"We do not expect significant improvements in the capitalization of Vietnamese banks in the next 12-18 months," Moody's said. "Capital remains inadequate to absorb the extent of potential losses stemming from pervasive weaknesses in asset quality."
While it noted the government had taken some constructive steps on the banks, regulators haven't implemented "decisive" policies to address the need for better accounting and transparency, Moody's said.
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By way of comparison, China's banks, which have spurred concerns globally, saw their NPLs rise to 1.0 percent of assets in the last three months of 2013, according to data from regulators. But unlike the rally in Vietnam's share market, China's shares have trended downward for a year, partly due to concerns over the banking system.
China's government also has the resources – and some willingness -- to step in with financial help for troubled banks.
In Vietnam, "if they have to provide support, there's room. But it comes to the question does the government want to use public finances to support the banking sector and so far it's indicated it doesn't want to," Art Woo, an analyst at Fitch Ratings, told CNBC.
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But if Vietnam's banking system is wobbly, why are investors pushing up the stock market?
For one, not all investors believe the banking system looks as bad as the Moody's estimates suggest.
"The banking sector is improving," said Kevin Snowball, CEO of PXP Vietnam Asset Management, adding he believes NPLs are less than 10 percent of assets.
"We think it's on the way to resolution. A lot of collateral for these NPLs is in property and as the property sector begins to pick up that will assist in the resolution of these issues," he added.