BPCE - 2020 Universal Registration Document

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FINANCIAL REPORT

IFRS CONSOLIDATED FINANCIAL STATEMENTS OF GROUPE BPCE AS AT DECEMBER 31, 2020

interest income is recognized in income, as for Stage 1 • assets, using the effective interest method applied to the gross carrying amount of the instrument before impairment. Stage 3 (S3) these are loans for which there is objective evidence of • impairment loss due to an event which represents a known credit risk occurring after the initial recognition of the instrument in question. As was the case under IAS 39, this category covers receivables for which a default event has been identified as defined in Article 178 of the EU Regulation no. 575/2013 of June 26, 2013 on prudential requirements for credit institutions. Default situations are now more tightly identified for significant amounts outstandings (introduction of relative and an absolute thresholds for past due payments) and the criteria for a return to non-defaulted status have been clarified with the introduction of a probation period and of explicit criteria for a classification as default of restructured loans; 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; 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) are also Stage 3). 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 electednot to make use of the option of applying the simplifiedapproachas set out in IFRS 9 paragraph 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 describedbelow. Only a few portfoliosheld by Group entities – representinga limited volume of exposures – cannot be treated according to the methods describedbelow and are subject to appropriate valuation techniques. Significant increase in credit risk A significant increase in credit risk is measured on an individual basis for each instrument by taking into account all reasonableand supportableinformationand by comparingthe default risk on the financial instrument at the reporting date with the default risk on the financial instrumentat the date of initial recognition.A counterparty-basedapproach(applyingthe contagion principleto all outstandingloans to the counterparty in question) is also possible, in particular with regard to the watchlist criterion.

In accordance with IFRS 9, a counterpartywith a significant deterioration in credit risk (Stage 2) that has just been originated will be classified as Stage 1. Assessmentof increases in credit risk involves comparingthe probability of default or ratings on the initial recognition date with those applicable at the reporting date. The same principlesas those used to classify an exposurein Stage 2are applied in case of a decline in the material deterioration in credit risk. The standard also includes a rebuttable presumption that credit risk has significantlyincreasedsince initial recognitionif contractual payments are more than 30 days past due. In particular, the moratoria granted as a general measure to support businesses facing cash flow problems, and the granting of State-guaranteed loans, do not in themselves constitute evidence of financial hardship calling into question the counterparty’s capacity to honor its contractual agreementson maturity. As a result, the principles described above apply in full dependingon each counterparty’sspecific situation. In most cases, a measurement showing an increase in risk leads to the asset’s transfer to Stage 2 before it is individually impaired (Stage 3). Assessmentof 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 measuredon the basis of the following criteria: for loans to Individual Customers, Professional Customers, • SMEs, Public Sector entities and Social Housing entities, measurement of the increase in credit risk relies on a combination of quantitative and qualitative criteria. The quantitative criterion is based on 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, undergoing adjustments due to financial hardship if the declassification in default criteria are not met; for loans to Large Corporates, Banks and Sovereigns, 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, along with additional criteria based on the sector rating and the level of country risk; for SpecializedFinancing, the criteria applied vary according • to the characteristics of the exposures and the related ratings system. The 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 correspondto the ratings producedby internal systems when they are available, as well as external ratings, particularly when an internal rating is not available.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

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