In a break with U.S. banking practice in Mexico, Citicorp has begun providing loans and other services to medium-size Mexican companies.

Since last year, the bank has been targeting local suppliers to both Mexican and foreign-based multinational corporations, said Julio de Quesada, who oversees Citicorp's corporate banking business in Mexico. Loans to such companies provide richer margins for the bank.

"Spreads are under tremendous pressure, so we are expanding into areas which are quite interesting for us," Mr. Quesada said.

Citicorp's decision to move deeper into the Mexican market signals a departure from a long-standing creed among U.S. banks: stick to the biggest and best-rated Mexican corporations.

And given Citicorp's preeminent role in international banking, the move is prompting other U.S. banks in Mexico to consider moving down-market. Bank of Boston Corp., for example, is planning to open a branch in Monterrey this year to serve smaller businesses.

"We still remain focused on multinationals, but we are also looking at second-tier local companies which have very close association with multinational companies we know well," said Luiz de Campos Salles, Bank of Boston's general manager in Mexico City.

Citicorp's move down-market comes in the wake of a 45% decline in profits at the bank's Mexican operations last year, a falloff that Mr. Quesday attributed to shrinking loan margins.

Since the beginning of last year, he said, the volume of Citicorp's business remained unchanged-but margins fell 30% to 40% as a result of declining risk and reduced economic volatility in Mexico.

The Citicorp executive is predicting, moreover, that margins will shrink further this year as Mexico's economy improves and local companies strengthen their credit ratings.

Mr. Quesada emphasized that last year's decline in profits followed a record surge in earnings in 1995, when Citicorp's profits climbed fivefold to $80 million over 1994.

"1995 was an exceptionally good year because of huge spreads," Mr. Quesada noted. "Those spreads dropped significantly last year because liquidity and competition came back into the market and Mexican risk improved considerably."

Analysts generally applauded Citicorp's middle-market gambit in Mexico, saying it should produce higher returns. They added that if Citicorp plays its cards right, the move should should not entail undue risks.

"The question is how much risk are you taking to get that higher return, and there's no clear-cut answer to that," said Lawrence Cohn, a banking analyst with PaineWebber Inc. "The kind of business they want to do can be a very lucrative if done properly, and they've certainly been in Mexico long enough to know these customers."

The decline in Citicorp's earnings compares with a mixed bag of earnings at other subsidiaries of U.S. banks in Mexico.

Accoding to data from the Mexican Banking Commission and individual banks, BankAmerica Corp. posted an 80% increase in earnings to nearly $24 million, J.P. Morgan & Co a 19% increase to $43 million, and Chase Manhattan Corp. a threefold increase in earnings to nearly $22 million.

Much of the increase in earnings at Chase came as a result of that bank's merger last year with Chemical Banking Corp., while Bank of Boston Corp. suffered a $1.7 million loss, mainly as a result of high start up costs.

Although Citicorp has had offices in Mexico since 1929, other U.S. banks did not open Mexican banking units until after the North American Free Trade Agreement took effect, in 1994.

Bankers cautioned that earnings in Mexico are only a partial indication of profitability in the country, since much of the business done with Mexico is booked in New York, London, or other locations.

They also noted that some banks shift operating costs to the parent company, thereby artificially increasing local profits, while fluctuations in the peso's value also produce paper profits and losses that do not reflect the real scope of business done in Mexico.

Alongside the move to offer lending, cash management, trade finance, and foreign exchange to second-tier companies, Citicorp plans to expand capital-markets activities, treasury services, derivatives, custodial services, cash management, and trade finance operations with existing customers, Mr. Quesada said.

Meanwhile consumer banking, a major area of activity for Citicorp, remains sluggish.

"Consumer banking remains depressed because consumers have not yet regained their purchasing power," Mr. Quesada observed.

As part of the effort to develop middle-market operations, Citicorp recently opened a banking office in Guadalajara and will open another one Puebla next month. If both offices meet expectations, Mr. Quesada said, the bank will probably move later this year to add middle-market banking offices in Aguas Calientes and other cities.

Mr. Quesada said he would not be surprised if other banks follow Citicorp's lead.

"Obviously, the competition is going to try to catch up," he said. "This is basically a game of innnovation."

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