Fitch Ratings: Azerbaijan's banking sector outlook remains stable

The outlook for Azerbaijan's banking sector remains neutral, with key financial indicators expected to remain stable throughout the year, according to Maksim Maliutin, Deputy Director for CIS+ and Middle East Banks at Fitch Ratings.

Maliutin highlighted that in October 2024, Fitch Ratings upgraded Azerbaijan’s local operating environment score from B+ to BB-, Caliber.Az reports via local media.

This improvement was primarily attributed to a reduction in legacy asset quality risks that had previously posed challenges for the sector.

Since 2019, the Azerbaijani government has implemented measures to strengthen the banking sector by eliminating weaker banks. At the same time, the business environment has improved, leading banks to shift their focus from large-scale corporate lending to retail lending, which is deemed less risky and more profitable due to lower consumer spending.

By the end of 2024, retail loans accounted for approximately 60% of total sector lending, a significant increase from around 40% in 2018.

Maliutin also noted that since 2022, the Central Bank of Azerbaijan has taken significant steps to enhance the regulatory framework and mitigate sector risks. Measures have been introduced to curb the rapid growth of retail lending and tighten restrictions on foreign currency loans to borrowers without hedging. Additionally, regulations on related-party lending—previously a key credit risk—have been reinforced.

These efforts have led to record-low levels of problem loans. By the end of 2024, loan quality metrics had stabilized, and Fitch Ratings anticipates that this stability will continue into 2025, despite low credit penetration. Total sector loans represented just 22% of GDP at the end of 2024. However, there could be a slight deterioration in retail loan quality due to increasing household debt burdens.

The regulator’s Tier 1 capital ratio has declined moderately from its elevated levels in 2020, mainly due to continued loan book growth, particularly in retail lending, which carries higher risk weights. Despite this, it remains well above the minimum regulatory threshold of 5%, with stability expected in 2025.

Fitch Ratings has also welcomed the Central Bank’s plans to implement Basel III capital structures and adopt a risk-based approach to banking supervision. These changes aim to bring Azerbaijan’s banking regulations further in line with international standards.

The liquidity position of Azerbaijan’s banking sector remains strong, supported by a moderate proportion of loan books within total sector assets—around 50% by the end of 2024.

By Aghakazim Guliyev