International -- Finance: STRATEGIES
SALSA FOR A NEW ENGLAND BANK (int'l edition)
First National of Boston is hot in Latin America
Banking in Latin America is not for the fainthearted. Since 1995, more than 30 Brazilian institutions have failed or merged, unable to adapt to the new low-inflation environment. In Argentina, 40 local banks have folded or were forced into mergers as panicky depositors withdrew some $8 billion last year in the wake of Mexico's financial crisis. Most foreign banks, unwilling to hop aboard the region's economic roller coaster, have simply stayed away.
But First National Bank of Boston is enjoying the ride. Boston, the 18th-largest U.S. bank--with $47 billion in assets--has made Latin America the center of its global expansion efforts. Operating profits rose 50% in the region last year, compared with 25% for the bank as a whole. In Brazil and Argentina, which account for 85% of the bank's Latin American revenues, economic reforms promise even better profit growth ahead.
As the leaders of Latin America's large economies try to impose stability on inflation, exchange rates, and growth, a rapidly expanding middle class is turning increasingly to banks for new investment products and services. So Boston is moving aggressively into fee-based services such as mutual funds, private banking, and credit cards and is targeting the potentially huge market for pension-fund management. "In terms of growth for a long period of time, [Latin America] could be one of our best areas," says William J. Shea, Boston's chief financial officer and head of international operations.
Shea's optimism is tempered by realism born of years of experience in the region. The bank has weathered its way through devaluations, debt disasters, hyperinflation, and political upheavals, and its officers don't expect Latin America to make a seamless transition into full-blown market economics. "From time to time, there will be what the markets call crisis," says Henrique Meirelles, president of Boston's Brazil branch. For example, if a devaluation were followed by massive capital flight or by a steep increase in inflation, Boston's profit growth would be hurt, and the American bank might have to abandon its push into consumer credit and home mortgage loans.
Nevertheless, the bank is about to crank up growth in the region. The reason: After First National Bank of Boston's $2 billion acquisition of New England's BayBanks Inc., which is expected to close this month, non-U.S. operations will shrink from 21% to 12% of the new bank's total revenues. Since Shea believes non-U.S. business should account for 25% to 30% in the next several years, Latin American operations have room to grow. Says Gerard S. Cassidy, senior vice-president at Hancock Institutional Equity Services: "This gives Bank of Boston management down in Latin America a tremendous opportunity. They've never been in full-speed-ahead mode before."
CREDIT DELUGE. Ever since it followed New England wool traders to Argentina in 1917, Boston has made South America its specialty. When Argentina and Brazil began outlining economic stability programs in the early 1990s, Boston had already built a solid presence. With more than $4 billion in assets in its Brazilian and Argentine operations, it has little competition from foreign banks in the region. Among international institutions, only Citibank directly challenges Boston throughout Latin America.
The bank's regional chiefs are making sure Boston keeps its prominence as new products hit the market. Through an aggressive marketing effort, it has doubled its mutual-fund volume in Brazil since early 1995, to $3.5 billion. And in Argentina, where banks were allowed to enter the mutual-fund business only last year, Boston is No.1, with $1 billion, or 30% of the market. The bank has also bet that manageable inflation and stable currency rates will break open the credit-card market in both countries. Boston now issues nearly 350,000 cards, including United Airlines Mileage Plus cards, in the two countries--a 300% increase from 1994. The card business is modestly profitable so far.
Pension funds will be the New England bank's next playing field. In Argentina, Boston is a partner with American International Group Inc. in a fund that manages $360 million. The bank is forming a fund with partners in Uruguay, which will soon open its pension system to private investors. And although Brazil is years away from following suit, Boston is itching to get into that market of 160 million people. "The magnitude of the system in Brazil will dwarf anything else in the region," says John Kahwaty, the bank's director of investor relations.
Boston is moving to expand its franchise to northern Latin America. It has opened branches in Mexico and Colombia in the past two years and will open one in Peru later this year. Meanwhile, the bank is already well established in Chile and Uruguay.
By building a beachhead along the Pacific, the bank hopes to connect its Latin American operations, which account for 80% of Boston's non-U.S. revenues, with Asia, where the bank concentrates on trade. Boston is looking to grow in China, where it has representative offices in Beijing and Shanghai. An office in Bombay was opened a month ago. Boston's Latin presence should give it a competitive edge over Asian banks in countries that trade with Latin America.
MEXICO NEXT? Regionally, the bank wants to broaden its customer base by acquiring some of the troubled banks that litter Latin America's financial landscape. Although the bank would not confirm its interest in specific institutions, it is believed to be studying the purchase of a midsize retail bank, Banco Mexicano. An acquisition in Mexico would add significant weight to the bank's small operation there, which has just $200 million in assets. In Brazil, Boston is also considered a contender to purchase Banco Meridional do Brasil.
The volatility of Latin American economies, with each country at different stages of free-market reform, makes the region a tricky ride. Meirelles is already bracing for the likelihood that Brazil will speed up the pace of its devaluation of the real within the next year. He doesn't foresee a Mexico-type collapse but expects some investors to run scared. "Stability in Latin America is a long-term movement," says Meirelles. "There will be setbacks." But when you see them coming, as Boston seems to, they're not so scary.By Ian Katz in Sao Paulo, with Alison Rea and Joan Warner in New York