Making the world go round: A look at the credit picture across the banking sector

In the third quarter of 2013, credit was the main component of International Banking Centre (IBC) assets, reaching $62.5bn, 64% of the total. Interest generated by loans was the source of 58% of the IBC’s income from January to September 2013. In 2012 the volume of credit represented 154% of GDP in the IBC and 128% in the national banking system (NBS). The biggest share of the credit portfolio in the third quarter of 2013 was held by foreign private banks (FPBs), 42%, followed by Panamanian private banks (PPBs) with 29%, international banks (IBs) with 18% and official banks (OBs) with 11%. PPBs hold 46% of total domestic credit, followed by FPBs with 40% and OBs with 14%. Of the total external credit portfolio, FPBs’ share is 52%, IBs have 41% and PPBs 7%.

Domestic Credit

In the same period, the volume of domestic credit was $36.5bn, representing 58% of the total, while external credit reached $26bn, or 42%. In Panamanian banks, domestic credit prevails, reaching 100% and 90% of the credit portfolio of OBs and PPBs, respectively. As IBs cannot operate domestically, their credit portfolios are composed solely of external credit. FPBs have a balanced portfolio, with 51.7% domestic and 48.3% external credit. The growth of total credit from the third quarter of 2012 to the third quarter of 2013 was 12.5%. External credit had a slightly better performance than domestic, up 12.8%, against 12.3% for the latter.

Free Trade Zone

Domestic credit is mainly directed to the private sector (95% in September 2013). Analysing the importance of private sector credit, in September 2013, 29% of loans went to the commercial sector, reaching a volume of $10.6bn. Credit to the Colón Free Trade Zone reached $2.9bn, around 27% of commercial credit and 7.8% of the total. Since the activity in Colón also depends on the performance of other countries – especially Colombia and Venezuela – this may be a channel through which external sectors can affect the performance of banks in Panama. Credit for housing is the second-most-important sector, with a share of 26.5%, followed by personal consumption with 18.5%, construction with 10% and industry with 5%. Combined, their share reaches 93.5% of private credit.

By Sector

For FPBs and PPBs the weight of each sector is similar to that prevailing in the NBS. The only difference worth noting is that credit to the public sector represents 7% of the domestic credit of FPBs and only 0.15% of PPBs. For OBs, the composition of their portfolios has important differences in relation to FPBs and PPBs. Credit to the public sector is the most relevant in the portfolio, with a total of $863m (16%). Although having a share of 14% in domestic credit, they are responsible for 45% of the credit provided to the public sector (FPBs account for 53%). Of the credit to the domestic private sector from OBs, housing has the biggest share (36%), followed by personal consumption (26%), commercial (14%), livestock (7%) and industry (6%).

Private domestic credit grew from September 2012 to September 2013 by $3.7bn, a variation of 11.8%. The sectors with the highest increases were fishing and construction with 48% and 23%, respectively. Given the weight on total credit, housing (with a rise of $1.3bn) and commercial credit ($683m) were responsible for 53% of the increase. The construction sector has benefitted from the high level of investment in past years, with large works like the expansion of the canal and construction of the metro.

From September 2012 to September 2013, loans issued to micro companies grew by 28%. Credit to small companies also performed well, rising by 22%. Loans to medium-sized and large companies had below-average growth of 3% and 6%, respectively.

Javier Motta, head of financial statistics at the Superintendency of Banks of Panama ( Superintendencia de Bancos de Panama, SBP), does not see a problem for small and medium-sized firms, but recognises that micro companies may not have sufficient access to credit. “The problem is not availability of resources but the process of formalisation they have to go through to get access to credit,” he told OBG. According to Motta, there has been a joint effort from different state offices to help micro companies to become formal in order to have access to credit.

Juan Robles, financial manager of Banco Hipotecario Nacional, said, “Housing and corporate credit are growing a lot, so there may still be room for all competitors to grow and even for newcomers. But regarding cars, credit cards and personal consumption, it is dog eat dog.”

Eduardo Quirós, manager of financial stability at the SBP, told OBG that to prevent fierce competition creating instability, the SBP implemented a measure to reduce the maximum duration of car loans. Another important measure to control credit was setting a limit on the value of a real estate square metre to be funded ($1200-$1500, depending on the location) by banks. The measure was taken after what happened in the US housing market in 2007, and it helped avoid a real estate bubble in Panama. An interesting feature of this action on real estate loans is that it was taken by each bank individually, not by the SBP. It was, therefore, a self-regulation measure and seen as an example of the good functioning of the system, and of the responsible way domestic banks run their businesses.

Opportunities

Regarding other sectors with potential for growth, Carlos Troetsch, the president of the Panamanian Banking Association, sees good opportunities in credit to small companies and agriculture. Comparing the cost of credit for certain sectors in September 2013, for commercial credit, the FBPs’ interest rate of 7.55% was slightly higher than the PPBs’ 7.48% for a one-year loan and 17% higher for a five-year time length (7.9% and 6.6%, respectively). FPB loans to industry carried an interest rate of 6.1% for a one-year loan and 7% for five years, both lower than those offered by PPBs in the same period (7.1% and 7.8%, respectively).

Consumer Loan Rates

For a one-year consumer loan, FBPs charge 9.89%, against the 9.84% of PPBs. For a five-year loan, the interest rates were 8.2% for FPBs and 9% for PPBs. The interest rates for the different sectors are low compared to recent years, and for mortgages they have been declining since the fourth quarter of 2000, and stand at their lowest rate for the past 28 years.

Analysis of liquidity and capital adequacy ratios shows the cautious and conservative profile of banks operating in Panama. The minimum capital adequacy index required by law, for example, is 8%, but for the IBC the index was at 16% in September 2013, twice the minimum. FPBs had the lowest level in the same period, 15.2%, still almost twice the minimum, and IBs the highest, at 25.7%. In the IBC the share of Tier 1 capital (the safest kind, consisting of equity capital and disclosed reserves) is 14%. IBs and OBs have higher shares, both being around 20%.

Regarding liquidity, the numbers also indicate a very sound system. The average monthly liquidity for the SBN in February 2014 was 60.3%, smaller than the number for February 2013 (63.5%), though still more than twice the minimum required level of 30%. OBs had the highest index, at 74.5%, while FPBs stood at 65.8% and PPBs at 46.4%.

With regards to the quality of the credit portfolio, the percentage of past due plus delinquent loans felt slightly, from 2.75% in June 2012 to 2.5% in June 2013 for domestic credit. For the foreign portfolio the numbers are lower, standing at 0.35% in June 2013 compared to 0.46% in June 2012.

The ratio of domestic deposits to total credit was 64.3% in the IBC in September 2013, slightly lower than the 65% of September 2012. OB was the only group where this ratio saw an increase, going from 165% to 175%. PPBs can finance almost all of their credit with domestic deposits (97%) and in 2012 the figure was 100%. For FPBs the ratio in September 2012 was 50%, falling to 46% in September 2013.