Rising Bond Yields Squeeze Vietnamese Bank Profits and Slow Issuance

Keywords: Corporate bonds, Vietnamese banks, issuance yields, liquidity, funding costs, capital markets, real estate credit, VBMA, FiinGroup, VNDirect

Introduction

As bank funding costs rise rapidly and approach lending rates, Vietnam's corporate bond market is entering a clear adjustment phase. According to Vietnam Bond Market Association (VBMA) data, banks that successfully issued bonds in April had to accept high yields, typically 8.4%-8.9% per year. Compared to the same period last year, this level is significant, when institutions like MSB and Techcombank paid only about 5.2%-5.3% annually.

The rapid rise in yields is not only changing the issuance landscape but also reflects greater liquidity pressure across the financial system. When bank bonds are no longer significantly cheaper than loan funding costs, the incentive to issue weakens. Behind this is a chain reaction: higher funding costs, narrower profit margins, more cautious fundraising plans, and a relative shift of funds to other business sectors, especially real estate.

Rising Bond Yields: A Signal of Liquidity Pressure

VNDirect data shows that in April 2026, the average yield on private bank bonds rose to 8.5% annually, up 1.6 percentage points from end-2025 and 3.1 percentage points year-on-year. For credit institutions, this change has a significant impact as it directly raises medium- and long-term funding costs.

According to a State Bank of Vietnam report, as of March 2026, the average lending rate of domestic commercial banks was 7.4%-9.7% annually, up 0.3 percentage points from February and 0.7 percentage points from end-2025. As bond yields approach lending rates, profit spreads compress. In other words, the cost of raising funds is close to the income from interest-earning assets, weakening operating performance.

This is also the main reason for the sharp decline in bank bond issuance in the first four months of this year. Bonds should be a tool to supplement medium- and long-term capital, but if issuance costs are too high, they become less attractive compared to alternatives like deposits, interbank borrowing, or open market operations.

Why Are Banks Reducing Bond Issuance?

In the first quarter of 2026, although the banking system experienced a period of tighter liquidity, especially during the Lunar New Year, banks still prioritized more flexible funding sources over increasing bond issuance. Customer deposits, interbank market transactions, and liquidity support tools from the State Bank of Vietnam were preferred.

This approach is highly technical. Bonds are typically suitable when banks need to lock in long-term funds for specific purposes. But in an environment of rapidly rising market rates and unstable funding costs, issuing private bonds at high yields may carry the risk of locking in expensive funds for a long time, reducing balance sheet flexibility.

Additionally, about half of listed banks reported weaker capital mobilization capacity in their first-quarter reports. This shows that pressure exists not only in bond issuance but throughout the entire funding structure. When deposit growth is slower than capital usage, banks are forced to seek additional funding sources. However, interbank channels are also near their limits, making bonds a final adjustment "valve," but an increasingly expensive one.

Impact on Profits and Market Structure

Once bond yields approach lending rates, the net profit from credit operations is clearly affected. For banks, net interest margin is not just a simple difference between fund inflows and outflows; it must also cover provisions, operations, maturity mismatch risk, and liquidity risk. When funding costs rise faster than the loan portfolio's ability to reprice, profits are compressed.

This impact is especially pronounced for banks that promote medium- and long-term loans. Financial experts point out that long-term loans always require higher provisions due to greater term and credit risks. Therefore, if banks must fund at bond yields of 8.5%-8.9% annually, they not only face higher funding costs but also pressure to strengthen capital buffers to meet regulatory requirements.

From a market perspective, VBMA data shows a significant change in issuance structure. If banks accounted for 100% of corporate bond issuance in Q1 2025, that share dropped to 30% in Q1 2026, while real estate rose to 60%. This reflects two parallel trends: banks becoming more cautious about the bond channel, and real estate companies increasingly relying on capital markets to make up for tightening bank credit lines.

Non-Financial Firms Seizing Opportunities

High bank yields have unintentionally created space for some non-financial firms to return to the bond market, including Transimex, Coteccons, and BAF Vietnam. The diversification of issuers stems not only from funding needs but also from the new legal framework, especially Decree 245/2025/ND-CP effective from September 2025, which expanded bond financing options for multiple sectors.

However, this does not necessarily mean a sustainable recovery. In reality, high yields remain a major obstacle for companies with unstable cash flows or long payback periods. Manufacturing and project development firms may need funds in Q2 and Q3, but if bond costs remain high, they must choose between accepting expensive funds or delaying investment plans.

FiinGroup says the bond market typically accelerates in Q2 and Q3 due to production needs, project implementation, and credit growth. But this year, conditions may be calmer as rates show no clear sign of decline. Issuers will be more cautious, entering the market only when funding needs are truly urgent or market conditions are favorable.

Outlook: Caution Likely to Prevail

In the short term, a cautious tone will likely continue to dominate the corporate bond market. For banks, large-scale issuance is unlikely if spreads are insufficient to cover costs and risks. For companies, especially real estate groups, tightening bank credit access will force them to reconsider bonds as an important alternative funding source.

Even so, this return does not mean a sharp increase in market liquidity. When rates are still high, each issuance must be carefully weighed in terms of timing, tenor, collateral, and cash flow structure. Thus, the market will shift from "rapid expansion" to "credit quality stratification."

Conclusion

The recent sharp rise in bank bond yields is not just a reflection of higher funding costs but a signal of changing liquidity cycles in Vietnam's financial system. As issuance yields gradually approach lending rates, bank profits are compressed, bond issuance demand declines, and the capital market enters a more selective phase.

In this context, banks will prioritize liquidity and optimize funding costs, while companies need to be more flexible in their financing strategies. As a result, Vietnam's corporate bond market is unlikely to return to its previous high-growth phase; instead, it will move toward being more cautious, more differentiated, more sensitive to rates, and also more responsive to changes in credit policy.