Moody’s ups Panama banking outlook

The risk rating agency Moody’s Investors Service has changed the outlook for the Panamanian banking system from negative to stable.

The agency forecasts a certain recovery of the economy after a “severe contraction” in 2020 amid the pandemic and also highlights the robust levels of capitalization and liquidity of the system as factors for the change in perspective.

After a contraction of 17.9% in 2020, the rating agency’s forecast points to a growth of 8% this year, although the pre-crisis production level would not recover until 2023.

The agency expects further deterioration in asset quality in the second half of the year, once loan deferral measures expire. A relatively high concentration of the system in consumer loans will continue to be exposed to lower economic activity and higher unemployment.

Furthermore, as happened in 2020, the profitability of banks will be pressured by higher spending on provisions.

High capitalization levels will mitigate weak asset quality. Moody’s recalls that as a consequence of being a dollarized economy and having no lender of last resort, Panamanian banks tend to have higher levels of capital compared to their regional peers.

The agency also refers to stable funding and liquidity conditions, highlighting the increase in deposits experienced in 2020.

Thus, among the factors that Moody’s analyzes to determine the outlook for the system, the operating environment went from deteriorating to stable; capital, funding, and liquidity, and government support remain stable; while asset quality and profitability would be deteriorating.