The fall in real estate prices could cost Kyrgyzstan's banks 25 billion KGS

A decline in real estate prices could become one of the key sources of risk for the banking sector in Kyrgyzstan. This is evidenced by the results of stress testing conducted by the National Bank at the end of the first half of the year.

According to the regulator's assessment, 7.2% of all loans in the banking system are secured by real estate. At the same time, real estate accounts for 62.9% of the total collateral for the loan portfolio. This means that the stability of banks largely depends on the dynamics of prices for residential and commercial real estate.

Risks for banks arise when the market value of collateralized real estate falls below the outstanding loan balance. In this case, borrowers may refuse to service their debt, and banks will be forced to take collateral on their balance sheets and sell it at reduced prices.

According to the National Bank's calculations, even with a 35.2% drop in real estate prices, there is a risk of a decline in the banking sector's profits and losses for individual banks. For systemically important banks, this threshold is even lower—about 31.3%.

Stress testing shows that in the event of a sharp deterioration in the real estate market, the risks could become systemic.

Thus, with a 40% drop in prices, the potential losses of the banking sector could amount to about 8.5 billion KGS, and for systemically important banks — 7.5 billion KGS. In a more severe scenario, with prices falling by 50%, total losses could increase to 24.6 billion KGS, and for the largest banks, to 15.7 billion KGS.

At the same time, the risk of violating capital adequacy ratios increases. According to the regulator's assessment, such risks become likely when real estate prices fall by almost 79% across the entire system and by 87% for systemically important banks.

Thus, the real estate market remains one of the key factors of financial stability. With a high share of collateral in the form of residential and commercial real estate, any sharp decline in prices can quickly translate into credit losses and pressure on banks' capital.

It should be added that the most significant decline in real estate prices in the country was recorded during the global financial crisis of 2008. At that time, prices fell by 23%.