Fitch: Basel III transition to strengthen Azerbaijan’s banking sector

The transition to Basel III standards is expected to strengthen the resilience of Azerbaijan’s banking sector by improving banks’ ability to absorb losses and withstand economic cycles, international ratings agency Fitch Ratings said.

Fitch said the implementation of the Basel III framework in Azerbaijan remains at a developing stage, with the country set to fully adopt the new requirements from January 2027, Caliber.Az reports, citing local media.

The reforms were approved by the Central Bank of Azerbaijan (CBA) in December 2025 as part of the Financial Sector Development Strategy for 2024–2026.

Under the new framework, the minimum Common Equity Tier 1 (CET1) capital requirement is set at 4.5% of risk-weighted assets, while the minimum Tier 1 capital requirement has been raised from 5% to 6%. The minimum total capital requirement, meanwhile, has been reduced from 10% to 8%.

The CBA has also introduced a 2.5% capital conservation buffer, alongside the 0.5% countercyclical buffer introduced in March 2025. Including these buffers, effective minimum requirements stand at 7.5% for CET1, 9% for Tier 1 capital and 11% for total capital.

Systemically important banks will face an additional differentiated capital buffer ranging from 1% to 4%, depending on their size. Fitch said the measure replaces previous fixed surcharges and will make capital requirements more tailored to individual banks.

The reforms also establish a framework for Additional Tier 1 (AT1) capital instruments, which can be written down or converted if a bank’s CET1 ratio falls below the 5.125% trigger level. However, Fitch expects retained earnings and common equity to remain the main sources of capital accumulation in the medium term, given the still-developing local AT1 market.

Fitch does not expect significant regulatory risks for most banks it rates, including ABB, Expressbank and AFB, citing their capital buffers at the end of the first half of 2026.

However, the agency said Kapital Bank, Bank Respublika and Unibank had relatively limited buffers against Tier 1 capital requirements, including applicable capital buffers, at the end of June.

Kapital Bank accounts for about 22% of Azerbaijan’s banking-sector assets, while Bank Respublika and Unibank each account for around 4%.

Fitch expects the three banks to maintain controlled asset growth during the second half of 2026 and, where necessary, limit dividend payments to ensure compliance with the CBA’s requirements by January 2027.

The ratings agency considers the regulatory reforms positive for banks’ credit profiles. The changes have already been reflected in Fitch’s decision to raise its assessment of Azerbaijan’s banking operating environment to “bb” from “bb-”.

Further reforms are planned over the medium term, including additional liquidity requirements, improvements to the Basel Pillar 2 framework and the adoption of IFRS 9.

According to Fitch, these measures should increase the transparency of banks’ financial reporting and strengthen underwriting discipline.

By Aghakazim Guliyev