Small and mid-sized banks in Central America are bracing for
tighter regulations, strict capital and liquidity requirements, speakers said
last week at LatinFinance’s 2nd
Central America Finance and Investment Forum in Panama City.

Mario Rojas, chief executive officer at Panama’s state-owned
savings bank Caja de Ahorros said “these regulations are necessary to
strengthen our financial systems, but smaller banks will be under pressure”.

As a result, M&A activity in Central America’s financial
sector is expected to increase, bankers said. Lenders in Central America are
consolidating their total assets in the region, while more international banks
are expected to retreat.

More internal acquisitions within holding companies could also
occur at the same time, said Juan Antonio Nino, chief executive officer at
international financial services firm Active Capital. “New regulatory
requirements from Basel III, such as changes in accounting standards, will mean
a difficult jump for smaller banks. Margins will be tighter and competition,
harder. Technology, size and a specialization niche will matter a lot for the
players,” he said.

Several international banks have sold assets in Central America in
recent years to focus on their core businesses and markets, bankers said. Other
foreign banks, such as Bancolombia, Davivienda and Grupo Aval from Colombia and
Scotiabank from Canada, have grown their presence in the region, Nino said.
Guatemalan development bank Banrural and Nicaraguan financial services firm
Promerica are also gaining size in Central America, he added.

Promerica bought Citi’s retail and commercial banking businesses
in Guatemala in September last
year, while Scotiabank bought Citi’s operations in Costa Rica
and Panama in June last year.
Citi also sold its banking business in El Salvador to Honduran investment firm
Grupo Terra in December last
year, following the sale of its Nicaraguan consumer bank to
Ficohsa in  March last
year and its Honduran unit in  April 2014.
Davivienda bought HSBC’s operations in Costa Rica, El Salvador and Nicaragua
in January 2012.

Along the sidelines of the event, delegates said Panama’s removal
from the Financial Action Task Force’s (FATF) gray
list in February was a further sign that regulations would be of greater
importance in order to sustain financial services.

In June 2014, FATF placed Panama on its list of countries that
were not doing enough to combat money laundering. Since then, Panama
implemented various reforms, including the passing of a law against bearer
shares, or shares not registered or identified.

Infrastructure focus

Infrastructure development meanwhile, will remain an integral part
of Central America’s financial markets. Structures comprising the private and
public sectors are an important part of meeting the region’s infrastructure
needs.

Honduras signed two financing packages for infrastructures
projects, minister of economic development Arnaldo Castillo said.

Mexican developer Gia signed a 30-year public-private partnership
concession to demolish, finance, design and build the government’s buildings, a
deal worth approximately $200m. 

The developer agreed to raise the funding without a sovereign
guarantee, allowing the government to reduce financing exposure and debt
leverage, Castillo said.

Honduran pension fund Injupemp helped finance the project, taking
construction risks after negotiations involving President Juan Orlando
Hernandez. Banco Lafise is the trustee of the $200m fund.

Additionally, sponsors of the Palmerola airport have also
completed a $162m financing package. The consortium, Inversiones Emco, which
comprises builder Emco and the German airport operator of Munich’s Franz Josef
Strass airport, signed a 20-year concession to design, construct, finance, and
manage Palmerola airport.

Spain’s government contributed $50m in aid, the Honduran
government invested $22m while sponsors will commit the remaining $90m.

Panama could also use multilateral loans to help finance
infrastructure projects, including a fourth bridge over the Panama Canal and
two mass transit lines in Panama City.

The Japan International Cooperation Agency (JICA) is expected to
provide financing for the new bridge and the third line of the Metro de Panama.
An agreement could be signed when President Juan Carlos Varela visits Japan
next month, Finance Minister Dulcidio De La Guardia said.

The Japanese government has requested confidentiality over the
negotiations, but sources told LatinFinance that SMBC has been
mandated to provide financing for Linea 3.

SMBC is also participating in a possible $1.25bn loan to
Consorcio Linea 2, the Brazilian-Spanish consortium that is building the second
line of the Panama City metro system. Deutsche Bank and Mizuho are the two
other global bookrunners, alongside SMBC, while Citi and MUFG are the mandated
lead arrangers. 

The eight-year facility is
expected to price around 200bp over Libor. The Ministry of Economy and
Finances has budgeted
$154.7m to build Linea 2.