Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market completed its first climate stress test of the banking sector for 2024, DKNews.kz reports.
The analysis has covered physical and transition risks. Physical risks include consequences of global warming, manifested as droughts, extreme heat and floods. Transition risks are associated with a decrease in demand for Kazakhstan's exports amid decarbonization, stricter environmental standards, and impact of the EU Carbon Border Adjustment Mechanism (CBAM).
The analysis has involved 11 banks which account for 85% assets of the banking system. The test has covered a three-year horizon and two scenarios.
The baseline scenario assumed implementation of climate measures and limiting temperature increase to 1.5°C. In this case, the negative impacts would have been moderate, and the country would have had time to adapt and modernize its economy.
The stress scenario has provided for a temperature rise of up to 3°C with insufficient emission reduction measures. As a result, more severe climate events and increased international restrictions, leading to a decrease in the aggregate capital of banks from 17.4% to 14.2% are expected. The main pressure came from rising credit and market risks, but capital adequacy remained above minimum requirements.
The methodology has included an individual approach to assess the impact of climate factors on sectors and borrowers, and also a portfolio approach for an aggregated assessment of the impact of macroeconomic factors.
Findings have demonstrated that the highest risks are attributed to the portfolio of large corporate borrowers. Share of high-risk loans (stage 2) rose from 2.6% to 21.2%, while the share of non-performing loans (stage 3) grew from 10.5% to 15%. Meanwhile, the probability of default on stage 1 loans increased from 4% to 5.6%. The largest increase in reserves occurred in the construction (41%) and manufacturing (21%) sectors.
In collective portfolios, an increase in the share of non-performing loans was reported in the segments of small and medium-sized enterprises (+5.6 pp) and consumer lending (+8.2 pp).
"The conducted climate stress test has allowed us to comprehensively assess how global climate change and decarbonization policies could impact resilience of the banking system. The findings have confirmed that the sector has sufficient resilience to adapt to emerging risks," indicated Timur Abilkassymov, First Deputy Chairman of the Agency.
The Agency will continue its efforts in this area. A detailed report with findings of the study is posted on the official website of the Agency.
