The Enduring Appeal of real Estate as Collateral

Within vietnam’s banking sector, real estate remains the dominant form of collateral for loans.Banks favor real estate due to its perceived stability and long-term gratitude potential. This preference creates a critically important dependency on the health of the real estate market.

Real estate’s inherent characteristics,such as its tangible nature and tendency to appreciate,provide a substantial buffer against loan defaults. The value of the property often exceeds the outstanding loan balance, acting as a safeguard for banks in their lending activities.

Data from various bank financial reports confirm real estate’s prevalence in mortgage portfolios, highlighting the banking system’s deep-rooted connection to the property sector.

State-Owned Banks Heavily Invested in real Estate

leading state-owned banks, including Agribank, BIDV, and Vietinbank, hold substantial real estate collateral portfolios. Agribank, for instance, saw its real estate holdings increase by over 10% in 2024, reaching 2.92 trillion VND, surpassing other asset classes like gardens (1.9 trillion VND) and securities (54.66 trillion VND). This trend underscores a consistent credit strategy among state-owned “big companies” that is closely interwoven with the real estate market.

As of the close of 2024, BIDV reported total collateral valued at 3.33 million VND, while Vietinbank’s reached nearly 3.39 million VND, further illustrating the significant reliance on real estate within these major financial institutions.

Cracks in the Foundation: Rising Bad Debts

Despite the apparent stability, vulnerabilities exist. SSI Research indicates that problem loans have not improved significantly in the first quarter of 2025, particularly those tied to real estate projects facing legal hurdles. These projects suffer from constrained liquidity and diminished investor confidence.

Consequently, some mortgage loans linked to these troubled projects have been reclassified as non-performing loans, inflating the proportion of such loans within commercial banks’ portfolios. State-owned commercial banks also face pressure from loan restructuring for companies in the construction materials sector, which is indirectly affected by the real estate downturn.

The average non-performing loan ratio across 24 banks monitored by SSI Research climbed to 2.46% in the first quarter of 2025,nearing the 2.58% peak observed in the first quarter of 2023. Delinquency loans surged by 11.6% in a single quarter, with group 2 debts increasing by 2.8% qoq and bad debts by 20.4%. This escalating trend signals a deepening cycle of risk within the credit system.

According to Fitch Ratings, asset-quality risks are indeed growing for Vietnamese banks due to government crackdowns and constricted real-estate sector credit [[1]]. Furthermore, Vietnamese banks, with some exceptions, are heavily exposed to the property sector [[2]].

Decreasing Provisioning: A Risky Strategy?

Adding to concerns, banks have not been actively increasing their provisions for potential losses. The non-performing loan coverage ratio has fallen to 88.7%, the lowest in five years, suggesting a perhaps lenient approach to credit risk management.

A VPBANKS Securities Company report reveals that only 0.24% of unpaid loans were provisioned for by 11 analyzed banks in the first quarter of 2025, down from 0.30% in the same period last year. This creates a paradoxical situation where non-performing loans are rising while provisioning is declining, even as pressure to adopt cautious international accounting standards (IFRS) increases.

Vietcombank, Sacombank, TPBANK, and VIB have experienced the moast significant reductions in procurement costs, driven by expectations of market recovery and supportive government policies.

The banking system is at risk of “double burden” if the subjectivity increases and the real estate market does not recover as expected.

Experts caution that the banking system faces a “double burden” if optimism proves unfounded and the real estate market fails to rebound as anticipated.

Short-Term Optimism,Long-Term Vulnerabilities

In the near term,analysts are optimistic that the peak in non-performing loans will occur in the first half of 2025,followed by a gradual decline due to low interest rates and debt restructuring initiatives.

However, over-reliance on real estate as collateral creates long-term vulnerabilities. The banking system could be susceptible to market volatility, as collateral values may not always accurately reflect the true risk associated with loans. The turmoil in Vietnam’s bond and real estate markets has been attributed to rising interest rates,regulatory bottlenecks,and reduced bank lending [[3]].

Real Estate Rebound: A Boost for Bank Asset Quality

As the real estate market shows signs of recovery after a prolonged downturn, the financial health of commercial banks is also improving. This resurgence is expected to bolster real estate companies’ cash flow, facilitate the recovery of bad debts, and enhance overall credit performance.

A recent VPBANKS securities Company analysis indicates that “other income” items, including debt recovery, have increased significantly in the first quarter of 2025, reflecting the positive impact of the real estate market.

In 2024, income from non-performing loans constituted a substantial portion of “other income” for Vietcombank (84%), BIDV (88%), and Vietinbank (79%), the three largest commercial banks in Vietnam.

In the first quarter of 2025, these banks continued to experience rapid growth in bad debt recovery, up 51% year-over-year. The rate of unpaid loans increased by 2 basis points, indicating improved efficiency in recovering collateral and managing delinquent debts.

SSI Research reports that real estate market liquidity in the first quarter of 2025 decreased slightly compared to the fourth quarter of 2024 but remained significantly higher than the previous year,particularly in Hanoi,where it increased by approximately 70-72%.

This improved liquidity enables banks to accelerate the liquidation of collateral assets and recover previously written-off bad debts. Revenue growth from these sources provides crucial support, offsetting stable profit margins from foreign exchange and bond transactions and declining service fee income in volatile global financial markets.

Government Intervention and Future Prospects

Nguyen xuan Binh,head of KBS Securities Vietnamese corporation (KBSV) analysis,attributes the rise in bad debts in recent years to reduced profitability among real estate companies and limited access to bond financing.

However, government efforts to remove legal obstacles, promote public investment, and implement flexible monetary policies have revitalized numerous real estate projects, improving corporate debt repayment capabilities.

Successfully handling many bad debts in the real estate sector will not only help banks lower bad debts, but also reverse provisions to create a strong driving force for profit growth in 2025.
Nguyen Xuan Binh, head of KBS Securities Vietnamese corporation (KBSV) analysis

Binh emphasizes that accomplished resolution of bad debts in the real estate sector will not only reduce banks’ non-performing loans but also reverse provisions, driving profit growth in 2025.

The controlled recovery of the real estate market is generating a positive ripple effect, benefiting credit institutions and industry companies by improving asset quality, strengthening financial foundations, and mitigating potential macroeconomic risks.