Moody's Investors Service has upgraded its outlook for Singapore's banking system to stable from negative, saying the change reflects improving growth conditions and stabilising commodity prices that will limit a further weakening in asset quality and profitability.

The stable outlook is based on Moody's assessment of five drivers: Operating Environment (stable); Asset Quality and Capital (stable); Funding and Liquidity (stable); Profitability and Efficiency (stable); and Systemic Support (stable), according to a release issued yesterday.

"Loan growth will increase mildly but be sustained by the system's strong capital, funding and liquidity buffers," Moody's vice-president and senior credit officer Eugene Tarzimanov said. "Improving growth momentum in Singapore's key trade partners will support export-oriented manufacturers and offset some lingering weaknesses in the local economy."

Moody's expects real GDP growth in Singapore to edge up to 2.2 per cent this year and 2.5 per cent next year, from 2 per cent in 2016. Credit growth will also rebound to mid-single digits in this outlook, after almost flat growth last year.

The release last week of Singapore's first-quarter growth numbers of 2.7 per cent has likely prompted more optimism. The Trade and Industry Ministry also said that growth this year is likely to come in at more than 2 per cent.

Last week, S&P Global Ratings affirmed the "AA-" credit rating of the three Singapore banks on the basis of their sound fundamentals.