BPCE - 2019 Universal Registration Document

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FINANCIAL REPORT

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

loss given default (LGD); • the probability of default (PD) over the coming year for • Stage 1 financial instruments and to maturity for Stage 2 financial instruments. The Group’s methodology draws on existing concepts and mechanisms to define these inputs, and in particular on internal models developed to calculate regulatory capital requirements (Basel framework) and projection models used in the stress test system. Certain adjustments are made to comply with the specifics 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; IFRS 9 inputs must allow expected credit losses to be • estimated until the contract’s maturity, whereas prudential inputs are defined to estimate 12-month expected losses. 12-month inputs are thus projected over long periods; IFRS 9 parameters must be forward-looking and take into account the expected economic environment over the projection period, whereas prudential parameters correspond to mid-cycle estimates (for PD) or bottom-of-the-cycle estimates (for LGD and the cash flows expected over the lifetime of the financial instrument). Prudential PD and LGD inputs are therefore also adjusted to reflect forecasts of future economic conditions. Recognition of forward-looking data Groupe BPCE uses forward-looking data to estimate any material increase in credit risk and to measure expected credit losses. The amount of expected credit losses is calculated using an average of ECLs by scenario, weighted by probability of occurrence, taking into consideration past events, current circumstances and reasonable and justifiable forecasts of the economic environment. To determine a material increase in credit risk, as well as applying rules based on the comparison of risk parameters between the initial recognition date and the reporting date, the calculation is supplemented by forward-looking information such as sector or geographical macro-economic scenarios, which may increase the amount of expected credit losses on certain exposures. Group entities therefore assess the exposures in question in terms of the local and sector characteristics of their portfolio. The few portfolios not covered by the methodologies described above (which are not material at the Group level) may also be subject to assessments made on the basis of forward-looking information. To measure expected credit losses, inputs are adjusted to economic conditions by defining three economic scenarios over a three-year period:

the core scenario, aligned with the scenario used for the • budget process; a pessimistic scenario, corresponding to a deterioration in • macro-economic variables in relation to the core scenario; an optimistic scenario, corresponding to an improvement in • macro-economic variables in relation to the core scenario. 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. Inputs for periods longer than three years are projected using 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, making it possible to calculate the average probable loss, which is used as the amount of the IFRS 9 expected credit loss. Each scenario is weighted according to how close it is to the marketplace consensus on the main variables in each scope (BPCE is more focused on the economic environment in France while Natixis is relatively more affected by international conditions). The projections are deployed, for each of the Group’s significant markets, using the main macroeconomic variables such as GDP, unemployment rate and interest rate. These scenarios and their review are defined using the same organization and governance as those used for the budget process, requiring an annual review based on proposals from the Economic Research department and approval by the Executive Management Committee. 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 allow expected credit losses for all rated exposures to be valued, regardless of whether they belong to a scope approved using an internal method or are processed using the standardized method for the calculation of risk-weighted assets. The IFRS 9 model validation process is fully aligned with the Group’s existing model validation process. Models are reviewed by an independent unit responsible for internal validation and the unit’s conclusions are then examined by the Group Models Committee. Subsequent recommendations are monitored up by the validation unit. Method for measuring assets classified as Stage 3 Loans and receivables are considered as impaired and are classified as Stage 3 if the following two conditions are met: there is objective evidence of impairment on an individual • or portfolio basis: there are “triggering events” or “loss events” identifying counterparty risk occurring after the initial recognition of the loans in question. Objective evidence of impairment includes any payments that are past due by at least three months, or regardless of whether any payment has been missed, the observation of financial hardship experienced by the counterparty leading to the expectation that some or all of the amounts owed may not be recovered or to the initiation of legal proceedings;

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UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE

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