Vietnam's Banking Sector: Riding Regulatory Reforms to Unlock Value

The Vietnamese banking sector, long plagued by non-performing loans (NPLs) and governance challenges, is undergoing a transformative regulatory overhaul. As of early 2025, amendments to the Credit Institutions Law, paired with revived mechanisms like the defunct Resolution 42, are reshaping the landscape. These changes aim to attract foreign capital, bolster capital adequacy, and streamline bad debt resolution—creating both opportunities and risks for investors.

Foreign Ownership: A Bridge to Strategic Capital

The most significant shift is the increase in foreign ownership caps to 49% for banks involved in acquisitions of distressed lenders, up from 30%. This policy, enshrined in Decree No. 69/2025, targets weaker institutions like OceanBank (now MBV) and Construction Bank (VCBNeo), which have been acquired by stronger rivals. While the cap excludes state-controlled banks, it opens doors for foreign investors to take strategic stakes in recapitalized institutions.

Banks like Vietcombank—already a regional leader—could leverage foreign partnerships to enhance risk management and technology. However, execution risks remain: charter amendments and regulatory approvals may delay foreign entry, favoring institutions with proactive governance.

NPL Resolution: Reviving Resolution 42's Legacy

The expiration of Resolution 42 in late 2023 had slowed NPL recovery, as banks lost the power to unilaterally seize collateral. The revised Credit Law now reintroduces key provisions, allowing banks to seize collateral even in cases involving criminal proceedings—provided such clauses exist in loan agreements. This clarity has already boosted recovery rates, with data showing NPL resolution surged to 65% monthly during Resolution 42's tenure.

The reforms also address collateral protection, ensuring assets held as evidence in legal cases are returned to banks. This is critical in a sector where systemwide NPLs hit VND833 trillion (US$40.7 billion) by early 2025, with 65% concentrated in five weak banks, including SCB (bad debt ratio 98.5%).

Structural Reforms: Strengthening Governance

The law introduces stricter cross-ownership limits (10% for institutional shareholders, 15% for individuals) to curb corporate group dominance. Lending limits to single customers will drop from 14% to 10% of equity by 2029, reducing exposure to risky borrowers.

These measures target systemic vulnerabilities, such as those exposed by SCB's collapse. Meanwhile, the State Bank of Vietnam (SBV) gains early intervention powers to stabilize at-risk banks before crises escalate—a lifeline for the sector's long-term stability.

Opportunities and Risks: Where to Invest

Opportunities:
- Retail-focused banks like Techcombank (TCB) or MBV (post-OceanBank integration) stand to benefit from improved capital and diversified portfolios. Their emphasis on consumer lending and digital infrastructure aligns with Vietnam's rising middle class.
- Foreign-partnered institutions, such as VietinBank (VIB) or DongA Bank (Vikki Bank), may attract strategic capital for tech upgrades and risk mitigation.

Risks:
- Real estate exposure: While a rebound in the sector (driven by NPL asset sales) could boost collateral values, overexposure to developers with shaky balance sheets remains a concern.
- Geopolitical pressures: U.S. tariffs and global economic slowdowns could strain corporate borrowers, reigniting NPL spikes.

Investment Strategy: Selective and Prudent

Investors should prioritize banks with:
1. Strong capital adequacy ratios (e.g., Vietcombank's 13.5% as of Q1 2025).
2. Diversified loan portfolios away from real estate.
3. Transparent governance structures—avoid banks linked to corporate groups with opaque ownership.

For long-term investors, the sector's alignment with Vietnam's 8% GDP growth target and 16% credit growth offers a compelling macro backdrop. However, short-term volatility is inevitable, given lingering NPL challenges and regulatory implementation delays.

Conclusion

Vietnam's banking reforms are a double-edged sword: they unlock value through foreign capital and NPL resolution but require patience and selectivity to navigate risks. Institutions with robust governance, retail dominance, and prudent lending practices will lead the recovery. For investors, this is a sector of high-reward, high-conviction picks—not a blanket bet.

Final thought: In Vietnam's banking arena, the winners will be those who marry regulatory tailwinds with disciplined risk management.