Fitch: Azerbaijani banks to shift to more moderate lending growth

Fitch Ratings expects lending growth in Azerbaijan to slow to single-digit levels, Report informs referring to the agency's commentary on its decision to maintain a neutral sector outlook for banks in the CIS+ region (Azerbaijan, Armenia, Georgia, Kazakhstan, Ukraine, and Uzbekistan) through 2026.

Fitch estimates that lending growth will become more manageable, particularly in the high-yield consumer finance segment. This is due to regulators in fast-growing markets – Azerbaijan, Kazakhstan, and Uzbekistan – continuing to tighten credit availability criteria. These measures are aimed at raising underwriting standards and reducing the risk of overheating in the retail segment.

The agency notes that recent macroprudential initiatives in Azerbaijan include restrictions on maximum effective interest rates and unsecured loan sizes, debt-to-income ratio limits, and increased risk weights for some retail products.

The ‘neutral' outlook reflects our expectations of continued reasonable financial performance in 2026, despite slower credit expansion amid moderated economic growth (2026: 2.5%; 2025: 2.3%), primarily driven by the non-hydrocarbon sector. Banks' healthy profitability, which is underpinned by still wide, but declining, margins, should provide a good cushion against projected moderate volatility in credit risk. Funding and liquidity conditions should be broadly unchanged.

After strong expansion averaging 18% during 2021–2024, loan growth is likely to slow to high single digits in 2026 (9M25: 7%), led by the retail lending segment (end-3Q25: 47% of gross loans). This moderation reflects diminishing growth opportunities, particularly in retail, as household debt rises and regulation tightens, including high statutory risk weights for retail loans and recently introduced caps on credit card limits.

The sector"s Stage 3 loans ratio could gradually increase to a still manageable 4.5% in 2026 (end-2024: 3.5%), accompanied by a moderate rise in the Stage 2 loans ratio. This reflects portfolio seasoning and continued expansion into consumer lending, the quality of which is particularly sensitive to rising household debt. However, the potential loan-quality deterioration should remain manageable, given banks" generally strong capacity to absorb credit losses through pre-impairment profits (9M25: 7% of sector average loans, annualised).

"We expect foreign-currency loans to decline further, approaching a moderate 12% of total loans by end-2026 (end 2024: 16%), supported by the effective manat peg to the US dollar and strict regulations on foreign-currency lending. We expect customer deposit dollarisation to remain high (end-3Q25: 44%), and in the absence of significant macro prudential initiatives, de-dollarisation is likely to remain only a very gradual process," reads the update.

Banks' profitability should be supported by wide margins (9M25: 6.5%), although these will probably narrow by about 50bp in 2026 due to the continued expansion of the term deposit base. Combined with the anticipated increase in loan impairment charges (2026F: 2% of average loans; 9M25: 1.2%), this will reduce operating profitability metrics, although to still-healthy levels.

Sector capital ratios are likely to be stable, with adequate profitability and moderate risk-weighted asset growth to be offset by material dividend pay-outs at large banks. Consequently, we expect the regulatory Tier 1 ratio to hover around 14% in 2026 (end-3Q25: 14.6%), comfortably above the regulatory minimum of 5% (6% for systemically important banks). Liquidity buffers, including in foreign currency, should remain strong, with the sector-average gross loans/deposits ratio staying at around 80%.

Analysts also note that most economies in the region remain significantly dependent on Russia - through trade, energy supplies, infrastructure, migration, and remittances. The exceptions are Ukraine and, to a lesser extent, Azerbaijan.

Risks associated with Russia, including the possibility of secondary sanctions, pose significant challenges for banks and companies in CIS+ countries. However, implementing trade diversification programs, strengthening compliance, and strengthening risk monitoring systems help mitigate these challenges, Fitch analysts believe.