Fitch Ratings has affirmed National Bank of Kuwait France S.A.'s (NBK France) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.

Key Rating Drivers

NBK France's ratings are based on potential support from its parent, National Bank of Kuwait S.A.K.P. (NBK; A+/Stable). This reflects NBK's strong ability - as indicated by its ratings - and willingness to provide support to NBK France. Fitch does not assign a Viability Rating to NBK France given its close integration with its parent and our view that NBK France's franchise cannot be assessed meaningfully in its own right.

Integral to Parent's Strategy: NBK France is viewed as an important part of NBK's international banking unit, playing a key role in capturing business flows between NBK's core markets in the Middle East and north Africa, and the EU. Its core activities are corporate, real estate and private banking, as well as treasury.

Easy to Support: NBK France is small relative to NBK, representing about 1% of the latter's end-2022 consolidated assets, meaning that support would be manageable for the parent.

Close Integration: NBK France's strategy, risk management, systems and processes are highly integrated with NBK's. NBK France's management has reporting lines to the parent in Kuwait, and the board of directors is chaired by NBK's deputy group chief executive.

Other Support Factors: In equalising NBK France's IDRs with NBK's, Fitch also considers the high reputational risk to NBK of a subsidiary default, as well as the 100% direct and indirect ownership by NBK.

Resilient Operating Environment: Fitch has lowered its 2022 and 2023 economic forecasts for France and most eurozone countries. However, we expect the French economy to be less affected than some peers and the banking sector to remain resilient given their diversified business models, satisfactory asset quality and comfortable capital buffers.

Conservative Risk Profile: NBK France's conservative risk appetite is underpinned by strict lending criteria, which are adhered to at all times, selective growth, a low-risk clientele, as well as a good risk- control framework benefiting from the group's conservative risk culture.

Sound Asset Quality: Asset quality remains healthy despite challenging macro conditions. Impaired loans accounted for 2.5% of total loans at end-2022, the majority of which were related to one impaired account in the commercial real-estate portfolio. The bank's largest exposures are well-collateralised, which underpin the bank's ability to recover bad debts. Non-loan assets are of high quality and comprise cash, bank placements and high-quality bonds.

First Pre-Impairment Profit: In 2022, NBK France reported its first pre-impairment profit since inception in 2019, with strong revenue growth outpacing operating expenses growth. Nevertheless, the bank reported an operating loss due to high impairment charges in relation to an impaired account. We expect the bank to report a net profit in 2023 as revenues increase while operating expenses and provisions remain contained.

Strong Capitalisation: Capitalisation is very strong with a common equity Tier 1 (CET1) ratio of 51% at end-2022, largely above the minimum regulatory requirement. Stronger growth could weigh on capital ratios but any capital need will be addressed by NBK on an ongoing basis.

Funding Diversification Underway: NBK France is mainly funded by short-term customer deposits, but sources of medium-term funding are being developed and longer-term funding has been raised from banks in 2022. Liquidity is strong with a liquidity coverage ratio of 485% at end-2022.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of NBK's ratings would trigger a downgrade of NBK France's. NBK France's ratings would also be downgraded if Fitch views the propensity of NBK or the Kuwaiti authorities to support NBK France as diminishing. This would most likely be the result of a reduction in NBK France's strategic role for NBK, in its integration with NBK or in NBK's ownership stake. However, this is unlikely in the near term.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

NBK France's IDRs could be upgraded if NBK's IDRs are upgraded.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

NBK France's Long-Term IDRs are linked to NBK's.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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