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By Andrei Khalip and Sergio Goncalves
LISBON, Feb 7 (Reuters) - Portugal's banking system will become more stable this year, but profitability will be held back by limited credit demand and bad loans, Moody's analyst Pepa Mori said on Tuesday.
The ratings agency has a stable outlook for Portuguese banks, which have been among the most fragile in the euro zone after two rescues in 2014 and 2015, for the next 12-18 months.
"Overall, the fundamentals are weak but they are on a stabilizing trend after years of deterioration... Our view is that the trend will continue. That will be the trend for 2017," she told Reuters at a conference in Lisbon.
After years of capital shortages and growing provisions for bad loans, state-owned Caixa Geral de Depositos is being recapitalised to the tune of 5 billion euros, while Millennium bcp completed a 1.3 billion euro capital increase.
"The good news is that the stock of problem loans has stabilized. But it is still very high and will continue to drag on the balance sheet of the banks for some time," Mori said.
Moody's was awaiting a decision from the Portuguese authorities on what bad bank model they would adopt.
"We have had many models of bad banks in Europe, with or without access to public funds ... We have to see what kind of scheme will be approved."
Concerns about profitability were aligned with Moody's view on most European banks as low interest rates and subdued business volumes weigh on revenues.
"It's going to be difficult to improve profitability," she said, as a large part of net interest income and profits last year were driven by one-off cuts in funding costs.
"The trend is that it will be very much stable compared to 2016 on a recurrent basis."
Mori said the planned sale of Novo Banco was important in terms of providing a sense of medium-term strategy regardless of who ends up owning the bank. Lisbon has not ruled out nationalising it if the sale fails. (Editing by Axel Bugge and Alexander Smith)