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 (mainly residential real estate). The bank has a key role for its parent, acting as a bridge between the UK and the Middle East (mostly Kuwait), and 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, and IT systems. NBKI has a local management team, with 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 from a default by its subsidiary. We also take NBK's 100% ownership of NBKI into consideration.

Conservative Risk Profile: NBKI's balance-sheet management remains conservative, as reflected in its selective growth, focus on low-risk customers, and a high portion of the balance sheet being 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.

Deteriorating Asset Quality: NBKI's impaired loans ratio increased to 6% at end-2022 from 1% at end-2021. Stage 2 loans accounted for about 12% of gross loans at that date and are closely monitored. Impaired loans coverage was a low 5%, reflecting high reliance on collaterals. 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 31% increase in net income in 2022 as stronger net interest margins (due to higher interest rates) and higher non-interest revenues (especially foreign-exchange gains) boosted performance. We expect profitability to have improved 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 into NBKI to fund its ambitious growth plans, thus demonstrating NBK's commitment to its subsidiary. NBKI's common equity Tier 1 (CET1) ratio was 21.3% at end-2022, which we expect to remain around this level over the medium term as rapid growth is offset by healthy internal capital generation.

Stable Funding; Strong Liquidity: NBKI's main source of funding is customer deposits (end-2022: 56% of total non-equity funding). The remainder is predominantly deposits from banks and other financial institutions (37%), which are Gulf Cooperation Council public-sector entities. The bank has been actively diversifying its funding base with certificates of deposits that now account for 7% of total 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.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

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

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

NBKI's Long-Term IDR (xgs) would mirror changes to NBK's Long-Term IDR (xgs). Its Short-Term IDR (xgs) is sensitive to changes to its Long-Term IDR (xgs) and Fitch's Short-Term rating mapping.

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 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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