RECORDS AND RISKS

For years, Azerbaijan's banking sector has maintained a stable position as a leading segment of the financial market and one of the country's most dynamically developing industries. Despite crises, volatility, geopolitical factors, and other challenges, banks have managed not only to stay afloat but also to pioneer corporate governance mechanisms, international standards, regulatory innovations, and digital advancements.

While both local and international experts are generally satisfied with the sector's current state, numerous challenges remain for participants to overcome to prove their resilience to risks. The regulator's reforms are focused precisely on this objective—encouraging sustainable and long-term development within the sector.

International Ratings

Assessments from international experts are largely positive. Recently, S&P Global Ratings upgraded its evaluation of Azerbaijan's banking sector's country and industry risks from "stable" to "positive," while maintaining its classification in group "8."

"The positive trend in industry risk reflects initiatives to enhance financial sector regulation and oversight over the past two years within the framework of the 2024–2026 Financial Sector Development Strategy," the agency noted. According to S&P, if these initiatives are implemented effectively, they will further strengthen banking regulation and supervision in Azerbaijan.

S&P also reaffirmed Azerbaijani banks' credit rating at BB, recognising the regulator's role in maintaining sector stability and highlighting recent reforms. These include the introduction of new corporate governance standards, regulations limiting transactions with affiliated parties, and enhanced liquidity risk management in line with Basel III requirements.

"In 2025–2026, plans include a transition to risk-based supervision, a revision of capital adequacy structures to align with Basel III requirements, and stricter stress testing for banks. If implemented effectively, we believe these measures will further bolster Azerbaijan's banking regulation and oversight framework," S&P stated.

Another major agency, Fitch Ratings, also views the sector positively, noting that Azerbaijani banks hold a stable position among South Caucasus banks. Maxim Malyutin, Deputy Director for CIS+ and Middle East Banks at Fitch, told local media that bank ratings across the Caucasus have risen in recent years. While in Georgia and Armenia, this was driven primarily by post-pandemic economic recovery and an inflow of Russian-origin deposits due to the war in Ukraine, in Azerbaijan, it was attributed more to rising oil prices, reduced legacy asset risks, and strengthened regulatory frameworks.

Addressing why banks in the region, including Azerbaijan, struggle to surpass B and BB+ ratings, Malyutin pointed to sovereign rating constraints and structural issues. "Additional limiting factors include high dollarisation in lending and funding, balance sheet concentration, and certain regulatory shortcomings compared to international standards," he noted.

Unique Indicators

Statistical indicators of Azerbaijan's banking sector development are generally positive. As of January 1 this year, bank assets exceeded ₼53 billion, up 7.8% year-on-year. According to the Central Bank of Azerbaijan (CBA), the sector's equity capital rose by 9.2% to ₼6.6 billion, while liabilities to the CBA were completely eliminated.

Overall, banking sector liabilities grew by 8.7% to ₼46.4 billion, with the deposit portfolio expanding by 5.9% to ₼37.7 billion. A standout indicator from last year was the record level of household bank deposits, reaching ₼14.7 billion—the highest to date—marking a 13.2% increase (₼1.7 billion) in just one year.

The regulator is particularly proud that, in 2024 alone, the number of unique term deposit holders in Azerbaijan's banking sector surged by 41% to 150,500 individuals. Notably, most of this growth came from small-scale depositors (up to ₼30,000), who accounted for 77.6% of new unique depositors. The CBA interprets this as growing public confidence in banks.

A unique depositor is defined as an individual holding term deposits in one or multiple banks. Even if a person has deposits in five different banks, they are counted as only one unique depositor in aggregate statistics. This approach provides a more accurate picture of actual depositor numbers.

What drove this sharp increase in Azerbaijanis entrusting their money to banks within just a year? Experts attribute it to improved monetary policy, tax incentives, and, crucially, deposit insurance covering small-scale deposits, which plays a key role in risk mitigation. The CBA also cites measures to enhance interest rate transmission and tax benefits on deposits in the national currency as contributing factors.

The primary driver, however, has been the notable rise in deposit interest rates. Previously at 3–4%, manat deposit rates have now reached 10–12%. This positive trend supports financial accessibility, banking sector stability, and more efficient capital circulation in the economy.

A strong indicator of banking penetration in Azerbaijan is that 46% of the population holds bank accounts. Among those with higher education, this figure rises to 82%, according to Khurshid Rustamov, an economist at the UN Resident Coordinator's Office in Azerbaijan.

Credit Risks

The banking sector's second key indicator, credit portfolio performance, has also shown stable annual growth. In 2024, total sector loans increased by 18.7%, with the share of loans in assets rising from 44.4% to 48.9%. Net loans to clients amounted to ₼26 billion.

International experts believe Azerbaijan's banking sector benefits from favourable macroeconomic conditions driven by high commodity prices, which stimulate credit demand and improve asset quality. They also link credit growth to oil prices and GDP expansion.

"In 2024, lending volumes grew by approximately 20%, driven by both retail and corporate loans. We anticipate that infrastructure investments and interest rate cuts will sustain double-digit credit growth in 2025–2026. Additionally, real estate prices rose 10–15% last year (inflation-adjusted), and we expect continued strong single-digit growth in 2025. The limited involvement of banks in the construction (5% of total loans as of end-2024) and mortgage sectors (15%) somewhat mitigates risks," S&P reported.

At the same time, CBA Governor Taleh Kazimov noted that loan interest rates have remained relatively stable in recent years. A slight increase was observed in late 2024 due to market liquidity constraints, but it did not dampen credit demand.

The main concern remains overdue loans, which reached ₼449.1 million as of January 1, up 2.6% year-on-year. Another issue is the continued growth of retail lending. "Azerbaijan's business environment has strengthened, leading banks to reduce interest in large, long-term corporate loans in favour of retail lending, which is less risky and more profitable amid declining consumer spending. By the end of 2024, retail loans comprised 60% of the sector, compared to just 40% in 2018—a significant increase," Malyutin observed.

He warned that rising household debt burdens could elevate credit risk for Azerbaijani banks in the medium term, potentially leading to higher non-performing loans. "Nevertheless, we believe any deterioration will be manageable, with the CBA overseeing retail lending and implementing effective measures to prevent excessive growth," the Fitch analyst stated.

Stability as the Key Forecast

Among the few negative trends, the banking sector's net profit declined slightly in 2024, amounting to just over ₼1 billion—a 3% drop from the previous year. Experts attribute this to a sharp 25.6% rise in operating expenses, outpacing the 17% increase in operating income, along with a 19.7% increase in provisioning.

Considering these figures, international analysts maintain a stable outlook for Azerbaijan's banking sector. "Our forecast remains neutral. We expect core financial indicators to remain steady this year," Malyutin emphasised.

He added that the sector's core capital adequacy ratio has slightly declined since 2020 due to increased retail lending, which carries higher risk weightings. However, it still significantly exceeds the 5% regulatory minimum and is expected to remain stable in 2025.

As outlined, the regulator plans to continue banking reforms, adapting to global technological advancements and addressing internal risks. Regardless of the challenges, Azerbaijan's banking sector will remain at the forefront of the country's economic development.