BPCE - 2018 Registration document

FINANCIAL REPORT Statutory Auditors’ report on the consolidated financial statements

Impairment of loans and receivables (stages 1, 2 and 3)

Risk identified and main judgements

Our response

Impairment of Stage 1 and Stage 2 outstanding loans In keeping with the procedures performed as part of the first-time application of IFRS 9, our work mainly consisted in: verifying the existence, at the main Group establishments, of ● internal control which enables the ratings of different loan outstandings to be updated at appropriate intervals; verifying the existence of a governance framework specifying ● appropriate intervals to assess the appropriateness of impairment models, inputs used for the impairment calculation and analyzing changes in impairment with respect to the new IFRS 9 rules; assessing the relevance of the inputs used for the impairment ● calculations at December 31; redoing the calculations on the main loan portfolios; ● reviewing the updating measures for local sectoral provisions, when ● necessary. Impairment of Stage 3 loans outstanding As part of our audit procedures, we generally reviewed the internal controls related to identifying exposures, monitoring credit and counterparty risk, assessing non-recovery risk and determining related impairment and provisions on an individual basis. Our procedures consisted in assessing the quality of the measures for monitoring sensitive, doubtful and litigious counterparties; the loan review process. Furthermore, based on a sampling of files selected using materiality and risk criteria, we redid the calculations for the provision amounts. We have also assessed the relevance of the disclosures set forth in the notes required by the new IFRS 9 standard with respect to “impairment” at December 31, 2018.

The Groupe BPCE is exposed to credit and counterparty risks. These risks result from the inability of one of its clients or counterparties to honor their financial commitments, in particular, covering their loan activities. In accordance with the “impairment” aspect of IFRS 9, your Group records impairments and provisions intended to cover expected (Stages 1 and 2 loans) or proven (Stage 3 loan) losses. Impairment for expected losses (Stages 1 and 2) is mainly determined based on models developed by BPCE integrating different inputs (Probability of Default, loss rate in the event of default, PD, LGD forward-looking information, …), in addition to, if necessary, sectoral-based charges based on local specificities. Loan outstandings having a proven counterparty risk (Stage 3) are mainly impaired on an individual basis. These impairments are assessed by Management depending on estimated future recoverable cash flows for each loan concerned. We considered the identification and assessment of credit risk to be a key audit matter given that the provisions resulting therefrom represent significant estimates for the preparation of the accounts and requires Management to exercise judgement with respect to classifying the loan outstandings in the different stages, determining the Stage 1 and 2 impairment calculation inputs and methods and the assessment of the amount of provisioning for Stage 3 loan outstandings on an individual basis. In particular, in the context of the low cost of risk maintained by the Group on its main market and the first-time application of IFRS 9, we considered the assessment of the appropriateness of the level of credit risk hedging by provisions and the amount of related cost of risk to be a key audit matter for fiscal year 2018. Exposures to credit and counterparty risk on which IFRS 9 impairments are calculated represent approximately 71% of total assets of Groupe BPCE at December 31, 2018 (60% and € 763.1 billion of gross outstandings only for loans and receivables). The impairment on outstanding and related loans amounts to € 12.7 billion of which € 0.98 billion for Stage 1, € 1.9 billion for Stage 2 and € 9.8 billion for Stage 3. The cost of risk for fiscal year 2018 amounts to € 1.3 billion. For more information on accounting principles and exposures, please see Notes 5.5 and 7.1 to the consolidated financial statements.

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Registration document 2018

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