During the month of October 2020, the bank moratorium was extended in Panama, on loans granted by banks, cooperatives, and finance companies, both public and private, until June 30, 2021.
Agreement 13-2020 was carried out with the spirit of providing this additional period of six months, in which banks and clients must agree and agree on the new terms and conditions for the repayment of their commercial and/or personal credits on the basis of their new payment capacity, current economic condition, as well as the reactivation of the economic activity of companies and the possibility of generating new income from natural persons to be able to meet their deferred payments.
The banks’ moratorium agreements provide benefits to their clients, those natural and legal persons that have been economically affected by the coronavirus pandemic (COVID-19), because in modified loans no late interest or fees are charged or penalties, as well as do not affect the credit references of the debtors.
However, the modified credits do not contemplate that the debt or the current interests that are generated are forgiven or are no longer enforceable. The moratorium indicates that banks must refinance as many commercial and personal loans pending maturity in June 2021 based on the new payment capacity of clients, where grace periods, loan maturity extensions, and loan maturity extensions would be granted. adjustments in the letters or monthly installments. Even the banks and other financial institutions mentioned would be willing to give fresh money in cases where the need for working capital of clients is demonstrated to reactivate their companies on a case-by-case basis.
But the question is: What will happen after June 30, 2021 when the moratorium expires and the modified loans go forward?
When answering these questions, we must consider several factors: Part of the interest accumulated during the moratorium and recorded as profit by the banks must be deferred and a percentage of the collection thereof would have difficulty in being recovered after the moratorium; A percentage of the portfolio currently modified at $ 22.93 trillion will not be able to recover its payment capacity, which would imply potential provisions or additional penalties for banks and a decrease in their financial income with the respective decrease in their equity.
To understand the situation, it is important to consider a summary of the results of the Banking System of Panama (SBP) as of December 2020, the size of the portfolio under the moratorium regime, and the resilience of the banks in the face of a more complex and adverse scenario for the current year.
By 2020, the bank has reported a total loan portfolio of $ 54.29 billion, of which 42.2% is under the modified loan regime, with 1 million debtor clients who have chosen to adhere to this scheme.
As a result of the economic situation in Panama due to the COVID-19 pandemic, the banking accounting provisions grew by 49.8% for 2020 in an amount of $ 623 million due to the deterioration of the portfolio in the application of the provisions according to the International Financial Reporting Standards (NIIF) and the 9-2020 agreement to require a minimum of 3% provisions of the loan portfolio established by the regulator.
Both the provisions and the decrease in new disbursements caused the banks to decrease their profitability from 11.8% in 2019 to 6.39% in 2020. Additionally, the default indicator reached 4.2% in 2020, mainly in the mortgage segments, credit cards, and personal loans reporting increases in their past due portfolio from 3% in 2019 to 5% in 2020.
It is important to emphasize that the consumer portfolio leads the SBP’s modified portfolio with an amount of $ 12,685 million concentrated in 25% of the population of Panama in the aforementioned segments.
The impact on the consumer portfolio comes mainly as a consequence of the increase in the unemployment rate from 7.1% in 2018 to 18.5% in 2020, as well as the increase in informality levels, which went from 35.0% in 2018 to 58.2% by 2020.
Despite the adverse behavior of the loan portfolios, the SBP presents solid indicators of liquidity, capitalization, and solvency.
For 2020, the banks’ average liquidity levels are at 63.5% versus 57% in 2019, considering that the minimum required indicator is 30% and average capital adequacy levels of 15.71% in 2020, which is similar to that reported in 2019 (15.24%), in addition, we bear in mind that the minimum requirement is 8%.
And it is that despite facing such a complex environment, banks have the resilience and the ability to face the deterioration of portfolios as a result of the scenario expected in 2021.
An adverse and stressed scenario was worked out by the Superintendency to see the effect on the Banks based on the following variables: The fall in Gross Domestic Product (GDP) (-17.8% at the end of 2020), the increase in the unemployment rate, the reduction in the risk rating of both the country and the Panamanian banks (which results in an increase in the cost of funding), the increase in the default rate and risky portfolio and the increase in provisions.
Under this adverse and stressed scenario, banks would have a drop in their average capital adequacy ratio from 15.89% (current) to 12.90% and their liquidity levels remain above 40%.
Based on these results, we can favorably conclude that banks have adequate capitalization and liquidity levels to be able to resist and support their clients during 2021.
However, it is necessary to articulate and execute a comprehensive strategy between banks, the Government, corporate clients, commercial, personal and business associations to prepare for the expiration of the Moratorium Law in June 2021, due to the reopening of commercial activities will have an impact later than the current year.
The banks will have to give soft conditions, in terms and rates, to be able to achieve the repayment of the debts agreed to provide peace of mind to the population in particular to creditors belonging to consumer banking. Additional financial relief measures will be necessary for the second half of 2021 and there will probably be a scenario where banks should not resort to foreclosure of guarantees, surety bonds, and mortgages to their debtors who will continue to be affected by the COVID-19 pandemic in the next months.
