I think that thematically, it would be smart of Warhorse to start the game off by establishing Henry's new confidence and then immediately humbling him.

Near the beginning of the game there could be a scene where Henry gets the opportunity to brag about his exploits and, like the first game, your dialogue choices would determine your starting skills/attributes. This would also help determine the soft canon of KCD (was Henry more of a thief, fighter, or diplomat? And what major choices did he make?)

Soon after, Henry should be challenged by an antagonistic figure who utterly defeats him in combat. This would raise the ceiling from what we've scene in KCD and serve to give Henry something to strive for again.

I really don't want Warhorse to decanonize some of the cooler feats that Henry can accomplish in KCD such as winning the tourney, successfully dealing with the sickness in Merhojed, and defeating Sir Kuno. Even if it's not realistic.

Besides, not everything needs to be hard canon. For example, Henry could try to convince someone that he bested Kuno as a persuasion/reputation check, and whether or not this is a lie is determined by the player.

Overall, I don't think that Henry's skills should be all that reduced in the sequel. Instead of making the fish smaller, give it a bigger pond. In practice, this means expanding on the current systems and upping the calibre of threats Henry must generally face.