In recent years, Vietnam’s banking sector appears to have been overlooked by investors due to high-profile incidents such as the Van Thinh Phat-SCB case and the corporate bond turmoil, which cast doubts on governance and stability. However, developments since then tell a different story, with the sector maintaining robust growth, improving risk management and governance, and aligning with a strengthened regulatory framework focused on transparency and sustainability. The sector’s financial strength and profitability was further evidenced by cash dividend distributions over the last two years.

With Vietnam’s strong macroeconomic momentum and ongoing progress toward emerging market status, bank stocks are well-positioned to capitalize on a favorable economic outlook and substantial capital inflows driven by improved market sentiment. This creates a compelling investment case, driven by the sector’s strong earnings growth potential, lowering risk through improved governance, 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.

Strong Earnings Momentum: the Sector’s Net Profit Expected to Deliver a 17.4% Growth in 2025

Credit expansion potentially exceeding 16% annually. Vietnam is undergoing a bold wave of reforms aimed at enhancing government efficiency and driving transformative infrastructure development. Key initiatives, such as the $67 billion North-South High-Speed Railway—expected to add approximately 1% to annual GDP growth during its development—or the ambitious expansion of metro networks in Hanoi and Ho Chi Minh City with nearly $80 billion in planned investment, a reset to reshape the economic landscape. Supported by low public debt and robust reforms, GDP per capita is projected to grow at double-digit rates annually over the next decade (for more detailed analysis, see our Doi Moi 2.0 note).

This optimistic economic outlook is expected to drive substantial credit demand, particularly for retail lending, fueled by fast-rising income levels. Historically, credit growth has outpaced nominal GDP growth by an average of 1.6x, a reflection of the banking sector’s central role in providing capital due to the underdevelopment of alternative financing channels such as corporate bonds or commercial paper. As these conditions persist, the sector is well-positioned to capitalize on the anticipated economic expansion.

Additionally, the profitability of the lending business, which has been under pressure in recent years due to subdued credit demand and recovery-support measures, is expected to improve. With retail lending—offering higher margins than corporate loans—gaining momentum and longer-term corporate credit demand rebounding, banks’ NIM is projected to increase by 10–20bps.

Fee income only accounts for 11% of total operating income in 2022-2024, far below the 30-40% seen in international markets. This gap underscores a vast untapped potential for banks to diversify their revenue streams and enhance profitability. Vietnamese banks are increasingly capitalizing on fee-based services, supported by advancements in digital transformation and operational efficiency. Vietnam’s growing middle class and increasing wealth accumulation are fueling the need for wealth management services, while the surge in digital payments and e-commerce is boosting demand for transaction solutions and credit card services.

New and promising areas are also emerging, including Banking as a Service (BaaS), which allows banks to integrate financial services into non-financial businesses through APIs. This model enables collaboration with tech companies, retailers, and other industries by embedding services such as payment systems, lending products, or digital wallets directly into their platforms. For instance, retailers can offer installment loans at checkout, while ride-hailing apps integrate banking solutions for seamless transactions, expanding access and convenience for consumers.

Regarding bancassurance, although the life insurance sector has faced challenges over the past two years due to issues with overselling, the market is now showing signs of stabilization under new regulations and is poised for a gradual rebound. The non-life insurance segment, however, offers a considerable opportunity, driven by low penetration rates that indicate substantial room for growth. Increased awareness of health, vehicle, and property insurance, combined with ongoing developments in the industrial and infrastructure sectors, is expected to stimulate demand in this area.

Stabilizing Asset Quality and Enhanced Operational Efficiency

On the risk management front, Vietnam’s banking sector has made notable strides in strengthening asset quality. While reported non-performing loan (NPL) ratios have risen following the expiration of COVID-era relief measures, underlying asset quality shows clear improvement. Credit costs, which surged during the support periods, have since declined, while the loan loss reserves ratio remains close to 100%, reflecting enhanced provisioning and risk management practices.

A revitalized real estate market has also helped enhance income from handling non-performing loans, supported by improved frameworks for managing and liquidating collateral. With the economy gaining momentum, these advancements are poised to accelerate, driving down overall credit costs across the sector and solidifying its financial stability.

Operational efficiency has also seen significant gains over the past decade. Investments in digital transformation now enable banks to process up to 95% of transactions online, dramatically reducing costs while improving service quality and customer experience. Automation, process optimization, and targeted employee training have further streamlined operations, lowered the cost-to-income ratio (CIR), and enhanced competitiveness. These improvements position Vietnamese banks as agile, efficient players ready to capitalize on emerging opportunities in a dynamic market.

Lowering risk through improved governance

Transformative regulatory reforms to strengthen stability, transparency, and resilience. The Amended Law on Credit Institutions introduces stricter ownership limits, tighter disclosure requirements, and more rigorous credit exposure controls. These measures are designed to prevent manipulation, reduce concentration risks, and encourage diversified, responsible lending practices. The State Bank of Vietnam (SBV) has also been granted greater authority for early intervention in financially distressed institutions, a change prompted by past delays that led to the latest incident.

On capital adequacy, nearly all Vietnamese banks have adopted Basel II standards, with a roadmap in place for the gradual adoption of Basel III. Banks capable of leveraging advanced models to optimize capital requirements are encouraged to adopt earlier. This phased transition aligns the sector with global standards while allowing flexibility for gradual implementation. These reforms underscore SBV’s commitment to building a stable, competitive, and internationally aligned banking sector, strengthening investor confidence in its long-term prospects.

Attractive valuations for a top ROE in the region

With average trailing price-to-earnings (P/E) and price-to-book (P/B) multiples of just 8.3x and 1.4x, the sector is notably undervalued compared to regional peers, presenting a compelling opportunity for investors. Vietnam’s push toward emerging market status is poised to draw significant foreign capital inflows and enhance local investor sentiment. Representing over 40% of market capitalization, banks are set to benefit significantly due to their considerable size and liquidity.

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 35% discount to SOCBs on a relative valuation basis.

TIM