Panama authorities work to strengthen banking sector

Due to its openness to foreign financial institutions, dollarisation, low inflation and relative political stability, Panama remains a highly attractive regional financial centre. Recording strong performance in 2014, the country’s International Banking Centre (IBC), which contributes 7.5% to Panama’s GDP and comprises the national banking system (NBS) and international banks (IBs), remains well capitalised with total assets of some $111.4bn as of March 2015. In light of the country’s inclusion in the grey list of the Financial Action Task Force (FATF), the authorities are currently taking steps to adapt sector legislation to enhance transparency and to improve its anti-monetary laundering/counter financing of terrorism (AML CFT) regime.

Strong Centre

The IBC is substantial in global terms and even more so in regional terms. The latest Global Financial Centres Index, released in March 2015, rated Panama as the 48th-most-competitive financial centre of the 82 assessed worldwide. Within the Latin America and Caribbean region, Panama ranks as the sixth-most-competitive financial centre, after the British Virgin Islands (34), the Cayman Islands (39), Bermuda (41), São Paulo (43) and Rio de Janeiro (47), with Panama ranking higher than Mexico City (56) and the Bahamas (69). The survey found that Panama’s relative position has been improving since September 2014.

The strength of the IBC also boosts the country’s overall competitiveness. According to the World Economic Forum’s “Global Competitiveness Report 2014-15”, Panama is the 48th-most-competitive country of the 144 evaluated, with the soundness of its banking system ranking 12th on the list, and the country placing 22nd in terms of overall financial development.

Performance

The soundness of the IBC is reflected in its financial performance. According to the Superintendency of Banks of Panama (Superintendencia de Bancos Panamá, SBP), the banking regulator, key indicators such as return on equity, return on average assets, operating income as a percentage of general expenses and net interest income as a percentage of general expenses have been tracking sideways or rising over recent years. Net interest margin has been falling slightly, but this is in the context of extremely low interest rates. Meanwhile, net income rose by 9% to $1.55bn in 2014. Total equity of the IBC jumped by 13.6% to $11.37bn, while total assets rose by 10.9% to $108.66bn. Liquid assets increased by 23.2% to $21.35bn. With total assets of $90.2bn, customer deposits of $67.05bn and customer loans of $55.45bn, the NBS is substantial in the context of Panama’s GDP of $43.78bn.

In addition to being well capitalised and liquid, the banks have generally taken a conservative approach to lending. At the end of 2014, the delinquency rate (i.e., 30 days or more overdue) on domestic loans was 2.6%. Provisioning expenses for the NBS were up by 8.8% to $246m in 2014. Those for the IBC as a whole rose by 5.1% to $268m. Total loans of the NBS increased by 11.3% to $55.45bn, while those of the IBC rose by 8.9% to $66.04bn, according to the SBP.

Deposits have seen faster growth than loans over the past year or so. As of January 2015 liquidity in the NBS reached 59.29%, nearly double the level required by law.

Strengths

The conservatism of the banks reflects another important feature of Panama’s IBC: an effective regulator. Funded by fees received from the organisations that it oversees, the SBP was established as an independent institution by Law 9 of 1998, with the stated aim to “strengthen financial systems and achieve greater security in banking operations while providing greater transparency, truthfulness and accuracy in the financial information that is provided and used to make decisions”. A number of legislative changes relating to Panama’s efforts to improve the AML CFT regime and to be removed from the Financial Action Task Force’s grey list are also under way (see analysis).

An additional strength of the IBC is its openness to foreign institutions. Operating as IB, foreign banks also play a major role in the NBS. In particular, major banks elsewhere in Latin America see Panama as an attractive market opportunity. Central America has much potential for development, which is why many banks looking to expand into other countries in Central America enter the Panamanian market. Although large global banks such as HSBC and BBVA decided to cease local operations in 2013 – HSBC sold its Panamanian operation to Bancolombia and BBVA sold its Panamanian unit to Colombia’s Grupo Aval – these sales reflected issues with these banks’ global businesses, and were not the result of problems in Panama. Patricio Mosquera, an economist in the Financial Research Department of the SBP, told OBG that the number of banks in Panama is more likely to rise than fall over time.

International Dimension

One of the defining characteristics of the IBC, as its very name suggests, is its strong linkages with foreign countries. The IMF noted that, at the end of 2013, exposure of the NBS, which includes both foreign and domestic players, to the US amounted to around $7bn. Coming in at some $4bn, exposure to Costa Rica was the second largest at that time. Exposures to the Cayman Islands, Brazil and Colombia each amounted to around $1bn. Other countries to which the NBS was exposed included Peru, Ecuador, Mexico, Guatemala, China, the UK, Chile, Canada, Switzerland, Venezuela, Montserrat, El Salvador, the Dominican Republic, Honduras and the Bahamas. Venezuela was the largest source of deposits within the NBS, with deposits amounting to some $2.5bn at the end of 2013.

