BPCE - 2019 RISK REPORT Pillar III

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CREDIT RISKS

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 reclassifications need to be conducted among the internal risk credit risk assessment categories and, if necessary, the appropriate allocations to non-performing loans and charges to provisions.” When a counterparty is 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 (Default WL). 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 (reviewed by an independent unit and validated by the Group Models Committee and the Group Standards & Methods Committee). These provisions include scenarios of changes in the economic environment determined each year by the Group’s Economic Research team, coupled with probabilities of occurrence reviewed quarterly by the Group Watchlist and Provisions Committee. Provisions for loans in default are calculated at the individual institution level, with the exception of shared loans in default exceeding €20 million and subject to central coordination as decided by the Group Watchlist and Provisions Committee on a quarterly basis. The amount of the provision is calculated by incorporating the present value of collateral (prudent valuation), without systematically applying a haircut at this point: a methodology aimed at deploying a haircut policy was defined in late 2019 and rolled out as NPL guidance was implemented. Any defaulted exposures not covered by provisions shall be subject to enhanced justification requirements to explain why no provision has been recorded.

Impairment is recorded, for financial assets which have not been individually subject to ECL, based on observed past losses but also on 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 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; 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; 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. The Group implements a provisioning policy for its corporate customers. 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 the components (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, gone concern, combined approach. Groupe BPCE applies the contagion principle when identifying 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 asset). 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).

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).

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RISK REPORT PILLAR III 2019 | GROUPE BPCE

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