Is the Banking System the Devil?

 

With the pandemic, many passions have been unleashed in different countries (yes, in all countries, contrary to what we Panamanians think, that only bad things happen here) especially about the role of banks in a pandemic, on the one hand, or how to repay the debts to the banks if we have not been able to work for several months.

These are valid questions, especially for the bulk of the population, especially those with bank debts of any kind, which must be paid monthly.

First, let's put Panama's Economy in context. Panama does not have a Central Bank. We do not issue currency; much less can we establish monetary policy. The National Bank of Panama (Banco Nacional de Panama) has some functions of a Central Bank, such as the transit of the checks of the local banking system for their compensation, collects mutilated bills, and exchanges them for new bills, among the most important. Its other main mission is to bring commercial banking services to the most remote parts of the country (together with the other government bank Caja de Ahorros).

But even though it is a state bank, it competes with the commercial banks of the banking system, it obtains the majority of its funds from the central government (including a large part of the funds from the Social Security Fund, for which it pays very little interest and there one of the main financial problems of the IVM program, but this is another matter).

Only under extremely urgent situations, such as the 2008 crisis and now under the pandemic, the national government, through the National Bank, makes funds available to the banks of the banking system in case they need them for the particularities of the crisis. In 2009, they were not used (if I remember correctly it was about $ 700 million that Martin Torrijos made available to local banks), and by 2020 about $ 1,000 million have been made available (but I doubt that anyone will use them).

Due to the above, the cost of funds in Panama is not given by any type of interest rates, such as Fed Funds Rate or LIBOR. On the contrary, it is a combination of the cost of funds, which in a local bank is given by a combination of equity (both the capital contributed by the shareholders and the retained earnings that increase from the earnings of each period not paid to investors as dividends and are reinvested in the business), customer deposits (checking accounts - to which no interest is paid, savings accounts and time deposits), and loans and lines of credit (local and foreign) that banks obtain in case of being necessary.

Now, if foreign banks (especially from the USA) grant loans or lines of credit to local banks, this would be the only relationship that local banks had with the movement of Fed Funds Rates. But since the% of foreign obligations of the total assets of the system is only 11%, its incidence in the total cost of funds is minimal (in fact, deposits reach 72%, and equity another 11%, the remaining 6% corresponds to other liabilities).

This means that the cost of deposits is between 3% to 4% (3.80% at the end of the first semester of 2020), and the total cost of funds remains between 2.25% to 3.25% (2.73% at the end of the first semester 2020). Now, these total costs of funds are system averaged and do not necessarily reflect the reality of private banks. On the other hand, the yield on loans is between 6.75% and 8.20% (8.18% at the end of the first half of 2020) and a total return on productive assets of 6.02% at the end of the first half of 2020.

Contrary to what has been said lately in social networks, the interest rates in the different banking products, with everything and our cost of funds of more than 200 basis points above the ones in the USA (I must remind you that these differences have been radically lowered due to Panama's sovereign risk rating, which has been improving and makes us an investment-grade country), we find that in Panama personal loans can range between 7% to 18% (30% for financial) interest, while in the USA they vary from 6% to 36%.

In the case of auto loans, the rates vary from 6% to 12%, while in the USA they vary from 3.5% to 18%. Where if we find large differences is in mortgage loans wherein Panama there are several from 4% to 8% (but there are subsidized interest rates that would lower them from 0% to 6%), in contrast to the United States where the same they range from 2.5% to 5%, depending on the size of the mortgage.

With regard to credit cards, we are in a fairly similar situation, when in Panama they range from 12% to 28%, in the United States they range from 12% to 24% (although there are credit cards for high-risk customers that arrive above 30%).

We must make a clarification, interest rates depend a lot on the credit risk of the person, and there are banks that play with rates to attract the best customers. Remember that a high-risk customer can reach higher interest rates than the rest of the market.

Panama has good terms for mortgage loans that reach 30 years, personal loans, and car loans that can last up to 10 years, and credit cards that have them paying capital in 3 to 5 years.

In terms of products, we have a wide range of banking products that respond to local needs. The banked population can find quick answers in banking, depending on the individual risk, the problem is in the unbanked population, and the informal population.

This is the real problem, as they cannot prove their income (due to their informality), and they don't see any kind of appeal to deposit their money in the bank. FinTech's, and their effect on banking, can end this, and right now we are seeing favorable results with Nequi and Yappi, two Fintech backed/sponsored by local banks.

What products are we missing for banked customers? Real financial leasing, where you can buy a car (or rather rent them at a reasonable monthly price, use them for 3 years, and change cars for a new model) and the reverse mortgage. The reverse mortgage is an interesting concept, which can be sold as a retirement product. For this you need to have a fully paid property, which you are going to do a reverse mortgage - "selling" your house to the bank, with a% discount, and the bank will pay it to you in a number of months X at an additional interest rate. Once you pay for the property, the bank "acquires" it. There is a modality where you stay living in the property and you negotiate the rent with the bank, and the other modality is where you do not live in the property, and the bank can make use of it.

The bank is made to help the economy and the inhabitants of it. The environments suffer the same. The theme of this pandemic is that people want to see the banks give them everything, but this is impossible. However, the bank can (and will have to) restructure the loans so that customers can pay off their debts for the benefit of all. Panama has good interest rates, good terms, and terms in general, which are based on our reality and our environment. And we have a banking system that is quite solvent and strong, and that has shown year after year that it remains current and solid.