The international rating agency Moody’s predicts an increase in lending in Azerbaijan this year, Report informs.

"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. Asset quality will benefit particularly from rising income levels in Azerbaijan and expansion of the non-oil economy, where banks do most of their business, which will also drive credit growth in 2025. The banks have 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," reads the update.

"Economic and operating conditions for Azerbaijani banks will remain favorable. We expect Azerbaijan’s real GDP to normalize and grow by 2.5% in 2025, compared with 4.1% in 2024 and 1.1% in 2023. The growth will remain driven by the solid performance of the non-oil sector which contributed around 60% to Azerbaijan's GDP in 2024. High government spending will continue to improve economic diversification and boost the non-oil economy, in which banks conduct most of their business, supporting credit growth, asset quality and profitability. Economic growth will also benefit from increased natural gas production and export volumes, along with higher expenditure for the reconstruction of territories in Karabakh. Geopolitical tensions with Armenia are likely to ease as both countries work toward signing a full peace treaty.

Asset quality will remain good in the next 12-18 months. Loan performance will benefit from favorable economic conditions, with robust performance in non-oil sectors and rising total income levels in Azerbaijan strengthening many borrowers' debt-repayment capacity. Nonperforming loans (NPLs) remained at a historical low of 2.4% of gross loans as of December 2024 (2.6% in 2023 and 3.8% in 2022), while reserve coverage of NPLs was above 200%. The tight regulatory framework for consumer lending and the stable manat will also support the performance of foreign-currency loans, which decreased to 16% of total loans as of year-end 2024 from around 30% in 2020."

"The five rated Azerbaijani banks (International Bank of Azerbaijan, Kapital Bank, Xalq Bank, Bank Respublika and Bank of Baku) have robust capital buffers, with tangible common equity (TCE) equal to a weighted average of 18% of risk-weighted assets (RWA) as of year-end 2023. We expect banks' TCE/RWA to remain broadly stable in the next 12-18 months as RWA growth slows. In response to accelerating credit growth in 2024, the Central Bank of Azerbaijan (CBA) has introduced a 0.5% countercyclical buffer on banks starting 1 March 2025. These higher capital requirements should be manageable for the banks, which have solid capital buffers and robust internal capital generation. Some banks may need to adjust their growth strategies and dividend payments, but the sector as a whole should be able to absorb the new regulatory demands without significant disruption to lending activities," Moody's noted.

"Profitability improved marginally in 2024, and we expect it to stabilize over the next 12-18 months. The average net income to tangible assets ratio should remain solid at around 2%-3% in 2025, supported by robust net interest margins, solid fee and commission income, and lower loan-loss provisioning charges. Margins have grown in recent years, reflecting an increasing share of higher-yielding loans to retail borrowers and small and medium-sized enterprises, with the economic recovery driving strong loan demand from these segments. However, there may be margin pressure in 2025, as declining CBA policy rates decrease the rates on banks' interest-bearing assets while rates on their funding remain fairly rigid because of fierce competition for customers."

"Azerbaijani banks are mainly funded with customer deposits, which grew by 9% in 2024 and accounted for more than 80% of the banks' total liabilities. Banks have low reliance on the wholesale market and cross-border funding, and their refinancing risks are low, but they could increase their use of these channels in the next 12-18 months. The share of foreign-currency deposits in Azerbaijan was 38% as of year-end 2024, down from 47% as of year-end 2022 (over 70% in 2016). In addition, at the end 2024, over 30% of banking sector assets were liquid – comprising cash and cash equivalents, due from banks, and investments in sovereign and quasi-sovereign debt securities – providing a strong buffer against external shocks," reads the update.

"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. With total reserves accumulated by the sovereign wealth fund, state Oil Fund of the Republic of Azerbaijan, and the central bank exceeding 90% of GDP as of year-end 2024, the government is well placed to support the economy and the highly dollarised banking system, which is small, with total assets at about 42% of GDP. The long-term deposit ratings of four of the five Azerbaijani banks we rate incorporate government support uplift from their Baseline Credit Assessments (BCAs) to reflect their systemic importance."