Falling defaults, cheaper deposits boost bank profits in first half-year

This story has significance for readers across Kenya and beyond.

A drop in deposit costs and lower loan defaults propelled stronger bank profit growth in the first half of 2026, offering continued boost after a period of expensive funding and elevated credit risk.

Nine of the country’s 11 banks listed on the Nairobi Securities Exchange, which have released their performance results for the six months ended June 2026, posted a combined Sh144.9 billion net profit, up 16.9 percent from Sh124 billion a year earlier.

The improvement comes as banks benefit from a more favourable operating environment in which interest rates have fallen, credit demand is recovering, and the cost of funding has declined faster than lending rates.

The Central Bank of Kenya (CBK) cut its benchmark Central Bank Rate to 8.75 percent in February and has maintained it at that level, down from 13 percent at the start of the monetary easing cycle in August 2024.

By June, the average commercial bank lending rate had fallen to 14.4 percent from 15.3 percent a year earlier, while the mean deposit rate dropped much faster to 6.8 percent from 8.4 percent. The faster decline in deposit costs widened the industry interest-rate spread to 7.5 percent from 6.9 percent.

That shift is visible in the half-year numbers of KCB Group, Equity Group, Co-operative Bank of Kenya, NCBA, Absa Bank Kenya, Standard Chartered Bank Kenya, Diamond Trust Bank (DTB), Stanbic Holdings and Family Bank, which are the nine lenders used in this analysis.

Interest expenses for the nine lenders fell 7.2 percent to Sh111.6 billion as interest income rose 6.9 percent to Sh391.2 billion. Net interest income increased seven percent to Sh275.4 billion during the review period.

The recovery in asset quality has provided another lift. Gross non-performing loans across the nine banks fell 8.9 percent to Sh554.3 billion, with Equity, Absa and KCB recording some of the biggest reductions in the stock of bad loans.

Equity was the biggest beneficiary of the trend, lifting net profit 31.5 percent to Sh43.8 billion and contributing roughly half of the overall increase in profits among the banks analysed.

The lender’s gross non-performing loans (NPLs) fell 22.2 percent to Sh108.4 billion, while provisions for bad loans declined 11.6 percent.

Its NPL ratio improved to 9.5 percent from 13.7 percent last June following aggressive collection by the lender and what it termed “disciplined underwriting, improved analytics and a diversified portfolio.”

KCB, the second-largest profit generator, also combined stronger business with improved asset quality. Its profit rose 14 percent to Sh36.9 billion as gross NPLs fell 7.8 percent to Sh203.8 billion. Its NPL ratio improved to 15.1 percent from 18.7 percent.

“NPLs improved as targeted resolution initiatives, including recoveries, rehabilitations, full and final settlements, government engagements on associated entities, and strategic write-offs, delivered positive outcomes,” said KCB.

Co-op Bank and DTB posted some of the fastest profit growth during the half-year. Co-op’s earnings rose 28 percent to Sh18 billion as its NPL ratio improved to 13.9 percent from 17.2 percent, while DTB recorded a 34.1 percent jump to Sh6.4 billion.

However, the improvement in asset quality was not uniform, pointing to the uneven recovery across the banking industry given differences such as the type of clients.

Family Bank was the standout performer on profit growth, with earnings jumping 61.8 percent to Sh3.7 billion. However, its gross NPLs increased 19.2 percent to Sh18.1 billion, making it an outlier in an industry where bad loans generally fell. The rise in gross NPLs saw Family Bank step up provisions for loan defaults by 50.5 percent to Sh998.25 million.

The lender said several borrowers who fell into default due to the disruptions caused by the Covid-19 pandemic are yet to normalise repayments, thereby contributing to the stock of NPLs that drove the NPL ratio to 14.9 percent from 13.7 percent.

“Our interest is not just to report good numbers. Our interest is also to protect the asset that we are entrusted with by our shareholders and the economy at large. We are very deliberate in ensuring that the required accounting standards are followed,” Paul Ngaragari, chief finance officer at Family Bank, said.

DTB also recorded a six percent increase in gross NPLs, while that of NCBA rose 5.7 percent. The profit growth of the two lenders was influenced more by stronger lending income, lower funding costs and other revenue streams and less to do with falling stock of NPLs.

StanChart and Absa saw their net profits fall 16.8 percent and 9.8 percent respectively, making them outliers. Stanbic was another outlier, with profit edging up just 1.3 percent despite a 25 percent expansion in its loan book.

The disclosures of the nine lenders signal a sector moving from a defensive phase of managing expensive funding and elevated defaults towards renewed credit growth.

Private-sector credit growth accelerated to 10.6 percent in June, the fastest pace in 28 months, as lower lending rates improved demand from businesses and households.

Reporting originally appeared via Business Daily. Read the full source for additional context.