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by George Georgakopoulos

ATHENS, July 30 (Xinhua) -- Moody's Investors Service announced on Monday it has shifted its outlook on the Greek banking system from stable to positive on expectations of an improvement in the banks' funding and asset risk over the next 12 to 18 months.

In a report focusing on the eurozone country's credit sector as well as its non-performing loans, Moody's said it expects the Greek economy to maintain its positive momentum over the outlook period, provided that Athens remains focused on structural reforms to attract more foreign investment.

The rating agency was in line with most Greek and European authorities and observers to project an economic growth of 2 percent this year and 2.2 percent in 2019, supported by a strong increase in exports and services, particularly tourism.

Moody's expects bad loans to remain elevated, but banks will likely meet the targets committed to the eurozone regulator reducing their non-performing exposures (NPEs) to around 35 percent of total loans by the end of 2019. It argued lenders are progressing "amid an improving, but still challenging operating environment".

"Problem loans will gradually decline from very high levels as Greek banks benefit from improved loan recovery laws," Nondas Nicolaides, a Vice President and Senior Credit Officer at Moody's, said.

The outlook upgrade by Moody's follows a one-notch credit rating upgrade of Greek lenders by Standard & Poor's earlier this month, though with a stable outlook.

Moody's report added that Greek banks have comfortable regulatory capital levels, with a common equity Tier 1 (CET1) ratio for the system of around 15.8 percent in March 2018, although sizable Deferred Tax Assets (DTAs) continue to undermine the quality of such capital.

Greek banks' dependence on central bank funding and emergency liquidity assistance (ELA) is declining, with ELA likely to be fully eliminated in the coming months, as banks regain access to the interbank repo and covered bond markets and deposits gradually increase, said Moody's.

The report further highlighted that most Greek banks are likely to remain marginally profitable through 2019, as credit and operating costs remain low.

However, net interest margins are seen to remain pressured as banks continue to deleverage and run down their loan balances through write-offs and sales of NPEs, Moody's noted.