Salsa For A New England Bank
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 banks have folded or were forced to merge as panicky depositors withdrew $8 billion last year in the wake of Mexico's financial crisis. Most foreign banks, unwilling to jump on the region's economic roller coaster, have 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 Latin America's large economies try to impose stability on inflation and exchange rates, a burgeoning middle class is turning to banks for new investment products and services. So Boston is moving aggressively into 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.
NEW PUSH. Shea's optimism is tempered by realism born of years of experience in the region. "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, Boston might have to abandon its push into consumer credit and home mortgage loans.
Still, the bank is about to rev up growth in the region. After Boston's $2 billion acquisition of New England's BayBanks Inc., expected to close this month, non-U.S. operations will shrink from 21% to 12% of the new bank's total revenues. But Shea believes that non-U.S. business should account for 25% to 30% over the next several years. 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 have never been in full-speed-ahead mode before."
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 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 non-Latin banks in the region. Only Citibank directly challenges Boston throughout Latin America.
The bank is pushing new products. 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. Through an aggressive marketing effort, it has doubled its mutual-fund volume in Brazil since early 1995, to $3.5 billion. Boston now issues nearly 350,000 credit 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 are the bank's next play. In Argentina, it is a partner with American International Group Inc. in a fund managing $360 million. It's forming a fund with partners in Uruguay, which will soon open its pension system to investors. And although Brazil is years away from following suit, Boston is itching to get into that huge market.
FIRE SALES. The bank is also 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 this year.
The bank wants to broaden its customer base by buying some of the troubled banks that litter Latin America's financial landscape. Although the bank would not confirm its interest in specific institutions, it's believed to be studying the purchase of a midsize retail bank, Banco Mexicano. Boston is also considered a contender to buy Brazilian Banco Meridional do Brasil.
Its volatile economies make the region a tricky ride. Meirelles is already bracing for Brazil to speed up 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," he says. "There will be setbacks." But when you see them coming, as Boston seems to, they're not so scary.