INVESTMENT BANKING IN PANAMA
by: Maria Cristina Lima

Investment banking can be defined as the activity that results in the distribution of new securities, thus helping the businesses or other entities to obtain the necessary capital. Its characteristic is to buy and sell securities and assume the risk of distribution among investors.

How does the process of investment banking work? When a private company or a governmental institution needs to obtain funds in the financial markets, it generally uses the services of a banker. When the company or the governmental institution uses this process, it sells its shares or bonds to the investment bank that then sells the product to the investors.

When the investment bank keeps the securities for a period of time, it bears a risk because it may result impossible to resell to its investors at the same price of purchase. The process followed by the investment bank is of a primary market even though the securities are resold because the investment bank acts only as an intermediary when funds are passed from the investors to the issuers.

I.  PANAMANIAN BANKING SYSTEM

Investment banking represents a highly specialized segment of the finance industry in Panama. Its basic function is to unite, using the financing markets, the deposit institutions, banks or any other organization that need to raise capital or additional funds for consumption or investment. It also helps investors, using financing documents, to restructure its assets using the financial markets according to the changes in valuation or attractiveness of the risk diversity, return and liquidity.

Panama is a country that has the advantage of having one of biggest banking centers in Latin America; this is due to the following factors:

·  Since 1904 Panama has had a US dollar currency; subsequently, it doesn’t have exchange controls.

·  It has banking secrecy laws.

·  Trusteeship laws, leasing laws and banking laws have constantly been revised and actualized.

·  Panama has a tax environment favorable to foreign investors.

The banking industry in Panama has been growing and changing a great deal in recent years; the old banking laws of 1970 were actualized in 1998. Now, the Panamanian international banking center consists of more than 80 banks from several countries around the world. “The economic stability, the low volatility and constant gross domestic product growth, the absence of inflationary problems, and the diversity and flexibility of an economy which is 80% services, mainly international services, have historically caused this country’s economy to be exceptionally viable.”[1]

The law that regulates the banking industry in Panama is the Decree-Law No. 9 of February 26, 1998. The banking business in this decree has the following definition: “Primarily the act of obtaining financial resources from the public or from financial institutions by means of the acceptance of on demand or time deposits of money, or by any other means authorized under the Decree-Law; and the use of such and other resources, on account and at the risk of the Bank, for loans, investments or any other transactions authorized by this Decree-Law, the Superintendence or banking practices.”[2]

As we can see in the above-mentioned definition, the activities to be considered as “banking activities” are very broad, only limited by the scope of this Decree Law, the Superintendence and the banking practices.

In the Agreement No. 2 of 2002 of the Superintendence of Banks, we can find an interpretation of banking activities. In its article No. 2, we can find these activities:  the supply of loans or financial facilities in money; the insurance business; the financial leasing; factoring, the administration of funds and /or financial assets; the negotiation of securities in stock exchanges; the operation of credit card systems; the operation of electronic or semi-mechanical facilities systems for the use of debit cards;  the administration of real property acquired for the use of the bank or in compensation of pending credits;  or any other activity that the Superintendence of Banks determines to be considered as an activity related with the Banking Business.

Panamanian banks are authorized by law to provide commercial banking and investment banking services simultaneously; due to this fact, investment banking in Panama has the characteristic of presenting a large variety of services to investors.

II. TRUSTEESHIP IN PANAMA

In 1984, Law No.1 was enacted. This law regulates the trust in Panama. As we will see hereunder, banks in Panama can offer trust services because this law provides banks with guidelines to be followed. Nowadays in Panama there are several companies including banks that have the license to perform trust services; in total, there are 56. Some of the trusteeship corporations are: Primer Banco del Istmo, S.A., Banco General, S.A., Banco Continental de Panama, S.A., HSBC Investment Corporation (Panama), S.A., Credicorp Bank, S.A., BankBoston, N.A., and Citibank N.A., among others.

Banks are allowed to provide trusteeship services to its clients. The Decree Law No.9 of 1998 states that banks are allowed to possess or acquire shares of any type of enterprise up to twenty  five percent (25%) of the bank's consolidated capital funds when these shares are not related to the banking business. This limit shall be applied in a cumulative basis.

The 25% rule has its exception and this is when the shares are acquired as an investment as a trustee. Article 68 states: “Exception is made of investments that the Bank may undertake as a trustee, as well as beneficial interests or shares which the Bank may acquire in the collection of sums owed to it, in which case these must be liquidated at the earliest opportunity, consistent with the economic interests of the Bank as determined by the Superintendence, which may set a term for this purpose.”[3] It is important to note that the International banks (banks with international licenses) are not subject to the limitations on the participation of a bank in other enterprises.

