Moody's upgrades outlook for Kenyan banks on interest rates fall

A Cooperative Bank branch in Nairobi /FILE

Global ratings agency Moody’s Investors Service has upgraded its credit outlook on key Kenyan banks, reflecting improved macroeconomic conditions in the country, including a more stable shilling, easing lending rates, and lower default risks that are bolstering confidence in the financial system.

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The move comes on the heels of Moody’s sovereign credit upgrade of Kenya to B3 from Caa1, the highest level since July 2023, citing strengthened external liquidity and reduced near-term default risk.

The agency raised the country’s rating from Caa1 to B3 in late January, six notches below investment grade, while revising the outlook to stable from positive.

In its latest ratings action, Moody’s has raised the long-term deposit ratings of three major Kenyan banks — Co-operative Bank of Kenya (Coop Bank), Kenya Commercial Bank (KCB) Group and Equity Bank Kenya — to B3 from Caa1, and changed their outlooks to stable from positive.

According to the rating firm, Kenya’s macroeconomic backdrop has shifted appreciably in recent months.

“After a period of sharp volatility, the Kenyan shilling has stabilised, supported by higher foreign-exchange reserves and inflows, helping to anchor inflation expectations and reduce currency-related risk.”

Until this action, Moody’s had placed long-term deposit and senior unsecured ratings for the three banks at Caa1 with a Positive outlook, a non-investment-grade designation signaling very high credit risk but with potential for improvement.

The upgrade to B3 moves the banks higher on Moody’s speculative grade scale — still below investment grade but indicating a reduction in assessed credit risk relative to the prior category.

The Stable outlook suggests Moody’s now sees the banks’ credit profiles as less susceptible to short-term deterioration.

“This action reflects closer alignment with the sovereign’s improved credit fundamentals — particularly stronger liquidity and access to finance — which, in turn, limits direct and indirect risks to the lenders’ balance sheets.”

The rating firm cited steady performance by the country’s top banks in the first nine months of the year, where they generated a combined net profit of Sh120 billion, with Cooperative Bank Group posting Sh21.6 billion, KCB Sh47.3 billion and Equity at Sh51.1 billion.

Total operating income reached Sh633.8 billion, a 6.7 per cent increase from 2024. Equity Group maintained its position as the largest operator by revenue at Sh156.3 billion, with KCB Group close behind at Sh149.4 billion.

Together, these two institutions accounted for 48.2 per cent of all operating income in the sector. Cooperative Bank delivered the fastest operating income growth at 13.9 per cent.

This is attributed to sound monetary policies employed recently, including the cutting of Kenya’s Central Bank Rate (CBR) over a prolonged easing cycle — marking at least nine consecutive policy rate cuts culminating in a drop to nine per cent.

“This reflects a broader effort to stimulate private sector lending and support economic activity amid stable inflation and resilient economic conditions.”

Banks have commenced adjusting their loan pricing under the new framework to align with this lower benchmark.

Kenya is also implementing significant regulatory reforms to bank capital requirements, aimed at strengthening financial stability and resilience.

The Business Laws (Amendment) Act, 2024, mandates an increase in the minimum core capital requirement for commercial banks in Kenya from Sh1 billion to Sh10 billion by 2029. This increase is being phased in progressively to give banks sufficient time to raise the required capital.

“The hike is intended to bolster bank resilience, protect the financial system against shocks, enhance risk absorption, and enable banks to support larger-scale financing and economic development. As smaller banks work to meet these thresholds, there may be increased mergers, acquisitions, and capital-raising activities in the sector.”

Moody’s highlighted the relevance of Kenya introducing the Kenya Shilling Overnight Interbank Average Rate (KENSONIA) in September last year,saying that thereform modernizes the country’s monetary policy transmission mechanism by shifting from the traditional Central Bank Rate (CBR) to a market-determined benchmark, similar to global standards like the UK’s SONIA or the US’s SOFR.

Under the Risk-Based Credit Pricing Model, the interest rate charged to borrowers will be KESONIA + a borrower-specific premium (“K”), improving transparency and aligning lending costs with actual market conditions and borrower risk profiles.

On Friday, another rating agency, S&P, indicated that Africa’s banking sector will remain resilient in 2026, supported by favourable economic and financing conditions that are projected to sustain credit growth and keep asset quality stable.

The latest outlook report shows that about 50 per cent of bank ratings across the continent carry a positive outlook this year, largely reflecting improving sovereign credit profiles, particularly in Kenya, Nigeria and South Africa.