Earnings growth among Kenya’s listed banks slowed sharply in the third quarter of 2025 as lenders contended with softer non-interest income and a shifting regulatory and interest rate environment, according to a new industry report by Cytonn Investments.
The Q3’2025 Banking Sector Report, themed “Earnings Resilience Tested as Interest Income Softens,” analysed the financial performance of Kenya’s 10 listed banks and found that core earnings per share grew by a weighted average of 7.6 per cent, down significantly from 24.6 per cent recorded in the same period last year.
Cytonn attributed the deceleration primarily to a 3.3 per cent decline in non-funded income, reflecting slower growth in fees, commissions, and transaction-based revenues. The weaker performance in this segment was only partially offset by a 13.4 per cent increase in net interest income, which continued to benefit from balance sheet expansion and repricing of loan books.
“The sector faced challenges from softer non-interest income, but net interest income provided support amid an easing interest rate environment,” said Hezron Mwangi, an investment analyst at Cytonn Investments.
Despite slower earnings growth, asset quality showed modest improvement during the quarter. The weighted average gross non-performing loan (NPL) ratio declined to 13.2 per cent from 13.5 per cent a year earlier, signalling gradual stabilisation in loan performance as economic conditions improved.
However, Cytonn noted that the NPL ratio remains above the sector’s 10-year average of 11.9 per cent, highlighting persistent credit risk pressures, particularly in sectors such as trade, manufacturing, and real estate.
Regulation, Digitisation and Interest Rates Shape the Sector
According to the report, three key forces shaped banking sector performance in Q3’2025: regulatory reforms, accelerating digitisation, and changes in the interest rate environment.
In August 2025, the Central Bank of Kenya (CBK) introduced a revised risk-based credit pricing framework anchored on the Kenya Shilling Overnight Interbank Average (KESONIA), marking a shift away from the long-standing reliance on the Central Bank Rate (CBR).
However, most commercial banks have continued to price variable-rate loans using the CBR, citing operational and systems readiness challenges. Major lenders including KCB Group, Equity Bank, Absa Bank Kenya, NCBA, and Diamond Trust Bank announced that from December 1, 2025, they would apply a CBR-plus-risk-premium model, delaying full adoption of the interbank-based benchmark.
To date, only Co-operative Bank and Kingdom Bank have committed to fully transitioning their loan pricing frameworks to KESONIA.
Cytonn noted that while KESONIA is viewed as a more market-reflective benchmark, its higher volatility has prompted caution among banks, particularly in the context of customer communication and system integration.
Higher Capital Requirements Drive Consolidation Pressure
Regulatory pressure also intensified following the enactment of the Business Laws (Amendment) Act, 2024, which raised the minimum core capital requirement for commercial banks to Kshs 10.0 billion, up from Kshs 1.0 billion.
The new capital thresholds will be implemented gradually through 2029, but Cytonn said the reforms are already reshaping strategic priorities across the sector, prompting banks to accelerate capital-raising initiatives.
Several mid-tier lenders have pursued rights issues and private placements to shore up capital buffers. Paramount Bank and ABC Bank have completed rights issues, while Credit Bank has secured shareholder commitments through a broader private placement.
Foreign-owned banks, including Access Bank Kenya, UBA Kenya Bank, CIB International Bank, and Ecobank Kenya, are largely relying on parent company capital injections to meet the new requirements.
In contrast, Consolidated Bank remains significantly undercapitalised, with a negative core capital position exceeding Kshs 700 million, underscoring the likelihood of further consolidation across the sector.
“The regulatory environment is accelerating capital strengthening and reshaping competitive dynamics in the sector,” said Christine Sheila, Investment Analyst Coordinator at Cytonn Investments. “While the transition may be uneven in the near term, these measures are expected to enhance resilience, support long-term stability, and position the sector for sustainable growth.”
CBK’s decision to lift the moratorium on licensing new commercial banks is also expected to stimulate competition and innovation over the medium term, although analysts caution that higher capital requirements will limit the entry of undercapitalised players.
Absa Retains Top Ranking
Against this backdrop, Absa Bank Kenya retained its position as the most attractive listed bank in Q3’2025, according to Cytonn’s proprietary ranking framework.
The ranking is based on a combination of franchise value and intrinsic value scores, which assess banks across 13 metrics including profitability, efficiency, asset quality, capital adequacy, and growth potential.
Absa’s top ranking was supported by continued improvements in operating efficiency and profitability. The bank’s cost-to-income ratio improved significantly to 48.0 per cent from 55.0 per cent in Q3’2024, while return on average equity edged up to 26.8 per cent.
Cytonn said the results underscore the strength of Absa’s franchise and its ability to defend margins in a more challenging earnings environment.
Equity Bank Climbs, Stanbic Slips
Equity Bank emerged as the strongest climber in the rankings, rising four places to second position from sixth a year earlier. The improvement was driven by tighter cost controls and stronger margins, with the bank reducing its cost-to-income ratio to 58.0 per cent and expanding its net interest margin to 7.9 per cent.
Analysts said the performance reflects improved earnings quality and better balance sheet management as interest rates eased.
In contrast, Stanbic Bank recorded the sharpest decline, sliding six places to rank tenth from fourth in Q3’2024. The drop reflected pressure on profitability, with return on average equity falling to 18.5 per cent from 22.2 per cent year-on-year.
Operating costs also rose, pushing the cost-to-income ratio, excluding loan loss provisions, up to 45.6 per cent, highlighting the impact of expense growth on earnings.
Outlook
Cytonn said the divergence in rankings highlights a sector increasingly differentiated by cost efficiency, balance sheet strength, and the ability to protect margins as earnings growth moderates.
While asset quality trends are improving and capital buffers are strengthening, the report cautioned that banks will need to adapt quickly to regulatory reforms, technology investments, and shifting interest rate dynamics to sustain profitability.
“Banks that successfully balance efficiency, prudent risk management, and innovation will be best positioned to navigate the next phase of the cycle,” Cytonn said.
