S&P: Stronger regulation to cut credit risks in Azerbaijan’s banking sector

The introduction of a risk-based supervisory framework and tighter regulatory oversight in 2026 is expected to reduce credit risks in Azerbaijan’s banking sector, according to an assessment by international rating agency S&P Global Ratings.

In a recent report, S&P said that during 2024–2025 the country’s regulator had already implemented a series of measures aimed at curbing banks’ risk appetite and tightening lending standards. These steps were introduced as part of Azerbaijan’s Financial Sector Development Strategy for 2024–2026, Caliber.Az reports per local media. 

The agency noted that the reforms include a transition to risk-based supervision, the planned application of IFRS 9 for regulatory reporting in 2026, and improvements in corporate governance standards over the past two years. S&P said it expected that banks’ accumulated reserves would be preserved following the full transition to IFRS 9.

Loan growth is forecast to moderate to 10–12% in 2026–2027, in line with 2025 levels, compared with the average annual expansion of 18% seen over the previous four years. According to S&P, the earlier rapid growth was partly driven by regulatory actions.

The share of Stage 3 loans under IFRS standards is projected to remain stable at 4.5–5% in 2026–2027. The agency said the overall level of sector risk in Azerbaijan had declined due to ongoing efforts to modernise the regulatory framework and strengthen supervision of financial institutions.

S&P analysts also highlighted that Azerbaijani banks have maintained a stable funding profile since the 2016 financial crisis, supported by growth in the deposit base. Although deposit dollarisation has gradually fallen closer to regional peer levels, it still significantly exceeds the dollarisation of loans, creating currency mismatches between banks’ foreign currency assets and liabilities.

The agency added that its stable industry risk assessment already factors in the regulatory tightening of the past three years, which it expects will help minimise systemic vulnerabilities. It also cited a sustainable funding profile and a relatively concentrated market structure, dominated by the three largest banks, with limited competitive pressure from potential new entrants.

S&P further expects Azerbaijan to maintain its exchange rate peg of 1.7 manat per U.S. dollar, supported by regular currency interventions. However, the agency cautioned that if oil prices remain low for a prolonged period, authorities may consider a controlled adjustment of the exchange rate. While the fixed exchange rate helps contain inflation, it constrains the Central Bank’s monetary policy flexibility.

Looking ahead, S&P said the economic risk outlook could be revised to stable if hydrocarbon prices fall significantly, potentially weighing on economic growth and weakening the solvency of businesses and households. The agency also warned that a sharp acceleration in lending combined with rising property prices could heighten risks stemming from economic imbalances.

By Sabina Mammadli