BPCE - 2018 Registration document

6 RISK REPORT Credit risk

exposures rated by the large corporates, banks and specialized ● financing software tool are also downgraded to Stage 2 depending on the sector rating and the level of country risk. Exposures for which there is objective evidence of impairment loss due to an event representing a counterparty risk and occurring after initial recognition will be considered as impaired and will be classified as Stage 3. Identification criteria for impaired assets are similar to those under IAS 39 and are aligned with the default criterion. The accounting treatment of restructuring operations due to financial hardships is similar to their treatment under IAS 39. Expected credit losses on Stage 1 or 2 financial instruments are measured as the product of several inputs: cash flows expected over the lifetime of the financial instrument, ● discounted at the valuation date - these flows are determined according to the characteristics of the contract, its effective interest rate and the level of prepayment expected on the contract; Loss Given Default (LGD); ● probabilities of default (PD), for the coming year in the case of ● Stage 1 financial instruments and through to maturity in the case of Stage 2 financial instruments. The Group draws on existing concepts and mechanisms to define these inputs, and in particular on internal models developed to calculate regulatory capital requirements and on projection models used in the stress test system. Certain adjustments are made to comply with the specific provisions of IFRS 9. IFRS 9 inputs: aim to provide an accurate estimate of expected credit losses for ● accounting provision purposes, whereas prudential inputs are more cautious for regulatory framework purposes. Several of the safety buffers applied to prudential inputs are therefore restated; shall allow lifetime expected credit losses to be estimated, whereas ● prudential inputs are defined to estimate 12-month expected losses. 12-month inputs are thus projected over long periods; shall be forward-looking and reflect forecasts of future economic ● conditions over the estimated period, whereas prudential inputs consist of cycle-average estimates (for PD) or cycle-trough estimates (for LGD and EAD). Prudential PD and LGD inputs are therefore also adjusted to reflect forecasts of future economic conditions. Inputs are adjusted to economic conditions by defining three economic scenarios over a three-year period. The variables defined in each of these scenarios allow for the distortion of the PD and LGD inputs and the calculation of an expected credit loss for each economic scenario. Projections of inputs for periods longer than three years are based on the mean reversion principle. For consistency purposes, the models used to distort PD and LGD inputs are based on those developed for the stress test system. The economic scenarios are associated with probabilities of occurrence, ultimately making it possible to calculate an average probable loss used as the IFRS 9 impairment amount. These scenarios are defined using the same organization and governance as those defined for the budget process, requiring an annual review based on proposals from the Economic Research department and approval by the Executive Management Committee. For consistency purposes, the baseline scenario serves as the budget

scenario. Two variants – an optimistic view and a pessimistic view – are also developed around this scenario. The probability of occurrence of each scenario is reviewed on a quarterly basis by the Group’s Watch List and Provisions Committee. The inputs thus defined are used to measure expected credit losses for all rated exposures, whether they were subject to the IRB or the standardized approach for the calculation of risk-weighted assets. For unrated exposures (insignificant for Groupe BPCE), prudent valuation rules are applied by default, assigning the last rating on the scale before “at risk” status. The IFRS 9 input validation process is fully aligned with the Group’s existing model validation process. Inputs are reviewed by an independent unit responsible for internal model validation, the unit’s conclusions are then examined by the Group Models Committee, and subsequent recommendations followed up by the validation unit. Forbearance results from the combination of a concession and financial hardship, and may involve performing or non-performing loans. Two types of concessions can be made when restructuring a loan (performing forborne exposures): a contractual modification, which is formalized through a rider or ● waiver; refinancing, which is formalized by setting up a new loan ● agreement at the same time as or in the seven days preceding the full or partial repayment of another loan agreement. Groupe BPCE recognizes financial hardship when: a payment has been past due for more than 30 days (excluding ● payments past due for technical reasons); or an overdraft authorization has been exceeded for more than ● 60 days in the three months preceding the rider or refinancing operation; a loan has been rated “at-risk”. ● The decision to downgrade a loan from the “performing forborne exposure” to the “non-performing forborne exposure” category is subject to a different set of rules than the rules for default (new concession or payment more than 30 days past due) and, like the decision to move a loan out of the “forborne” category, is subject to probationary periods. Forced restructuring, overindebtedness proceedings, or any kind of default as defined by the Group standard, which involves a forbearance measure as previously defined, results in classification as a non-performing forborne exposure. Retail forborne exposures are identified in the information systems. In addition, there is a guide for using expert opinion to identify forbearance exposures, particularly for short-, medium-, and long-term loans to non-retail counterparties. Permanent controls are performed on any non-retail forborne exposures. Disclosures on “forbearance, performing and non-performing exposures” are made in addition to disclosures on default and impairment. FORBEARANCE, PERFORMING AND NON-PERFORMING EXPOSURES

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Registration document 2018