According to the SBP, total assets of the NBS at the end of 2014 were $90.2bn. These included $17.56bn in liquid assets, as well as $55.45bn in loans to customers (of which $15.57bn was credit to customers outside Panama) and $13.98bn in securities. Customer deposits and equity amounted to $67.05bn and $9.07bn, respectively. Other borrowings – claims on the NBS by banks in the rest of the world – amounted to $11.62bn.

“There is a significant increase in capital coming from Europe into the Panamanian private banking sector, which is triggered by the strength of the local financial system. Although European deposits in the private banks currently account for 15% of the total, this figure is expected to rise in the coming years,” according to Juan Carlos Fábrega, president of Prival Bank.

While the NBS could benefit from these international linkages due to the potential they offer for growth, destabilisation resulting from a slowdown of these economies could also have a negative impact.

Who's Who

As of the end of March 2015, the IBC comprises the 49 banks of the NBS, 27 IBs, which perform transactions abroad, and 15 representative offices of foreign banks. The SBP also oversees 76 licensed trust companies, many of which are banks or subsidiaries of banks operating in the NBS. Within the NBS, 20 of the banks are Panamanian. The oldest are the state-owned Banco Nacional de Panamá and Caja de Ahorros, which were established in 1904 and 1934, respectively. The newest is Canal Bank, which was set up in late 2014.

Of the 29 foreign-owned banks that operate in the NBS, the longest established is Citibank, whose Panamanian branch opened its doors in 1904. The newest foreign-owned entrant in the NBS is a branch of Colombia’s Banco de Bogotá, which began operations in July 2013. The foreign banks include five from each of Colombia and Ecuador, three from Venezuela and two from Costa Rica. Other foreign banks are owned by interests in the US, Taiwan, Canada, China, Brazil, Guatemala, Honduras and Nicaragua.

Most of the 49 banks that operate in the NBS are small institutions by virtually all metrics. Half of the 20 Panamanian banks have five branches or fewer.

Within the IB sector, a mixed group of institutions have representative offices. The longest established representative office is that of Banco do Brasil, which opened in 1973. Others include Bank Hapoalim (1982) and Banco de la Provincia de Buenos Aires (1982), an offshore subsidiary of Panama’s Banco General (1986), Bank Julius Baer (2006), UBS (2007), BSI (now a part of Brazil’s BTG Pactual group, 2007), Commerzbank (2007), Safra National Bank of New York (2008), Mizrahi Tefahot Bank (2008), JP Morgan Chase (2011) and Lombard Odier & Cie (Bahamas, 2013). Banco Etcheverría of Spain and Saxo Bank of Denmark opened representative offices in 2014.

The vast majority of the 27 institutions that operate as IBs are based in nearby countries. Colombia’s Banco de Bogotá began international activities in Panama in 1967. Other Colombian banks with a presence as IB include Bancolombia (1973), Banco de Occidente (1982), Helm Bank (1998), GNB Sudameris Bank (2000), BAC Bank (2003), Banco Corficolombiana (2004) and Banco Colpatria (2006). Peruvian banks include Inteligo Bank (1997), Banco Crédito del Perú (2002), Scotia-bank Perú (2006) and Banco Internacional del Perú (2010). There are two banks from each of Venezuela and the Dominican Republic, and one from each of Brazil, Argentina, Ecuador and the Cayman Islands.

Spain’s Santander group has had a presence since 1973. There are also three banks from Andorra and two from Switzerland. The newest entrant is BSI (2014), which had previously only had a representative office.

Bladex

Trade finance bank Banco Latinoamericano de Exportaciones (Bladex), which is part owned (16.3%) by central banks and designated state institutions of 23 countries in the region, and 6.4% by financial institutions, with private investors accounting for the remainder, was set up in Panama in 1979. The share class of the percentage owned by the central banks gives them more voting power, therefore making them the majority shareholders. The country was chosen because it had an established offshore banking centre with free transfer of capital, as well as for its geographic location, the good communications infrastructure and the use of the US dollar as legal tender. Bladex accounts for around a fifth of the assets, more than a quarter of the loans and a 10th of the deposits of the banks with fewer than 12 branches.

Universal Banks

Within the universal banking network there are 11 institutions operating 12 or more branches in the country. These are listed below, ranked by assets. With 68 branches and total assets of $12.3bn at the end of 2014, locally listed Banco General is the largest universal banking group in the NBS. Founded by Panamanian entrepreneurs in 1955, it has had an international investment grade rating since 1997. The second-largest universal bank in terms of assets and deposits and the biggest by number of branches is state-owned Banco Nacional de Panamá, which was set up in 1904. It serves as the banker to the government and oversees the national payments system.

Locally listed Banistmo, the rebranded banking business that Colombia’s Bancolombia group purchased from HSBC in 2013, is the third-largest universal bank by assets. It is followed by BAC International Bank, a subsidiary of Banco de Bogotá, owned by Grupo Aval, Colombia’s largest financial holding company established in 1995. Global Bank, established in 1994 as a purely corporate bank, became a universal bank with the 1999 acquisition of Colabanco. In terms of assets, loans and deposits, and number of branches, Global Bank is the fifth-largest universal bank and the second-largest Panamanian private sector bank after Banco General.

