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 the bank's 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: We view NBK France 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 services.

Easy to Support: NBK France is small relative to NBK, representing about 1% of the latter's end-3Q23 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.

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 benefitting from the group's conservative risk culture.

Sound Asset Quality: Asset quality remains healthy despite uncertain macro conditions. The bank's impaired loans ratio fell to 1.9% at end-1H23 (end-2022: 2.6%). Its largest exposures are well-collateralised, which underpins the bank's ability to recover bad debts. Non-loan assets are of high quality and comprise cash, bank placements and high-quality bonds.

Weak but Improving Profitability: NBK France has been loss-making since inception in 2019 due to start-up costs. In 2022, operating loss was driven by fair-value losses from its securities portfolio and loan impairment charges. We estimate a net profit for 2023 on higher revenues while operating expenses and provisions remained contained.

Strong Capitalisation: Capitalisation is very strong, with tangible equity/tangible assets at 23.5% at end-3Q23 (end-2022: 28%). Stronger growth could weigh on capital ratios, but we expect the ratios will remain largely above their regulatory minimum requirements. We continue to believe that capital needs would 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 was raised from banks in 2022 and 1H23. Liquidity is strong, with a liquidity coverage ratio of 274% at end-1Q23.

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.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

NBK France's Long-Term IDR (xgs) of 'A-(xgs)' is aligned with NBK's Long-Term IDR (xgs). Its Short-Term IDR (xgs) of 'F2(xgs)' is mapped to its Long-Term IDR (xgs).

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

NBK France's Long-Term IDR (xgs) is sensitive to changes in NBK's Long-Term IDR (xgs).

NBK France's Short-Term IDR and Short-Term IDR (xgs) are sensitive to changes in its Long-Term IDR and Long-Term IDR (xgs), respectively.

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 and Long-Term IDR (xgs) rating 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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