The outlook for Bermuda’s banking system is stable with improving asset quality, strong capital buffers and sound liquidity, which balances profitability challenges, Moody’s Investors Service has said in a new report.

The outlook expresses the credit rating agency’s expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months.

“The operating environment will improve as Bermuda emerges from a six-year recession,” said Jeanne Del Casino, a Moody’s vice-president.

“Increased infrastructure investment in the tourism sector and international airport renovations should drive moderate growth during the next few years.”

Moody’s forecast real GDP growth of 1 to 2 per cent this year and next year, following an estimate of flat growth for 2016.

The report “Banking System Outlook — Bermuda: Recovering Economy, Improving Asset Quality and Profitability, Underpin Stable Outlook,” also noted that the operating environment for Bermuda banks is supported by a strong institutional framework which helps maintain Bermuda as an attractive offshore jurisdiction as well as by its adoption of Basel III rules in 2015.

Moody’s said that with the economy strengthening, problem loans are declining reflecting writedowns after the recent recession and improvements in borrower quality. Problem loans remained high at 8.25 per cent in 2016, but down from 11.6 per cent in 2013 and more than a third on a nominal basis.

The investors service said that, additionally, the quality and predictability of capital will strengthen as tougher Basel III requirements emphasise increasing tangible capital requirements through 2019.

Moody’s also conducted a scenario analysis to gauge the solvency of Bermuda’s banks under both a base case and a low probability, highly stressed scenario that is roughly equivalent to a 1-in-25-year event. Under the stress scenario, there is a severe but manageable impact on capital.

The improvement in asset quality has led to lower provisioning costs, which will bolster profitability, according to Moody’s.

It also said that Bermuda’s banks maintain robust liquidity that is needed as the island does not have a central bank that can act as a lender of last resort.