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

Key Rating Drivers

NBKI'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 NBKI. Fitch does not assign a Viability Rating to NBKI given its close integration with its parent and Fitch's view that NBKI's franchise cannot be assessed meaningfully in its own right.

Integral to Parent's Strategy: NBKI's core activities are corporate (mainly commercial real estate) and private banking. The bank has a key role for its parent, acting as a bridge between the UK and the Middle East (mostly Kuwait), serving clients with ties to both regions.

Easy to Support: NBKI is small relative to NBK, representing about 3% of NBK's end-2022 consolidated assets, meaning that support would be manageable for the parent.

Close Integration: Operations are highly integrated with NBK in business origination, risk management, IT systems and processes. NBKI has a local management team with dotted reporting lines to its Kuwaiti parent. NBKI's board of directors is chaired by NBK's CEO.

Other Support Factors: In equalising NBKI's ratings with NBK's, Fitch considers the high reputational risk to NBK of a default by its subsidiary. We also take into consideration NBK's 100% ownership of NBKI.

Conservative Risk Profile: NBKI's balance-sheet management remains conservative as reflected through selective growth, focus on low-risk customers, and a high portion of the balance sheet allocated to high- quality liquid assets. As at peers, concentration risk is high but is mitigated by the quality of the bank's largest customers. NBKI's risk profile is supported by the implementation of a group-wide risk-management framework.

Healthy Asset Quality: NBKI's impaired loans ratio was low at 0.9% at end-2022 (end-2021: 1.1%). Stage 2 loans accounted for about 6% of gross loans at that date and are closely monitored. NBKI's classification policy is conservative and we do not expect any large migration into the Stage 3 category in 2023. Non-loan assets account for about 50% of NBKI's balance sheet and are of high quality, comprising cash, interbank placements and high-quality securities.

Sound Profitability: NBKI reported a 60% increase in net income in 2022 as stronger net interest margins (in line with higher rates) and higher non-interest revenues (especially foreign-exchange gains) boosted performance. We expect profitability to improve further in 2023, supported by stronger business volumes and higher net interest margins.

Strong Capitalisation: NBKI operates with strong capital ratios. In January 2022, NBK completed a GBP40 million capital injection in NBKI to fund its ambitious growth plans. This demonstrates NBK's commitment to its subsidiary. NBKI's CET1 ratio was 21.5% at end-2022, which we expect to remain around this level over the medium term as rapid growth is balanced by healthy internal capital generation.

Stable Funding; Strong Liquidity: NBKI is mainly funded by customer deposits but has been actively diversifying its funding base with certificates of deposits that now account for about 10% of non-equity funding. Customer deposits are evenly split between retail and corporates and have proved stable over time. NBKI has ample liquidity, with a liquidity coverage ratio in excess of 200% 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 NBKI's. NBKI's ratings would also be downgraded if Fitch views the propensity of NBK or the Kuwaiti authorities to support NBKI as diminishing. This would most likely be the result of a reduction in NBKI's strategic role for NBK, in 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:

NBKI'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

The ratings of NBKI's 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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