BPCE - 2020 Universal Registration Document

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RISK FACTORS & RISK MANAGEMENT

RISK FACTORS

This ongoing crisis could lead to a significant increase in the Group’s cost of risk (provisions for actual or future credit risk) in 2021. The Group’s results and financial position may continue to be affected by adverse financial market developments (extreme volatility, equity market and index slump, spread tensions, steep and unforeseen decline in dividends, etc.). Accordingly, the valuation of certain products was affected during the period by illiquid markets, particularly in Natixis’ Corporate & Investment Banking operations, which were exposed to the effects of the significant adjustment of valuation inputs, such as the “dividend” component. The deterioration of economic conditions and its impacts on the Group increased the risk that the Group’s ratings, like those of other banks, will be downgraded by the financial rating agencies. Furthermore, the French government’s ratings may end up being downgraded, due in large part to an increase in public deficits and indebtedness. These factors could have a negative impact on the Group’s funding cost on the financial markets. More generally, the Covid-19 pandemic poses a risk to Groupe BPCE, insofar as it (i) causes organizational changes (teleworking, for example) that may generate an operational risk; (ii) has triggered and could again trigger a slowdown in trade, or even requests for early repayment, in money market transactions and could have an impact on the supply of liquidity; (iii) increases the liquidity needs of customers and, therefore, the amounts loaned to these customers to enable them to withstand the crisis; (iv) could lead to an increase in business failures, particularly among the most vulnerable companies or those in the most exposed sectors; and (v) causes sudden movements in the valuation of market assets, which could have an impact on the marketactivities or investments of institutions. Developments in the Covid-19 crisis (uncertainty over the duration, magnitude and future trajectory of the pandemic, especially given the uncertainties about the rate of vaccination of the population to achieve herd immunity and because of the emergence of variants that are more contagious or more resistant to vaccines, the implementation of new lockdown or restriction measures in the event of additional epidemic waves) are a major source of uncertainty, making it difficult to predict the overall impact on the Group’s main markets and on the global economy in general. At the date of filing this universal registration document, the impact of this situation, factoring in the aforementioned support measures, on Groupe BPCE’s businesses (retail banking, insurance, Asset Management, Corporate & Investment Banking), income (mainly net banking income and cost of risk) and financial position (liquidity and solvency) is difficult to quantify. The physical and transition components of climate risk, together with their repercussions for economic players, could adversely affect the activities, income and financial position of Groupe BPCE. The risks associated with climate change are factors that exacerbate existing risks, including credit risk, operational risk and market risk. In particular, BPCE is exposed to physical and transition climate risk.

Physical risk leads to increased economic costs and financial losses resulting from the severity and increased frequency of extremeweather events related to climate change (such as heat waves, landslides, floods, fires and storms), as well as long-term gradual changes in climate (such as changes in rainfall patterns, extreme weather variability, and rising sea levels and average temperatures). It could have an extensive impact in terms of scope and magnitude, that may affect a wide variety of geographic areas and economicsectorsrelevant to GroupeBPCE. For example,the Cévennes episodesthat affect the south-eastof France every year can cause the flooding of buildings, factories and offices, slowingdown or even making it impossiblefor some of the Group's customers to carry out their activities. For example, a corporate customer of the Group producing a component essential to the opening of buildings was flooded at the end of 2019, causing it to file for bankruptcy. This company was supplying a real estate project whose construction had to stop while a new supplierwas found. The real estate projectwas delayed, which induceda credit risk on the operationfor the bank financing it and led to penalties for late opening, late rental, etc. Thus, physical climate risk can spread along the value chain of Groupe BPCE’s corporate customers, which can lead to default and thus generate financial losses for Groupe BPCE. These physical climate risks are likely to increase and could lead to significant losses for Groupe BPCE. The transition risk is connected to the process of adjusting to a low-carbon economy. The process of reducing emissions is likely to have a significant impact on all sectors of the economy by affecting the value of financial assets and the profitability of companies. The increase in costs related to this energy transition for economic players, whether corporates or individual customers, could lead to an increase in defaults and thus significantly increase Groupe BPCE’s losses. For example, the French law “ Energie-Climat ” of November 8, 2019 is expected to limit from 2028 the sale and rental of real estate with very low energy performances. Some of Groupe BPCE’s customers will therefore have to plan renovation work for a possible future sale or lease of such type of properties. The risk consists in the impossibility for the Group’s customers to carry out this costly work and consequently not being able to carry out the financial transaction necessary to balance their budget. These customers of Groupe BPCE could therefore become insolvent, which would result in significant financial losses for Groupe BPCE. A persistently low interest rate environment may have an adverse impact on Groupe BPCE’s profitability and financial position. The global markets have been subject to low interest rates in recent years, and it appears this situation will not be changing anytimesoon.When interest rates are low, credit spreadstend to tighten, meaning Groupe BPCE may not be able to sufficiently lower interest rates paid on deposits to offset the drop in revenues associated with issuing loans at lower market rates. Groupe BPCE’s efforts to reduce the cost of deposits may be restrictedby the high volumesof regulatedproducts,especiallyon the French market, including in particular Livret A passbook savings accounts and PEL home savings plans, which earn interest above the current market rate. In addition, Groupe BPCE may incur an increasein prepaymentsand renegotiationsof home loans and other fixed-rate loans to individualsand businesses,as customers seek to take advantage of lower borrowing costs. Combinedwith the issuance of new loans at low interest rates prevailing on the markets, Groupe BPCE may see an overall decrease in the average interest rate in the loan book.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE

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