One of the fastest growing economies in Latin America, Panama’s gross domestic product (GDP) grew by 10.6% in 2012, following on from double-digit growth in 2011. Unemployment is at an all-time low, with a 4.4% unemployment rate recorded in 2012. Meanwhile, the expansion of the Panama Canal – which connects the Atlantic Ocean with the Pacific Ocean – is set to generate so much revenue that the country decided to set up a sovereign wealth fund to manage excess income.
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All of this means that Panama’s finance minister, Frank De Lima, is one of the few finance ministers in the world with something to smile about at the moment. “Once the canal expansion is completed, the increase in revenue will sustain our investment programme: the government will invest $14bn over five years, excluding the Panama Canal expansion. The next administration will have the capacity to invest nearly $19bn,” he says. “The excess revenue will be sent to the sovereign wealth fund. The idea is that the fund will have $6bn by 2025.”
When the expansion is complete, however, some of the growth drivers connected to the project – such as commercial and residential real estate developments – are likely to quieten down. Nonetheless, economic forecasts indicate an average 6% GDP growth over the next five years.
“New trade routes [are being] established with the new Panama Canal. You’re going to see natural gas being exported from the US to Asia, coal exported from Colombia to Asia, larger ships passing through the Panama Canal [carrying goods] from Asia to the US," says Mr De Lima.
Low on numbers
For all its good fortune, Panama is not without its problems. Income distribution is still a key issue and inflation is also a concern – as of April this year, the rate was still a relatively high 3.7%. High employment rates and fast economic expansion have created a shortage of skilled workers, needed not only in the booming real estate sector but also in the services sector, which represents the vast majority of Panama’s GDP. Such shortages are felt by the country's banks, too. The lack of available skilled labour is one of the crucial development challenges facing Panama.
“We are near full employment in Panama; the reality is that we are importing human resources from other countries,” says Raul Alemán, chief executive of Banco General, Panama’s largest locally owned bank. “We see professional workers with Spanish construction companies who are thinking of staying in Panama after works are over – and they’ll find jobs, there’s a scarcity of talent in that sector. There is tough competition for human resources in the financial sector. We see more foreigners coming to the sector – [Banco General] is hiring people from Venezuela and Argentina.”
The government is trying to help by speeding up the work permit process for foreign professionals in areas such as finance and engineering. Applicants from more than 30 countries can now have all bureaucracy dealt with in less than a month. Higher unemployment levels in other parts of the world can also offer a solution.
“The fact that our friends in Europe are not doing as well gives an opportunity to professionals who don’t have a job to come to Panama and find work here. We need this type of highly skilled labour,” says Mr De Lima.
Big opportunities
High employment levels also mean big business opportunities for lenders. According to Panama’s banking superintendence, SBP, in 2012, mortgages and personal finance loans grew by 14.6% and 10%, respectively, for the whole of the banking system. Non-performing loans (NPLs) have been steadily declining from 4.2% in 2009 to 2.6% in 2012.
International loans, a sizable business for Panama’s banks, have also grown in size (recording an 15.6% increase in 2012) and in terms of timely repayments (NPLs decreased from the already low 1.1% in 2009 to 0.5% last year). As a result, banks’ profitability improved. The return-on-equity ratio for the system went from 13.99% in 2010 to 15.88% in 2012, while return on assets rose from 1.57% in 2010 to 1.74% in 2012.
Robert Williams, head of Scotiabank Panama, says that there are many beneficiaries from the country’s economic development, including consumers, corporates and banks. “There are lots of jobs and growing consumption and, as a result, we are growing our retail and commercial books,” he says. The Canadian lender plans to expand its branch network from the current 12 to 20 branches within the next two years.
Scotiabank is not the only international bank with an appetite for Panama. Despite the country’s small population of about 3.5 million, more than 90 banks have operations within it – 45 of which have a general banking licence, while the others operate through either a representative office or a more limited licence.
Expansion plans
The global financial crisis, however, has forced some international players to be less active in the Panamanian market, according to bankers, and has pushed others out of the country entirely. Following a revised global strategy, Panama’s largest lender by both assets and Tier 1 capital, HSBC, decided to exit the market. In Latin America, it has narrowed its focus to just three countries: Brazil, Mexico and Argentina.
