KCB: 9-10% net interest margins are long gone

KCB Group has revealed that Kenya's reduced interest-rate environment is reshaping the banking sector, with the lender stating that net interest margins (NIMs) are falling to a range of 6.5–7 percent due to monetary policy's impact on lending rates. The Group Chief Financial Officer, Lawrence Kimathi, emphasized that such a decline is particularly evident in KCB's Kenyan operations after several rate cuts by the Central Bank.

Speaking on Trading Bell on August 13, 2026, Kimathi mentioned that the era of having NIMs of 9–10 percent is now over, with the new norm being between 6.5 and 7 percent, provided banks manage their interest expenses effectively.

This shift follows the Central Bank of Kenya (CBK) maintaining the Central Bank Rate at 8.75 percent for three consecutive meetings on August 11. The rate has remained at this level since a 25-basis-point cut in February. As a result, commercial bank lending rates have dropped, with average lending rates falling to 14.3 percent in July from 17.2 percent in November 2024.

Kimathi highlighted that KCB has already experienced benefits from re-pricing its deposits, with the cost of funds declining from 3.9 percent to 3.4 percent. He noted that deposit pricing is influenced by competition from government securities, such as 91-day bills, which are perceived as risk-free. Consequently, banks must consider the returns provided by these securities when setting deposit rates.

Kimathi also noted the inverse relationship, stating that if the Central Bank Rate increases, so too will the cost of funds, but KCB's ability to adjust its pricing will be influenced by the higher rates. He further explained that KCB's performance will increasingly hinge on loan growth, operational efficiency, and revenue from fees and other services.

During the first half of the year, KCB's loan book expanded by 14 percent, while deposits grew by 15 percent. New customers contributed approximately 15 percent of the loan growth. Kimathi emphasized productivity improvements, with the bank's cost-to-income ratio reduced to 44 percent. Non-funded income, which has become more vital given the pressure on interest income, has also increased. The bank's digital business generates around Ksh1.7 billion in daily transactions, and service fees rose by 13 percent.

KCB's Q1 results demonstrated an 8.5 percent rise in operating income despite a decline in NIM, with growth in interest-earning assets compensating for weaker margins. This trend is not unique to KCB, as data from Kenyan banks shows varying NIMs based on individual business models, funding costs, and loan pricing. In Q1 2026, Cytonn reported NIMs of 8.9 percent, while KCB reported 7.9 percent, Equity reported 7.9 percent, and NCBA reported 7.7 percent.

Despite the challenging margin environment, Kimathi believes that Kenya's NIM will remain under pressure but anticipates stronger performance in other markets. He also highlighted that foreign exchange income, digital services, and new products could bolster earnings. KCB's loan quality has improved, with the non-performing loan (NPL) ratio falling to 15.1 percent, the lowest level in 57 months, as the bank works to reduce bad loans through restructuring, settlements, recoveries, and write-offs.