Moody's predicts increased lending in Azerbaijan amid strengthened economic outlook

International rating agency Moody’s has forecasted an increase in lending activity in Azerbaijan for the year ahead, buoyed by favorable economic conditions and solid government support for the banking sector.

According to a recent update, Moody’s maintains a positive outlook on the Azerbaijani banking system, noting a continued stable operating environment, Caliber.Az reports per local media.

"We maintain a positive outlook on the Azerbaijani banking system, reflecting a continued benign operating environment and strengthening government support. Favorable operating conditions will support asset quality and profitability over the next 12-18 months," the report states.

Moody's further highlighted that Azerbaijan’s banks are well-positioned to benefit from the rising income levels in the country, coupled with the expansion of the non-oil economy, where banks primarily conduct their business. The growth in these sectors is expected to drive credit growth into 2025. The agency emphasized that the country’s banks boast robust capital buffers, and their profitability is expected to remain solid, providing ample loss-absorption capacity and liquidity.

The agency's report projects a 2.5 per cent growth in Azerbaijan’s real GDP in 2025, following a strong 4.1 per cent growth forecast for 2024. This economic growth is anticipated to be supported by solid performance in the non-oil sector, which contributed roughly 60 per cent to Azerbaijan’s GDP in 2024. High government spending is also expected to foster greater economic diversification, boosting the non-oil economy and thereby supporting the banking sector’s credit growth, asset quality, and profitability.

Azerbaijan’s banking sector has shown resilience in asset quality, with nonperforming loans (NPLs) remaining at a historic low of 2.4 per cent of gross loans as of December 2024. The country's tight regulatory framework for consumer lending and the stable manat have contributed to this strong performance, with the share of foreign-currency loans significantly reduced to 16 per cent of total loans by the end of 2024, down from around 30 per cent in 2020.

Moody’s also noted that the five rated Azerbaijani banks—International Bank of Azerbaijan, Kapital Bank, Xalq Bank, Bank Respublika, and Bank of Baku—have strong capital buffers, with tangible common equity (TCE) averaging 18 per cent of risk-weighted assets as of year-end 2023. While the Central Bank of Azerbaijan (CBA) has introduced a 0.5 per cent countercyclical buffer for banks, starting from March 2025, the sector is expected to manage this requirement with minimal disruption.

"These higher capital requirements should be manageable for the banks, which have solid capital buffers and robust internal capital generation," Moody’s noted.

Profitability in the banking sector showed marginal improvement in 2024, and Moody’s expects this trend to stabilize in the coming year. With strong net interest margins, solid fee income, and reduced loan-loss provisioning charges, banks are well-positioned to maintain profitability. However, there may be some pressure on margins in 2025 due to decreasing CBA policy rates, which could lower returns on interest-bearing assets, while competition for customers may keep funding rates elevated.

Azerbaijani banks are primarily funded through customer deposits, which grew by 9 per cent in 2024, accounting for over 80 per cent of total liabilities. The reliance on the wholesale market and cross-border funding is low, though this could rise in the next 12-18 months. The share of foreign-currency deposits has decreased to 38 per cent as of year-end 2024, down from 47 per cent in 2022, reflecting greater domestic confidence in the manat.

Finally, Moody’s pointed to the government's improving creditworthiness as a key factor in bolstering confidence in the banking sector.

"The government's improving creditworthiness, as reflected in the positive outlook on the sovereign, means depositors of the largest banks will continue to benefit from government support," the report states.  

“With total reserves from the sovereign wealth fund, the State Oil Fund of the Republic of Azerbaijan, and the central bank exceeding 90 per cent of GDP as of 2024, the government is well-positioned to support the economy and the banking system.

Overall, the outlook for Azerbaijan's banking sector remains strong, with the country’s economic stability, government support, and robust banking fundamentals providing a solid foundation for continued growth,” Moody’s added.

By Vafa Guliyeva