The H1 2026 results favoured banks with strong deposit franchises, diversified income streams, improving asset quality, the capacity to grow loans without significantly increasing credit risk, regional diversification, digital capabilities and reasonable valuations.
- Equity Group stood out for its combination of earnings growth, scale, non-funded income and regional diversification.
- KCB Group offered scale and valuation appeal, although its large absolute NPL stock remains a variable to monitor.
- Co-op Bank’s strong earnings growth reflected greater balance-sheet deployment, creating more upside if credit growth accelerates, but also greater sensitivity to asset quality.
- Weaker performance of Absa Kenya and Standard Chartered demonstrated that operational efficiency alone does not guarantee earnings growth in a changing rate environment.
Banks and Equities: Recovery, but selectivity matters
Investors should therefore look beyond headline H1 2026 profit growth and examine how much of the improvement came from sustainable loan growth, lower funding costs, fee income and stronger asset quality.
The falling-rate environment also changes the relative attractiveness of different asset classes. As government bond yields decline, the opportunity cost of holding equities falls. The movement of pension funds from government securities toward listed equities provides evidence of this portfolio reallocation.
However, investors should not chase the market indiscriminately. Rising share prices alongside foreign selling (Sh4.55 billion August outflow) suggests that some international investors are taking profits after the rally, even as domestic institutions continue accumulating.
The next stage of the market may therefore depend more heavily on earnings growth and domestic liquidity than on foreign inflows. Investors therefore need to distinguish between companies whose share prices have already fully reflected the recovery and those where earnings still have room to catch up.
Inflation changes the rate-cut thesis
With inflation at 6.6 percent, investors should not assume that the CBR will continue falling at the same pace seen during the 2024–2025 period. The Central Bank of Kenya (CBK) has kept the CBR at 8.75 percent since February, suggesting that policymakers are balancing growth support against inflation and external risks.
The investment implication is important: the strongest bull case is not necessarily one where rates fall sharply. It is one where rates remain relatively accommodative while economic growth and corporate earnings continue improving.
This is also where the distinction between pull-forward and pull-through becomes important. If the benefits of lower rates have largely been brought forward into H1, H2 could see slower earnings growth. But if lower rates continue to translate into stronger borrowing, investment and consumption, the initial boost could pull through into the second half of the year.
What to watch in H2 of 2026
The outlook for Kenyan equities will depend on how inflation, monetary policy, economic activity and corporate earnings interact.
In a bull case, inflation moderates, the shilling remains stable, PMI returns above 50 and GDP growth remains above 5 percent. This would support faster credit growth and continued strong bank earnings, provided NPLs remain contained.
In a base case, inflation remains within the 5–7 percent range, the CBR stays broadly stable and GDP growth holds around 5 percent. Banks would continue growing earnings, but at a slower pace as some benefits of monetary easing have already been captured in H1. The market would consequently become more selective and valuation-driven.
A bear case would emerge if food and fuel prices push inflation higher, the shilling weakens and PMI remains below 50. Weaker credit demand, rising provisions and NPLs, and pressure on bank margins could then slow earnings growth, while the NSE could face foreign outflows and valuation compression.
For investors, the key indicators to watch are inflation, the CBR and KESONIA, PMI, private-sector credit growth, NPLs and provisioning, the shilling, and NSE valuations and foreign flows.
Inside Kenya’s banking sector: Is strong H1 performance sustainable?
Inflation is particularly important because a sustained move above 6–7 percent could reduce the likelihood of further monetary easing. Similarly, whether the 8.75 percent CBR represents the floor or whether the CBK resumes rate cuts will provide an important signal for borrowing costs and bank margins.
The PMI is also worth watching. A sustained return above 50 would strengthen the economic recovery story, while continued readings below 50 could indicate that rising input costs are weighing on business activity.
Private-sector credit growth may be the most important link between easier monetary conditions and sustainable earnings growth. Faster lending would strengthen the recovery story, but only if it does not come at the expense of asset quality.
