For Fleet, Latin Exposure Spices Up BankBoston Deal

But the risky region could end up being too hot for Fleet investors, who have already punished the stock after a recent dive in Argentina's market.
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Call it

Fleet's

(FLT) - Get Report

tainted tango.

Through its pending acquisition of

BankBoston

(BKB)

, Fleet is going to pick up a substantial presence in Latin America, particularly Argentina, where BankBoston has its largest non-U.S. country exposure with just over $9 billion of assets.

During last year's emerging-markets turmoil, BankBoston's Latin businesses unnerved the market, causing the bank's stock price to plunge more than 50% from its all-time high reached in 1998.

However, when Fleet's fusion with BankBoston was announced in March, many believed that the Latin operations wouldn't weigh on the stock price of the new merged institution because they would constitute a much smaller part of its overall business.

But that relaxed attitude could be changing. Fleet's stock price dropped 2.65% to 43 5/8 Thursday. That coincided with a 4.36% dive in Argentina's stock market, which was caused by nervousness over the political and economic situation there. Labor unrest is growing, and the economy is shrinking ahead of the presidential and congressional elections in October.

In addition, BankBoston, after expanding rapidly in Argentina in 1998, is experiencing a rise in credit problems in its $6 billion loan book for the country. Provisions for credit losses more than doubled in the first quarter compared with the year-earlier period.

A BankBoston spokesman says BankBoston doesn't expect to see a decline in profits in the Argentine business this year, compared with 1998, when the bank notched up net income of $74 million in the country. "We're on track for our earnings expectations for Argentina" this year, he says.

Yet all is not well in the country. Average loans there jumped 17%, or $866 million, in the first quarter from the year-ago period, according to BankBoston's 10-Q filing. But provisions for credit losses soared to $21 million from $10 million over the same period.

This rise in provisions suggests that BankBoston has taken on less creditworthy customers to expand in Argentina. In fact, consumer loans swelled to 33% of the bank's Argentine loan portfolio at the end of March from 25% at the same point last year.

The BankBoston spokesman says that the Argentine operations have "moved a little more down market." But, he adds, "while we may be picking up more credit losses in this segment of the market, it is also more profitable."

Fleet CEO Terrence Murray made a trip to BankBoston's Latin operations late last month. Two analysts say he came away impressed, despite difficulties in Argentina.

BankBoston has managed to make money in the country in tough times. Net income from Argentina was up 25% in the first quarter compared with the year-earlier period. And investors would like to see the Latin operations stay within

Fleet Boston

, the proposed name for the merged institution. The Latin business "is extremely well run," says Carole Berger, a manager at

Berger Jackson Capital Management

. "I doubt Fleet will pack it all up and go home." Berger declined to say whether she holds Fleet or BankBoston in her fund.

"I'd be disappointed if they did divest the Latin operations," says Adam Levy, banks analyst for

Invesco

, which holds Fleet stock in some of its funds. "They're an attractive diversification."

Latin operations will account for 9% of Fleet Boston's 1999 earnings, according to an estimate from both banks. That puts them almost on par with the combined credit-card and mortgage business. In BankBoston, they accounted for some 20% of earnings.

Fleet Boston is likely to have $180 billion in assets. That's big, but the question will be whether it's big enough to ride out storms in Latin America.