The international group’s retreat gave a unique opportunity to an expanding regional bank, Bancolombia, which bought HSBC’s Panamanian operations in early 2013 for $2.1bn, in what was the largest deal to date by a Colombian bank.
The deal includes HSBC Panama's brokerage, fiduciary services unit, banking business and its insurance company. Prior to the acquisition, Bancolombia Panama was the fourth largest lender by assets and Tier 1 capital in the country. Banco General’s Mr Alemán says: “[Since the financial crisis, some] global players have been quieter but regional players are going to be more aggressive. It’s a loss for the system because having good global players is good for Panama. But we’re replacing them with strong regional players, which is also positive.”
Like other Colombian lenders present in Panama and Central America, Bancolombia is following corporate clients’ expansion in the region, as well as searching for additional consumer business.
“Many Colombian companies are migrating to Panama to take advantage of the growth in the construction sector,” says Augusto Restrepo, who will head Bancolombia Panamá once the takeover is completed later this year. “Colombia and Panama are negotiating a free-trade [agreement]. Many companies are investing to prepare the infrastructure and gain a market share in Panama, and many companies from Panama are investing in Colombia. We are helping both.”
Logistics lure
Thanks to its favourable geographical location and tax system, as well as its stable economic and political systems, Panama is highly attractive as regional and logistics hub. Bancolombia is keen to capture as much new corporate business as possible.
“Many companies from Venezuela are migrating to Panama because of complications maintaining operations [in their own country], and other companies are migrating their services operations to Panama to serve their activities in other countries,” says Mr Restrepo.
Mr Alemán also rates Panama’s potential as a business and logistics centre. “[As corporates come] to Panama and move some of their headquarters here, it makes a big impact in the economy. If they bring more people we need more schools, and restaurants do more business.” Both businesses and individuals will require bank services, he says.
Smaller businesses, in particular, may offer interesting opportunities, which Bancolombia is particularly keen to tap. Mr Restrepo believes that because this is a well-developed segment for Bancolombia in its home market – 35% of the group's profits are generated by small and medium-sized business products – it will provide the lender a good growth opportunity.
Investment for the future
With the regional expansion of many banking groups, it is increasingly important that banks are present in more than one market. Bladex’s chief executive, Rubens Amaral, explains that while most lenders are keen to capture Central America’s growing consumer finance market, there are also great opportunities in providing cross-border financing and advice on cross-border investments to those regional groups, something Bladex is determined to beat competitors at.
As competition intensifies on all fronts, all players are improving their services. Banco General intends to develop services to its corporate segment – to include electronic payroll payments, for example – and has already been ramping up its investments in technology on both the corporate and retail businesses, having invested to develop infrastructure on all channels of distribution, including internet banking, mobile banking and ATMs.
“Basically, [we are creating] a bank that is more cost effective, more efficient in the way we process transactions, both on the consumer and corporate side,” says Mr Alemán.
On top of being highly capitalised – last year Panama's banking system showed an impressive 16.2% capital adequacy ratio – lenders have a lot of liquidity at their disposal. Deposits have grown from $42bn in 2009 to $54.4bn in 2012 and the loan-to-deposit ratio was 60.7% in 2012, according to official figures. The average monthly liquidity ratio for December 2012, according to the SBP, ranges between 50.8% and 83.6%, depending on the type of bank.
Bladex’s Mr Amaral has also noted increased liquidity in syndicated deals, while Mr Restrepo says that one of the attractive elements of the HSBC acquisition is that Bancolombia will have access to a greater dollar deposit pool.
Wise management of Panama’s economic growth and the vast liquidity in banks’ pockets will be crucial to the development of the country and its financial centre. “We are working on maintaining the reputation of our international banking centre," says Mr De Lima. "Banks will have the sense of security of establishing their businesses here in Panama and people will have the security of leaving their deposits here. Panama wants to position itself as the hub for logistics, through the canal and the ports, as well as the region’s financial centre.”
