BPCE_REGISTRATION_DOCUMENT_2017

3 RISK REPORT Credit risk

A loan istherebyimpairedif both of the followingconditions are met: there is objective evidence of impairment on an individual or ● portfolio basis, i.e. there are “triggering events” (failure to repay a loan by its normal due date, insolvency proceedings,payments not received by the customer, inability to finance an equipment replacement investment, etc.) or “loss events” identifying counterpartyrisk occurringafter the initial recognitionof the loans in question; these events generateincurred or future losses on estimatedfuture ● cash flows from the loans in question, and these losses must be reliably measured. Impairment is determined as the difference between the amortized cost and the recoverable amount, i.e. the present value using the Effective Interest Rate (EIR) of estimated recoverable future cash flows, takinginto accountthe impact of any collateral. For short-term assets (maturity of less than one year), there is no discountingof future cash flows. Impairment is determined globally, without distinguishingbetween interestand principal. Probable losses arising from off-balance sheet commitments are taken into account through provisionsrecognizedon the liability side of the balancesheet. In order to specify which individual provisioningmechanism is used, and to incorporate the approaches taken during the 2014 asset qualityreview,where they are consideredappropriate,a specialGroup provisioning policy for corporates was established. In terms of the valuation of guarantees, this policy lays the foundations for the calculation of loan impairment and defines the methodology for determining individual impairment based onexpert opinion. It also defines concepts (credit risk measurement, accounting principles on the impairmentof customer receivablesunder IFRS and French GAAP) and data to include in a non-performing loan or disputed loan assessment, as well as essential items to include in a provisioning record. The methodologysectionfor determiningindividualimpairmentbased on expert opinion defines impairment approaches: going concern (the company can continue operating, and is ● generatingrepaymentflows that generallyrequire the existingdebt to be restructured); gone concern (the company has ceased operations and the ● repayment of the loansdependson the valueof the collateralheld); combined approach (the company will substantially reduce its ● activity,and in order to recoverits money the bank must combinea collection strategy based on operating cash flows with a strategy that involvescalling incollateral).

Finally, the policy defines other items that affect the calculation of collectionflows and covers the special circumstancesof loans to real estate professionals. Impairment under IFRS 9 The new IFRS 9 “Financialinstruments”was adopted by the European Commission on November 22, 2016 and will apply retrospectively from January 1, 2018, with the exceptionof the provisionsrelatingto financial liabilities at fair value through profit or loss, which Groupe BPCE appliedearly inits financialstatementsfrom January1, 2016. IFRS 9 sets out new rules for classifying and measuring financial assets and liabilities,the new impairmentmethodologyfor credit risk on financialassets, and hedge accounting,except for macro-hedging, which is currently under review by the IASB in a separate draft standard. The followingaccountingtreatmentmethodswill apply to fiscal years beginning on or after January 1, 2018, replacing the accounting standards currently used to recognize financial instruments. On initial recognition, financial assets are measured at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss, depending on the type of instrument (debt or equity), their contractual cash flow characteristics (Solely Payments of Principal and Interest – SPPI) and how the entity manages its financial instruments (its business model). Debt instrumentsclassifiedas financialassets at amortizedcost or at fair value through other comprehensive income, loan commitments and financial guarantees given that are not recognized at fair value through profit or loss, as well as lease receivables and trade receivables,shall be systematicallyimpairedor covered by a provision for expected credit losses (ECL). Impairment is recorded, for financial assets which have not been individuallysubject to ECL, based on observedpast losses but also on reasonableand supportableDCF forecasts.This more forward-looking credit risk approach is already partially factored in when collective provisionsare recognizedon similar financialasset portfoliospursuant to IAS 39. These financialassets will be divided into three categories dependingon the gradual increase in credit risk observed since their initial recognition. Impairment shall be recognized on outstanding amounts in each category, as follows: Stage 1 ● there is no significant increase incredit risk, - impairment for credit risk will be recorded in the amount of - 12-month expected credit losses, interest income will be recognized through profit or loss using - the effective interest rate method applied to the gross carrying amount of theasset before impairment;

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Registration document 2017

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