Coming in at sixth is Banesco, originally set up in 1993, and part of the eponymous Venezuelan group. Locally listed Multibank, established in 1969, is the seventh-largest universal bank overall and the third-largest domestic private sector institution. With the third-largest branch network serving over 1m clients, state-owned Caja de Ahorros is the eighth-largest universal bank. Listed Credicorp is a private sector universal bank established in 1992. Also listed is Banco Panameño de la Vivienda. Originally a mortgage lending bank, it now offers a broad range of products. Rounding out this group of universal banks is the local subsidiary of Canada’s Bank of Nova Scotia, Scotiabank Panamá.

Loan Portfolio

Lending has grown in recent years, with loans from the NBS to customers within Panama amounting to $40.35bn at the end of 2014, up 8.9% year-on-year. Most loans are done on a floating rate basis where the bank can adjust the rate as it pleases, protecting it from rising funding rate costs. This impact to the consumer is offset by the fierce competition in the sector but nonetheless it would have adverse consequences for the common debtor. The loan portfolio is well diversified. Residential mortgages amount to $9.96bn, or less than a quarter of the total. Other large exposures include personal loans at $5.33bn, services ($4.63bn) and construction ($4.45bn). Exposures to customers in the Colón Free Zone (CFZ) total $2.46bn.

Car loans, construction loans and mortgages ( including commercial mortgages) have been rising at double-digit rates. However, loans to wholesalers and CFZ customers have been falling. This is largely due to GDP growth slowing to 6.2% in 2014, after expanding 8.4% in 2013 and 10.2% in 2012. Economic headwinds included the slowing in public sector investment, weaker activity in the CFZ and delays in the expansion of the Panama Canal. According to the SBP’s report on the access to banking in Panama of early 2014, over recent years, loans to customers in the CFZ have generally accounted for about one-third of all commercial loans which, in turn, have generally represented about one-fifth of the total loan portfolio of the NBS. Credit to micro-companies rose from $1.65bn at the end of 2011 to $2.03bn in September 2013.

Access to Banking

The SBP’s analysis suggests that access to the NBS by individual Panamanians has improved. The number of deposit accounts in the NBS has been increasing steadily from around 1.8m at the end of 2008 to 3.4m in the third quarter of 2013. This included nearly 3m individual savings accounts. According to World Bank data, 43.7% of Panama’s population above the age of 15 held a bank account in 2014.

As of the end of March 2015, the NBS included 568 bank head offices and branches, and 1721 automatic teller machines (ATMs). The IMF estimates the total population to be around 4m, meaning there are 14 branches and 43 ATMs per 100,000 inhabitants, which is in line with regional norms. Regionally, around 70% of the population is estimated to remain unbanked. Although progress has been made to boost banking penetration from 24.9% in 2011 to 43.7% in 2014, rural areas still lack facilities. The provinces with lowest access to banking include Darién, which has two banks, three branches and three ATMs; Bocas del Toro followed with six banks, eight branches and 18 ATMs; and Los Santos with 11 banks, 14 branches, 24 ATMs and one agency.

Alternative methods to reach Panama’s unbanked population have emerged. In 2014 Cable and Wireless Panama, a subsidiary of London-based Cable and Wireless Communications, unveiled “Movilcash,” a mobile money service that allows customers to transfer money and make purchases from their mobile devices. Additionally, non-banking correspondents, which were established through Agreement 2-2012, have also helped increase banking services in remote areas, by allowing these agents to offer certain banking services on behalf of banks. This initiative allows shops and other establishments in the interior to act as banking agents.

Challenges

Although the banking sector has strong fundamentals, some challenges do exist. One such issue arises from a well known peculiarity of the IBC: the absence of a central bank. The local currency, the balboa, serves as a unit of account. However, the US dollar is used as the medium of exchange, the store of value and the store of deferred value, while monetary policy is set by the US Federal Reserve. As there is no institution serving as lender of last resort, the IMF suggests the creation of a facility that provides temporary liquidity to banks should be a key priority. According to the IMF, more work also needs to be done to develop a macro-prudential policy framework, along with tools that could be used to reduce adverse developments in the real estate sector. The IMF also advocates a deposit insurance scheme for small depositors.

Outlook

Benefitting from high economic growth in recent years, the banking sector has showed strong and stable performance. A number of factors will determine how the sector develops. One is Panama’s economic environment, which is likely to remain strong with steady growth in loans, deposits and overall assets. Another is the competitive landscape, with new entrants likely to enter the market. The timing and speed of the increase in interest rates in the US will also have an impact. Comments from the Federal Reserve have indicated that any rise will be gradual. In any event, compressions in the interest rate and yield premiums in Panama could more than offset a rise by the Federal Reserve or the London Interbank Offered Rate. Finally, the SBP and other actors are working to bring about positive changes, including boosting transparency.