Vietnam Banking H1 2025 – Superior Profitability While Navigating Margin Headwinds

Strong Start to 2025 Despite Margin Headwinds

Vietnam’s banking sector entered 2025 with strong momentum, riding the wave of the government’s ambitious 8.0% GDP growth target and the central bank’s 16.0% credit growth goal. Credit growth in the first quarter was at the highest pace in the last three years—highlighting the sector’s continued role in fueling economic activity. Despite tighter margins as lending rates stay low and funding costs remain sticky, banks have maintained stable non-performing loan (NPL) ratios and seen a continued decline in bad debt formation. A more active real estate market and improving macro conditions have also boosted collateral liquidation and bad debt recovery income.

These gains, combined with ongoing operational streamlining, supported the sector’s continued robust earnings growth and a superior return on equity (ROE) of 17.8%—well above the 9.0–11.0% range observed in neighboring markets. With Vietnam’s strong macroeconomic momentum and ongoing progress toward emerging market status, bank stocks are well-positioned to capitalize on rising credit demand and substantial capital inflows driven by improved market sentiment. This reinforces the sector’s investment appeal, underpinned by strong profit generation, a reduced risk profile, and attractive valuations relative to regional peers.

* The data in the following presentation are compiled from the top 15 largest banks by market capitalization, unless otherwise stated.

Vietnam’s Robust Macro Momentum Fuels Credit Growth

Corporate Lending Leads Credit Expansion

Credit growth expanded 3.9% YTD in Q1/2025—the strongest first-quarter pace in the past three years—setting a strong tone for the banking sector’s continued expansion. This momentum was underpinned by Vietnam’s solid macroeconomic performance, with GDP rising 6.9% y/y and inflation contained at 3.1% y/y. Domestic demand also remained firm, as reflected in retail sales growing 9.9% y/y and industrial production climbing 9.3% y/y.

Retail Credit Recovery Still Lagging but Improving

Among customer segments, corporate lending stood out—particularly in the real estate sector, where double-digit growth was recorded across several leading banks. This momentum was driven by a wave of residential development projects progressing after long-standing legal bottlenecks were resolved, thanks to recent regulatory changes and government efforts to revive the housing market. Meanwhile, retail credit remained measured, as mortgage demand is still in the early stages of recovery and the housing supply for end-users remains limited. An emerging bright spot is credit to the industrial real estate segment, as banks benefit from increased lending to both developers and leasing clients. This trend has been bolstered by resilient FDI disbursements—up 7.2% y/y, and strong export growth of 10.6% y/y in Q1.

Credit Outlook Remains Strong Despite Export and Tariff Risks

We observe continued strong momentum in credit growth, with total credit reaching 6.5% YTD by May. Looking ahead, corporate lending is expected to remain the primary driver of credit growth, supported by ongoing government efforts to accelerate public investment and stimulate private sector activity. This in turn is expected to gradually lift consumer sentiment pave the way for a pickup in retail lending toward year-end. Mortgage demand should improve as more residential projects—progressing after last year’s legal bottlenecks were resolved—gradually come to market, especially in the affordable segment targeting middle-income buyers. Other retail categories—including car loans, consumer finance, and household business credit—also stand to benefit from stronger domestic demand, a buoyant tourism sector, and pro-growth government initiatives. Regarding industrial real estate lending, the proposed U.S. reciprocal tariff may introduce near-term uncertainty for exports and FDI, but Vietnam’s long-term industrial fundamentals remain compelling. Structural advantages—including its strategic location, competitive labor and energy costs, and a growing skilled workforce—continue to attract foreign investors. This resilience is reflected in YTD May data, with FDI disbursements up 7.9% y/y and exports up 14.0% y/y.

Net Interest Margin (NIM) Under Pressure from Pro-Growth Policy, but Signs of Stabilization Ahead

NIM Contraction Driven by Policy and Competition

While credit growth was strong, net interest margin (NIM) came under temporary pressure, declining by 39bps q/q. This was primarily driven by a drop in asset yields, reflecting the State Bank of Vietnam’s (SBV) ongoing efforts to support economic growth by guiding lending rates lower. In contrast, the cost of funds (COF) remained broadly stable at historically low levels, inching up just 3bps q/q—helped by effective liquidity management across the sector. The compression in lending yields was most notable at state-owned commercial banks, which proactively reduced rates in line with policy guidance, creating short-term competitive pressure for private banks. Alongside competitive pressure, the continued shift toward shorter-term, lower-risk lending—partly reflecting a slow recovery in mortgage demand—has weighed on asset yields, but has also supported underlying improvements in asset quality. However, with most of the rate adjustments already absorbed in Q1, the outlook for margins is turning more constructive.

