Moody's: Azerbaijani government has sufficient resources to support banks

The Government of Azerbaijan has sufficient resources to support the national economy and the banking sector, which is characterized by a high level of dollarization but relatively small size (with total assets at 44% of GDP), Report informs, citing the international rating agency Moody's in its "Outlook for Azerbaijan's Banking System."

"With total reserves accumulated by the sovereign wealth fund, State Oil Fund of the Republic of Azerbaijan, and the central bank exceeding 108% of GDP as of December 2025, the government is well placed to support the economy and the highly dollarised banking system," Moody's said.

The agency's analysts maintained a positive outlook on the country's banking sector. This decision is driven by a stable and favorable operating environment and stronger government support. Current conditions are expected to sustain high asset quality and profitability of financial institutions over the next 12–18 months. At the same time, tighter supervisory standards will strengthen capital adequacy and improve liquidity management. Asset quality will also benefit from rising domestic incomes (sovereign rating Baa3 with a positive outlook) and growth in the non-oil sector, where most banking activity is concentrated. These factors are expected to catalyze lending growth, the report notes.

"The banks' robust capital buffers and continued solid profitability will help them maintain good loss-absorption capacity and ample liquidity. The government's ability and willingness to support the banking sector, in particular the largest banks, will remain strong," the document says.

Agency experts forecast that asset quality will remain sound over the next 12–18 months. Debt servicing will be supported by a favorable macroeconomic environment: borrowers' repayment capacity is improving due to stable performance in non-oil sectors and rising household incomes. The non-performing loan (NPL) ratio stood at 2.5% of the total loan portfolio as of December 2025 (compared with 2.4% in 2024 and 2.6% in 2023), while reserve coverage exceeded 220%.

"Loan performance will benefit from the tight regulatory framework for consumer lending, while the stable local currency (manat) will be positive for performance of foreign-currency loans (14.2% of total loans as of December 2025)," analysts believe.

According to the report's authors, capitalization levels will remain high. Rated Azerbaijani banks have solid capital buffers: the weighted average tangible common equity (TCE) to risk-weighted assets (RWA) ratio stood at 20% at the end of 2024.

"The introduction of a 0.5% countercyclical buffer on banks operating in Azerbaijan starting 1 March 2025 has improved capital further. We expect robust internal capital generation will continue to support the banks' capitalisation," Moody's notes.

The agency also predicts sustained profitability in the banking sector. The average net income-to-tangible assets ratio among rated banks is expected to remain in the 2–3% range. This is supported by stable net interest margins, substantial fee income, and moderate provisioning costs. Margin expansion in recent years has been driven by a higher share of high-yield loans issued to retail customers and small and medium-sized enterprises amid strong demand.

"However, there may be margin pressure, as declining Central Bank of Azerbaijan policy rates decrease the rates on banks' interest-bearing assets while rates on their funding remain fairly rigid because of fierce competition for customers. Increased obligatory reserve requirements will somewhat constrain still strong profitability," the document says.

Azerbaijani banks are mainly funded with customer deposits, which grew 1.4% annually as of December 2025 and accounted for about 77% of the banks' total liabilities. The share of foreign-currency deposits in Azerbaijan was 37% as of December 2025, down from 48% as of year-end 2022 (over 70% in 2016). At the end of December 2025, around 41% of banking sector assets were liquid – comprising cash and cash equivalents, due from banks, and investments in sovereign and quasisovereign debt securities – providing a strong buffer against external shocks.

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

Moody's also noted that as of December 2025, the five largest commercial banks in Azerbaijan accounted for approximately 56% of the banking system's total assets.