BPCE - 2018 Registration document

RISK REPORT Credit risk

The individual limits system in place, aimed at evenly distributing risks and making them individually acceptable in terms of each institution’s beneficiary and capital position, i.e. without including the value of collateral, to define the maximum amount of acceptable risk for a given counterparty. The aim of this position is to neutralize the operational risk associated with the recognition of collateral and with execution in the event the institution is required to call in the collateral. Netting of on-balance sheet and off-balance sheet transactions For credit transactions, Groupe BPCE is not required to carry out netting of on-balance sheet and off-balance sheet transactions. Recognition of provisions and impairment under IFRS 9 Provisioning methods Debt instruments classified as financial assets at amortized cost or at fair value through other comprehensive income, loan commitments and financial guarantees given that are not recognized at fair value through profit or loss, as well as lease receivables and trade receivables, shall be systematically impaired or covered by a provision for expected credit losses (ECL). For financial assets not showing objective evidence of impairment on an individual basis, impairment recognition is based on observed losses as well as reasonable and supportable DCF forecasts. Financial instruments are divided into three categories (Stages) depending on the increase in credit risk observed since initial recognition. A specific credit risk measurement method applies to each category of instrument: Stage 1 (S1): performing exposures for which credit risk has not ● increased materially since initial recognition. The impairment or provision for credit risk amounts to 12-month expected credit losses; Stage 2 (S2): performing exposures for which credit risk has ● increased materially since initial recognition are transferred to this category. The impairment or provision for credit risk is determined on the basis of the instrument’s lifetime expected credit losses; Stage 3 (S3): impaired exposures, within the meaning of IFRS 9, for ● which there is objective evidence of impairment loss due to an event which represents a known credit risk occurring ( e.g. non-repayment of the loan at its normal term, collective proceeding, past due payments recorded by the customer, customer unable to finance an investment in new equipment, etc.) after the initial recognition of the instrument in question. 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. In order to specify which individual provisioning mechanism is used, and to incorporate the approaches taken during the 2014 asset quality review, where they are considered appropriate, a Group provisioning policy for corporates was established. In terms of collateral valuation, this policy lays the foundations for the calculation of loan impairment and defines the methodology for determining individual impairment based on expert opinion.

It also defines concepts (credit risk measurement, accounting principles on the impairment of customer receivables under IFRS and French GAAP) and data to include in a non-performing loan or disputed loan assessment, as well as essential items to include in a provisioning record. The methodology section for determining individual impairment based on expert opinion defines impairment approaches: going concern (the company can continue operating, and is ● generating repayment flows that generally require the existing debt to be restructured); gone concern (the company has ceased operations and the ● repayment of the loans depends on the value of the collateral held); combined approach (the company will substantially reduce its ● activity, and in order to recover its money the bank must combine a collection strategy based on operating cash flows with a strategy that involves calling in collateral). Finally, the policy defines other items that affect the calculation of collection flows and covers the special circumstances of loans to real estate professionals. The operational implementation of this methodology is being reviewed to ensure it is being applied by the institutions. Groupe BPCE applies the contagion principle, which holds that, given the ties between entities of a single group, contagion must be recognized for a company undergoing hardships if those hardships are expected to result in another company struggling to meet its commitments. This principle is applied early in the process, when KYC data are collected on groups of customer counterparties, through the ties binding the groups together. Impairment under IFRS 9 Impairment for credit risk amounts to 12-month expected credit losses or lifetime expected credit losses, depending on the level of increase in credit risk since initial recognition (Stage 1 or Stage 2 exposure). A set of qualitative and quantitative criteria is used to assess the increase in credit risk. A significant increase in credit risk is measured on an individual basis by taking into account all reasonable and supportable information and by comparing the default risk on the financial instrument at the reporting date with the default risk on the financial instrument at the date of initial recognition. Any significant increase in credit risk shall be recognized before the transaction is impaired (Stage 3). In order to assess a significant increase in credit risk, the Group implemented a process based on rules and criteria which apply to all Group entities: for the individual customer, professional customer and SME loan ● books, the quantitative criterion is based on the measurement of the change in the 12-month Probability of Default since initial recognition (Probability of Default measured as a cycle average); for the large corporate, bank and specialized financing loan books, ● it is based on the change in rating since initial recognition; these quantitative criteria are accompanied by a set of qualitative ● criteria, including the existence of a payment more than 30 days past due, the classification of the contract as at-risk, the identification of forbearance exposure or the inclusion of the portfolio on a Watch List;

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Registration document 2018