* Capital buffers help depositors' confidence
* Cenbank's Costa says more needed to increase credit supply
* Bad loan problems persist
By Sergio Goncalves
LISBON, May 30 (Reuters) - After three years of the worst recession since the 1970s, credit is finally flowing back into the Portuguese economy but more must be done to stimulate growth in the bailed-out country, bankers said on Thursday.
"I am sure that we are entering a phase of greater supply of credit to Portuguese companies and even adjustments to its price," Nuno Amado, chief executive officer of the country's largest listed bank, Millennium BCP, told a conference hosted by Reuters and TSF radio.
"We will be more active in lending to companies," he added.
Portugal's government has complained that companies are still struggling to access credit that is prohibitively expensive or comes with very stringent terms, despite an improvement in the perceived level of risk over the last few months.
Portugal's benchmark bond yields have fallen to around 5.5 percent from a 17 percent high in January 2012, as Lisbon regains access to the bond market. It hopes to exit its 2011 international bailout programme, as scheduled, by mid-2014.
Bank of Portugal Governor Carlos Costa told the same conference that more needed to be done to increase banks' willingness to lend, such as improving transparency in company accounts, but the situation was improving.
"Today we have a more solid banking system and in better shape to finance a sustainable recovery of the Portuguese economy," Costa said. However he added that banks still had profitability problems and a heavy burden of bad loans.
Costa urged the government to move ahead with its plan to reform corporate tax and create incentives for companies to open their capital to new investors in order to boost financing.
Analysts worry that low levels of investment will delay Portugal's emergence from the worst recession since the 1974 return to democracy. The economy is still expected to contract 2.3 percent this year after last year's 3.2 percent slump, before returning to meagre growth in 2014.
Amado said there are signs, at least for companies if not yet for households, that the worst may be over after a sharp drop in credit supply in 2010-2012. But he also called for incentives to stimulate demand for loans.
However, despite the signs of progress, Amado warned against relaxing austerity measures too fast.
"I'm a bit afraid that too much easing ... may just imply more effort later on... It is essential to have more economic activity, but without relaxing the austerity too much," he said.
Ricardo Espirito Santo Salgado, CEO of BES - the country's second-largest listed lender - said banks were now stronger and more resilient, praising the Portuguese for their confidence in the banking system, which has set the country aside from other struggling euro zone economies.
"The governor said we now have more liquidity and that is true; there has been a positive evolution here. One of the reasons is the trust of the Portuguese in their banks," Salgado said.
"Savings are growing, deposits are stable and the levels of confidence are superior to Spain, Ireland and Greece."
But he complained that ratings agencies were slow to recognise the progress being made in Portugal, still assessing Portugal's debt as "junk".
"Investors have recognised Portugal's efforts and achievements. However, rating agencies haven't yet followed this movement," he said.
Bankers at the conference said deposits were either stable or rising, brushing off any impact from the tumultuous bailout in Cyprus where large bank deposits were taxed.
Costa, who is also a European Central Bank Governing Council member, said that despite a worrying trend of rising bad loans, higher capital requirements for banks are helping to reinforce their overall stability.
"Raising capital requirements and doing stress tests on banks' balances will not just reinforce the stability of the financial system but also increase the confidence of depositors and national savers," he said.
Participants at the conference, however, criticised capital buffers against risky debt assets imposed by the European Banking Authority in 2011, saying the rules have to be more flexible to allow them to reduce their holding of expensive loans.