After suffering thorough a seismic financial collapse two years ago, Mexico is slowly rebuilding its economy.

Per capita income, which stood at around $4,000 in 1994, is back up-but only to around $2,800. Unemployment remains high, a simmering guerrilla campaign drags on in the South, and many Mexicans continue to view the road north to the United States as their best hope for the future.

Indeed, widespread crime causes the streets of this sprawling city of 18 million to empty after 9 p.m.

"The recovery is beginning to be felt, but it's been uneven, and Mexico is not totally out of the woods." said Luiz G. de Campos Salles, general manager of Bank of Boston's Mexican banking unit.

Nevertheless, U.S. banks and other foreign operators see opportunity arising from all the problems.

It hasn't hurt matters that competing Mexican-based banks are still struggling through the aftermath of the crisis.

Net income at Grupo Financiero Bancomer, the country's second-biggest banking group, with $25 billion of assets, slumped 60% last year after a steep rise in provisions for bad loans. Net income at Grupo Financiero Banacci, the biggest banking group, with $28.4 billion of assets, fell more than 50%

"Mexican banks have done an awful lot of restructuring, but they still have a pretty whopping asset-quality problem," remarked Peter Shaw, senior vice president for Latin America at Thomson BankWatch Inc. The New York- based credit rating agency is an affiliate of American Banker.

"They may have lower levels of provisions in the future, but their balance sheets are weaker, they hold lower-yielding assets, and they face stiff competition for deposits, all of which means downward effects on profit margins," Mr. Shaw said.

As Mexican banks work to cope with a large numbers of problem loans, opportunities abound for many outside player.

U.S. banks, with the exception of Citicorp, entered the market only after the North American Free trade agreement took effect in 1994. Since then they have concentrated mainly on foreign exchange trading and underwriting capital-market issues for a handful of financially stronger Mexican companies. As growth resumes, they are stirring again.

Citicorp, the U.S. bank with the biggest and oldest presence in Mexico, has resumed enlarging its branch network with an eye to developing business with medium-size Mexican companies. Comerica Inc. the Detroit-based regional, expects to soon open a subsidiary in Mexico City.

Other U.S. banks with Mexican subsidiaries, like Bankers Trust New York Corp., BankAmerica Corp., NationsBank Corp., and J.P. Morgan & Co., are prospecting the terrain. They are looking to build up business with a wider range of companies in a wider range of transactions, including peso- denominated lending, asset management, trade finance, capital-market underwritings, real estate, insurance, and even retail banking.

"Foreign banks have been able to get established here much faster than they expected," said Mr. de Campos.

"The internationalization of banking sector has been beneficial to the country," observed Eduardo Cepeda, president and general manager of J.P. Morgan's Mexican banking unit.

"In fact," he added, "it has happened faster than anyone expected, because of the banking and peso crisis." He estimated that foreign banks now hold nearly 20% of the more than $9 billion in equity of the Mexican banking system, as well as a significant share of the $138 billion in total banking assets.

Bankers also noted that foreign banks, with their higher credit rating, have a lower cost of funds than domestic banks and are likely to maintain that and other advantages for some time to come.

"Domestic banks went through tremendous problems with past-due loan problems," said one U.S. banker. "They have many problems to solve before they become active again."

Foreign banks have indeed moved in quickly, picking up Mexican banks whose capital was wiped out by massive loan defaults at bargain-basement prices.

Bank of Nova Scotia has acquired a majority stake in Grupo Financiero Inverlat, while Spain's Banco Santander has acquired Banco Mexicano Somex, Mexico's third-biggest bank. Another big Spanish bank, Banco Bilbao Vizcaya, took majority control of Grupo Financiero Probursa as well as Banca Cremi and Banco de Oriente.

The bright new signs they have just tacked up over hundreds of branches in Mexico are now the most visible evidence of the growing foreign banking presence.

However, Emilio Ybarra, chairman of Banco Bilbao Vizcaya, acknowledged that demand for loans remains low as a result of the crisis, and that Banco Bilbao is still laying groundwork for growth in Mexico by building up its funding in anticipation of stronger demand for credit.

"We're very optimistic," Mr. Ybarra said. "The moment the Mexican economy begins to run, we'll be in a good position to compete.

The cautiously renewed confidence in Mexico is reflected in the decision of banks like Citicorp and BankAmerica to open new offices outside Mexico City. It is also reflected in their decision to do business with companies beyond the top 30 internationally recognized Mexican corporations, multinational corporations, and a handful of state-owned companies and financial institutions; and to expand local peso-denominated lending and other activities.

"We see great opportunities to bring expertise to midsize companies," said Adalberto Palma Gomez, managing director for Bankers Trust. He listed securitizations, underwriting, real estate and risk management, custody services, project finance, pension fund management, and insurance as among the areas Bankers Trust has identified as possible opportunities.

BankAmerica, which cornered much of the market for commercial paper for Mexican companies, expects to underwrite and distribute "significantly" more than last year's $2.3 billion, which was up from $1.3 billion in 1995, said James McCabe, president and general manager for the bank in Mexico. The bank is also considering setting up a brokerage house and expanding into retail banking.

"As inflation comes under control and interest rates decline, we will be in a better position to get into peso lending," Mr. McCabe said. "We can do more, and we will later,"he said.

U.S. and other foreign banks, as well as a small number of new and better-managed local banks, may well strengthen their position in the future.

"Newer and more professional banks will take the place of the traditional Mexican banks, and that will be good for the economy," predicted Rogelio Ramirez de la O, a leading Mexican economist and head of Ecanal SA, a consulting company for corporate planning.

"That includes some of the recently established banks, such as the younger banks in Monterrey, which have better management," he said. "But by far the majority of the newer banks will be foreign-owned."

Some argue that a stronger role for foreign banks will be good for Mexico's economy.

"Foreign banks may be conservative when it comes to lending, but they also going to bring a new competitive environment that will push local banks to reassess their costs, become much leaner, divulge more financial information, and manage their risks better," said Manuel Lasaga, president of Strategic Information Analysis Inc. The Miami-based consulting firm specializes in Latin America.

"It will make a very interesting story," Mr. Lasaga said.

Bank of Boston's Mr. de Campos agreed. "We like the way Mexico is going," he said. "We have a significant presence in Latin America, and we have a predisposition to doing more in Mexico."

Still, bankers and analysts were quick to caution that Mexico's economic recovery is far from complete.

"Mexico is definitely on the road to recovery, but it's not back on the superhighway," Mr. Lasaga observed.

In particular, they noted that while Mexican exports have surged dramatically in the wake of a sharp depreciation of the peso, helping the Mexican economy grow by 4% in 1996, industries geared to domestic consumption are still struggling.

"Exports aren't pulling local suppliers in as fast as they should, or fast enough to generate growth in employment," said Mr. Palma.

"I don't see local consumption picking up as fast as it should."

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