Moody’s Ratings reports that Kenyan banks’ holdings of government securities were 1.7 times their equity at the end of December 2025, a level that ties their capital, earnings and liquidity to the state’s fiscal health.

Because of that exposure, the standalone credit strength of the banks it rates remains at or below Kenya’s B3 sovereign rating.

The sector’s profitability improved, with aggregate return on assets rising to 3.5 % in the first half of 2026, up from 3.3 % in 2025.

Equity Bank Kenya posted the highest return and the biggest year‑on‑year improvement, followed by Co‑operative Bank, whose profitability stayed consistently high.

Lenders benefited from deposit costs falling faster than loan rates, and the Central Bank’s benchmark rate cut to 8.75 % in February 2026 helped lift margins.

Full rollout of risk‑based loan pricing this year has forced banks to pass rate changes to borrowers more quickly, making earnings increasingly sensitive to monetary‑policy moves.

Moody’s says sustaining profit growth will depend on loan expansion, lower provisions and higher non‑interest income, which remains low compared with regional peers.

Profit concentration is high: the ten most profitable banks generated nearly 90 % of pre‑tax profit in 2025 while holding just over 70 % of deposits and assets.

The industry’s non‑performing loan ratio fell below 15 % after peaking at 17.6 % in mid‑2025, a reversal driven mainly by large and medium‑sized lenders.

Moody’s flags downside risks from higher inflation linked to regional conflicts, weather shocks and the upcoming general election, and notes a regulatory rise in minimum core capital to Sh10 billion by 2032.

More than half of Kenya’s 39 banking institutions will need to build or raise capital to meet the new core‑capital requirement, putting pressure on smaller lenders.

Regional expansion has not weakened the sovereign link: Equity Group’s overseas operations accounted for half of its revenue, yet its holdings of Kenyan government securities still exceed its core capital, a pattern mirrored by KCB Group.