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Ongoing fallout from Panama Papers could spur a wave of bank consolidation

Panama could soon see a wave of banking sector consolidation as a tougher regulatory environment in the wake of the Panama Papers scandal has started to hit the bottom line at smaller institutions.

Revealing alleged tax evasion by wealthy people around the world, the giant data leak that became known as the Panama Papers had far-reaching ramifications when published by several international news agencies three years ago. Mossack Fonseca, the Panama-based law firm and offshore service provider at the center of the scandal, collapsed. International organizations relegated Panama to their dirty money blacklists. Criminal investigations into banks and individuals continue to mount.

In a bid to improve Panama's image, the government implemented stricter regulations for banks. It tightened operational supervision, while also moving banks to the adoption of IFRS 9 and a path to Basel III capital ratio standards.

But the costs associated with those regulations have also depressed bank profits, particularly at Panama's numerous smaller institutions. In response, an increasing number of Panamanian banks are turning to mergers to combat their new regulatory reality.

"Given the high reputational risk that Panamanian banking involves, the operating environment for many banks is quite complicated in terms of costs," Moody's analyst José Montaño said in a telephone interview. "There are many niche banks that could be good candidates for mergers."

Some banks have already managed to strike deals. In late 2018, G.B. Group Corp., which operates Global Bank Corp., purchased mortgage and agricultural lender Banco Panameño de la Vivienda SA. Two of the country's bigger banks, Banco Aliado SA and Banco Panamá SA, have also agreed to merge, with the latter's shareholders having approved the tie-up at the end of May.

"We are not surprised that mergers are starting to appear ... precisely to strengthen the solvency and profitability," Montaño noted. The analyst expects the trend to continue, as more of Panama's approximately 80 banking institutions struggle with profitability under new and more robust anti-money laundering and anti-tax evasion rules.

In addition to creating economies of scale, merging banks can also help steady income streams and lower funding costs, as Montaño noted. In acquiring Banvivienda, for instance, Global Bank will diversify its credit portfolio with more mortgages and agricultural credit. It also will gain a larger branch network that can help improve its funding structure by adding low-cost deposits.

"Several banks still have to rely a lot on wholesale funding ... which is expensive," Montaño noted.

In a report published earlier this year, Fitch Ratings noted that rising funding and operating costs could lead to consolidation of the banking industry, but it noted that Panama's improved regulatory framework and capital ratios were positive from a credit risk perspective.

Financial access impact

In addition to adding costs to Panamanian banks' income statements, stricter regulations following the Panama Papers have also dampened financial access for Panamanians, said Laritza Lezcano Navarro, a Panama City-based financial analyst at Lezcano Financial Group.

"The increased bureaucracy restricts [financial access] and therefore also fundraising and credit activity for banks," Lezcano Navarro said in an interview. "We don't think that the increased demands for financial transparency are bad ... but they must be applied according to the context of the country."