Bank of Baku: The Hidden Price of Growth

Bank of Baku is one of the banks that have helped build Azerbaijan's card economy.

According to the audited 2024 financial statements, the bank's plastic card count reached a historic high of 19.9 million — twice the country's population. Leadership in retail lending, an aggressive expansion strategy, strong market positioning — on the surface, a success story. However, a closer examination of the 2024 audited financials and Q3 2025 regulatory data reveals a more complex picture.

The Truth Behind the Numbers

According to Q3 2025 regulatory filings, the bank's gross loan portfolio stood at AZN 860.6 million. The retail segment (individuals) reached AZN 735 million — 85 percent of the total portfolio. The bank penetrates the market through plastic cards and consumer loans: per the 2024 audited statements, card loans grew from AZN 73 million to AZN 115 million — a 58 percent increase in a single year.

But growth demands its price. According to Q3 2025 regulatory data, the overdue loan ratio reached 4.9 percent. Meanwhile, provisions have been built up to 8 percent of the portfolio. Such a conservative provisioning stance may indicate expectations of further asset quality deterioration.

The Profitability Paradox

Bank of Baku's 2024 results appear positive at first glance: net profit of AZN 27.1 million, return on equity of approximately 14 percent. However, this is 10 percent below the AZN 30.1 million of 2023. The portfolio grows, profits fall.

The reasons for the profit decline are complex. First, credit loss recoveries dropped sharply: from AZN 15.7 million in 2023 to AZN 2.6 million in 2024 — a difference of AZN 13 million that directly hit the bottom line. Second, the fee and commission deficit widened: commission expenses exceeded income by AZN 10.8 million versus AZN 6.9 million a year earlier. Third, operating costs rose: staff expenses increased 7 percent, administrative costs 11 percent.

The economics of the card business deserve particular attention. Commission income from plastic cards totaled AZN 12.4 million, while expenses reached AZN 18.8 million. The net commission loss on cards exceeds AZN 6 million. This doesn't mean the card business is loss-making overall — cards generate interest income on loans and have cross-sell value. However, the commission economics are clearly negative, and this gap is widening.

The Agricultural Lesson

The bank's loan portfolio contains a small but instructive segment: agricultural loans. According to Q3 2025 data, the overdue rate here stands at approximately 26 percent — one in four loans is not being serviced. For comparison: the retail segment's overdue rate is 4.5 percent.

Meanwhile, the 2024 audited statements show the agricultural portfolio already shrank from AZN 6.3 million (2023) to AZN 3.6 million — nearly halved. This looks like a managed exit from a troubled segment. The question arises: if similar problems emerge in the retail segment, which is 200 times larger, what will the exit strategy look like?

Capital Compression

The bank's capital adequacy ratio (CAR) stood at 15.26 percent in 2023, declining to 14.62 percent by end-2024. The regulatory minimum is 10 percent, meaning there's still significant headroom. However, the trend is clear: with continued rapid portfolio growth and potential increases in provisions, capital will compress faster than profits can replenish it.

If growth continues at this pace and asset quality deteriorates, the bank will need to either raise capital or slow growth. Neither option is pleasant for shareholders.

The January Question

The bank's financial structure contains a notable detail: subordinated debt of AZN 16.76 million from Azpetrol, which holds 28.89 percent of the bank's shares. According to the audited statements, this debt is due for repayment in January 2026 — that is, right about now.

Subordinated debt from a related party is not a crisis. Such instruments are regularly refinanced. However, it demonstrates a structural feature of the bank's capital base: part of the regulatory capital depends on a shareholder's willingness to extend financing.

Legacy Debts

The aging analysis of overdue loans from Q3 2025 data shows: AZN 12.7 million has been past due for more than a year. In the retail segment, this figure is AZN 8.6 million. These are legacy problems that remain on the balance sheet.

The presence of significant debt past due for over a year indicates collection difficulties. These loans need to be either written off or genuinely restructured. Their retention on the balance sheet increases the overdue ratio and requires corresponding provisioning.

Conclusion

Bank of Baku occupies a unique position in Azerbaijan's retail banking market. However, the rapid growth strategy creates pressure on multiple fronts: rising overdue loans, negative commission economics on cards, capital compression, and declining profits despite portfolio growth.

The conservative provisioning stance — a coverage ratio well above 100 percent — suggests a cautious approach to risk. The question is when and how the growth strategy will change. How much longer can expansion continue under these trends?

First News Media