Kyrgyzstan's banks have become more vulnerable to a collapse in housing prices

Kyrgyzstan’s banking sector has become more sensitive to fluctuations in the real estate market. This is evident from the updated stress test as of June 30, 2025, which showed a deterioration in several key indicators compared to 2024.

Despite a decline in the share of real estate-backed loans in banks’ portfolios—from 21.3% to 7.2%—the system itself has become more vulnerable to a sharp drop in housing prices. At the same time, the share of real estate in the collateral structure remains high—62.9% (compared to 67.5% a year earlier).

While the impact on the sector was limited in 2024 even under stress scenarios, estimates have deteriorated significantly in 2025. Thus, with a 40% drop in real estate prices (alternative scenario), potential losses for the banking sector are estimated at 8.5 billion KGS, of which 7.5 billion KGS are attributable to systemically important banks. As many as 5 banks could face the risk of breaching capital adequacy ratios (compared to 1 a year earlier).

Under a more severe scenario—a 50% decline—losses could reach 24.6 billion KGS, with systemically important banks accounting for 15.7 billion KGS. Eight banks would be at risk (compared to four in 2024).

Even in the “historical” scenario (a 23% price decline, as in 2008), one bank remains at risk.

The key change is the lowering of the thresholds at which banks begin to incur losses:

• in 2024, risks to profitability arose when prices fell by 54.2%;
• in 2025—already at 35.2%.

For systemically important banks, the situation is even more sensitive. For them, the threshold has fallen from 58.4% to 31.3%. This means that even a moderate deterioration in the real estate market can now hit banks’ financial results more quickly.

The increased sensitivity is explained not so much by the share of mortgage loans as by the structure of collateral. Real estate continues to dominate collateral, and as prices fall, banks risk ending up with assets on their balance sheets that they will have to sell at a discount.

Under such conditions, borrowers’ default on loans as collateral values decline becomes the key channel for risk transmission to the banking system.

At the same time, risks to capital adequacy remain relatively remote. According to estimates, regulatory violations are possible only in the event of an extreme price drop:

• approximately 78.9% for the banking sector as a whole (compared to 74.8% a year earlier);
• 86.6% for systemically important banks (compared to 76.6%).

Nevertheless, even here there is a noted increase in sensitivity regarding systemically important banks.

Thus, despite a formal decline in the share of “mortgage” loans, Kyrgyzstan’s banking system has become more dependent on real estate market dynamics.