate their respective fair value.

110 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

(ii) Fixed rate financial instruments The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Thus, market interest rates when they were first recognized are compared to the current market rates offered for the comparable financial instruments available inM ongolia. In case there were no significant changes in market rates, carrying amounts approximate fair value of the instrument. The Bank does not operate in a normal market environment. On the asset side loans are provided to socially and economically important entities or sectors at well below normal commercial market rates. The rate of the Bank has issued loans to both Ministries and Corporates has not significantly changed since inception and thus, carrying value of lending approximates its fair value. The Bank has only one long term fixed rate debt instrument “Bond issued to international market” which was fully guaranteed by Mongolia and issued back in March 2012 at a rate of 5.75%. This bond is listed on the Singapore Stock Exchange and its fair value has been calculated using its quoted price as at 31 December 2013. Discount rates, used below, depend on currency, maturity of the instrument and credit risk of the counterparty. The increase in range in 2013 is due to new one off specific loan agreements and do reflect a general increase in the interest rates being charged by the bank in this specific market.T he discount rates were as follows: The rates used in determining fair values.

31 December 2013 31 December 2012 Bank deposits Short-term placements with other banks with MNT 8.50% to 12.00% p.a. - original maturities of more than three months USD 5.00% to 5.40% p.a. 3.80% to 5.50% p.a. Loans and advances funded by: - The Bank’s equity and Bond: - Loans given to the Ministries MNT 7.38% p.a. 7.34% p.a. USD 6.75% to 7.38% p.a. - - Loans given to the Corporates MNT 7.38% to 12.0% p.a. 6.75% to 7.38% p.a. USD 7.35% to 8.10% p.a. 7.35% to 8.10% p.a. - Borrowing: - Loans given to the Ministries MNT 6.00% to 6.125% p.a. - USD 5.125% to 6.125% p.a. - - Loans given to the Corporates MNT 5.70% to 7.00% p.a. - USD 8.00% to 9.50% p.a. - Customer accounts - - Due to other banks MNT 8.50% p.a. - USD 6.00% p.a. - Bond USD 7.64% p.a. 4.66% p.a. Borrowing MNT 4.7917% p.a. - USD 4.7917% p.a.

111 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Fair values of financial instruments as at 31 December 2013 carried at amortised cost are as follows:

In thousands of 31 December 2013 MNT Carrying Amount Level 1 Level 2 Level 3 Assets Cash and cash equivalents 379,461,233 6,589 379,454,644 - Cash on hand 6,589 6,589 - - Cash at Bank of Mongolia 418,732 - 418,732 - Cash at other banks 21,293,060 - 21,293,060 - Short term deposits with local banks 357,742,852 - 357,742,852 - Bank deposits 652,338,027 - 652,338,027 - Loans and advances 2,179,590,302 - - 2,179,590,302 loans and avdances to be 1,321,250,545 - - 1,321,250,545 repaid by the State budget loans and advances to be 858,339,757 - - 858,339,757 repaid by the Corporates Total financial assets carried 3,211,389,562 6,589 1,031,792,671 2,179,590,302 at amortised cost Liabilities Other liabilities 373,841 - 373,841 - Customer accounts 16,278,742 - 16,278,742 - Due to other banks 111,041,307 - 111,041,307 - Borrowings 1,987,189,199 - 1,987,189,199 - Bonds 972,107,029 920,565,915 - Bond issued to international market 972,107,029 920,565,915 - - Total financial liabilities 3,086,990,118 920,565,915 2,114,883,089 - carried at amortised cost

112 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

Fair values of financial instruments as at 31 December 2012 carried at amortised cost are as follows:

In thousands of MNT 31 December 2012 (Restated) Carrying Level 1 Level 2 Level 3 Amount Assets Cash and cash equivalents 216,468,206 6,132 216,462,074 - Cash on hand 6,132 6,132 - - Cash at Bank of Mongolia 31,672,320 - 31,672,320 - Cash at other banks 31,358,100 - 31,358,100 - Short term deposits with local banks 153,431,654 - 153,431,654 - Bank deposits 168,924,490 - 168,924,490 - Loans and advances 493,555,967 - - 493,555,967 loans and avdances to be repaid by the State budget 256,215,623 - - 256,215,623 loans and advances to be repaid by the Corporates 237,340,344 - - 237,340,344 Total financial assets carried at amortised cost 878,948,663 6,132 385,386,564 493,555,967 Liabilities Other liabilities 161,677 - 161,677 - Customer accounts 6,960 - 6,960 - Due to other banks - - - - Borrowings - - - - Bonds 817,317,727 807,101,255 - - Bond issued to international market 817,317,727 807,101,255 - Total financial liabilities carried at amortised cost 817,486,364 807,101,255 168,637 -

