Higher deposit rates weigh on bank profit margins

Higher deposit rates weigh on bank profit margins

Rising deposit rates and lagging lending rate adjustments continued to compress banks’ net interest margins in the first quarter, with analysts warning that a meaningful recovery remains unlikely in the near term.

Financial statements for the first quarter of 2026 from 27 listed banks showed that the group’s average net interest margin (NIM) stood at 2.87 per cent, down from 2.93 per cent in Q4 of 2025. Of the banks, 20 reported narrower margins.

Credit growth across the banking sector reached a record-high 19.1 per cent in 2025, while deposit growth continued to lag behind at approximately 14-15 per cent.

In Q1 of this year, credit expanded by 3.18 per cent, whereas deposit growth reached only around 1 per cent, adding further pressure on system liquidity and intensifying competition among banks to draw in deposits through higher interest rates.

VPBank was among the best performers in the banking sector in regards to NIM in Q1

Deposit rates rose sharply in the early months of 2026, with some long-term deposits offering rates exceeding 9 per cent per annum. Although banks adjusted lending rates upward, NIMs remained under pressure because lending rate increases typically take longer to materialise than rises in deposit rates.

Across the banking system, VPBank recorded the highest NIM as of the end of Q1 at 5.17 per cent. It was followed by HDBank at 4.41 per cent, KienlongBank at 4.06 per cent, MB at 3.85 per cent and Techcombank at 3.66 per cent.

Nguyen Quang Huy, CEO of the Faculty of Finance and Banking at Nguyen Trai University, said the banking industry faced a double challenge in the first quarter of 2026 as it grappled with shrinking NIMs while also seeing declines in certain non-interest income streams.

“This is a sign that the sector’s profit growth potential is narrowing significantly compared with previous periods,” he said.

According to Huy, NIMs may improve modestly in the coming quarters if funding pressures ease and capital flows return to the banking system after a period of heightened demand for gold accumulation and high-yield savings products.

However, a strong recovery is unlikely in the short term, given the many uncertainties facing the global economy, ranging from oil prices and inflation to geopolitical tensions and supply chain risks.

Bui Van Huy, vice chairman and head of Investment Research at FIDT JSC, said banking sector NIMs would remain under pressure in the short term, particularly during Q2.

“The reason is that funding costs typically react with a lag following a period of rising deposit rates, while asset yields cannot be adjusted at the same pace. Medium- and long-term loans, preferential-rate lending programmes and the need to support customers make it difficult for banks to raise lending rates excessively,” he said.

Le Thanh Tung, a member of the Board of Directors at state lender VietinBank, noted that recent domestic and international macroeconomic developments had caused interest rates to rise sharply.

Under its baseline scenario, VietinBank expects the pace of interest rate increases to slow and gradually stabilise as market conditions become more favourable. However, should external shocks persist, interest rate pressures could continue throughout 2026.

Against a backdrop of high deposit rates and lending rates that must be kept under control to support economic growth, many banks said they would restructure their credit portfolios, focusing on higher-yielding and more efficient loans to improve NIMs generated from lending activities.

Commenting on the outlook for NIMs, Huy from FIDT JSC said NIMs could improve in the second half of 2026.

The extent of improvement, however, is likely to vary significantly across banks. Institutions with high current account savings account ratios, large customer bases, high proportions of short-term lending and strong asset quality will be better positioned to protect their NIMs.

By contrast, banks with elevated funding costs and high loan-to-deposit ratios, coupled with lower bad debt coverage ratios or loan portfolios heavily exposed to the real estate and consumer lending segments, are expected to face prolonged pressure.

VIR