New York, October 27, 2022 — Moody’s Investors Service (“Moody’s”) has today changed the outlook on Banco General, S.A.’s (Banco General) and Banco Nacional de Panama’s (Banconal) ratings to negative, from stable, and at the same time affirmed all ratings and assessments assigned to these banks, including their Baa2 long-term foreign currency deposit ratings, the Baa2 foreign currency senior unsecured debt ratings as well as the Baa1(cr) and Baa1 counterparty risk assessment and rating, respectively. In addition, Moody’s also affirmed both banks’ baa2 baseline credit assessments (BCA) and adjusted BCAs, as well as all short-term ratings. Banco General’s foreign currency junior subordinated debt rating was also affirmed at Ba2(hyb).
The rating action follows Moody’s announcement published on 25 October 2022 that it had affirmed the Government of Panama’s Baa2 bond rating, and changed the outlook to negative, from stable. For additional information, please refer to the related press release: ” Moody’s changes Panama’s outlook to negative from stable; affirms Baa2 ratings” at https://www.moodys.com/research/–PR_470041.
RATINGS RATIONALE
The negative outlook on both Banco General’s and Banconal’s ratings reflects the increased liquidity and asset risks stemming from weakening operating conditions in Panama. The negative outlook on Panama’s Baa2 sovereign rating reflects the rising fiscal pressures from an increasingly rigid spending structure related to upward trend in wages, transfers and interest payments, and prospects of persistent deterioration in the financial position of the social security’s defined benefit program. If these risks were to materialize and lead to a weaker credit profile of the sovereign, it would have implications on banks’ funding conditions, profitability and asset quality, which could in turn translate into pressures to capital, which could translate into downward rating pressure to these banks BCAs that are at the same level of the government rating.
The two Panamanian banks’ Baa2 deposit and senior unsecured debt ratings are positioned at the sovereign rating level and do not benefit from any notching uplift from Moody’s assessment of government support, because these banks’ BCAs are already at the baa2 level. Moody’s view that probability of government support to Panamanian banks is limited by the lack of a lender of last resort given the full dollarization of Panama’s economy.
BANCO GENERAL
The affirmation of Banco General’s baa2 BCA reflects the bank’s track record of strong and above-peers profitability levels and sound capital buffers. Banco General’s diversified and granular funding base and adequate liquidity buffers limit refinancing risks in times of rising volatility in global financial markets. The bank’s capitalization has benefited from recurring earnings generation, which remained strong between 2020 and 2021, and moderate credit growth in recent years.
Banco General’s asset quality weakened since 2020, with problem loans measured as Stage 3 loans under IFRS 9 at a high 6.9% of gross loans as of June 2022. The latter will likely decline in the coming quarters as borrowers that benefitted from deferrals or loan restructurings continue to normalize their payment performance. The bank’s asset quality is backed by a reserve coverage of 62% of stage 3 loans, which accounted for 4.3% of gross loans in June 2022. The risk of weakened economic activity in 2023 will be mitigated by the high share of residential mortgage loans in Banco General’s portfolio (close to 45% of total loans in June 2022), which is lower risk and leads to a relatively high real collateral coverage at 76% of stage 3 loans, and also the bank’s strong capital buffers sufficient to withstand potentially stressed scenarios. In June 2022, capitalization measured as Moody’s tangible common equity over risk-weighted assets (TCE/RWA) stood at 20.1%.
BANCONAL
By affirming, Banconal’s BCA at baa2, we acknowledge the bank’s stable and lower-cost core funding base, strong capitalization, with a TCE/RWAs at 16.2% in June 2022, and the bank’s high-quality liquidity position. Banconal has historically maintained high liquidity, and despite buffers are leveling off, especially during H1 2022, we expect will remain close to already high pre-pandemic levels. At the same time, funding is mainly sourced from the government and government related entities, that have been historically steady, supporting one of the lowest funding costs in the system. These credit strengths, which derive from Banconal’s role as the financial agent of the government, provide some degree of protection against increasingly challenges related to the operating conditions in Panama that could affect asset quality and profitability in 2023. Banconal’s deposit and debt ratings are aligned to those of the sovereign because as a government-owned bank, its obligations are explicitly guaranteed by the Government of Panama.
Banconal’s asset quality slightly recovered in the first half of 2022, with stage 3 loans falling to 2.0% of total loans from the 2.2% as of June 2021, after the 2.6% peak reached at the end of 2021. However, Moody’s expect asset risks to remain high as a result of the likely weakened economic activity in 2023, which could exert pressures to borrowers’ repayment capacity, straining on medium-term asset quality metrics that will likely remain above pandemic levels. However, Moody’s believe that the lower risk nature of Banconal’s loan book, predominantly mortgages and loans to civil servants and public sector employees who enjoy job stability, will help the mitigate these pressures.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of the two Panamanian banks’ ratings is unlikely at this point given their negative outlook. However, a stabilization of the outlook on the Panamanian sovereign ratings, which would imply lower risks to the banks’ operating environment, could lead to similar action on the banks’ ratings, provided that their key credit fundamentals, including asset quality, capital and funding, remained in line with Moody’s current assessment.
The ratings of Banco General and Banconal could be downgraded if Panama’s sovereign debt rating were to be downgraded, reflecting the high interlinkages between the sovereign’s credit profile and that of the banks. The banks’ ratings would also face downward pressure if their intrinsic credit fundamentals were to deteriorate unexpectedly.
ISSUERS AND RATINGS AFFECTED
Affirmations:
..Issuer: Banco General, S.A.
…. Adjusted Baseline Credit Assessment, Affirmed baa2
…. Baseline Credit Assessment, Affirmed baa2
…. ST Counterparty Risk Assessment, Affirmed P-2(cr)
…. LT Counterparty Risk Assessment, Affirmed Baa1(cr)
…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-2
…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Baa1
…. ST Bank Deposit (Foreign Currency), Affirmed P-2
…. LT Bank Deposit (Foreign Currency), Affirmed Baa2, Negative from Stable
….Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Baa2, Negative from Stable
….Junior Subordinated Regular Bond/Debenture (Foreign Currency), Affirmed Ba2(hyb)
..Issuer: Banco Nacional de Panama
…. Adjusted Baseline Credit Assessment, Affirmed baa2
…. Baseline Credit Assessment, Affirmed baa2
…. ST Counterparty Risk Assessment, Affirmed P-2(cr)
…. LT Counterparty Risk Assessment, Affirmed Baa1(cr)
…. ST Counterparty Risk Rating (Foreign Currency), Affirmed P-2
…. LT Counterparty Risk Rating (Foreign Currency), Affirmed Baa1
…. ST Bank Deposit (Foreign Currency), Affirmed P-2
…. LT Bank Deposit (Foreign Currency), Affirmed Baa2, Negative from Stable
….Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Baa2, Negative from Stable
Outlook Actions:
..Issuer: Banco General, S.A.
….Outlook, Changed To Negative From Stable
..Issuer: Banco Nacional de Panama
….Outlook, Changed To Negative From Stable
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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Marcelo De Gruttola
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Ceres Lisboa
Associate Managing Director
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