Foreigners flock in as Panama blossoms

With a thriving economy that appears to be on the up, Panama is seeing a wave of takeovers by foreign banks.

Panama has experienced a new binge of banking consolidation driven by foreign entrants in the last two years. Stimulated by robust economic growth and the background buzz generated by the expansion of the Panama Canal and other large development projects, bankers are very optimistic about the future, and with good reason. There remains the troubling question of just how much growth, particularly in real estate, is being stimulated by rampant speculation and even some money laundering, and bankers say there is a small but real risk that growth will unleash inflation, but overall the picture is very positive.

The latest wave of banking consolidation has put foreigners back in pole position in Panama. That is not completely new: Panama was unique in central America for the high penetration of foreign banks, reflecting its status as a trading hub and open financial centre in the 1970s. Foreign presence grew steadily more marked and by the late 1980s, foreign banks controlled 65% of deposits. According to Raúl Alemán, general manager of domestic bank Banco General, Panamanian banks learnt to compete and were more aggressive just as foreign banks’ commitment fell off. That saw the needle swing back and domestic banks controlled 70% of the system until recently, he says. The legacy is an efficient and highly competitive banking system, which is the envy of the central American region.

But the balance has tipped back again – a sign that foreign banks rate Panama’s prospects. HSBC bought Banco del Istmo (Banistmo) in a $1.8bn deal in 2006. Citibank bought El Salvador’s Grupo Cuscatlán, including Panama operations, in late 2006 and later Grupo Financiero Uno for a total of $2.6bn. The final flourish came in the form of the merger of two domestic banks, Banco Continental and Banco General, maintaining the name of the latter.

Seeking opportunities

For banks that would like to jump on the bandwagon, it can all seem a little dispiriting. Scotiabank has been in Panama since 1974. It started with a single branch and now has five, and with organic expansion it expects to have some 15 branches in the next three to five years. Even so, “we’d like to be bigger still but there’s really not much for sale”, admits Peter Cardinal, executive vice-president, Latin and central America. “It’s tough. We’re keeping our eyes open for possible acquisitions but no-one wants to sell up. Everyone is waiting for the peak of the market.”

It is not just the Panamanian economy that interests foreign banks, but Panama as a beach-head for the region, as witnessed in the acquisitions by Citigroup and HSBC, which give them wide- ranging presence in the region. Panama is a logical headquarters for launching into central America as it is the most competitive and advanced market, says Jaime Rivera, CEO of Bladex. “We are used to a highly competitive environment here. Panamanian banks are Darwinian.” The relative sophistication of banks and greater levels of penetration means Panamanian financial institutions have a head start in what is an under-banked region overall, he says.

Regional hub

“Panama is the regional hub and is emerging as a logistics and financial hub,” agrees Panama City-based Alastair Bryce, head of international, central America and Colombia, HSBC. “There has been a sea-change in stability and there’s a new sense of opportunity in the region,” he adds. More broadly, the HSBC acquisition in Panama neatly fits with the bank’s aim of providing a true global platform. “Ten years ago, we were small in Latin America. Now, we have a complete footprint across the region,” adds Mr Bryce.

Naturally, all this foreign interest has generated some sparring between domestic and foreign banks. Foreign banks argue that they have inherent advantages, such as the ability to heavily capitalise Panamanian operations from their overseas headquarters. They can fund the kind of big projects that local banks find difficult, argues Scotiabank’s Mr Cardinal. Scotiabank has carved a niche in areas such as the cash-thirsty hospitality industry and in serving multinational companies, businesses that play to the bank’s strengths as a well-capitalised and regional player with a north American parent.

As well as bringing expertise in rapidly changing areas, such as risk management, branding and customer service, foreign banks bring economies of scale and central resourcing, says Mr Bryce. Furthermore, there is a natural advantage to having a presence throughout the region for niche, international client bases. “We are joining markets together in areas such as remittances and multinational trade, which is difficult for purely local banks to do. We have demonstrated that the whole is worth more than the sum of the parts.”

Already, professionalism has improved across the board and local banks have had to come up to par, argues Mr Rivera. Other local banks retort that they are less encumbered and know their client base better than their foreign rivals. Banco General sees itself as more nimble and aggressive in developing products. It provides stability and the ability to respond to client needs quickly as a bank with a local base, says Mr Alemán. Decisions are made without resorting to a foreign headquarters with sometimes very different criteria and standards, i.e. in lending standards.

Indeed, even foreign bankers admit that these markets require some personal verve. “It is key not to lose the local flavour,” says Mr Cardinal. Personal relationships are indispensable as is the ability to be agile, “much work is still being done on a handshake”. That dictates Scotiabank’s policy of retaining management when it buys local operations, as has been the case in neighbouring Costa Rica. “We don’t come in with manuals and impose the Scotiabank way. We meld cultures,” he adds.

Drivers for growth

For now, there is ample scope for growth for all as the pie grows. Gross domestic product (GDP) growth hit a scorching 8.5% in 2007, with the expectation of 8.8% this year. Real estate and canal widening and other big projects are at the core of this. The canal widening alone should cost some $5.25m (see box, left). Mr Rivera points out that the widening will generate plenty of work for sub-contractors and demand for real estate.

Plans to develop the enormous US air force base, Howard, with retail, industrial and residential units comes with a price tag of $10bn. And Panamanians are convinced their country is on the cusp of a slew of other big projects to upgrade infrastructure throughout the economy.