Outlook for Lending Yields and Funding Costs in H2 2025

Looking ahead, several factors could support a gradual NIM recovery. We expect NIM to stabilize in Q2, followed by a modest improvement of 10–20bps in the second half of 2025. COF is projected to stay broadly stable, aided by continued liquidity support from the SBV. On the asset side, lending yields may gradually improve as credit demand strengthens, enabling banks to expand their portfolios toward longer-tenor retail loans with greater pricing power. As these dynamics unfold, banks are well-positioned to defend profitability—even in a policy environment focused on maintaining affordable credit to fuel growth.

Improving Asset Quality and Robust Recoveries Ease Credit Cost, Supporting Profitability

Stable NPL Ratio and Falling Special Mention Loans

On the asset quality front, conditions remained stable in Q1/2025, with the non-performing loan (NPL) ratio standing at 2.0% by quarter-end—a slight uptick from end-2024 following the expiry of bad debt relief measures of the SBV, but broadly unchanged from the same period last year. Meanwhile, special mention loans (Group 2) continued to decline, falling 49bps y/y, signaling reduced new bad debt formation and easing pressure on future provisioning. As a result, total provisioning cost fell by 4.6% y/y, even as total credit expanded by 19.5% y/y, reflecting enhanced credit quality and significantly contributing to the sector’s earnings growth.

Resolution 42 Amendments Could Boost Collateral Recovery

Additionally, favorable economic conditions and a revitalized real estate market have continued to support strong bad debt resolution, with income from recoveries surging 148.1% y/y in Q1. Combined with lower provisioning cost, this drove net credit cost down to just 0.7% of total credit—41bps lower than the same period last year. Looking ahead, further improvement could be driven by the expected adoption of key provisions from Resolution 42 into official law—restoring a legal framework that previously allowed banks to recover collateral more quickly and efficiently. The proposed amendments are currently under review in the ongoing National Assembly session, and, if passed, would establish a more stable legal framework for asset liquidation and strengthen banks’ ability to manage distressed assets—paving the way for continued gains in asset quality and credit efficiency.

Operational Efficiency Gains via Centralized Operations and Automation

Cost-to-Income Ratio (CIR) Improves Through Automation

Operational efficiency continued to improve in Q1/2025, as banks further reduced staff-related costs while accelerating investment in technology and digital infrastructure. Automation, process optimization, and targeted employee training helped streamline operations, driving the cost-to-income ratio (CIR) down to 30.7%. At the same time, total operating income (TOI) per staff has continued to rise, reflecting improved productivity across the sector.

Retail Banks Embrace Centralized Operations

A notable trend in recent quarters has been the accelerated streamlining of branch-level staff among retail-focused banks with large physical networks. These banks have increasingly shifted toward centralized operations, leveraging digital platforms to enhance efficiency and reduce overhead. Major retail banks such as ACB, STB, and VIB have seen their workforce reduced by 3.0% to 7.0% as part of this transition. These improvements position Vietnamese banks as more agile and cost-effective operators, well-prepared to scale and capture new growth opportunities in an increasingly digital market landscape.

Attractive valuations relative to regional peers:

Vietnamese Bank Valuations vs. Regional Peers

Today, Vietnamese banks are trading at modest valuations (8.1x trailing P/E and 1.4x trailing P/B) compared to regional peers (11.8x trailing P/E and 1.0x trailing P/B). The slightly higher P/B remains appealing given the sector’s strong average return on equity of 17.8%, well above the 9–11% level  seen in neighboring markets, while the P/E is noticeably lower. Vietnam’s push toward emerging market status is poised to draw significant foreign capital inflows and enhance local investor sentiment. Representing over 40.0% of market capitalization, banks are set to benefit significantly due to their considerable size and liquidity.

Private Banks Trading at Discount – Opportunity or Risk?

Within the sector, bank stocks are divided into state owned commercial banks (SOCBs) and private banks. We favor private banks for their more dynamic approach to capturing growth opportunities and their attractive valuation, trading at an average 30.0% discount to SOCBs on a relative valuation basis.

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