26. COMMITMENTS AND CONTINGENCIES

Guarantees provided 31 December 2013 31 December 2012 Within a year 138,747,823 116,770,960

The Bank has given a guarantee to the Export-Import Bank of China on behalf of “New Yarmag Housing Projects LLC” amounting to USD 84 million on the 13th September 2012. To date the Export-Import Bank of China has not yet provided any funding to the New Yarmag Housing Project. The Bank has MNT 1,223,940 million of loan commitments (2012: MNT 314,464 million). Tax legislation. Mongolian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant authorities.

113 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

The Mongolian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged by tax authorities. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. The Mongolian tax legislation does not provide definitive guidance in certain areas, specifically in areas such asAT V , withholding tax, corporate income tax, personal income tax, transfer pricing and other areas. From time to time, the Bank adopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity. Management believes that its interpretation of the relevant legislation is appropriate and the Bank’s positions related to tax and other legislation will be sustained. Management believes that tax and legal risks are remote at present. The management performs regular re-assessment of tax risk and its position may change in the future as a result of the change in conditions that cannot be anticipated with sufficient certainty at present.A s of 31 December 2013, management has assessed that recognition of a provision for uncertain tax position is not necessary.

27. SEGMENT REPORTING

Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.T he CODM is the person - or group of persons - who allocates resources and assesses the performance for the entity. The functions of the CODM are performed by the Management Board of the Bank. The Bank is a development finance institution dedicated to the economic and social progress ofM ongolia. The Bank’s products and services are similar and are structured and distributed in a fairly uniform manner across borrowers. Based on the evaluation of the Bank’s operations, management has determined that the Bank has only one reportable segment since the Bank does not manage its operations by allocating resources based on a determination of the contribution to net income from individual borrowers. Management receives and reviews financial information in IFRS format. The Bank’s revenue is received solely from entities with Mongolia. All non-current assets of the Bank are located within Mongolia.

114 Development Bank of Mongolia Notes to the Financial Statements – 31 December 2013 (Expressed in thousands of Mongolian tugriks unless otherwise stated)

A spilt of the Bank’s revenue streams from sources is shown below.

In thousands of MNT Year ended 31 Year ended 31 December December 2013 2012 (restated) Interest income for loan paid by: 94,023,422 7,542,660 - The State budget 45,984,927 3,255,895 - The Corporates 48,038,495 4,286,765 Interest income from Commercial banks: 37,036,136 5,335,613 - Deposit 35,814,458 5,225,708 - Current account 1,221,678 109,905 Gain from foreign currency trading: 2,000,002 4,060 - With the Government 121 - - With the Corporates 1,999,881 4,060 Total income 133,059,560 12,882,333

28. POST BALANCE SHEET EVENTS

In January 2014, Japan Bank of International Cooperation (JBIC) and the Ministry of Finance has signed set of agreements to provide guarantee for yen-denominated foreign bonds issued by the Bank in the Japanese bond market (Samurai bonds). This was a privately placed issue amounting to 30 billion yen. JBIC’s guarantee covers the principal and part of the interest of this issue. The joint lead arrangers were Nomura Securities Co., Ltd. and Daiwa Securities Co., Ltd. with Mizuho Bank Ltd. participated as the bond administrator. This was the first guarantee for issue of Samurai bonds by a Mongolian institution. The Government of Mongolia issued a resolution No.299 dated on the 16 August 2013 pertaining to enhancement of coal exports of Mongolia. The Resolution states the road built by Gobi Road LLC connecting Tavan tolgoi and Gashuunsukhait and basic infrastructure built by Energy Resources LLC to enhance Gashuunsukhait port capacity are to be purchased and ownership of the assets transferred to Erdenes MGL LLC. Pursuant to this Resolution, on February 2014 the Bank has lent to Erdenes MGL LLC amount of MNT 170.6 billion for the purchase of road and infrastructure. The Bank has issued a two year guarantee in the name of Erdenes Tavan Tolgoi LLC to a local commercial bank in the amount of USD 35 million in January 2014.

115