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EMERGING MARKETS REPORT
Vietnam allows more foreign ownership in banks
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By Polya Lesova, MarketWatch
Last Update: 4:23 PM ET Apr 23, 2007

NEW YORK (MarketWatch) -- In a move to further liberalize its banking sector, Vietnam will allow foreign strategic investors to hold a stake of up to 15% in a Vietnamese bank, an increase from the current 10%.
The change, decreed by the Vietnamese government on Friday, should take effect in May, the Vietnam News Agency reported. In special cases, the Vietnamese prime minister might raise the cap to 20%.
Foreign investors who want to own stakes in Vietnamese banks must have at least $20 billion in assets, and a strategic foreign investor can sell its bank stake only five years after buying it, according to the new rules.
The cap for foreign banks remains unchanged and is still 10%, while non-strategic foreign investors can own up to 5%. The total foreign ownership limit in a domestic bank is 30%.
"The relaxation marks a small step in Vietnam's cautious banking sector liberalization policy," said Renee Chen, analyst at Citigroup, in a Monday research note.
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The liberalization was much smaller in scope that the market expected and the State Bank of Vietnam had proposed to double the 10% cap to 20%, Chen said. Also, the change didn't apply to foreign banks. Those of them with stakes in Vietnamese banks have already hit the 10% cap on ownership, Chen said.
Among the foreign banks that own stakes in Vietnamese banks are Singapore's Overseas-Chinese Banking Corp., HSBC Holdings (HBC :
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"With Vietnam committing to a gradual liberalization of its financial sector, the outright lifting of total foreign ownership limit and/or limit for foreign bank ownership could be on the roadmap," Chen said.
"That could buoy cross-border merger and acquisition activities that would increase domestic banks' economies of scale and propel domestic capital market development."
Booming economy
Vietnam, a communist country of over 83 million people, is one of the fastest-growing economies in Asia, with an average GDP growth of 7.1% over the last decade. In 2006, foreign direct investment surged to $10.2 billion from $6.8 billion in 2005.
The S&P/Vietnam Frontier Index rose 128% in 2006 and has already gained 60% in the first two months of this year.
"Vietnam can sustain 8%-plus GDP growth over the next five years, supported by positive demographics, availability of natural resources, the accelerated pace of reforms and benefits from globalization, as it continues to open up its trade and capital accounts," said Chetan Ahya, analyst at Morgan Stanley, in a recent research note.
However, given the underdevelopment of the domestic capital market, opportunities for portfolio investors are limited, Ahya said. The country's first stock market was opened in 2000.
"We believe that the stock market is overheated and has probably run ahead of itself," Ahya said. "The real stock market, with the listing of large blue-chip businesses, has yet to emerge."
Still, "with the government committed to implementing the privatization program more aggressively going forward, we believe that the depth and breadth of Vietnam's stock market will improve significantly by 2008," Ahya said. End of Story
Polya Lesova is a MarketWatch reporter based in New York.


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