Moody’s projects a moderation in Kenyan banks’ profitability in 2026, signalling a shift from the elevated earnings recorded over the past year toward more normalized performance levels. This outlook comes despite the sector posting an 11.8% growth in profit after tax in the nine months to September 2025, a period characterized by higher yields on government securities and prudent balance sheet positioning. Banks had strategically tilted their portfolios toward interest-earning assets that benefited from tight monetary conditions earlier in the cycle, cushioning earnings even as private sector credit contracted.
The operating environment, however, is evolving. Private sector credit growth has rebounded from a contraction of 2.9% in January 2025 to a positive 6.4% in January 2026 as borrowing costs eased. While this recovery is a positive signal for economic activity, credit expansion remains largely concentrated in safer, short-tenor exposures. This cautious lending approach limits banks’ ability to rebuild higher-yielding loan books, particularly in segments that previously drove stronger interest income. As a result, balance sheet growth may not translate into proportional earnings growth.
A key driver of the expected earnings moderation is yields compression. The 364-day Treasury bill rate has declined from 11.3% in early January 2025 to 10.9% by end-January 2026, reflecting a broader downward trend in interest rates. In February 2026, the Monetary Policy Committee lowered the policy rate further to 8.75% from 9.00% in December 2025, following cumulative cuts throughout 2025. This easing cycle is expected to push government security yields lower, directly compressing banks’ net interest margins. Given the significant allocation of bank assets to government securities, falling yields reduce interest income and weigh on returns on assets.
At the same time, lending rates have also declined, easing to 14.82% in December 2025 from 15.8% in January 2025. Lower borrowing costs are improving affordability for households and businesses, supporting credit demand and contributing to improved asset quality. The gross non-performing loan (NPL) ratio has moderated from 17.6% in June 2025 to 16.9% in September 2025 and is expected to decline further from 15.5% in January 2026. Improving asset quality should help reduce provisioning expenses and cushion banks against rising credit costs.
However, the improvement in credit metrics is unlikely to fully offset the sustained compression in yields. With both asset yields and lending rates trending downward, net interest margins are expected to narrow further in 2026. Consequently, bank profitability is set to normalize from the highs achieved during the tight monetary phase rather than deteriorate sharply. Overall, the sector remains stable, supported by recovering credit growth and improving asset quality, but earnings growth will likely moderate as the rate cycle turns and extraordinary yield-driven gains fade.