Law No. 1 of 1984 in its article 36 establishes that the Superintendency of Banks is the entity  in charge of supervising the trust business of the banks. Supervision that shall be in accordance to Law No.1 of 1984. The first paragraph of the same article states that official banks (actually two in Panama) are not required to obtain a license to provide trust services.

Investing in a trust in Panama has many advantages, but one of the most attractive advantages of Panamanian Trusts is the tax advantage of having a trust offshore in Panama. Article 36 of the Trust Law establishes that constituting, modifying or extinguishing the trust are exempted from taxes, liens, levies or duties when the trust consists of assets that are located abroad, when the revenues of the person making the deposits are not acquired in Panamanian territory, and when shares or securities exist in Panama, the rent of their issuer does not originate from a Panamanian source.

III. THE RESOLUTION No. 7-2000. RULES TO GOVERN

CLASIFICATION AND RECORDING OF INVESTMENTS BY BANKS.

The resolution No. 7-2000 of Superintendency of Banks of Panama adopted this resolution to “adopt rules to govern the classification and recording of investments by Banks in securities…”[4]

This Resolution deals with the following subjects: risk administration in relation to investments in securities, valuation of the securities portfolios, policies for investment in securities, information on investments in securities, verification of risk control, classification of investment in securities, permanent investment, securities transactions, derivatives and, disclosure of information among others.

Hereunder is a broad explanation of the articles of the Resolution No. 7-2000 of the Superintendency of Banks:
• Article 3 states that the banks have to maintain a method in order to identify and control the risk of its securities’ investments. This article also establishes the minimum requirements that a “Securities Investment Manual” of a bank should have.
• In article 6 we can find the minimum requirements on information that the banks must have available for the Superintendency of banks relating to the investments in securities. These minimum requirements are: the Securities Investment Manual, information on the nominal, book and market value, and type of acquisition or sale, acquisition or sale information and confirmation of custody.
• Article No. 8, modified by the Agreement No.1 of 2001 establishes that the banks need to classify the securities in these categories: investment in Trading Securities; investment in securities available for sale, investment in securities to be held until maturity; and permanent investments. This classification should be in accordance with International Accounting Standards (IAS) or US GAAP.
• In article 12 there is an explanation of permanent investments, which states that they are: “securities representing capital acquired by the bank for the purpose of being a shareholder and have control of other companies, or merely to be linked to them.”[5]  This article as it reads is a modification by Agreement No. 1-2001 of May 4, 2001.
• Article 16 contains some special provisions to be followed by banks when some situations arise. These situations are:
? When the issuer is probably going to be bankrupt, or when its financial insolvency is increasing dramatically and it is clear and recurrent. In this case the Bank has the obligation to determine an estimation of the recoverable amount. This value has to be recorded and must be included in the net profit or loss for the period.
? When more than ninety days has passed since the maturity of the principal or interest or both, whether wholly or in part. In this case the bank has to make provisions depending on the type of security.
? When the prices of the investment in securities are not reliable and aren’t listed in an organized market. In this case the banks have to make provisions of up to 100% of the estimated loss.
? When there is deterioration in the exchange-rate risk, country risk, or other types of risks. In this case the banks need to make provisions to cover these risks.
• Another important article is article 16 that deals with disclosure. In this case the disclosure is of financial statements of the banks; these financial statements shall be audited according to international accounting standards (IAS), or according to the United States Generally Accepted Accounting Principles (US-GAAP). The purpose of this disclosure is to provide the investor with information helpful to evaluate the profile risk in the securities investment portfolio of the banks.
• All the information presented to the Superintendency of Banks about the status of the classification and provision of the investment portfolio must be done each month during its first ten days. This provision can be founded in the new article 28, added by the Agreement No. 1-2001.

The articles discussed above are most important in examining Investment Banking in Panama. This Resolution came into force in August of 2000 and banks in Panama had a deadline on June 30th of the same year to comply with its obligations. The Resolution 7-2000 suffered some changes in May of 2001 with the Agreement No.1-2001.

IV. PANAMANIAN FINANCIAL INSTITUTIONS THAT

OFFER INVESTMENT BANKING IN PANAMA

Among the financial institutions that offer investment banking in Panama, we can find the following:

1. Wall Street Securities:

The services of investment banking of this institution are divided in two groups: Corporate Finance and Mortgages.

