The Azerbaijani banking sector has demonstrated remarkable resilience and steady growth in recent years, despite global economic challenges, according to the latest central bank report.. As of March 2025, the sector continues to maintain stability with 22 operational banks, including two state-owned institutions.

Total banking assets have grown steadily, with the loan portfolio reaching AZN27.88bn by the end of March 2025, a 1.32% increase from the previous month. Meanwhile, the non-performing loan (NPL) ratio remains relatively low at 2.55%, indicating effective risk management practices across the sector.

Azerbaijan's banking landscape has undergone significant consolidation over the past seven years. The number of operational banks has decreased from 30 in 2018 to the current 22, reflecting a strategic shift towards a more efficient and robust financial system. Of these institutions, two are state-owned banks, while the remaining 20 operate as private entities.

Foreign investment continues to play an important role in the sector, with nine banks having foreign capital participation, including five with majority foreign ownership (50-100%) and three with minority foreign investment (less than 50%). This consolidation has strengthened the overall stability of the banking sector, with remaining institutions showing improved capitalisation and operational efficiency.

The banking sector has demonstrated consistent asset growth over the past five years. As of March 2025, banks' claims on the Central Bank of Azerbaijan stood at AZN5.48bn, while securities holdings amount to AZN9.43bn. The sector has maintained strong liquidity positions, with cash holdings increasing significantly by 33.31% to AZN2.71bn compared to the previous month. Interest income has shown robust growth, reaching AZN1.13bn in the first quarter of 2025, a 200.83% increase from the previous period. This growth has been primarily driven by interest on loans, which grew by 204.45% to AZN897.75mn. Interest expenses have similarly increased, rising by 197.39% to AZN399.01mn, with interest on time deposits showing the most significant growth at 451.09%.

The total loan portfolio of Azerbaijani banks reached AZN27.88bn as of March 2025, showing a healthy 1.32% month-on-month growth. Business loans total AZN14.94bn, representing 53.6% of total loans, with an increase of 1.53%. Consumer loans stand at AZN8.60bn, or 30.9% of total loans, growing by 0.61%. Mortgages have reached AZN4.34bn, comprising 15.5% of the portfolio, with a 2.01% increase. Within the business loan category, large entrepreneurship accounts for AZN8.36bn (56.0% of business loans), followed by micro entrepreneurship at AZN3.07bn (20.6%). Medium entrepreneurship showed the strongest growth at 5.62%, reaching AZN1.97bn, while small business loans slightly decreased by 0.58% to AZN1.53bn.

The business loan portfolio is well-diversified across various economic sectors, reflecting the broader Azerbaijani economy. Trade accounts for AZN4.22bn (28.3% of business loans), industry represents AZN2.69bn (18.0%), and other non-production and service sectors stand at AZN2.63bn (17.6%). Agriculture holds AZN1.80bn (12.1%), transport AZN1.48bn (9.9%), construction AZN1.46bn (9.8%), and information and communication AZN0.66bn (4.4%).

Notable sectorial trends include the construction sector showing the most significant growth at 6.22%, followed by information and communication at 5.26%. This growth in construction financing reflects the ongoing infrastructure development and real estate expansion across Azerbaijan, while the rise in information and communication funding underscores the increasing digitalisation of the economy.

The banking sector has maintained strong asset quality indicators, with NPLs totalling AZN709.91mn as of March 2025, representing a relatively low 2.55% of the total loan portfolio. While this figure shows a slight increase of 2.79% from the previous month, it remains well within manageable limits and significantly below levels seen in many comparable economies. Business NPLs amounted to AZN391.21mn (55.1% of total NPLs), having increased by 0.46%. Consumer NPLs totalled AZN283.57mn (39.9% of total NPLs), with a 6.12% increase. Mortgage NPLs stood at AZN35.13mn (4.9% of total NPLs), having grown by 3.38%. The higher growth rate in consumer NPLs warrants monitoring, as the consumer NPL ratio increased by 5.48% during the same period. This trend could indicate emerging pressures on household finances that may require targeted policy responses if the trend continues.

The analysis of business loans by funding sources reveals an interesting pattern in how banks finance their business lending activities. State-funded programmes continue to play an important role in supporting business development, with AZN984.01mn (6.6% of business loans) coming from state funds, showing a modest increase of 0.70% from the previous month. The remaining 93.4% of business loans are financed through banks' own resources and other funding sources, highlighting the sector's capacity to mobilise private capital for economic development. This healthy balance between state-supported and market-based financing provides flexibility while ensuring strategic sectors receive necessary support.

The Azerbaijani banking sector faces both opportunities and challenges. The steady growth in loan portfolios, particularly in business lending to medium enterprises and strategic sectors like construction and information technology, suggests ongoing economic diversification beyond the traditional hydrocarbon sector.

However, several areas require continued attention. The rising NPL ratio in consumer loans bears watching, as it may indicate increasing financial stress among households. The substantial growth in interest expenses, particularly on time deposits, may impact banking sector profitability if not matched by corresponding asset yields. The growing information and communication sector lending suggests increasing digitalisation, but banks themselves must accelerate their technological transformation to remain competitive. While lending is well-distributed across sectors, further supporting non-oil industries remains crucial for Azerbaijan's long-term economic resilience.