BPCE - 2018 Registration document

FINANCIAL REPORT Statutory Auditors’ report on the consolidated financial statements

Level 2 and 3 financial instruments under IFRS 13

Risk identified and main judgements

Our response

The Groupe BPCE holds a substantive part of financial instruments which are recognized in the balance sheet at fair value. They are allocated to three levels defined by IFRS 13 depending on the fair value measurement method used. Levels 2 and 3 comprise financial instruments measured using valuation models based on significant inputs observable or unobservable on the market, and which as a result are not directly measured based on a market price on a liquid market. The valuation of levels 2 and 3 financial instruments at fair value relies on valuation techniques that use significant judgement regarding the choice of methodologies used: determination of valuation inputs unobservable on the market; ● use of internal valuation models; ● estimates of additional adjustments of valuation, to take into ● account some risks such as market risk, credit risk or liquidity risk. We deemed the financial instruments classified in levels 2 and 3, according to the fair value hierarchy, to be a key audit matter due to: the significant amount of exposures and the exercise of judgment ● to determine fair value (level 2 and 3 financial instruments amount to € 176 billion, or nearly 14% of total assets and 71% of total financial assets at fair value); specific valuation adjustments recorded by Natixis in 2018 on ● certain products marketed and sold in Asia for which the business model used resulted in setting up a hedging strategy which turned to be deficient under 2018 market conditions. For more details on accounting principles and fair value hierarchy of financial instruments, please see Note 10 to the consolidated financial statements.

We reviewed the internal control procedures relating to the determination, valuation and recording of complex financial instruments classified at fair value in levels 2 and 3. We interviewed the Risk, Compliance and Permanent Control division and we acknowledge reporting and memos of committees from this department (in conjunction with our Audit team at Natixis which is the main contributor to this topic). We tested the controls that we deemed relevant to our audit, including those relating to: the approval and regular review by Management of the risks of the ● valuation models; the independent verification of the valuation inputs; ● the determination of value adjustments as well as corrections ● added in the value; the classification of financial instruments according to the fair ● value hierarchy. We performed these procedures with the assistance of our valuation experts, with whom we also made counter valuation work. Based on sampling, our experts analyzed the relevance of the assumptions; inputs and models used to determine the main adjustments to valuation. With respect to fiscal year 2018, our procedures covered more particularly the valuation adjustments recorded by Natixis on certain products marketed and sold in Asia. We also analyzed the differences on existing collateral calls and gain or losses in case of sale of instruments allowing to contribute to the review of appropriateness of valuations. Finally, we examined the disclosures relating to the valuation of financial instruments published in the notes to the consolidated financial statements.

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Registration document 2018