S&P: Azerbaijan to improve banking sector recovery mechanism in 2026

International rating agency S&P Global Ratings expects banks in Azerbaijan, Armenia, Georgia, Kazakhstan, Kyrgyzstan, and Uzbekistan to remain stable in 2026, at the level of the previous two years.

As reported by The Daily Baku, citing S&P Global Ratings, bank profitability and capital indicators will be moderate, but will remain supported by high average lending growth rates in the region—at 15–20%—and stable asset quality.

The agency notes that regulatory oversight has significantly strengthened in Kazakhstan and Azerbaijan over the past few years. Kazakhstan has already implemented Basel III standards and risk-based supervision, while Azerbaijan is in the process of implementing them.

According to the agency's analysts, economic growth in Azerbaijan primarily reflects declining hydrocarbon revenues: declining oil production and stagnant gas production outweigh moderate growth in the non-oil sector.

S&P notes that the Central Bank of Azerbaijan, as the banking sector regulator, has developed a Financial Sector Development Strategy for 2024–2026.

"As part of this strategy, the regulator is transitioning to risk-based supervision and IFRS9 standards. In 2026, it is also planned to revise the capital adequacy system to align it with Basel III requirements, tighten bank stress testing requirements, and introduce a new regulatory framework for market risks. The development of the banking sector resolution mechanism will also continue this year," the report emphasizes.

S&P notes that in 2025, the agency revised the industry risk outlook in its BICRA assessments for Azerbaijan from "stable" to "positive." This, according to analysts, reflects the strengthening of banking regulation and supervision in the country.

The agency also emphasizes that lending growth in Azerbaijan has historically been closely correlated with oil prices. According to S&P's forecast, lending growth in the country will be around 12% in 2026, the same as in 2025. This is due to the lowest economic growth rates in the region compared to peer countries and expectations of lower oil prices. "At the same time, the private sector debt burden in Azerbaijan remains the lowest among peer countries: the household debt-to-GDP ratio is 15%, and the corporate debt-to-GDP ratio is 11%.

S&P believes that geopolitical risks remain among the most significant for the region. The resolution of the conflict between Russia and Ukraine remains uncertain and will impact the economies of the region.

At the same time, as the authors of the report emphasize, regional economies continue to benefit from increased trade flows, capital flows, and immigration, as they have over the past three years.

The agency notes that maintaining a balance in political relations with the West and Russia will remain challenging amid macroeconomic uncertainty in Russia, the main trading partner of Central Asia and the Caucasus. "For Armenia, uncertainty also remains over the conclusion and implementation of a comprehensive peace agreement with Azerbaijan," the report states.