U.S. banks have missed the boat in Latin America.

So says Andre Cappon, president of CBM Group Inc., a New York-based management consulting firm specializing in financial markets.

"A lot of people see opportunities in Latin America because markets are underbanked," the consultant says. "But U.S. banks have returned to Latin America in only a very timid way, mainly on the wholesale side, and they're not going to make a lot of money."

Only a handful of U.S. banks still operate extensively in Latin America. Among them: Citicorp, Chase Manhattan Corp., Chemical Banking Corp., J.P. Morgan & Co., Bankers Trust New York Corp., and Bank of Boston Corp.

But only two, Citicorp and Bank of Boston, kept their commercial banking networks up and running. throughout the debt crisis. Others by and large discarded their commercial banking operations after Latin borrowers defaulted on tens of billions of dollars in loans in the 1980s.

Those banks, Mr. Cappon notes, opted for businesses like Latin debt trading, financial advisory work in mergers and acquisitions, privatizations, project finance, and underwriting.

But, Mr. Cappon argues, it's a case of too little, too late. The large-scale pullout by U.S. banks from commercial banking in Latin America ranks as one of the more shortsighted moves in modem U.S. banking strategy, he insists.

Big banks like Chase and Chemical reduced their commercial banking role too quickly, discarding a valuable franchise where they had prestige and a competitive advantage over local players, he says.

Chase, for example, had 47 branches in Brazil 10 years ago, employing 3,300 people. Today it has only one branch that focuses on large Brazilian companies and subsidiaries of multinational corporations. As recently as three years ago, Chase sold off 11 retail banking branches in Argentina in favor of developing capital markets business with Argentine corporations.

"They [U.S. banks] threw the baby out with the bath," Mr. Cappon says. "The big opportunity in Latin America is the emerging middle class, and its rapidly growing financial needs, for whom there is a shortage of suppliers at this point."

The proof, he adds, is that both Bank of Boston and Citicorp are now making money hand over fist in Latin America from traditional banking operations, while other banks, which chose to pursue capital markets activities, are fighting for razorthin margins on Latin debt underwritings.

Citicorp, for example, runs more than 500 offices, including 165 branches in 27 countries across Latin America, with revenues of $1.9 billion on some $22 billion in assets. The company does not break out net earnings for Latin America.

Bank of Boston, which runs 45 branches in Argentina and 23 in Brazil, offering everything from corporate lending to trade finance and consumer banking earned about $85 million last year on some $4.1 billion in assets, yielding an even steeper 20% return on assets. Latin earnings accounted for roughly 15% of Bank of Boston's total net profits. Bankers both agree and disagree with Mr. Cappon's conclusions.

"The issue is, not whether commercial banking in Latin America is an attractive business," says Brian O'Neill, senior vice president and head of Latin American operations at Chase. "The question is, for whom is it an attractive business?"

Mr. O'Neill's point is fairly simple. First, though there's probably money to be made, big U.S. banks have no long-term future getting into local currency lending in Latin America, since it would require extensive investments. And, sooner or later, they would find themselves running up against large, sophisticated local banks with thousands of branches.

"There are limits to where you can put your capital to use and where you have a competitive advantages'" Mr. O'Neill says.

"Going up against large, indigenous banks for undifferentiated, straightforward commercial banking is a losing proposition, because sooner or later they're going to hand you your head on a platter."

Second, local lending also means getting into retail banking or lending to small and medium-size businesses, or large corporations that are lower rated and do not have access to debt capital on international terms and conditions. It also means large investments in branches and manpower and lending to companies where the risks are different and perhaps higher.

Mr. O'Neill added that although Chase does engage in retail and middle-market lending, it does so only in its own backyard.

Overseas, he added, "you wind up with the lower end of the credit-quality profile. Although doing business with such companies may look good on the uptick, remember member that you're dealing with highly volatile economies, and I predict whoever does such business will buy a lot of workouts on a cyclical downturn."

Since the bigger and better-rated Latin companies are already moving into international capital markets for their borrowing needs, Mr. O'Neill says, it's only logical that Chase should follow its customers.

"Our clients tend to be larger and better companies or subsidiaries of muiltinationals," he said. The proof that this strategy makes sense, he adds, is that Chase has consistently ranked at the top, or near the top, of Euro-market bond underwriters for Latin corporations.

Mr. Cappon disagrees. U.S. banks, he predicts, are likely to soon start losing the largest and most creditworthy corporate customers that they have been cultivating in Latin America to investment banks, just as those customers step up their reliance on the capital markets.

As Latin corporations become more familiar with international equity and bond markets, they will likely turn to big U.S. investment banks, such as Goldman, Sachs & Co., C.S. First Boston, Salomon Brothers Inc., Merrill Lynch & Co., and Bear, Steams & Co., which have greater capabilities to distribute debt and stock.

Latin companies will also turn to foreign banks, like Spain's Banco Santander and Holland's ING Bank, which offer extensive investment and commercial banking networks in Latin America.

However, one avenue of opportunity for U.S. banks, Mr. Cappon suggests, may lie in joint ventures.

"In our opinion, Latin America will experience significant bank consolidation in the near future," Mr. Cappon predicts. "The bank M&A wave has already started in Mexico and Argentina and will likely soon hit Brazil and Venezuela."

This and other developments, he says, could offer U.S. banks an opportunity to get back into Latin America. "Latin banks respect U.S. banks for their technology and innovation, and would welcome a renewal of ties with the leading American banks in these areas via either joint ventures or equity stakes."

Analysts generally agree with Mr. Cappon's conclusion that U.S. banks may have missed out on an opportunity to make money in Latin America. But they add that U.S. banks, hard pressed to build up adequate capital in the late 1980s and early 1990s, probably didn't really have much choice except to cut back on their commercial banking networks in Latin America.

"Hindsight is always 20/20, and if you look at the demographics, leverage, and branch density in Latin America, it's obviously advantageous to be there," says Frank DeSantis, a banking analyst with Donaldson, Lufkin & Jenrette. "At the time, though, it was probably a smart move for man banks to pull out."

Raphael Soifer of Brown Brothers Harriman agrees. He says Mr. Cappon's conclusions "as a generalization, are probably not that far off. But there are probably significant exceptions in selected local currency operations and trading."

He and others add that at this stage, there is no real way of knowing how successful banks have been with their new focus in Latin America, because they do not break out results geographically.

"We don't see and don't even calculate profit centers for the kinds of business they do in Latin America," Mr. Soifer says.

"Clearly, the question is whether the money they've made has justified the investment. But I would doubt if most U.S. banks are making serious money in Latin America."

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