Azerbaijan's banks are expanding credit more than 15 times faster than the economy they lend into, with profits up a quarter and a bad-loan surge abruptly stalling.

Sector assets reached AZN61.0bn ($35.9bn) as of August 1, up 9.5% year on year, with net loans to customers of AZN30.1bn ($17.7bn) on a credit portfolio that grew 12.5%. Deposits rose 10.2% to AZN40.4bn ($23.8bn) and balance-sheet capital 9.1% to AZN7.6bn ($4.5bn). Loans now make up 49.4% of assets, against 48.1% a year earlier.

The figures come from the Central Bank of Azerbaijan's credit institutions data, published on August 27. They flatter the underlying picture. Assets, liabilities and capital each grew 0.1% over July itself, and the headline annual rate accelerated from 7.4% a month earlier mostly because a weak mid-2025 base fell out of the comparison, not because lending accelerated.

Azerbaijan's economy grew 0.8% in the first half and the central bank's own full-year forecast is 1.1%. A banking system putting on credit at 12.5% into that is not financing growth so much as financing consumption: households take three of every five manats lent, while industry and manufacturing take one in 20.

The profit engine

Net profit reached AZN858.7mn ($505mn) in the seven months to end-July, up 25.8% y/y from AZN682.8mn ($402mn). Operating income rose 13.25% to AZN4.4bn ($2.6bn) while operating expenses grew 9.25% to AZN3.1bn ($1.8bn), pulling the cost-to-income ratio down to about 70% from roughly 73%. Provisions rose 13% to AZN273.4mn ($161mn) and the tax bill 28.8% to AZN213.4mn ($126mn).

Annualised against balance-sheet capital of AZN7.6bn, that is a return on equity of roughly 19% - respectable for a frontier market, and a wide margin over the 6.5% refinancing rate the central bank cut in February and has held at every meeting since, most recently on July 31.

Banks owed the central bank AZN0.4mn ($235,000) at the start of August, down about a fifth over the year and a rounding error against a AZN40.4bn deposit book. This is a deposit-funded system rather than one leaning on the regulator, and households are supplying the growth: their deposits grew 15.6% against 6.45% for corporates, so Azerbaijani savers are bankrolling the loans that other Azerbaijani savers are taking out.

Bad loans stop climbing

Overdue loans stood at AZN723mn ($425mn) on August 1, up 36.6% y/y and 37.85% since the start of the year. Over July itself they rose 0.5%.

June added AZN84mn ($49mn) to the pile of problem loans. July added AZN3.6mn ($2.1mn). The share of overdue credit in the total portfolio held at 2.1% for a second month, against 1.6% at the end of last year and 1.7% a year ago.

Most of the first-half surge sat outside the banks. Economist Toghrul Valiyev told Meydan TV that overdue manat lending at non-bank credit organisations rose close to 70% y/y, against 30% for long-term bank loans, on a book of about AZN2bn ($1.2bn). Borrowers on stable public-sector salaries have watched inflation of around 6% eat into pay rises, and the squeeze has landed hardest where the credit is dearest.

Baku is closing the informal channel that has long sat behind the licensed one. The Supreme Court warned on August 26 that lending at interest systematically and for profit without a licence risks prosecution for illegal entrepreneurship, and that a lender suing to recover a debt may find the court referring their own conduct to prosecutors.

Three banks, most of the money

Of the 21 banks licensed in Azerbaijan, three hold more than half the assets. State-controlled International Bank of Azerbaijan (ABB) led on assets at AZN14.31bn ($8.4bn) in the last full sector breakdown, ahead of Kapital Bank on AZN11.80bn ($6.9bn) and PASHA Bank on AZN9.05bn ($5.3bn). Only PASHA was growing, up 9.7%, while ABB was flat and Kapital shrank 5.2%.

ABB absorbed about AZN295mn ($174mn) of Bank BTB's assets at the regulator's request, is negotiating a 51% stake in Uzbekistan's Davr Bank for more than $100mn, and is weighing a Eurobond priced at 4.5-5.5%. It made AZN404.5mn ($238mn) in 2025 and paid AZN200mn ($118mn) in dividends, AZN184mn ($108mn) of it to the state that owns it. Kapital Bank, part of PASHA Holding, is chasing retail through its Birbank digital platform, though its loan book grew only about 4% last year.

Below the big three the growth rates are far higher and the bases far smaller. Unibank lifted second-quarter net profit to AZN17.2mn ($10.1mn) and capital 32% to about AZN254mn ($149mn), with a capital adequacy ratio of 14.57% at end-June and 2.4mn customers. Ziraat Bank Azerbaijan, 99.98%-owned by Turkey's Ziraat Bank, grew assets 46% and posted the largest first-half net profit of the banks reviewed at AZN11.6mn ($6.8mn), but its own overdue loans rose 83.1%.

AFB Bank expanded its loan book 35% y/y in the first half after 58% in 2025, on roughly 1% of sector assets, and Fitch put its cost-to-income ratio at 98% against 70% a year earlier, its Tier 1 ratio at 16% from 21.9%, and its top 25 borrowers at 39% of gross loans - which is what that rate of growth costs. The mid-tier is meanwhile paying out: Bank Respublika, Bank of Baku and Expressbank raised dividends on 2025 earnings by between 14% and 25%, while the eight-bank Azerbaijan Credit Bureau nearly doubled its payout.

Basel III lands in January

Full Basel III adoption takes effect in January 2027, under reforms the central bank approved last December. Minimum common equity tier 1 will be set at 4.5% of risk-weighted assets and tier 1 at 6%, up from 5%, while the total capital minimum falls to 8% from 10%. A 2.5% conservation buffer and a 0.5% countercyclical buffer lift the effective floors to 7.5%, 9% and 11%, with a further 1-4% on systemically important lenders.

Fitch, which this month raised its assessment of the sector's operating environment to 'bb' from 'bb-', named three lenders carrying relatively limited buffers as of June: Kapital Bank, on about 22% of sector assets, plus Bank Respublika and Unibank on roughly 4% each. All three have until January to comply.

S&P Global Ratings had already cut its industry risk score for Azerbaijan to 7 from 8 in February, forecasting credit growth of 10-12% this year and problem loans stabilising at 4.5-5.0% on an IFRS stage 3 basis. That is a wider measure than the central bank's 2.1% overdue-loan reading and the two should not be read against each other. The agency put Azerbaijani private-sector debt at about 26% of GDP, below Georgia, Armenia and Uzbekistan, with foreign-currency lending at roughly 16% - the lowest in the region, and the sector's single best defence.

The channel that is shrinking

The Mortgage and Credit Guarantee Fund issued AZN237.8mn ($140mn) in the seven months, down 3.8%, while refinancing through it fell 20.8% to AZN204.1mn ($120mn) and bond funding 18.9% to AZN300mn ($176mn), even as budget transfers into the fund rose a third to AZN63.9mn ($37.6mn). State-backed mortgage credit is the one channel going the other way - the single form of lending directed at an asset that secures itself is contracting, while unsecured consumer credit runs at 12.5%.

Azerbaijan has a well-capitalised, deposit-funded and increasingly well-supervised banking system lending at double digits into an economy that is barely moving, with three-fifths of the book sitting on consumers whose real incomes are rising more slowly than their borrowings. Nothing in the July numbers says that breaks. The next two quarters, once the base effect wears off and Basel III takes the slack out of three balance sheets at once, will show whether these profits were earned or merely timed.