Vietnam’s Banking Sector Faces Pressure to Cut Interest Rates: A New Cycle of Divergence Begins

The State Bank of Vietnam (SBV) has recently delivered a clear message: banks that fail to lower their lending rates could face reductions in their credit growth quotas for 2027. From my perspective, this move effectively calls on the banking sector to share more of its gains with the broader economy, particularly at a time when bank profits have continued to grow strongly. It could become a powerful lever forcing banks to accept tighter net interest margins (NIMs) in order to support businesses, while also ushering in an unprecedented period of competition and market polarization.

NPAT growth of industry groups in Q1/26 and Q2/26

Source: Fiin ProX, compiled by Virtus Prosperity

According to the SBV’s report at its meeting with the Prime Minister, the central bank intends to use adjustments to credit growth quotas as a form of market discipline. Banks that fail to proactively reduce lending rates or demonstrate a willingness to share profitability with the broader economy may see their credit growth limits tightened in the following year. This marks the first time the SBV has publicly linked credit growth quotas with banks’ responsibility to lower lending rates, underscoring the regulator’s determination to bring down borrowing costs, which are still considered high relative to businesses’ capacity to absorb capital.

In my point of view, pressure on NIMs is becoming unavoidable. Bank profits have been growing at a much faster pace than those of the non-financial corporate sector, creating an increasing imbalance in how economic gains are distributed. As NIMs come under pressure, competition among banks will no longer simply revolve around offering higher deposit rates to attract funding. Instead, the focus will shift towards the ability to secure low-cost funding, optimize operating expenses and leverage technology to improve efficiency.

In this new competitive environment, banks with strong current account and savings account (CASA) franchises, access to lower-cost international funding and advanced technology platforms capable of reducing personnel and operating costs are likely to hold a significant advantage. These institutions will be better positioned to maintain profitability even as NIMs compress, thanks to their lower funding costs and superior operational efficiency. By contrast, weaker banks and those slow to adapt, particularly institutions whose business models rely heavily on aggressively raising deposit rates to fund their lending ecosystems, or on using short-term funding to finance large, long-term projects, could face significant challenges.

Source: Financial statements of commercial banks, compiled by Virtus Prosperity

Based on my observations, the K-shaped divergence within Vietnam’s banking sector is likely to become increasingly pronounced. Stronger banks with sustainable strategies and solid competitive advantages will continue to grow and capture market share, while weaker institutions may fall further behind and experience slower growth. Pressure to reduce lending rates and compress NIMs could also force banks to restructure their loan portfolios. Lending to highly speculative or higher-risk sectors may become more selective, while greater emphasis will be placed on borrowers with stronger credit quality and more sustainable cash flows.

Looking ahead, Vietnam’s banking sector is likely to see intensifying competition in technology, service quality and risk management capabilities. Banks that are slow to innovate or fail to keep pace with digital transformation may find it increasingly difficult to maintain their market position. At the same time, a process of market consolidation could eventually lead to mergers and acquisitions (M&A), voluntary restructuring or regulatory-led intervention involving weaker institutions.

From a regulatory perspective, using credit growth quotas as leverage against banks that fail to lower lending rates is also a way to promote a more competitive and efficient banking system, one driven by productivity and capital efficiency rather than simply balance-sheet expansion. However, the policy could present a greater challenge for smaller banks, which generally have less room to cut lending rates than larger institutions with stronger funding franchises and lower operating costs.

Ultimately, Vietnam’s banking sector is entering a period of structural transition in which banks may be required to sacrifice part of their profitability in support of the broader economy. The next phase of competition will no longer be defined primarily by interest rates, but by management capability, technological strength, funding advantages and the ability to adapt. Banks with strong fundamentals and the ability to respond quickly to these changes will be better positioned to survive and expand. Those that are slower to adapt or structurally less competitive may face increasing pressure. The result could be a much more polarized banking landscape, with a K-shaped pattern of divergence becoming an increasingly defining feature of the sector in the years ahead.