Recent dramatic moves by global players such as HSBC Holdings PLC, Banco Santander, and Banco Bilbao Vizcaya have given foreign banks control over 20% of the Latin American banking system. In some countries, such as Peru and Venezuela, they control more than 40%.

By and large, U.S. banking companies have refrained from joining in the buying spree, although institutions like Citicorp and BankBoston Corp. have made selective purchases. Have U.S. companies missed the boat? Not necessarily. The situation in Latin America is more complex than it appears.

The emerging-middle-class phenomenon is far more superficial than commonly assumed. By and large, the Latin American population remains mostly poor.

Only the top 10% or so of the typical Latin American nation's population has household income comparable to the median household income in developed countries. Median mass-market salaries in Latin America are currently around a few hundred dollars per month, but prices are not significantly lower than in the United States or Europe.

The middle class, in fact, shrank during the lost decade of the '80s, and the privatization wave of the '90s has eliminated many public-sector jobs that supported middle-class households.

A new middle class is definitely emerging, but it is not clear it has enough members. For the foreseeable future, Latin America is likely to have relatively low income per capita and the great income inequalities typical of emerging markets.

While proponents of banking in Latin America like to talk about the region's underbanked status, this phenomenon is a lot less dramatic than it seems. Latin America's low branch density reflects the continent's low per capita income. Quite simply, much of the population lacks the minimum necessary to maintain a traditional banking relationship.

Although part of the leveraged growth of financial assets in Latin America is due to natural growth, the better part is due to "remonetization" after years of high inflation.

That is to say, consumers are shifting holdings out of physical assets, such as cars and homes, and putting cash from under the mattress into deposit accounts. As this phenomenon runs its course, growth in bank deposits of 30% to 50% per year will falter.

The high-margin loans seen in Latin American commercial and consumer banking reflect higher risks and the higher costs of a relatively inefficient banking system. As new, and presumably more efficient, foreign owners compete for market share, margins will fall.

What does this mean? Basically, foreign banks expanding in Latin America may need to take an approach that differs from conventional commercial banking. The real opportunities may lie in:

Developing consumer finance (at high rates!), possibly through separate subsidiaries, that will help meet the enormous pent-up demand for automobiles and homes.

Expanding pension fund management and creating pension fund investment opportunities by originating and securitizing consumer banking assets such as mortgage-backed securities.

Reducing the costs of branch networks and shifting away from a "generalist" distribution to "specialist" distribution that will serve the mass-market banking needs of low-income economies, most likely through consumer finance companies or minimum-service branches.

Building commission-related sales forces in specialized areas such as credit cards, mortgages, mutual funds, and consumer finance in order to boost productivity.

Rationalizing operations along cross-border regional rather than national lines. This would create economies of scale that could, for example, yield significant reductions in the cost of credit card operations.

Call centers can also be set up on a cross-border rather than national basis, while treasury and capital markets operations can also be centralized, further reducing costs.

So far, the strategy pursued by big U.S. banking companies that have been in the region for a long time has served them well. Chase Manhattan Corp., J.P. Morgan & Co., Citicorp, and BankBoston Corp. all have strong positions in Latin American corporate banking.

Citicorp and BankBoston have also become integral parts of the local banking scene, with strong consumer franchises focused on the small upscale population.

But the question remains: Where do they go from here? Do they broaden their customer base and go "down-market"? And if so, do they do it through branches-which would require acquisitions-or through nonbranch channels.

Most likely, some acquisitions will be necessary, though the major U.S. banking companies will probably be cautious and opportunistic buyers. They will also probably lead the market in innovation, in terms of both products and nonbranch distribution methods.

U.S. regional banks, which have become excessively domestic, will soon also begin to look across international borders to the beckoning Latin American market.

U.S. players will have to work hard to establish a presence in Latin America. Some, undoubtedly, will acquire banks at a high premium. Others will look into strategic alliances with local banks. And still others may make nonbank acquisitions in businesses such as consumer finance and securitizations.

However, no matter what strategy they adopt, U.S. banks will have to move fast.

Otherwise, they risk losing to others a marketplace in which they traditionally hold a natural advantage.

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