Our outlook for the Azerbaijani banking sector remains neutral, meaning we expect key financial metrics to remain stable this year, Maksim Maliutin, Deputy Director for CIS+ and Middle East Banks at the international rating agency Fitch Ratings told APA.
Maliutin highlighted that this improvement was confirmed in October 2024 when Fitch Ratings revised Azerbaijan’s local operating environment score from B+ to BB-. The upgrade was driven primarily by a reduction in legacy asset quality risks that previously weighed on the sector.
Since 2019, the government has taken steps to clean up the banking sector by removing weaker banks. At the same time, Azerbaijan’s business climate has strengthened, and local banks have reduced their appetite for long-term and large-scale corporate lending. Instead, they are now focusing more on granular retail lending, which is less risky and more profitable due to lower consumption.
By the end of 2024, retail loans accounted for approximately 60% of total sector loans, compared to about 40% at the end of 2018. This represents a significant increase over the past few years.
Maliutin also noted that since 2022, the Central Bank of Azerbaijan has made significant efforts to enhance the regulatory framework and sector risk profile. The regulator has introduced measures to cool down rapid retail lending growth and tightened rules on foreign currency lending to unhedged borrowers. Furthermore, regulations on related-party lending—previously a significant credit risk for local banks—have also been strengthened.
As a result, problem loans have reached record lows. By the end of 2024, loan quality metrics stabilized, and we expect them to remain stable in 2025, despite weak credit penetration, with sector loans equaling just 22% of GDP at the end of 2024. However, some manageable deterioration in retail loan quality could occur due to rising household debt burdens.
The regulator’s Tier 1 ratio has declined moderately from higher levels in 2020, mainly due to continued loan book growth, particularly in retail lending, where risk weights are higher. Nonetheless, it remains well above the minimum regulatory threshold of 5%. Maliutin emphasized that the ratio is expected to remain stable in 2025.stable in 2025.
Fitch Ratings also views positively the Central Bank’s plans to implement Basel III capital structures and adopt a risk-based approach to banking supervision, aligning capital requirements more closely with international standards.
Liquidity remains strong in Azerbaijan’s banking sector, supported by a moderate share of loan books in total sector assets (around 50% at the end of 2024). Refinancing risks are also mitigated by the sector’s reliance on customer deposits, particularly current accounts, as the primary funding source.
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