[Vnbiz] Banks FT part 1

[Craig Stevenson]

Forget R&R on the beaches, these days Americans - along with Europeans and
Asians - are heading to Vietnam to exploit the country's nascent capital
markets.

Investment bankers from leading houses are making monthly trips to Ho Chi
Minh City and Hanoi. Many fund managers are also making repeated forays.
Funds on the ground are mushrooming, raking in some Dollars 500m in the past
six months or so.

"We have probably set up more funds this year than we did in the previous 11
years put together," says Tony Foster, managing partner of Freshfields in
Vietnam.

The lure is not hard to fathom. Vietnam's economy has been growing at about8
per cent a year, second only to China's. The country is rich in resources
and, unlike most in the region, is a net oil exporter. On top of that,
Vietnam boasts political stability, steady inflows of foreign direct
investment and a stock market up 67 per cent this year.

In tones reminiscent of economist Barton Biggs - whose "I'm tuned in,
overfed and maximum bullish" pronouncement on China in 1993 sparked a rally
in neighbouring Hong Kong - strategists are heaping praise on Vietnam.

"Vietnam is a little like China was 10 years ago and India a few years ago,"
says one banker. "It's the next big thing."

Sadly for the bulls, it is not that easy. The five-year- old Vietnam Stock
Exchange has a market capitalisation of just Dollars 2.7bn, and average
daily turnover is a mere Dollars 5m. There are a growing clutch of funds,
often Dublin or London-listed, as well as a Dollars 750m sovereign bond and
opportunities for private equity. Overall, however, the investible universe
is small.

That is not deterring the investment banks. Merrill
Lynch<javascript:void(0);>this month acquired a trading code, which
gives it the right to hold shares
directly, following Deutsche Bank <javascript:void(0);>, which won its code
last month. Citigroup has had a similar arrangement for over a year, and Credit
Suisse <javascript:void(0);> is considering following suit. According to
lawyers, the codes are easy to acquire and already held by a number of fund
managers.

In addition, many of the big houses offer synthetic trading, using
derivatives based on underlying Vietnamese equities. Some are trying to dig
deeper roots by taking stakes in local brokerages, principally to obtain a
toe-hold in the market since domestic trading commissions are tiny.

Others are still debating how to tackle Vietnam. Goldman
Sachs<javascript:void(0);>eschews the "planting a flag in every
country" model, preferring to service
Vietnam offshore - albeit with an increasing number of trips to build
relationships

"We are talking to clients in Vietnam about raising debt and equity," says
Tim Leissner, a Hong Kong-based managing director at Goldman
Sachs<javascript:void(0);>
.

Citibank, which has been operating in Vietnam since the mid- 1990s, has been
underwriting the Vietnamese government's domestic, local currency bonds,
with about a 20 per cent market share, and hopes soon to help Vietnamese
companies tap the bond market as a source of long-term capital.

The biggest plum is privatisations. A slew of state-owned enterprises -
including state-owned Vietcombank and several telecoms companies - are
scheduled to list. However, the pace is proving slow, as Communist
authorities agonise over every step in the process. When they finally get
off the ground, some of these listings could potentially take place
overseas, possibly in Hong Kong or Singapore.

Like other emerging markets, Vietnam has risks, as ABN Amro has discovered.
Two of its Vietnamese employees are in prison and two under house arrest -
the result of a nasty dispute with state-owned Incombank, which lost Dollars
5.4m in foreign currency trades and wants the Dutch bank to cover its
trading losses.

The ABN Amro bankers and one Incombank executive are being investigated by
police for alleged illegal foreign currency trading, which means they can be
held without formal charges for up to 16 months. ABN Amro says the trades
with Incombank were carried out in accordance with common market practices.

There is little doubt that market optimism is excessive. As Mr Foster points
out, there may simply not be enough deals to hold institutions' attention,
given Hanoi's deliberately gradual pace of reform.

"Before the bond issue, we used to get investment banks coming through maybe
once or twice a year and they were lukewarm about the place. After the bond
we got them all coming through on all fronts and they are red hot. They are
all trying to do deals - with not much success yet, I should say."
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