HSBC, Standard Chartered Pioneer Vietnam

Under obligations that were a condition of its entry into the World Trade Organization, Vietnam must swing open wider its doors to foreign banks. And the first arrivals will be HSBC and Standard Chartered Bank, which will tap into a fast-growing country that has been undergoing the transition to a market economy over the past two decades.

The two banking giants got the green light on Tuesday from Vietnam’s central bank to open the country’s first wholly foreign-owned branches within the year. HSBC (nyse: HBC - news - people ) will plant its subsidiary in Ho Chi Minh City, with legal capital of $183 million, and Standard Chartered (other-otc: SCBFF - news - people ) will plunk down $61 million in Hanoi, the State Bank of Vietnam said.

HSBC and Standard Chartered, which previously operated branches in concert with indigenous partners and took stakes in local banks, will able to widen their operations beyond serving a foreign clientele or going through joint ventures to tap into domestic markets. The foreign banks, in keeping with their strategies in Bangladesh, India and other Asian countries, will likely focus on transaction banking rather than lending, in order to temper their risk exposure, according to Cameron Odgers of China International Capital Corp. Operations will focus on reeling in deposits from small and medium-sized domestic enterprises, keeping clear of vulnerability to loan defaults by such firms in Vietnam's volatile business climate.

The Communist government, meanwhile, is trying to tighten credit in order to combat a sky-high inflation rate of 28.3%. (See "Is Vietnam The Next China?") It has hiked interest rates to among the highest levels in Asia and aims to cut this year’s credit growth to 30%, from 54% in 2007. Vietnam also lowered its GDP growth target to 7% this year, from 9%.

But the country, which grew 8.5% in 2007, offers some attractive opportunities to foreign banks. Penetration of banking services is low, with only about 10% of Vietnam’s 86.5 million population owning bank accounts. It “doesn’t take very long before that becomes a meaningful market,” said Odgers. The foreign banks will compete with state-run Agribank, which operates half of Vietnam’s 4,000 bank branches, and three other top state-owned banks.

HSBC and Standard Chartered Bank last year opened their first wholly owned branches in China, which itself has opened up to foreign banking to comply with WTO rules.

In London Tuesday mid-morning, HSBC shares were up 15 pence (27 cents), or 1.73%, to 9.09 pounds ($16.00). Standard Chartered shares were up 31 pence (55 cents), or 2.06%, to 15.33 pounds ($26.98).