BPCE - 2018 Risk report / Pillar III

5 CREDIT RISK

Credit risk management

Quality assessment of loan outstandings and impairment policy

SYSTEM GOVERNANCE From a regulatory standpoint,Article 118 of the Ministerial Order of November 3, 2014 on internal control specifies that “at least once each quarter, supervised companies must perform an analysis of changes in the quality of their loan commitments.In particular, this review should determine, for material transactions, whether any reclassificationsneed to be conductedamong the internal risk credit risk assessment categories and, if necessary, the appropriate allocations to non-performing loans and charges to provisions.” When a counterpartyis placed on either a local Watch List (WL) or the Group WL, supervision of the counterparty in question is enhanced (Performing WL) or the decision is made to record an appropriate provision (DefaultWL). Statistical provisions for performing loans, calculated at Group level for the networks in accordance with IFRS 9 requirements, are measured using a methodology validated by Group committees (reviewedby an independentunit and validatedby the Group Models Committee and the Group Standards & Methods Committee). These provisionsinclude scenariosof changes in the economicenvironment determined each year by the Group’s Economic Research team and validated by the Executive Management Committee, coupled with probabilitiesof occurrencereviewedquarterlyby the GroupWatchlist and ProvisionsCommittee. Provisions for loans in default are calculated at the individual institution level, with the exception of shared loans in default exceeding € 15 million and subject to central coordinationas decided by the GroupWatchlistand ProvisionsCommitteeon a quarterlybasis. The amountof the provisionis calculatedby incorporatingthe present value of collateral(prudentvaluation),withoutsystematicallyapplying a haircut at this point: a methodologyaimed at deploying a haircut policy willbe established when the NPL guidance is implemented. Any defaultedexposuresnot covered by provisionsshall be subject to enhanced justificationrequirementsto explain why no provision has been recorded. 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 maximumamount of acceptable risk for a given counterparty.The aim of this position is to neutralize the operationalrisk associatedwith the recognitionof 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 nettingof on-balancesheet and off-balance sheet transactions.

RECOGNITION OF PROVISIONS AND IMPAIRMENT UNDER IFRS 9 Provisioning methods

Debt instrumentsclassifiedas financialassets at amortizedcost 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 systematicallyimpairedor covered by a provision for expected credit losses (ECL). For financial assets not showing objectiveevidence of impairmenton an individual basis, impairment recognition is based on observed losses aswell 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 categoryof 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 ● increasedmateriallysince initial recognitionare transferredto this category. The impairmentor provision for credit risk is determined on the basis of theinstrument’slifetimeexpected credit losses; Stage 3 (S3): impairedexposures,within the meaningof IFRS ● 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 paymentsrecordedby the customer,customer unable to finance an investmentin new equipment,etc.) after the initial recognition of the instrument in question. This category covers receivablesfor 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 provisioningmechanism 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 onexpert opinion.

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Risk Report Pillar III 2018