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By The ETF Professor

Vietnam's banking sector, the Southeast Asian nation's most controversial industry group and one of the largest sector components in the Market Vectors Vietnam ETF (NYSEARCA:VNM), is the primary reason VNM and investor confidence in the country sank during the second and third quarters of 2012. Amid soaring bad debt levels and a government crackdown on corruption that resulted in the arrests of multiple Vietnamese banking luminaries, foreign investors had little reason to embrace Vietnam bank stocks. VNM suffered as a result, plunging from near $21 in May 2012 to around $15 in November.

VNM's fortunes have reversed for the better as the ETF has surged almost 24% in the past month. One big reason: the banking sector. The development of a debt asset management company to resolve bad bank debt has been helped lift VNM, which devotes about 45% of its weight to financial services stocks.

So has a new government outlook on foreign investment in Vietnamese banks. As is the case with so many large financial institutions in various developing markets, the state controls Vietnam's most recognizable banks. Apparently realizing that this can be a turnoff for foreign investors, the Vietnamese central bank is mulling an increase in foreign ownership limits in the country's so-called bad banks.

The State Bank of Vietnam is considering boosting foreign ownership limits in Vietnamese banks, which currently cannot exceed 30% of the bank's charter capital, according to the Asia News Network. Central bank Governor Nguyen Van Binh said the central bank has submitted a proposal to policymakers in Hanoi that would lift the limit on ownership of a single foreign strategic shareholder in any other bank from 15% to 20%, Asia News reported.

The news comes at a critical time. Vietnam saw its foreign direct investment total slump 15.3% last year to just over $13 billion. Manufacturing, real estate, and retail were the sectors that were on the receiving end of the bulk of FDI directed to Vietnam. Banks, not so much. Noteworthy is the fact that some foreign banks saw opportunity in Vietnam in advance of Binh's announcement regarding the push for relaxed restrictions on foreign ownership of stakes in the country's banks.

In late December, Japan's Mitsubishi UFJ, that country's largest bank, announced a $743 million deal to acquire 20% of Vietnam Joint Stock Commercial Bank for Industry and Trade, or VietinBank. The State Bank of Vietnam will remain the majority owner of VietinBank, but the deal shows Vietnam is warming to outsiders owning large slices of its financial services firms.

In the Asian News Network interview, Binh noted that "the most fundamental factors [for attracting capital] are still the business efficiency of companies, economic stability and investor psychology." With Vietnam, those points ring especially true given the country's reputation for corruption and a long-slumping equity market.

On the upside, should Vietnam proceed with opening its banks to increased foreign investment, the bull case for VNM becomes all the more compelling. As it is, the ETF carries a a P/E ratio of 9.29, a price-to-book ratio of just 1.15, and dividend yield of 3.33%.

Those numbers indicate VNM is inexpensive relative to the broader emerging markets universe as represented by the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM). VNM's dividend yield is far higher than EEM's and the former's price-to-book ratio is less than half of the latter's. EEM trades with a P/E of 17.31, according to iShares data.

For more on the Vietnam ETF, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Source: Foreign Investors: Saviors Of Vietnamese Banks, Market Vectors Vietnam ETF?