BPCE - 2018 Registration document

5 FINANCIAL REPORT

Statutory Auditors’ report on the consolidated financial statements

Impact of first-time application of IFRS 9 as of January 1, 2018

Risk identified and main judgements

Our response

Classification and measurement Concerning the impacts of first-time application, our main procedures consisted in: reviewing for validation the analyses performed at Group level to ● determine the classification of financial instruments and their breakdown in the entities included in the consolidation scope; obtaining and reviewing the documentation relating to the business ● models and verifying compliance with them; verifying, based on a sampling of contracts, the quality of the ● analyses made by Groupe BPCE entities leading to the classification of the contracts in the new categories under the standard. We have also familiarized ourselves with and assessed the internal control measures implemented by the Group to document the analyses and the compliance of the business models with the provisions of the new standard for new loans. Impairment (Stages 1 and 2) Our procedures mainly consisted in, with the assistance of our experts, in: reviewing the loan portfolios and mapping impairment calculation ● models by scope; analyzing compliance of calculation and calibration methods with ● the provisions of IFRS 9 and in particular, the significant deterioration of credit risk criteria (variation in - rating and Probability of Default since initial recognition…), expected loss calculation (reviewing models, calibration of DP, - LGD, taking into account guarantees, forward-looking assumptions, discounting to EIR, back-testing methods); redoing the calculations with our own tools; ● validating additional local sectoral provisions recognized, if ● necessary. Our IT specialists also verified the IT system, as a whole, set up by Groupe BPCE with notably a review of general IT controls and the embedded interfaces and controls with regard to specific data aiming to process IFRS 9 information. Finally, our controls also covered the review of the cost impact, the data consolidation process and financial disclosures with respect to the first-time application of IFRS 9 as of January 1, 2018.

The application of IFRS 9 “Financial Instruments” as of January 1, 2018 introduced significant changes to the rules on the classification, measurement and impairment of financial assets, resulting in financial and operational impacts. Classification and measurement According to IFRS 9, the classification of a financial asset is based on a business model (“hold to collect” model, “hold to collect and sell” model, other business model) and the basic contractual cash flow characteristics. Depending on the business model used, the cash flow characteristics and type (debt or equity instrument), the financial asset is measured either at amortized cost, fair value at equity or fair value through profit or loss. Based on these criteria, the financial instruments on the balance sheet at January 1, were analyzed to classify and measure them in accordance with the methods provided for by this new standard. Provision for expected credit losses (Stages 1 and 2) In addition to the impairment methods for proven credit risks (Stage 3), the new impairment rules for expected losses require the recording of estimated provisions as follows: Stage 1 showing an expected loss within 1 year from initial ● recognition of the financial asset; Stage 2 showing an expected loss on maturity, in the event of a ● significant deterioration in credit risk since initial recognition. The estimate of expected credit losses requires the exercise of judgement to define, in particular: certain inputs for calculating expected credit losses, notably, the ● Probability of Default and the loss rate in the event of default. These models were determined based on models developed in-house taking into consideration sectoral specificities; credit risk deterioration criteria; ● the methods for taking into account macro-economic projections ● for both deterioration criteria and measuring expected losses. These items are integrated in the different models developed by Groupe BPCE for each type of loan portfolio to determine the amount of expected credit losses. Given the scope of this standard, the complexity of its implementation and the importance of estimated “impairment,” we considered the first-time application of IFRS 9 as of January 1, 2018 to be a key audit matter for fiscal year 2018. The impact of the first-time application of IFRS 9 at January 1, 2018 is set forth in the “First-time application of IFRS 9” note in the consolidated financial statements, the options adopted are described in Note 2.2 and the accounting principles in Note 2.5.1. The impact of the first-time application of IFRS 9 on opening equity related to the implementation of the new impairment model amounted to - € 2,078 million before tax (- € 1,619 million after tax).

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Registration document 2018