Banking sector | 2Q26 Update, Navigating The Liquidity Tightening Cycle

Navigating The Liquidity Tightening Cycle

Outlook

Credit remains strong, but funding is becoming the constraint. Vietnam's investment-led growth agenda continues to support robust credit demand, particularly across infrastructure, manufacturing, corporate and real-estate-related lending. System credit increased 9.71% YTD to ~VND20.4qn as of 22 August 2026, versus deposit growth of 7.97%, implying an estimated c.VND2.6qn funding gap if  adjusting for State Treasury deposit. In addition, strong medium- and long-term credit demand is being funded by shorter-duration deposits, while banks are turning more actively to certificates of deposit, bonds, interbank and offshore funding.

NIM performance is increasingly diverging. Higher lending rates and asset repricing are providing some support to asset yields in 1H26, but rising deposit and wholesale funding costs limit sector-wide NIM recovery. Banks with strong CASA and deposit franchises are better positioned to defend margins, while smaller banks with greater funding gaps will continue to see NIM pressure.

Asset quality is the next key risk. Sector NPL increased to 2.01% in 2Q26 from 1.86% at end-2025, while LLR declined to 79% from 83%. Rapid expansion into large infrastructure, construction and real-estate projects could also increase concentration and duration risks, while higher borrowing costs may put additional pressure on SMEs and leveraged borrowers.

Earnings remain strong, but dispersion should widen. Listed-bank PBT increased 19.6% YoY in 1H26, supported by credit growth, fee-income recovery and operating efficiency. However, as funding and credit costs rise, we expect earnings and ROE to become increasingly differentiated. Banks with low-cost funding, diversified income and strong asset quality should be better positioned to convert credit growth into sustainable earnings.

Sector Rating and Top Pick

We move to NEUTRAL from Overweight as risk/reward becomes more balanced. We remain constructive on the sector's growth outlook but see fewer drivers for broad-based re-rating as tighter funding, limited NIM upside and rising asset-quality risks increasingly offset strong credit and earnings growth. Sector valuation remains supportive, the banking sector trades at 10.7x TTM P/E and 1.6x TTM P/B as of Oct 01, 2026, but inexpensive valuations alone are unlikely to drive sustained multiple expansion without clearer evidence of funding-cost normalization and asset-quality stabilization.

Bank selection becomes more important than the sector call. We see stronger defensive characteristics in VCB and CTG, given their large deposit franchises, strong FY26 earnings and superior provisioning/asset-quality buffers, and potential catalyst from State reducing stake to 65%. For TCB and MBB, the key strengths remain in their leading CASA franchise, diversified fee-income streams, and ecosystem-driven customer model. HDB and VPB offer stronger credit-growth optionality following their participation in the transfer of specially controlled banks, but we see asset quality and funding requirements as increasingly important offsets to their faster balance-sheet growth.