On March 13, Olga Ignatyeva, the Senior Director of Fitch Ratings, and Maksim Maliutin, the Associate Director for Financial Institutions and Banks, stated in a joint statement that the gap between Azerbaijan’s ‘BBB-’ sovereign rating and most domestic bank ratings reflects weaker standalone credit profiles of banks. They emphasized that these profiles, captured by Viability Ratings (VRs), are shaped both by the operating environment and institution-specific constraints.

The analysts stated that Fitch’s ‘bb-’ operating environment assessment serves as a key benchmark for the sector, incorporating structural factors such as macroeconomic volatility, institutional strength, governance standards, financial market depth, and the regulatory and supervisory framework. They emphasized that the main limitations affecting Azerbaijani banks are related to funding and liquidity, including deposit concentration, high levels of dollarization, and, in some cases, less diversified funding structures. These factors increase vulnerability to confidence shocks and foreign exchange liquidity risks compared to higher-rated banking systems.

Ignatyeva and Maliutin noted that additional constraints include risk concentration and rapid growth in certain segments, which may heighten loss volatility and increase sensitivity of capital and earnings to specific shocks. They also highlighted relatively volatile asset quality and a history of higher levels of problem loan origination. Institutional and governance factors, such as differences in risk management practices, underwriting standards, transparency, and exposure to related parties, were also cited as influencing credit profiles.

They emphasized that while the operating environment acts as a constraint, it does not represent a strict ceiling, noting that banks with strong domestic franchises, solid capitalization, conservative risk approaches, and stable funding structures could potentially be rated above this level, although such cases are uncommon.

The analysts stated that tighter capital requirements introduced by the Central Bank of Azerbaijan in line with Basel III standards—such as CET1 requirements and additional buffers, including capital conservation and systemically important bank buffers—are expected to enhance the sector’s resilience. "From a ratings perspective, this is credit positive and may, over time, support our view of the operating environment," they stated, adding that improvements in ratings would depend on consistent implementation and enforcement of these reforms, as well as sustained progress in capitalization, risk management, asset quality, and funding stability. They also emphasized the importance of further alignment with Basel III, including the introduction of additional liquidity requirements such as the Net Stable Funding Ratio and stronger supervisory practices.

Ignatyeva and Maliutin noted that the Central Bank’s macroprudential framework has strengthened and is helping to contain household leverage. Measures such as the ban on foreign currency retail lending, debt-to-income-based requirements, and stricter limits on credit cards were described as broadly adequate for the current environment. They stated that retail lending trends are not expected to create widespread rating pressure in 2026, highlighting that household debt remains manageable at 18.5% of disposable income and retail credit penetration is relatively low at 14% of GDP. They added that some asset quality deterioration is expected as recent loans mature, with the sector’s Stage 3 loan ratio projected to rise to around 4.5% in 2026, but noted that banks’ profitability should be sufficient to absorb these pressures without significant rating impact.

The analysts emphasized that mortgage lending in Azerbaijan is considered relatively low risk due to several factors. They stated that mortgages are collateralized, predominantly denominated in local currency, and often issued through state-supported programs under the Mortgage and Credit Guarantee Fund. These programs include standardized underwriting criteria and supportive features such as subsidies and below-market interest rates, which improve affordability and reduce default risk. They noted that the segment has demonstrated strong historical performance, with non-performing loans below 1%, and is expected to remain stable. Mortgages account for a moderate share of retail lending—around 16%—which limits their overall impact on the banking sector’s asset quality.