BPCE - 2020 Universal Registration Document

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FINANCIAL REPORT

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

a pessimistic scenario, corresponding to a deterioration in • macro-economic variables defined in relation to the core scenario; an optimistic scenario, correspondingto an improvement in • macro-economic variables in relation to the core scenario; The variables defined in each of these scenariosallow for the distortion of the PD and LGD inputs and the calculationof an expected credit loss for each economic scenario. Inputs for periods longer than three years are projectedusing the mean reversion principle over the medium-long term. The models used to distort the PD and LGD inputs are based on those developed for the stress test systemfor consistencyreasons. 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. Groupe BPCE has extended and adapted this approach by adjusting for a number of factors specific to certain scopes or significant markets. Each scenario is therefore weighted based on how close it is to the consensus forecast for the main economicvariablesin each scopeor significantmarketof the Group. For Retail Banking, projections are calculated using the main economicvariables such as GDP, unemploymentand interest rates on 10-year French sovereign debt. For Corporate & Investment Banking, the macroeconomic variables applied relate to the international situation and make greater use of financial and market data. These scenarios and their review are defined using the same organization and governance as those used for the budget process, requiring a quarterly review since the start of the Covid-19 crisis 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 Watchlist and ProvisionsCommittee.The inputs thus defined allow expected credit losses for all rated exposures to be valued, regardless of whether they belong to a scope approvedusing an internalmethodor are processedusing 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 validationand the unit’s conclusionsare then examinedby the Group Models Committee.Subsequentrecommendationsare monitored up by the validation unit. Method for measuring assets classified as Stage 3 Exposures for which there is objectiveevidenceof impairment loss due to an event representing a counterparty risk and occurring after initial recognitionare classifiedas Stage 3. The criteria for identifying assets are in line with the definition of default under Article 178 of EuropeanRegulation575/2013,of June 26, 2013, on prudential requirements for credit institutions,consistentwith EBA guidelines (EBA/GL/2016/07) on the application of the definition of default, and Delegated Regulation (EU) 2018/1845 of the European Central Bank on the thresholdfor assessingthe materialityof credit obligations past due, effective by December 31, 2020.

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 – consecutive months (at least six consecutive months for receivables from local authorities) for which the amount is above the absolute threshold (by €100 for a retail exposure, otherwise €500) and relative threshold of 1% of counterparty exposures; or the restructuring of loans if certain criteria are met, or – regardlessof 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. Restructured loans are classed as Stage 3 when the loss is greater than 1% of the difference between the net present value before restructuring and the net present value after restructuring; or the launch of legal proceedings; – these events are liable to lead to the recognition of • incurred credit losses, that is, expected credit losses for which the probability of occurrence has become certain. Debt instruments such as bonds or securitized transactions (ABS, CMBS,RMBS, cash CDOs) are consideredimpairedand are classified as Stage 3 when there is a known counterparty risk. The Group uses the same impairment indicators for Stage 3 debt securities as those used for individually assessing the impairment risk on loans and receivables, irrespective of the portfolio to which the debt securities are ultimately designated. For perpetual deeply subordinatednotes (TSSDI) that meet the definition of financial liabilities within the meaning of IAS 32, particular attention is also paid if, under certain conditions, the issuer may be unable to pay the coupon or extend the issue beyond the scheduled redemption date. Impairment for expected credit losses on Stage 3 financial assets is determinedas the differencebetweenthe amortized cost and the recoverable amount of the receivable, i.e . the present value of estimated recoverable future cash flows, whether these cash flows come from the counterparty’s activity or from the potential activation of guarantees. For short-termassets (maturity of less than one year), there is no discounting of future cash flows. Impairment is determined globally,without distinguishingbetweeninterest and principal. Expected credit losses arising from Stage 3 off-balancesheet commitments are taken into account through provisions recognizedon the liability side of the balance sheet. They are calculatedon the basis of the maturity schedulesdetermined based on historic recoveries for each category of receivable. For the purposes of measuring expected credit losses, pledged assets and other credit enhancementsthat form an integral part of the contractual conditions of the instrument and that the entity does not recognize separately are taken into account in the estimate of expected cash flow shortfalls.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

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