BPCE - 2018 Registration document

5 FINANCIAL REPORT

IFRS Consolidated Financial Statements of BPCE SA group as at December 31, 2018

the breakdown of gross exposure by geographic region; ● concentration of credit risk by borrower; ● the breakdown of exposure by credit rating. ● This information forms an integral part of the financial statements certified by the Statutory Auditors.

Certain disclosures relating to risk management required by IFRS 7 are also provided in the risk management report. They include: the breakdown of gross exposures by category and approach ● (separation of credit and counterparty risk);

7.1.1

Detail of financial assets and commitments by impairment Stage

Accounting principles Expected credit losses are represented by impairment of assets classified at amortized cost and at fair value through other comprehensive income, and provisions for financing and guarantee commitments. The financial instruments concerned (see Note 7.1.1) are impaired or covered by a provision for expected credit losses (ECL) as of the date of initial recognition. When the financial instruments have not been individually subject to objective evidence of loss, impairment or provisions for expected credit losses are measured based on past losses and reasonable and justifiable discounted future cash flow forecasts. The financial instruments are divided into three categories (Stages) depending on the increase in credit risk observed since their initial recognition. A specific credit risk measurement method applies to each category of instrument: Stage 1 (S1) these are performing loans for which credit risk has not ● increased materially since the initial recognition of the financial instrument; the impairment or the provision for credit risk corresponds to ● 12-month expected credit losses; interest income is recognized through profit or loss based on the ● Effective Interest Method applied to the gross carrying amount of the instrument before impairment. Stage 2 (S2) performing loans for which credit risk has increased materially ● since the initial recognition of the financial instrument are transferred to this category; the impairment or the provision for credit risk is determined on ● the basis of the financial instrument’s lifetime expected credit losses; as in the case of Stage 1 outstandings, interest income is ● recognized through profit or loss based on the Effective Interest Method applied to the gross carrying amount of the instrument before impairment. Stage 3 (S3) these are loans for which there is objective evidence of ● impairment loss due to an event which represents a known credit risk occurring after the initial recognition of the instrument in question. As was the case under IAS 39, this category covers receivables for which a default event has been identified as defined in Article 178 of the EU Regulation of June 26, 2013 on prudential requirements for credit institutions; the impairment or the provision for credit risk is calculated based ● on the financial instrument’s lifetime expected credit losses on the basis of the recoverable amount of the receivable, i.e. the present value of estimated recoverable future cash flows taking into account the impact of any collateral;

interest income is recognized through profit or loss based on the ● Effective Interest Method applied to the net carrying amount of the instrument after impairment; stage 3 also includes financial assets purchased or originated ● that need to be impaired for credit risk on their initial recognition because the entity does not expect to recover all the contractual cash flows (Purchased or Originated Credit-Impaired (POCI) financial instruments). On initial recognition, the effective interest rate is adjusted based on estimated recoverable cash flows. These recoverable cash flows are re-estimated at each reporting date. Any change results in the recognition of an impairment charge or reversal in income and does not affect the effective interest rate. These assets may be transferred to Stage 2 if their credit risk improves. For operating lease or lease financing receivables – which fall within the scope of IAS 17 – the Group has decided not to make use of the option of applying the simplified approach proposed by IFRS 9 §5.5.15. Method for measuring the increase in credit risk and expected credit losses The principles for measuring the increase in credit risk and expected credit losses applicable to most of the Group’s exposures are described below. Only BPCE International and a few portfolios held by Group entities – representing a limited volume of exposures – cannot be treated according to the methods described below and are subject to appropriate valuation techniques. Other than these few examples, the significant increase in credit risk is assessed on an individual basis by taking into account all reasonable and justifiable information and by comparing the default risk on the financial instrument at the end of the fiscal year with the default risk on the financial instrument at the date of its initial recognition. A counterparty-based approach (applying the contagion principle to all loans to the counterparty in question) is also possible if it gives similar results. In most cases, the measurement of the increase in the risk leads to the recognition of an increase in Stage 2 before the transaction is individually impaired (Stage 3). More specifically, the change in credit risk is measured on the basis of the following criteria: on the Individual Customer, Professional Customer, SME, Public ● Sector and Social Housing loan books: the measurement of the increase in credit risk relies on a combination of quantitative and qualitative criteria. The quantitative criterion is based on the measurement of the change in the Probability of Default within one year since initial recognition (Probability of Default measured as a cycle average). Complementary qualitative criteria are used to classify as Stage 2 all contracts with payments more than 30 days past due (the presumption that amounts are past-due after 30 days is therefore not refuted), rated at-risk, included on a watch list or undergoing adjustments due to financial hardship (forbearance);

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Registration document 2018