Vietnam's Banks Confront Margin Squeeze, Diverging Fortunes in Second Half

Vietnam’s banking sector is poised for a period of sustained pressure from narrowing interest margins, tight liquidity, and rising credit risks in the second half of 2026, with analysts forecasting a growing divergence in performance between stronger and weaker institutions.

A market strategy report for the second half of 2026, released by SSI Research on June 10, identified liquidity pressures, shrinking net interest margins (NIM), and early signs of deteriorating asset quality as the key factors shaping the industry’s outlook. The report suggests the defining feature of the current cycle is not whether banks can avoid macroeconomic headwinds, but rather how effectively each institution can absorb and manage risks compared to its peers.

On the funding side, SSI Research estimates that total deposits across the banking system exceeded $680 billion as of mid-May, an increase of almost 3% since the start of the year. However, this growth has continued to lag significantly behind credit expansion, pushing the system-wide loan-to-deposit ratio to an elevated level and reflecting persistently tight liquidity conditions.

Data from the State Bank of Vietnam (SBV) corroborates this trend, showing that as of April 28, outstanding credit had risen by more than 4.4% from the end of 2025, while deposit mobilisation grew at a much slower rate. This has resulted in an imbalance where VND deposits are approximately $80 billion below total outstanding credit. Consequently, deposit interest rates are unlikely to decline significantly, with long-term rates expected to hold in the 7–8% per annum range. Meanwhile, banks have limited capacity to raise lending rates immediately, as these typically adjust with a time lag.

Financial statements from 28 listed banks show the sector's average NIM fell to just under 2.87% in the first quarter of 2026, down from 2.93% in the fourth quarter of 2025. Twenty of these banks reported a quarter-on-quarter decline.

Nguyen Quang Huy, CEO of the Faculty of Finance and Banking at Nguyen Trai University, noted that the sector faced dual pressures in the first quarter as declining NIM coincided with weaker non-interest income streams. "This indicates that the sector's profit growth potential has narrowed considerably compared with previous periods. NIM is expected to remain under pressure in the short term, particularly in the second quarter," Huy said. He added, "Funding costs usually reflect previous increases in deposit rates with a time lag, while asset yields cannot adjust at the same pace. Medium- and long-term loans, preferential lending programmes, and continued efforts to support borrowers make it difficult for banks to raise lending rates significantly."

Market analysts believe NIM may stabilise in the later quarters of 2026, though a strong recovery remains unlikely. A meaningful rebound would require several conditions, including a halt in deposit rate increases, stable current account savings account (CASA) ratios, the repricing of existing loans, and credit growth focused on segments with reasonable yields and prudent risk control. Attempting to improve NIM by simply raising lending rates could expose banks to higher non-performing loan risks, particularly from small and medium-sized enterprises, real estate borrowers, and retail customers.

Against this backdrop, analysts expect liquidity conditions to gradually improve, supported by four main drivers: stronger cash inflows returning to the banking system, higher export earnings, continued growth in foreign direct investment, and accelerated public investment disbursement.

Regarding lending, the banking system's credit growth target for 2026 remains at around 15%. As of the end of May, outstanding credit had increased by just over 5.7% from the beginning of the year, an annualised rate of 19%. SSI Research forecasts that credit growth in the second half will become more cautious as banks are required to adhere to their assigned credit quotas. A significant shift in credit allocation towards construction and infrastructure projects is also underway. The housing mortgage segment is not expected to stage a meaningful recovery until 2027, when interest rates are projected to decline substantially.

SSI Research expects deposit rates to remain broadly unchanged before edging lower towards the end of 2026. As funding costs continue to rise faster than yields on interest-earning assets, a clear divergence is projected. Privately owned joint-stock commercial banks are forecast to see an average NIM decline of around 10 basis points. In contrast, state-controlled commercial banks, which benefit from more stable funding structures and lower costs, are expected to improve their NIM by approximately 8 basis points.

With interest income constrained throughout 2026, fee income from services such as trade finance, guarantees, and standby letters of credit will become an increasingly important driver of profitability for the sector.