Mario de Diego, executive vice-president at the Panama Banking Association, expects the canal to act as a catalyst in getting these off the ground. Panama has large energy generation needs, which are likely to be built on a concession basis as well as road projects and sanitation. Just the cleaning of the city bay will cost between $300m and $400m, he says. “When companies started to investigate Panama for the canal widening, they realised there were plenty of other necessary projects,” says Mr Rivera. Four years ago, Bladex launched a strategic plan to address the likely growth in export and increased trade flows. It introduced international factoring – which was not developed in Latin America – and established a leasing platform. Exporters prefer financing by leasing to loans and there was a niche here that was not covered.

“We are looking at project finance on the energy side, in ports and in telecoms and in tourism,” says Mr Alemán. He sees diversification as key to building a robust business, protected from the vagaries of consumer lending. The bank is working with partners including multi-laterals and other commercial banks to prepare club and syndicated loans and using its strong deposit base to fund projects ($800m in savings accounts alone).

Other frontiers include private wealth management. Latin America has the fastest growing population of high net worth individuals in the world, says Mr de Diego, who notes that firms including UBS and Credit Suisse are opening a regional headquarters for asset management in Panama.

Inflation downside

All this growth needs to be put into proper context: Panama has a population of 3.3 million, slightly less than the US state of Connecticut, and an economy of $27.5bn, smaller than Bolivia or the US state of Wyoming. And amid the boom times, there are some worrying trends. This strong economic growth has seen inflation rise. Dollarised Panama typically saw low inflation of between 1% and 2%. It is now running at 3.5%. “Inflation wasn’t a concern, but has become so in the past couple of years. And our dollarised economy means we can’t respond to the weakness of the dollar, particularly in oil prices,” says Mr Rivera. Still, this is a global phenomenon and Mr Rivera is not too worried for the time being. Latin economies have the macroeconomic stability to mitigate effects and it is clearly the number one priority of central banks, he says.

There are other concerns. Panama has a shady image. In part, that is a historical legacy and one which the reappearance of former dictator Manuel Noriega in headlines, because of possible extradition, is feeding. There are sincere attempts to tackle corruption under the government of Martín Torrijos, but they are far from complete and the country continues to lag in corruption indexes. Transparency International puts it in a lowly 94th position (sandwiched between Madagascar and Sri Lanka) in its Corruption Perceptions Index 2007.

A lack of transparency and weak data are also causing headaches in analysing the performance of the real estate market. The luxury apartments sprouting on every available waterfront in Panama City are being built in part because of a large influx of foreigners, particularly retiring baby boomers, looking for a cheap tax haven. But there is also an amount of speculation and money laundering. Reports are common of cash-down property deals with Colombian drug trafficking and Venezuelans salting away money to escape political instability. Money laundering, now mostly squeezed out of the banks, has simply flowed into new channels, bankers claim. The recent failure of the 104-storey Ice Tower, with projected construction costs of $200m, demonstrates the risks.

Competition

Competition between banks to lend for mortgages has heated up and many senior bankers see more froth than substance in this and other consumer lending. In real estate, the picture is mixed, says Mr Alemán. “There is a diversified base and at the same time there is an amount of speculation. We have seen some high priced apartments, mostly aimed at the foreign market.” Banco General is erring on the side of prudence and has imposed a 70% loan to value cap. Auto loans have also become keenly competitive, says Mr Alemán. “Our growth in 2007 was not as great as the year before as the market is not giving us the returns we are looking for. New banks have come in with aggressive terms both in pricing and on tenors. We take a long-term view and try to exit those markets where risk seems prevalent.”

There are always cycles in lending and when there is irrationality it is best to stay out and look at other markets, says Mr Alemán. “You need to do things differently to other banks and create client loyalty so that you are not purely exposed to price,” he adds. The frothy real estate market, whose depths and buyers are difficult to plumb, and acute consciousness of the US subprime crisis, has highlighted the importance of diversification, which the Panama Canal, the Howard air base and other projects should provide. Trade financing and private asset management are likely to grow rapidly as other banks too grab the opportunity to rely less on pure consumer financing.
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PANAMA CANAL WIDENING

The widening of the Panama Canal promises to be a bonanza for banks as contracts are awarded to local suppliers of equipment and services, and the trickle-down effect is felt throughout the economy. José Barrios Ng, CFO at the Panama Canal Authority (PCA), says that in principle the Authority will be financing the entire project, of which approximately 40% (or up to $2bn) will come from external financing. This could be allocated between a commercial and/or multilateral/ECA financing, he says, adding that a local financing tranche could also be considered. The tentative timeline includes selection and commitment letters by the second quarter of this year, with an indicative closing date by the third quarter of 2008.

Mr Barrios stresses that the $5.25m initial estimate of the widening is not the base cost, but the upper limit and includes contingency up to $1.03bn as well as a further $530m for inflation. Government guarantees are ruled out by law, and financial institutions that have shown interest, do not see this as a hindrance. That is in part because of ACP’s track record, and in part the strong cash flow generation and strength of the project itself, says Mr Barrios.

ACP continues to endorse ample participation from local as well as international contractors in order to encourage competition and transparency in the allocation of the expansion programme work. Given that there is interest from organisations all over the world, he does not foresee any limitations in the economy’s capacity to meet demand. At the peak of the project, the labour force will include about 7000 workers, with mostly Panamanians employed.

Mr Barrios says that competition from other Atlantic-Pacific routes is unlikely to hurt for two reasons. First, existing demand surpasses the capacity of the canal. Second, alternate routes – including the United States intermodal system; a potential intermodal system between the Mexican Pacific coast or Canada to the US, and other intermodal systems along Central America, as well as a potential Arctic route – all require significant capital investments programmes, as well as improved co-ordination between transportation systems. “At this time, the Panama Canal route represents the best value proposition, being the most economically attractive, safe, efficient and reliable alternative, which can capture the ongoing demand growth of global trade,” he says.

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