Financial Services & Banking Opportunities

An Expert's View about Banking, Finance and Insurance in Panama

Posted on: 31 Oct 2011

Summary
Total assets of the Panamanian banking center reached $75.7 billion in June 2011 with a positive growth rate of 15.1% over the previous year. Of this total, $60.9 billion was held by general license banks, which form the National Banking System. International License Banks held the remainder of $14.8 billion.
The local component of total bank assets amounted to $35.3 billion. This is a market largely controlled by Panamanians. U.S. banks operate with general licenses and their total assets reached $1.9 billion, or 2.5% of the banking center's total assets, of which 47% are local. U.S. banks have been present in Panama since the middle of the 19th century, however, and have played an important role historically in local consumer and corporate banking.
Banks with Panamanian capital have shown a significant expansion since 1990, when a deep political and economic crisis ended and marked the return to democracy. At the present time, there are twenty-one banks with Panamanian capital, two of which are official banks with assets amounting to $28.7 billion, or 38% of the banking center's total assets.
The Panamanian banking center primarily provides financial services to Latin American customers. As a result of the economic recovery of the major Latin American markets in the mid 90's, the banking center strengthened its external operations. Reflecting this renewed activity, an increased number of banks from Latin America began operations in Panama.
The political and economical situation in South American countries has promoted transfer of deposits to Panama banks and the arrival of banking offices attracted by Panama’s stability and economic development in recent years.
By constitutional provision, Panama has no Central Bank. The Ministry of Economy and Finance, the Comptroller General’s Office, and the National Bank of Panama perform the functions usually carried out by a Central Bank.
As of June 2011 Panama’s Banking system had 92 banks, consisting of:
• 2 Government banks which operate as commercial banks.
• 47 General License banks which engage in local and international operations.
• 29 International License banks or "offshore" banks.
• 14 Representation License banks (contact and link offices).

Background
The U.S. Dollar has been legal currency in Panama since 1904, as the result of an agreement signed by the two countries when Canal construction began. Inflation levels, therefore, have been similar to those of the U.S., not only because of the currency factor but also because the U.S. is Panama's main trading partner. The Panamanian economy, highly dependent on the services sector, grew at 7.5% in 2010, one the highest growth rates in the region. The inflation rate has reached almost double digit figures in the last year.
The banking sector in Panama was regulated until mid-1998, by Executive Decree No. 238, known as the Banking Law. This law encouraged the development of an international banking center. In June 1996, the Government of Panama decided to create a new banking law to replace Decree 238 in order to modernize banking legislation and bring it more in line with international practice and adopt the practices established by the Basel Accord with the reality of the Panamanian banking sector.
The law, Executive Decree No. 9 -1998, went into effect on June 1998. Highlights of the new law included the establishment of the capital adequacy level as 8% of total assets weighted by risk, the application of consolidated supervision, the creation of the Banking Superintendency and stricter credit controls regarding organizations related to the banks.
In 2008, Executive Decree No 9 was modified in various articles with the purpose of updating its standard to adapt it to today’s banking market. These modifications are contained in Executive Decree 52-2008. The Decree described the new rules for, liquidity, economic group supervision, banking liquidation, legal protection of the employees of the Banking Superintendency, banking users protection and capital adequacy.
Market Demand - Internal Sector
The prudent management of local risk has led to better administration of bank liquidity and financial margins. After the crisis period of 1987-1989, many banks successfully attracted funds that had been placed elsewhere because of the uncertainty that prevailed in Panama at that time. Additionally, the economic recovery generated new capital that strengthened the banking system.
This capital influx encouraged new credit activity that benefited all sectors of the economy, but had its greatest impact on commercial credit, consumer credit and medium to high-end housing construction.
In the past decade, interest rates stabilized at around 5%. In the last two years, interest rates have dropped, following worldwide trends. Currently, time deposit rates are at around 3% for one - two year periods.
Demand deposits, a key indicator of private sector growth, have grown 7% annually during the last two years.

There was a 18.6% growth in savings, with accounts over $20,000 showing most of this growth. This situation is explained by the fact that interest rates for savings are very similar to those for time deposits. Depositors thus obtain higher interest rates and still have the flexibility provided by demand deposits.
Local financing was influenced in 2010 by a dynamic economic activity. The credit portfolio to the private sector of $25.9 billion, equivalent to 89% of the GDP, increased 12.3%, with respect to 2010, a higher growth rate than the 7.1% for the 2009-2010 periods.
This trend is observed especially in the Panamanian private banks, which expanded their net flow of credits by 13.5% in comparison to the previous year, especially in the sectors of commercial credit, loans to other banks, consumer credit, industries and construction. Foreign private banks registered an expansion of 11.8% with respect to the previous year, especially in the commercial (trade) sector. The official banks increased their financing to the private sector by 9.6%, mostly to the housing and commercial sectors.
The quality of the overall banking portfolio has improved significantly, reflecting better credit management and a prudent adjustment in response to the perspectives of a weak economic environment. These have been reflected in the low rate of overdue loans that represented approximately 3% of the total credit portfolio.

Market Demand - External Sector
The instability in the international capital markets during 2007-2009 caused some degree of uncertainty in most Latin American countries. The impact on Panama's banking center was limited, however, because of the following factors: first, the perception that Panama is a stable country, and second, funds in the banking system tend to be stable, since they come primarily from deposits from individuals and not from interbank financing.
The banking center showed total assets of $75.8 billion in June 2011. This figure indicates redistribution in the use of funds. A great percentage of this comes from new deposits because interbank financing has been limited due to uncertainty in the financial markets.
External credit reached $20.9 billion, showing an increase of 35% over June 2010. External business credit increased, driven by the arrival of new foreign banks, combined with low interest rates. New external credit lines reflected the growth of the Latin American economies.

Foreign deposits from private individuals amounted to $16.9 billion in 2011, reflecting an increase in saving deposits. The situation was similar in the case of deposits from banking organizations (approximately 25% of the total). This was partially due to shifting of deposits (basically book entries) to some banks in Panama from foreign subsidiaries or associated organization in other countries, following corporate policies.

Deposits from U.S. sources reached $1.7 billion in 2011. These are basically deposits from banking organizations. The above amount represented 7.3% of total foreign deposits. The U.S. ranks sixth in participation in deposits.
It is often assumed that the distribution of deposits by region follows the same pattern as that of credit distribution, but in recent years this has not been the case.

Panamanian Banks
Panamanian banks have played an important role in the international banking center during recent years. The number of Panamanian banks grew from 17 to 21 in the last two years, but assets showed an even more dramatic growth.
In 1990 Panamanian banks registered total assets of $4.2 billion. In 2011, this figure reached $28.7 billion, a level that would be significantly greater today if HSBC had not acquired Panama’s largest bank (Banco del Istmo) in 2006.
Panamanian banks are responsible for 65% of the banking center's local deposits and 59% of the domestic credit. This substantial level of participation is the result of aggressive marketing practices in a market traditionally dominated by foreign banks.
A number of factors including attractive interest rates, better geographical coverage, and innovative services have contributed to the success of Panamanian banks. As in all major banking centers, consolidation has taken place in Panama. This has changed the structure of the Panamanian banking center.
The most prominent Panamanian banks are: Banco General, Global Bank, Multibank, Banco Aliado, and Credicorp Bank. The official banks (government-owned) Banco Nacional de Panamá and Caja de Ahorros are mainly dedicated to financing the agricultural, consumer and housing sectors.
Because of a highly competitive environment, it is likely that trade and private investment will continue in Panama as a way to respond more effectively to the growing globalization of international financial markets.

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Posted: 31 October 2011

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