Citicorp is at a crossroads in Hungary.

Since setting up shop here in 1986 in a fashionable area of downtown Bupadest, the New York-based banking giant has relied on large international companies and blue chip Hungarian concerns as its main clients.

But in recent years a range of competitors, including large Dutch, German, and Austrian banks, have followed Citicorp into Hungary. And the added competition-there are 37 banks doing business in this capital city- has made this business less profitable.

As a result, Citicorp is developing plans to go somewhat more down- market, where the margins are fatter.

"We want to be a large local bank with a broad range of customers, clients, and services," was the way Richard Jackson, Citicorp's general manager here, put it during a recent interview.

The bank's move to embrace the corporate middle market in this emerging capitalist country underscores the type of adjustments that many banks will inevitably make as emerging markets become saturated with financial institutions. Recently, Citicorp announced it was taking similar steps in Mexico.

"Bankers just don't know how to behave here," said Gyorgy Zeborsky, president and chief executive of CIB, a Hungarian-based bank. "They are undercutting prices just for the sake of undercutting," "The good old days are over-6 or 7% margins are finished. Today you are happy if you get a 2% margin."

While Citicorp's Mr. Jackson hopes smaller businesses spread throughout Hungary will provide a source of future business, his bank is currently not well positioned to get that business. Citicorp is one of the few banks here with no branches outside the capital city.

"We face a disadvantage. We need to build a network," concedes Mr. Jackson. He said he has plans under way to open a branch office every three to four months in Hungary's other business centers. Eventually, he would like to see as many as 10 branches throughout the country.

Mr. Jackson said that as Hungary develops technologically, banks will be able to meet many of their clients' needs electronically.

Other foreign banks longing to be major players in the market have taken a different strategy-actually purchasing local banks.

For example, last year ABN Amro Bank Magyarorszag, the Hungarian division of Dutch banking giant ABN Amro, paid $89 million for Magyar Hitel Bank, the country's fifth largest. That effectively gave ABN Amro instant access to all of Hungary.

Citibank still has a chance to buy a Hungarian bank; four are slated to be privatized this year.

Hungarian banks, after some extremely difficult times earlier in the decade, are in general quite healthy now.

After the transition, many Hungarian companies went bankrupt, leaving banks with millions of dollars in bad debts. Meanwhile foreign banks plowed into the market and cherry-picked the best clients. The combination pushed Hungarian banks to the edge of bankruptcy.

In the early 1990s, Hungary spent $3.5 billion to rescue its failing banks, which have been restructured into viable institutions that are now being privatized.

Hungary's improving macroeconomic picture also has made the banks more attractive.

In 1995, the country instituted an aggressive economic reform package that included devaluing the currency and cutting social spending to cope with a ballooning deficit. It worked.

The current-account deficit was expected to fall to $1.8 billion last year, or 4% of GDP, from 5.7% in 1995 and 10% in 1994. Inflation fell to 23.6% in 1996, from 28.2% in 1995, and should hover around 20% this year.

Last year, Hungary was admitted to the Organization for Economic Cooperation and Development.

"There have been many positive developments in the economy and in the banking sector; things are finally starting to move forward," said Helena Hessel, director of the sovereign ratings group at Standard & Poor's.

Mr. Jackson acknowledges the tremendous strides Hungary has made in overhauling its economy. He adds the Hungarian banking industry is extremely well-regulated. Indeed, he hasn't ruled out buying a Hungarian bank - but wonders if it may be more trouble than it is worth.

"The problem we (banks) face here is finding people," Mr. Jackson said. "There are not a lot of bright, experienced, mature people with banking experience. That is just the reality of the market, and it is what stops us from doing more."

Mr. Jackson says Citibank invests heavily in training employees so its customer service will set it apart from the competition.

He says people in the customer service department undergo two years of training before they answer a client's questions. That division has 14 people, up from nine a year ago.

Most bankers agree they essentially offer the same products, so it is service that sets them apart. "With this much price competition, you need service to give you an edge," Mr. Jackson said.

Unlike most banks in Hungary, Citibank is targeting only the well-heeled as retail customers. It has set a deposit minimum of $10,000, and offers special services such as investment advice and seminars to those who maintain balances of $100,000. The average Hungarian earns only $3,600 annually.

"Citibank has chosen a different approach to the market," says one executive at a foreign-owned bank, who requested anonymity. "But this market is still developing, so it will take time to see who took the right approach."

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