Once-Burned, U.S. Banks Plan Return to Mexico : Finance: They see opportunities if there’s a free trade agreement. But this time they will lend to business and consumers, not the government.

Just a decade after “Mexico” became nearly synonymous with “troubled Third World debt” to many American banks, U.S. financial institutions have done an about-face as dramatic as the market-oriented reforms of Mexico’s leaders.

They are getting ready to expand operations south of the border in a country they see as bursting with private-sector entrepreneurship and a growing middle class eager for credit cards and ATMs.

But while U.S. banks are carefully laying groundwork with an eye to future growth, they are not rushing in headlong, despite progress on free trade talks that could open up new opportunities. As part of the free trade negotiations, U.S. and Mexican officials said last week that they had reached agreement on allowing American banks, insurance companies and brokerage houses to operate in Mexico.

Today, unlike 10 years ago, the banks plan to lend to businesses and consumers, not the government. And having been burned once in Mexico, some American bankers say they will focus on “short-term” lending of a year or less--a sign that their faith in the staying power of Mexico’s reforms is not absolute.

Like many developing countries bent on industrialization, Mexico needs to modernize its banking system as much as its manufacturing technology. “In order to have a modern economy, you need roads, you need telephone lines . . . and another part of the infrastructure is a modern financial system. It’s what ties it all together,” says Peter McPherson, Bank of America’s group executive vice president for Latin America and Canada.

After Mexico’s banks were nationalized in 1982, they were largely protected from the competition that has transformed finance in many countries. The government figures that letting in foreign banks will help drive local banks to become more efficient.

That’s a heavy burden on Mexican banks so soon after they were sold off to private investors at a stiff premium. The $12-billion selloff ended two weeks ago as the last government bank passed into the hands of private business.

Analysts say the high prices entrepreneurs paid for the banks--up to four times book value--were a vote of confidence in the Mexican economy. But they also bolster the investors’ argument that they need protection from foreign competition while they get their new houses in order.

While the two countries have reached basic agreement that American banks will be able to set up branches and expand activities, a number of details remain to be worked out.

“Realistically, we have two years,” Antonio del Valle Ruiz said shortly after he bought Mexico’s Banco Internacional, the second-to-last bank sold. “Banks that are not ready to compete by then are in trouble.”

Mexican bankers said they were preparing to compete with their U.S. and Canadian counterparts before financial services provisions of the proposed free trade agreement were outlined.

As soon as foreign investment was permitted two years ago, Seguros Tepeyac began shopping for a foreign partner to help it improve its marketing and efficiency. Madrid-based Seguros Mapfre bought 50% of the Mexican company, bolstering its capital base and introducing new computer software.

“Foreign competition is coming, and we have to be prepared,” said Raul Rodriguez, the Tepeyac official who negotiated the deal.

The competition from U.S. banks could come in a number of areas. In retail banking--providing consumers with checking accounts, loans and credit cards--indigenous banks often have an advantage over outsiders because of their greater knowledge of local tastes and practices. But Citibank, the only U.S. bank until now allowed to have a branch presence in Mexico (it has five), may soon be joined by other American banks that want to introduce some of the computer technology and new products they developed with billions of dollars of investments in the 1980s.

The upper class in Mexico now takes ATMs and credit cards for granted, but there are millions of consumers in the growing middle class still to be tapped.

In addition to beefing up its retail business in Mexico, Citibank is also interested in expanding commercial lending and in getting into the securities business, a new area that will probably be allowed under the free trade agreement, industry sources say.

In corporate lending, Bank of America is one of several banks champing at the bit to expand in Mexico. The San Francisco-based bank is interested in taking deposits in pesos and lending in pesos, something its representative office is not now allowed to do.

So far, the bank has decided to focus on corporate lending, and has not yet laid out a retail strategy, according to McPherson. Bank of America is already active in cross-border lending in dollars, which does not require a Mexican branch. McPherson says it is the only American bank with branches in all states adjacent to Mexico, from California to Texas. “For us, a cross-border capability, carefully managed, is very important.”

He emphasizes “carefully.” Like many American institutions, Bank of America has had to restructure millions of dollars in loans to the Mexican government. But today, notes McPherson, who has been responsible for much of that restructuring, the lending will be primarily to private corporations, and will be liberally salted with “common sense.” For now, that means focusing on loans of one year or less, he says.

Other financial institutions are focusing on investment banking. J. P. Morgan has been active in helping Mexican corporations obtain access to international capital markets to finance mergers and acquisitions, both domestically and with overseas companies. Morgan advised the investment group Valores Monterrey S.A. on its successful multibillion-dollar bid for Bancomer, one of Mexico’s largest banks.

While current Mexican law does not severely constrain the business, liberalization may help J. P. Morgan expand into brokerage activities, bank officials said.

Times staff writer Juanita Darling in Mexico City contributed to this report.