Moody's Investors Service raised the outlook on Vietnam's bankingsystem to stable from a negative assessment, noting a stable businessclimate, improved macro-economic situation and easing liquidity stress.

Improvedmacro-economic stability helped strengthen the systemic liquidity, withdeposits seen growing recently, as the government's policies aimed toreduce the purchase of gold and foreign currencies, according to Moody'sSingapore-based vice president Gene Fang, quoted by the onlineVnexpress newspaper.

Fang said that banks were reducing dependence on interbank loans, which led to lower liquidity stress.

Moody'sreport on Vietnam's banking system – a comprehensive analysis and dataon the current and expected economic conditions and ratings drivers forthe banking system in the coming 12 to 18 months – pointed out that theoperating environment for lenders began to stabilise after falling intodecline since 2012 as a consequence of the rapid credit growths in theprevious years.

The country's inflation and interest rateswere on a downtrend from double-digit levels during the past two years.The increase in foreign direct investment, the shift of trade fromdeficit to surplus and efforts to emphasise economic stability overgrowth also helped to improve the situation.

However, theexisting credit problems will make the recovery of the banking systemremain slow, the report said, adding that credit loss provisions andcapital in banks were insufficient.

Banks' profitabilitywill remain under pressure due to the anticipated fall in borrowingdemand and the narrowing-down of the gap between the loan interest rateand the deposit interest rate. The report said that profitability willimprove in case the property market and the retail sector improve,leading to rising borrowing demand.

In July, the rating firm had upgraded Vietnam's credit rating, given the country's continued macro-economic stability.-VNA