BPCE_REGISTRATION_DOCUMENT_2017

RISK REPORT Credit risk

Classification and measurement The “Classification and Measurement” work completed so far has concluded that most financial assets that were measured at amortizedcost under IAS 39 will continue to meet the conditionsfor measurement at amortized cost under IFRS 9. Similarly, most financial assets measured at fair value under IAS 39 (available-for-salefinancial assets and financial assets at fair value through profit or loss) will continue to be measured at fair value under IFRS9. Impairment As indicated above, impairment for credit risk will be equal to 12-month expected credit losses or lifetime expected credit losses, depending on the level of increase in credit risk since initial recognition (Stage 1 or Stage 2 asset). A set of qualitative and quantitative criteria isused to assess the increase in credit risk. A significantincrease in credit risk is measuredindividually,based on reasonable and supportable information, and by comparing the default risk on the financial instrument at the closing date with the default risk on the financial instrument at the date of initial recognition.Any significantincrease in credit risk shall be recognized before the transaction is impaired (Stage3). In order to assess a significant increase in credit risk, the Group applies a process based on rules and criteriawhich apply to all Group entities. For the Individual Customers, Professional Customers and SME loan books, the quantitative criterion is based on the measurement of the change in the 12-month probability of default since initial recognition (probability of default measured as a cycle average). For the Large Corporates, Banks and Specialized Financing loan books, it is based on the change in rating since initial recognition. These quantitative criteria are accompaniedby a set of qualitative criteria, including the existence of a payment more than 30 days past due, the classification of the contract as at-risk, the identification of forbearance exposure or the inclusion of the portfolio on a Watch List. Exposures rated by the Large Corporates, Banks and Specialized Financing software tool are also downgraded to Stage 2 depending on the sector rating and the level of country risk. Financial assets where there is objective evidence of impairmentloss due to an event which represents a counterparty risk and which occurs after their initial recognition will be considered as impaired and will be classified as Stage 3. Identificationcriteria for impaired assets are similar to those under IAS 39 and are aligned with the default criterion. IFRS 9 calls for modifiedcontractualcash flows that are renegotiated or otherwise modified (whether or not as a result of financial hardships), but not subsequentlyderecognized,to be identified. Any profit or loss is recognized as a modificationgain or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiatedor modified contractualcash flows that are discountedat the financial asset’s original effective interest rate. The materiality of the modifications is analyzed on a case by case basis. Recognition of loans restructured due to financial hardship will be identical toIAS 39. For Stage 1 and Stage 2 assets, expected credit losses are calculated

Stage 2 ● in the event of a significant increase in credit risk since initial - recognition, the financial asset will be transferred to this category, impairmentfor credit risk will be determinedon the basis of the - instrument’slifetimeexpected 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; Stage 3 ● there is objective evidence of impairment loss due to an event - which represents a counterparty risk occurring after the initial recognitionof the asset in question.This categoryis equivalentto individuallyimpairedassets under IAS39, impairmentfor credit risk will continueto be calculatedbased on - the instrument’slifetimeexpectedcredit losses, interestincomewill be recognizedthroughprofit or loss based on - the effective interest method applied to the net carrying amount of the asset after impairment. Governance Since 2015, the IFRS 9 plan has been overseenby a strategicplanning committee covering both the Risk and Finance divisions. The committeemeets four times a year and most of its members also sit on the ManagementBoard of BPCE. The strategicplanningcommittee settles on guidelines, makes decisions, and defines the schedule for implementingand consolidatingthe budget for the plan. A steering committeealso meets five times a year for the purposesof the IFRS 9 plan. It is comprised of company directors or corporate officers of Caisses d’Epargne and Banque Populaire banks as well as their main subsidiaries (Crédit Foncier, Natixis). The steering committee settles on guidelines and operational decisions relating to the implementationof IFRS 9. It also reports on the progress of the work done by the Finance, Risk, IS and Change ManagementCommittees which meetonce everysix weeks. A completereviewof IFRS 9 implementation(progress,guidelinesand options taken) was presented and discussed during BPCE’s Audit Committeemeeting. IFRS 9 will also be on the agenda of upcoming Audit Committee meetings to update information on how the program is progressing. The stakes and challenges raised by IFRS 9 were also explained in October to members of the SupervisoryBoard of BPCE and its mainsubsidiaries. The second half of 2017 was mainly spent finalizing user tests for various projects, general user testing, preparing the opening balance sheet (first-time application), performing final model calibrations, measuring the impact of provisions on the third quarter, completing documentation,and adapting processesunder a change management program. Implementation

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as the product of three inputs: probabilityof default(PD); ●

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Registration document 2017

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