International rating agency Moody's Ratings has noted positive progress in the reform of Azerbaijan's banking sector, saying it is helping reduce systemic risks, improve asset quality, and strengthen banks' ability to absorb potential losses.

According to Moody's, cited by Report, Azerbaijan is actively strengthening prudential regulation and implementing international standards.

In particular, the country has already introduced new capital buffers under the Basel III framework, with the banking system expected to achieve full compliance with Basel III standards from Jan. 1, 2027.

"Banking regulators across Central Asia and the South Caucasus, including Kazakhstan (Baa1, stable), Azerbaijan (Baa3, positive), Georgia (Ba2, stable), Armenia (Ba3, positive), Uzbekistan (Ba2, stable), Tajikistan (B2, stable), and Kyrgyzstan (B3, positive), are strengthening supervisory frameworks and prudential regulation as they move toward international standards. These developments are credit positive because they will contribute to improved loan quality, stronger loss-absorption capacity, and a gradual reduction in systemic risk. Further regulatory tightening is likely to continue, although weak institutional capacity, implementation gaps, and shortcomings in the rule of law continue to constrain progress in some countries," the agency's analysts said.

Moody's noted that the Central Bank of Azerbaijan is implementing risk-based supervision guidelines and increasing capital buffer requirements. Higher capital requirements have already strengthened the solvency of Azerbaijani banks.

According to the agency, asset quality and loss-absorption metrics in Azerbaijan's banking sector have improved significantly since 2019. The share of non-performing loans (Stage 3 + POCI) in total loans declined from around 14-15% in 2019 to approximately 3-4% by the end of 2025, while the ratio of non-performing loans to tangible common equity and loan loss reserves (TCE + LLR) fell from more than 40% in 2019 to below 10% by the end of 2025.

"The country's banking system maintains sufficient liquidity to withstand stress situations," Moody's said.

At the same time, the agency noted that, according to the IMF-World Bank Financial Sector Assessment Program (FSAP), Azerbaijan's regulatory environment still has room for further improvement. Areas identified include strengthening regulatory independence, enhancing consolidated supervision, and improving bank resolution and crisis management frameworks.

Moody's also pointed to the high level of state participation in the economy, which requires particular attention to corporate governance.

Nevertheless, the agency expects Azerbaijan, alongside Uzbekistan, to continue converging institutionally with the region's more advanced banking markets-Kazakhstan, Georgia, and Armenia-which should support the standalone credit strength of Azerbaijani banks over time through stronger capitalization, governance, and risk management.