BPCE - 2020 Universal Registration Document

5

FINANCIAL REPORT

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

For all these loan books, the ratings on which the increase in risk is measured using 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 recognitionif this risk is consideredto be low at the end of the fiscal year. This provision is applied to certain investment-gradedebt securities that are managed as part of BPCE's liquidity reserve, as required by Basel III regulations. Investment grade ratings are those equal to or above BBB- or its equivalent by Standard and Poor’s, Moody’s or Fitch. In accordancewith IFRS 9, the recognitionof guaranteesand collateral does not influence the assessment of a material increase in credit risk, whichdependson changesin credit risk relating to the debtor without taking into account such guarantees. 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) weightedby the probabilityof occurrenceof 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; 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-cycleestimates (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. Expected credit loss calculations take into account assets pledgedas collateral and other credit enhancementsthat form an integral part of the instrument’scontractualconditionsand that the entity does not recognizeseparately.The estimateof expected cash flow shortfallson a financial instrumentreflects the amount and schedule for enforcing collateral. Recognition of forward-looking information BPCE SA group uses forward-looking data to estimate any material increase in credit risk and to measureexpectedcredit losses. The amount of expected credit losses is calculated using an average ECL by scenario, weighted by probability of occurrence, taking into consideration past events, current circumstances and reasonableand justifiable forecasts of the economic environment. To determine a significant increase in credit risk, as well as applying rules based on the comparison of risk parameters betweenthe initial recognitiondate and the reportingdate, 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. Methodology for calculating expected losses The parametersused to measure expected credit losses, are adjusted to economic conditions by defining three economic scenarios over a three-year period: the core scenario was updated based on the scenarios • determined by the Group’s economists in September; 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 defined in relation to the core scenario.

456

UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

www.groupebpce.com