BPCE - 2019 Universal Registration Document

FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF BPCE SA GROUP AS AT DECEMBER 31, 2019

Material increase in credit risk Assessment of a material increase in credit risk is made at the level of each instrument, based on indicators and thresholds that vary according to the type of exposure and counterparty. 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, measurement of the increase in credit risk relies on a combination of quantitative and qualitative criteria. The quantitative criterion is based on a measurement of the change in the probability of default over one year (mid-cycle average) from initial recognition. Additional 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 rebutted), rated at-risk or undergoing adjustments due to financial hardship (forbearance); for the Large Corporates, Banks and Sovereigns loan • books, the quantitative criterion is based on changes in the credit rating since initial recognition. The same qualitative criteria apply as for Individual Customers, Professional Customers and SMEs, as well as contracts placed on the Watchlist, along with additional criteria based on changes in the sector credit rating and the level of country risk; for Specialized Financing, the criteria applied vary according • to the characteristics of the exposures and the related ratings system. Exposures rated by the tool dedicated to large exposures are treated in the same way as Large Corporates; other exposures are treated in the same way as SMEs. For all these loan books, the ratings used to measure the increase in risk correspond to the ratings produced by internal systems when they are available, as well as external ratings, particularly when an internal rating is not available. The standard provides that the credit risk of a financial instrument has not increased materially since its initial recognition if this risk is considered to be low at the end of the fiscal year. This provision is applied to certain investment-grade debt securities held by Corporate & Investment Banking. Measurement of expected credit losses Expected credit losses are defined as being an estimate of credit losses ( i.e. the present value of cash flow shortfalls) weighted by the probability of occurrence of these losses over the expected lifetime of the financial instrument in question. They are calculated individually for each exposure. In practice, for Stage 1 and Stage 2 financial instruments, expected credit losses are calculated as the product of a number of 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, for home loans, the level of prepayment expected on the contract;

been identified as defined in Article 178 of the EU Regulation of June 26, 2013 on prudential requirements for banks; 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; interest income is recognized through profit or loss using • the effective interest method applied to the net carrying amount of the instrument after impairment; and Stage 3 also includes financial assets purchased or • originated and 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 or finance lease receivables (which fall within the scope of IFRS 16) the Group has elected not to make use of the option of applying the simplified approach as set out in 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 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. A significant increase in credit risk is measured on an individual basis for each instrument 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. A counterparty-based approach (applying the contagion principle to all loans to the counterparty in question) is also possible, in particular with regard to the watch list criterion. A recently-originated exposure will not be subject to the contagion principle and will remain classified as a Stage 1 exposure. Assessment of increases in credit risk involves comparing the probability of default or ratings on the initial recognition date with those applicable at the reporting date. The same principles are applied for significant improvements in credit risk. The standard also includes a rebuttable presumption that credit risk has significantly increased since initial recognition if contractual payments are more than 30 days past due.

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE