Effect of Climate-Related Risks on the Bank’s Portfolio

Otbasy Bank JSC applies a scenario-based approach to assess the impact of climate-related risks on its mortgage portfolio, taking into account the distinct nature of these risks:

• Acute physical risks (e.g., floods and landslides) are considered short-term, with immediate effects on expected credit losses (ECL) within a 12-month horizon.
• Transition risks related to regulatory and technological changes are considered long-term and are assessed using NGFS scenarios:
• Orderly transition: gradual modernization of buildings over the next 5 years;
• Disorderly transition: a prolonged adaptation period with a 10-15 year horizon.

This approach enables the Bank to factor in the specifics of various climate challenges and to develop well-grounded assumptions when evaluating their potential impact on financial performance.

A number of climate-induced natural disasters, such as rising temperatures, affect environmental processes including glacier melt and rising groundwater levels, which in turn increase the intensity of mudflows, landslides, and floods.

Flood risk is particularly significant during spring, when river levels rise due to snowmelt. Sudden temperature increases can accelerate snowmelt and trigger flooding. Heavy rains combined with rapid temperature rises further amplify flood severity. In the spring of 2024, Kazakhstan once again faced a major natural disaster in the form of widespread floods. As a result, 10 regions were affected. In response to the state of emergency and the flooding in the Republic of Kazakhstan, the Bank approved a payment deferral mechanism for loan holders, allowing up to 90 calendar days of deferred payments. Applications for payment deferrals were submitted for 89 loans from 6 flood-affected regions, which accounts for 0.10 % of the total credit portfolio in those regions. The share of the restructured portfolio in these regions amounted to 0.21 %. As of 1 January 2025, there were no loans with payment arrears exceeding 90 days among those that received a deferral due to flooding. This deferral measure was not classified as a traditional loan restructuring and did not trigger impairment recognition.

As part of its physical climate-related risk assessment, the Bank identified the Top 5 regions with the highest loss exposure.

Based on an analysis of available climate data and Kazakhstan’s climate-related risk vulnerability map, the following were identified as the most relevant physical climate threats for Otbasy Bank JSC’s mortgage portfolio:

• River and urban flood risk, present in nearly all regions of the country, especially during spring due to intense snowmelt and rising river levels;
• Landslide and mudflow risk, prevalent in the southern and southeastern regions, where climate change increases the likelihood of ground movement in mountainous and foothill areas;
• Water resource shortages, increasingly common in western and southern regions, affecting infrastructure and housing development;
• Rising frequency of extreme weather events, including heavy precipitation, temperature fluctuations, and droughts, which can impact the physical condition of collateralized real estate.

Flood and landslide risks are of particular concern to the Bank, as they have the greatest impact on collateral, borrower solvency, and the financial resilience of the mortgage portfolio. Landslides often occur alongside floods, compounding the damage and requiring an integrated risk assessment approach.

Identifying these risks enables the Bank to develop targeted adaptation measures and incorporate climate considerations into underwriting, monitoring, stress testing, and strategic planning processes.

Results of the scenario analysis on the Bank’s credit portfolio exposure to physical climate-related risks highlighted the most vulnerable regions where collateral losses could rise significantly under climate stress conditions.

A balanced scenario (10 % probability) indicated potential increases in expected credit losses in the range of KZT 63.8-143.6 million, or up to 1.93 % of the portfolio. The largest forecasted losses are in the following regions:

• Almaty city – KZT 43.68 million,
• Almaty region – KZT 21.03 million,
• Turkestan region – KZT 15.74 million;
• Zhambyl region – KZT 5.65 million,
• Pavlodar region – KZT 2.27 million.

A high-risk scenario (100 % probability) demonstrated potential losses up to KZT 439.98 million in Almaty alone. Total losses across the top five regions could exceed KZT 880 million, with a maximum expected loss across the portfolio of KZT 1.014 billion.

Almaty city and Almaty region show the greatest exposure to physical risks, requiring prioritized adaptation measures, especially in areas related to collateral management, insurance parameters, and underwriting practices.