Deal of the day: Citi buys stake in Vietnamese brokerage

[FT] Vietnam’s 11-year-old stock market is some way from maturity, with daily market turnover of a mere $30m-$40m, trading dominated by rumour-driven retail investors and brokers frequently executing trades via Skype, Yahoo Chat and other unsecured internet messaging services.

But, in a sign of the market’s potential, Citigroup has become the latest international investment bank to tie-up with a local brokerage, agreeing to take a 9.9 per cent in Horizon Securities.

If all goes well, Citi plans to increase its investment and eventually take a controlling stake in the brokerage once Vietnam allows foreigners to become majority owners of broking firms from 2012, according to Brett Krause, Citi’s country officer for Vietnam.

A number of other international investment banks including Morgan Stanley, Macquarie and Daiwa Securities have already invested in or launched partnerships with local brokerages.

But interest from foreign investors in Vietnamese stocks has waned since the market collapsed in 2007 and 2008 as the economy overheated. Although valuations are among the lowest in Asia, poor governance standards, a lack of liquidity and the smell of burnt fingers have dissuaded all but the most hardy of investors from returning.

Local brokers and fund managers continue to hope that reforms to the trading rules, a clampdown on the more unscrupulous operators and the opening up of the market to foreign-owned brokers from next year will provide a much-needed push.

“International brokerages are looking at the eventual liberalisation of the market and the eventual pick-up in listings of state-owned companies and are thinking about their presence in Vietnam,” said one broker.

Citi’s Krause added:

“The market has gone sideways for two-and-a-half to three years. We think that as the macro-economy stabilises and the market continues to develop, there are a lot of things you can do.”

Horizon Securities, which is a subsidiary of a local boutique investment bank connected to Bridger Capital, a New York-based hedge fund, is a small player in a small game, with market share of less than 3 percent.

But Krause said Citi was attracted by its institutional client base.

Rival brokers added that while the pure broking business in Vietnam is small fry for a big bank like Citi, having a market presence will help it to originate more lucrative M&A and fund-raising deals in the future.

Few doubt that the stock market in Vietnam will grow over time. But given the wider macro-economic problems that Vietnam is facing and the growing frustrations over the slow pace of reform, this process is unlikely to be rapid.

Citi, which has had its on eye on the stock broking business in Vietnam for a while, is clearly hoping for an early-mover advantage.
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