Moody's foresees a significant increase in refinanced loans and consequently an adjustment in the credit rating of the banking system, closely observes liquidity, availability of banks to access credit from their correspondents on the points that may affect the banking sector afterwards. of the flexibilization granted by the Superintendency of Banks to 'modify the loans' of the clients and grant 90 days of grace to the debtors. But it also highlights the availability of liquidity that banks may have, the diversity of the portfolio, the quality of the loan portfolio and the size of the bank.
Although it is too early to give an accurate opinion on the impact of Covid-19 on the system, since it is an issue that is under development, the firm highlights that the system has a stable depositor base, this being the main source of financing. Furthermore, the United States Federal Reserve (FED) rate maintains interest loans of 0 and 0.25%, which are accessed by the correspondent banks in Panama.
The report reiterates what is already known, the economic recession announced by the International Monetary Fund this year, which forecasts a 3% drop, a crisis deeper than the Great Depression of the 1930s.
It then resumes the actions of the Panamanian government to stop the spread of the virus, such as declaring a State of National Emergency on March 13, the closing of borders on March 22, and the total quarantine from March 25, measures in force to date.
This situation, according to Moody's alert, will affect the economy to the point of decreasing 2%, a figure that depends on the time that measures to contain the virus are prolonged.
For the sake of the above, it is highlighted that most companies have made adjustments in their ability to pay, starting with micro and small to large corporations, which is being reflected in the unemployment rate and affecting consumption capacity. of the population. This will affect the development of the Banking System in different aspects:
First, the operating environment will deteriorate as the economy contracts. This means that it will affect the growth of the system due to lower demand on loans, as well as on the active interest rate on loans.
A second point considered is the deterioration of the portfolio quality indicators. In this sense, they foresee an increase in default ratios (percentage representing an entity's doubtful loans over the total portfolio) and a significant adjustment in the coverage of the past due and delinquent portfolio with reserves. The magnitude will depend on how long it takes the country to return to normal, which until it does not have a vaccine will become more complicated.
The rating agency expects that once the established terms of the moratorium granted to clients have expired, a significant increase is expected in refinanced loans and, consequently, an adjustment in the credit rating and the need to resort to greater reserves.
Some adjustment in the solvency indicators is expected. A slight decrease in some entities due to the incorporation of Operational Risk within the capital weight.
Added to this is the recognition of unexpected losses as a result of the fall in the prices of fixed-income instruments in secondary markets, and the decline of the world's main stock markets. Although the report highlights that greater consumption of capital is also expected due to credit risk due to the expected deterioration in the portfolio, in addition to the fact that banks are not expected to make large dividend distributions at this juncture, it would help to avoid a fall. pronounced of said indicator.
A fourth point reflects the need for short-term liquidity and low potential in the cost of funding. It refers to the fact that as there is no Central Bank in Panama, the system will resort to the use of lines that it maintains with correspondent banks. It favors that it has a stable base of depositors, this being the main source of financing for the system. Likewise, the drop in the reference rate of the FED and Libor will support the drop in the cost of funding, although the latter will depend on the existing pressures in the system for liquidity, especially in the renewal of term deposits.
He highlights that the possibility of alleviating debtors with "modified loans" to pay their commitments, in counterparty, reduces the income of banks and widens the contractual mismatch between assets and liabilities in the short term.
Performance indicators will weaken. It is a combined effect of the lower generation expected due to the lower volume of loans as a result of the recession, the pressure on active interest rates and the expected adjustment towards the end of the year in the portfolio quality indicators, which will require higher Bookings. Again, it will all depend on how long the Covid-19 impacts.
All of the above led Moody's to change the perspective of the banking system from stable to Negative.
Everything depends on the banking portfolio
The pressure on the prolongation of the crisis will vary in each bank according to the composition of its loan portfolio, the level of liquidity and sources of financing it has, access to financing with third parties such as correspondent banks and the degree of use of the line, the stability of the deposits and the patrimonial support of each one. Since Panama does not have a Central Bank and has the dollar as its currency, interest rates are tied to the policies dictated by the FED. The latter generates a greater liquidity risk for the system, being relevant to determine the access of banks to obtain external funding, even more so considering the country's incorporation into the FATF gray list last June,
Non-resident capital flows are an essential component as a source of financing for economic activities. However, the current situation generates negative pressure on capital flows. For this year, the International Finance Institute estimates that emerging economies could register a decrease in these flows of up to 25% compared to 2018. As of March 31, 2020, a capital outflow from all emerging economies is estimated for a total of $ 83.3 billion, of which $ 14.4 billion is associated with Latin America.
According to the Superintendency of Banks of Panama, until February 29 last, deposits of individuals from abroad were registered for a total of $ 24,795 million. This implies a growth of 6.48% compared to last year on the same date. Of the total of these deposits, 68% correspond to fixed term, 19% at sight and 12% to savings deposits.
Moody's observes a high use of the lines with the correspondent banks, registering a greater demand or use in general by Latin America. Regarding the cost of funding, Panama favors the fact that the Federal Reserve has lowered the reference rate between 0 and 0.25% and that the Libor rate is at low levels compared to what was recorded prior to the pandemic, although it will be closely tied to the demand for liquidity in the system. Although the bank maintains its assets in liquidity, since it does not have a central bank, it could generate liquidity risk by not being able to discount them to obtain an alternative source of liquidity, the rating agency report warns.
High risk in SME portfolio and consumption
Moody's establishes differentiated risks by type of bank in the current environment, an estimate that could change in the short term depending on the duration of the current crisis. The exposure to market risk is between medium and high, everything depends on the bank's portfolio to obtain liquidity, the concentration in the funding with depositors and the slack registered before the crisis in solvency in order to sustain a scenario of lower expected profitability.
In this way, they expect high risk in medium-sized banks, whether they focus on loans in small and medium-sized companies, consumer or corporate. In medium-sized banks focused on small companies, they will be strongly affected by the situation. A high risk is also expected in medium-sized banks with a strong composition in their portfolio of consumer loans, since they are more susceptible to scenarios of economic slowdown.
It estimates an average risk when presenting a loan portfolio with debtors with a higher credit profile, but said portfolio could be affected due to the high concentration that they usually register with their main clients, since the deterioration of one of these could affect importantly its indicators of default and profitability.
In relation to large banks with a universal approach, a medium risk is expected given the greater atomization of their credit portfolio. Regarding international license banking, to date they expect a medium risk considering that they mostly have the support of regional groups that will allow them to face the impact of covid-19, but it will depend on the measures taken by the authorities in different countries originally.
The rating agency considers that it is not yet possible to determine the real impact of the covid-19 since it is an ongoing event.