Fitch: Azerbaijan's Basel III reforms to strengthen loss-absorption buffers

The alignment of Azerbaijan's bank capital rules with Basel III should significantly strengthen banks' loss-absorption capacity and support banking-sector resilience through the cycle.

According to Report, citing international rating agency Fitch Ratings, Azerbaijan's Basel III framework is advancing.

The amendments adopted by the Central Bank of the Republic of Azerbaijan (CBRA) in December 2025 under the 2024–2026 Financial Sector Development Strategy require full compliance from January 2027.

The revision introduces a minimum common equity Tier 1 (CET1) requirement of 4.5% of risk-weighted assets (RWAs), and new minimum thresholds of 6% for Tier 1 (previously 5%) and 8% for total capital (previously 10%). The CBRA is also adding a 2.5% capital conservation buffer on top of the 0.5% countercyclical buffer in place since March 2025, lifting the effective minimum thresholds to 7.5% for CET1, 9% for Tier 1, and 11% for total capital.

The CBRA is also adding a 2.5% capital conservation buffer on top of the 0.5% countercyclical buffer in place since March 2025. This lifts the effective minimum thresholds to 7.5% for CET1, 9% for Tier 1 and 11% for total capital.

The CBRA will apply an additional buffer for domestic systemically important banks (D-SIBs), ranging from 1% to 4% depending on each bank"s systemic footprint. The buffer replaces the current flat add-ons of 1% for Tier 1 and 2% for total capital, making overall capital thresholds for D-SIBs more bank-specific.

The amendments also formalise additional Tier 1 (AT1) instruments with loss-absorption features, including write-down or conversion if the CET1 ratio falls below a 5.125% trigger. However, given the nascency of the local AT1 market, Fitch expects common equity and retained earnings to remain the primary means of meeting higher capital requirements in the medium term.

Fitch does not expect the new framework to expose the majority of banks to significant regulatory risk, including Fitch-rated ABB, Expressbank and AFB, given their generally solid capitalisation at end-1H26 and expected profit generation during the 2026 phase-in period.

However, Fitch estimates that three D-SIBs - Kapital Bank, Respublika and Unibank - had low headroom against the new Tier 1 requirements at end-1H26, including buffers. Kapital Bank accounts for 22% of sector assets, while Respublika and Unibank each account for 4%.

Fitch expects these banks to pursue controlled asset growth in 2H26 and, if needed, limit cash pay-outs to stay on track with their capital plans for the January 2027 deadline.

Fitch views the recent regulatory changes as credit positive. They contributed to an upward revision of the operating environment score for Azerbaijani banks to ‘bb'/stable from ‘bb-'/stable this month.

Further regulatory changes planned by the authorities include the introduction and implementation of additional liquidity requirements and more robust Pillar 2 processes, including frameworks for internal capital and liquidity adequacy assessment processes.

Fitch expects the planned transition to IFRS 9 over the medium term to improve transparency and loss recognition through a forward-looking provisioning approach, while also encouraging stronger risk management and underwriting discipline.