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Fitch: Reputational Risk Remains Key Issue for Panama Banks
March 15, 2017 / 5:29 PM / 9 months ago

Fitch: Reputational Risk Remains Key Issue for Panama Banks

(The following statement was released by the rating agency) SAN SALVADOR/NEW YORK, March 15 (Fitch) Reputational and conduct risk will remain key issues for Panamanian banks in 2017 owing to the interconnectedness of the regional financial system and ongoing high profile corruption cases that have affected multiple countries in Latin America, says Fitch Ratings. Reputational risk events could put broad pressure on funding access and damage Panama's position as a regional financial center. Media reports of corruption scandals relating to Brazilian firms Odebrecht and Petrobras throughout the first two months of 2017 have re-focused attention on corporate corruption in Latin America. Both cases involve trans-national elements affecting multiple countries and have reinforced a focus on transparency, risk controls and governance in financial systems by regulators. This follows the "Panama Papers" scandal in 2016, which highlighted weaknesses in anti-money laundering controls in some Central American banks. The Odebrecht corruption scandal has not directly implicated any Panamanian banks, though several Panamanian government officials have been accused of receiving bribes. A scandal involving Brazilian oil company Petrobras has directly implicated a Panamanian bank, however. Following accusations in 2016 by Brazilian authorities that it was the recipient of funds from corruption involving Petrobras contractors and directors, FPB Bank was put under administrative control by Panama's regulator, risking the bank's viability. So far, the banks that have been directly implicated in recent corruption and money-laundering scandals have been small franchises with no significant deposit footprint in the domestic market, enabling relatively efficient damage control by the regulator. A potential risk event at a medium or large size bank would probably have greater systemic implications, though Fitch believes this is less likely as larger banks tend to have stronger corporate governance controls. Specific reputational and conduct risk events are unpredictable by nature and such events have had no meaningful system-wide impact on Panama's banking sector. Potential constraints on funding from correspondent international banks and other financial institutions have not materialized from the broader scandals. Panama's role as a regional financial hub is being increasingly challenged by the persistent corruption and money laundering events as well as competition from other centers. Over 30% of general license bank deposits in Panama come from abroad, mostly within Latin America, underscoring the potential for Panamanian banks to receive funds without clear origins. Panama's regulators - including the Superintendency of Banks - have acted promptly to enhance regulation and supervision since the Panama Papers scandal. In January, the regulator started publishing a list of banks that received compliance-related fines, in line with international best practices. Fitch believes this will gradually enhance both transparency and best corporate practices. Fitch has a negative sector outlook for Panamanian banks, with limited ratings upside expected in 2017. Limited industry capitalization, primarily in small and medium-sized lenders, leaves little room for these banks to absorb credit deterioration. Material capital deterioration would lead to ratings downgrades. Fitch expects asset quality deterioration to accelerate this year, but the level of bad loans should still be contained relative to the system's risk management capacity. Reputational risks remain a concern in the broader Central American region. The small size of financial systems and relatively weak transparency and anti-money laundering rules expose those systems to material reputational risks. That said, other Central American financial systems lack the interconnectedness with international markets as Panama and its role as a regional hub. This could mitigate the impact of reputational risk events relative to Panama. Contact: Mario Hernandez Associate Director, Financial Institutions +503 2516 6614 Fitch Centroamerica Edificio Plaza Cristal 3er. Nivel 79 Ave. Sur y Calle Cuscatlan San Salvador, El Salvador Rolando Martinez Senior Director, Head of Central America Financial Institutions +503 2516 6619 Justin Patrie, CFA Fitch Wire +1 646 582 4964 33 Whitehall New York Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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