Corporate finance services are provided to businesses, financial institutions and governments. These services include subscription and distribution of new emissions and corporate finance consulting services, principally corporate valuations, mergers and acquisitions, project finance, privatizations, and risk management, among others.

The Wall Street Securities Group manages assets of almost 600 million dollars. They were the first ones that created mutual funds that invested in Panamanian companies in 1995. In an interview for one of the Panamanian’s newspapers, its CEO declared: “What has given us the capacity to grow in these 15 years is that we have been very innovative; we make stuff that was never done before in Panama.”[6]

2. Banco Continental:

The private and investment banking of the Banco Continental offers the following products and financial services:
• Trusts: The different types of trusts offers to its clients are the inheritance trust, educational trust, investment trust, and guarantee trust.
• Local investment account: this account allows the client to buy, sell and collect returns using a single account.
• International investment account: this type of account helps the client consolidate all its international stock-exchange transactions. This account provides cash balance interest in a MMK account, and other benefits.
• CFS account: It permits the client to have a managed account with a line of protection in case of a casual twist.

3. Banco General:

This bank also offers different opportunities of investment banking to its clients such as the following:
• Securities: This Panamanian bank offers distribution of securities and stock. They buy and sell private and government bonds, commercial paper and bank acceptances and administer mutual funds.
• Pension Funds: the bank manages pension and severance payment funds inside Panama using a company affiliated to the bank called Profuturo. “Profuturo has designed 4 investment plans designed to meet the needs of each participant, depending upon the rate of return and risk desired. You decide when and how much you wish to contribute to the retirement you have been longing for, allowing you to determine and plan how much money you would like to retire with.”[7]

4. Banistmo:

This Bank is one of the biggest Panamanian banks. Banistmo has operations in Panama and offshore. It began operations in 1984 and nowadays is the biggest financial group in Central America with assets of 4,253 Million dollars.[8] They have presence in Honduras, Costa Rica and Panama and they offer the following investment banking services:
• Mutual funds: The bank offers several Panamanian mutual funds, they are: Banistmo Bond Fund, Inc.; Banistmo Growth Fund, Inc.; Banistmo International ADR Fund, Inc. and, Banistmo Large Capital Value Fund, Inc. These funds offer capital returns higher than returns offer by bonds or Certificates of Deposit. They invest in American industries with high capitalization under a value investing.
• Banistmo Securities offer financial consulting and corporate finance. They help corporations to raise capital issuing debt. They also help with corporations’ mergers and acquisition.
• Securities brokerage: This bank has a brokerage firm called Banistmo Brokers, Inc. They offer a diversified portfolio and management of funds for their investors. They purchase and sell national securities, treasury bonds and corporate bonds among other things. In Panama the securities transactions are regulated by Decree-Law No.1 of 1999. Article 1 of this Decree-Law defines s broker-dealer firm as any person dedicated to the business of buying and selling securities, on their own or in the name of third parties. Every broker-dealer firm is allowed to perform the following activities according to Article 27: management of custodian accounts, investment advising, asset management for investment funds, and granting securities for cash loans for the acquisition of securities. These activities can be performed by banks after the National Securities Commission grants them a license

To maintain the National Securities Commission licenses, the licensees shall follow some obligatory guidelines, such as:  to maintain books, registries and financial statements in a correct way, to provide the National Securities Commission audited financial statements and any other statement that the Commission demands, and to provide information to their clients of its transactions, financial statements, fees and any other information that the National Securities Commission require.

IV. CONCLUSION

We can conclude by saying that Panamanian investment banking comes to be a complete service that has the purpose to assess the investor offering him all its knowledge in the different areas of commerce set against a globalized economy. As we have been able to analyze through the present essay, Panamanian investment banking is characterized for its diversity in the services provided.

Qualified and trustworthy individuals are required if the investment market wants to function properly in the stock market. In order for investors to have a safe and favorable environment, all the participants must comply with Decree Law 1 of 8 of July of 1999, which regulates their activities in the stock market.

 

[1] Lee. Miguel. The Panamanian Banking System and Market Forces. October 10, 2002. www.superbancos.gob.pa

[2] Decree Law No.9 of 1998. Article 3. 16.

[3] Decree Law No. 9. Article 68.

[4] Resolution 7-2000. Superintendency of Banks. www.superbancos.gob.pa

[5] Resolution No. 7-2000 Article 12

[6] Palm, Monica. Diario La Prensa. Wall Street Securities expands in June 2003 to Central America. December 9, 2002.

[7] www.bgeneral.com

[8] Information as of June 30, 2002

more articles