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

Improved macro-economic stability helped strengthen the systemic liquidity, with deposits seen growing recently, as the government's policies aimed to reduce the purchase of gold and foreign currencies, according to Moody's Singapore-based vice president Gene Fang, quoted by the online Vnexpress newspaper.

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

Moody's report on Vietnam's banking system – a comprehensive analysis and data on the current and expected economic conditions and ratings drivers for the banking system in the coming 12 to 18 months – pointed out that the operating environment for lenders began to stabilise after falling into decline since 2012 as a consequence of the rapid credit growths in the previous years.

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

However, the existing credit problems will make the recovery of the banking system remain slow, the report said, adding that credit loss provisions and capital in banks were insufficient.

Banks' profitability will remain under pressure due to the anticipated fall in borrowing demand and the narrowing-down of the gap between the loan interest rate and the deposit interest rate. The report said that profitability will improve 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