Kenyan banks' significant exposure to government debt is limiting their credit strength, according to Moody's Ratings. Despite improving profitability and loan quality, the banks' large holdings of government securities, equal to 1.7 times their equity, tie their capital, earnings, and liquidity closely to the state's fiscal health. This exposure results in Moody's rating the standalone credit strength of the Kenyan banks it covers at or below the country's B3 sovereign rating.
The aggregate return on assets for the 11 listed banking groups in Kenya rose to 3.5% in the first half of 2026, up from 3.3% in 2025 and 3.1% in 2024. Equity Bank Kenya posted the strongest return and the biggest year-on-year improvement, while Co-operative Bank maintained consistently high profitability. These improvements are attributed to lower deposit costs, a benchmark rate cut to 8.75% by the Central Bank of Kenya in February 2026, and risk-based loan pricing.
However, sustaining profit growth will increasingly rely on loan growth, reduced provisions, and higher non-interest income, which remains low compared with regional peers. Profit concentration is high in the Kenyan banking sector, with the ten most profitable banks generating nearly 90% of pre-tax profit in 2025 while holding just over 70% of deposits and assets. This concentration highlights the need for banks to diversify their revenue streams.
The sector's non-performing loan ratio fell below 15% after peaking at 17.6% in mid-2025, marking a reversal of a decade-long deterioration. However, small banks saw their NPL ratio rise to 28.6% in 2025, highlighting a divergence between large-medium lenders and smaller institutions. This divergence may pose challenges for smaller banks in terms of asset quality and profitability.
Moody's identified higher inflation linked to the Middle East conflict, weather shocks, and the upcoming general election as downside risks to the banking outlook. These external factors may impact the banks' ability to sustain profit growth and maintain asset quality. As a result, banks will need to closely monitor these risks and adjust their strategies accordingly.
Regional expansion has not yet reduced the sovereign link, as Equity Group and KCB Group still hold Kenyan government securities exceeding their core capital despite sizable overseas operations. This suggests that even banks with significant international presence are still heavily exposed to the Kenyan government's fiscal health.
In conclusion, while Kenyan banks have reported improved profitability and loan quality, their significant exposure to government debt and high profit concentration pose challenges to their credit strength. To mitigate these risks, banks will need to focus on diversifying their revenue streams, improving asset quality, and closely monitoring external factors that may impact their operations.
Key points
- Kenyan banks' large holdings of government debt constrain credit strength despite improving profitability and loan quality.
- Profit concentration is high in the Kenyan banking sector, with the ten most profitable banks generating nearly 90% of pre-tax profit in 2025.
- External factors such as higher inflation, weather shocks, and the upcoming general election pose downside risks to the banking outlook.
