BPCE - Risk Report - Pillar III 2020

CREDIT RISKS

CREDIT RISK MANAGEMENT

Groupe BPCE performs three main types of stress test on credit risk:

the EBA stress test produced every two years, which is aimed at testing the resilience of credit institutions to • simulated shocks, and comparing their results. The outcome of the EBA stress test may result in stronger capital requirements or other mandatory measures imposed by the supervisor, which has not been the case for Groupe BPCE to date; Groupe BPCE’s internal stress test. This test is carried out annually and feeds into the ICAAP and the PPR. It covers • several more scenarios than the EBA stress test, and includes changes in projections on the entire balance sheet. The baseline scenario is also used to challenge Groupe BPCE’s medium-term plan. For the purposes of the Recovery Plan, an additional test is conducted on the real estate portfolio; specific stress tests. These tests can be run at an external request (supervisor) or internal request; there is a stress • test for the real estate professionals portfolio, on leveraged buyouts and, at a later stage, a stress test will be performed on renewable energy project financing operations.

ACTION PLAN FOR STRENGTHENED MONITORING AND RISK ANTICIPATION: A Covid summary indicator to identify customers who may be affected by the health crisis was introduced as at 12/31/20. This system makes it possible to identify and deal with risk situations and to quickly address any unfavorable developments on the basis of diverse information, particularly on PRO/VSE customer segments where data is more accessible.

The results of these stress tests have always demonstrated Groupe BPCE’s resilience to the shocks simulated in the test scenarios. They are consistently used with the aim of learning as much as possible from crisis simulations. A specific Covid crisis stress test was defined and implemented, and the findings of the Watchlist Committee and Group Provisions took its findings into account.

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Quality assessment of loan outstandings and impairment policy

SYSTEM GOVERNANCE From a regulatory standpoint, Article 118 of the Ministerial Order of November 3, 2014 on internal control specifies that “at least once each quarter, supervised companies must perform an analysis of changes in the quality of their loan commitments.” In particular, this review should determine, for material transactions, whether any reclassifications need to be conducted among the internal risk credit risk assessment categories and, if necessary, the appropriate allocations to non-performing loans and charges to provisions. When a counterparty is placed on either a local Watchlist (WL) or the Group WL, supervision of the counterparty in question is enhanced (Performing WL) or the decision is made to record an appropriate provision (Default WL). The contagion principle was automatically applied to the Group watchlist at the end of 2020. It will also apply automatically to the local watchlist of referenced institutions regarding non-referenced institutions in early 2021. Statistical provisions for performing loans, calculated at Group level for the networks in accordance with IFRS 9 requirements, are measured using a methodology validated by Group committees (reviewed by an independent unit and validated by the Group Models Committee and the RCCP Standards & Methods Committee). These provisions include scenarios of changes in the economic environment determined each year by the Group’s Economic Research team, coupled with probabilities of occurrence reviewed quarterly by the Group Watchlist and Provisions Committee. Provisions for loans in default are calculated at the individual institution level, with the exception of shared loans in default exceeding €20 million and subject to central coordination as decided by the Group Watchlist and Provisions Committee on a quarterly basis. The amount of the provision is calculated by incorporating the present value of collateral (prudent valuation), without systematically applying a haircut at this point: a methodology aimed at deploying a haircut policy was defined in late 2019 and rolled out as NPL guidance was implemented.

Any defaulted exposures not covered by provisions shall be subject to enhanced justification requirements to explain why no provision has been recorded.

NETTING OF ON-BALANCE SHEET AND OFF-BALANCE SHEET TRANSACTIONS

For credit transactions, Groupe BPCE is not required to carry out netting of on-balance sheet and off-balance sheet transactions.

RECOGNITION OF PROVISIONS AND IMPAIRMENT UNDER IFRS 9 As soon as the health crisis emerged, Groupe BPCE adapted its IFRS 9 system to avoid countercyclical effects, of which European banks were warned by the ECB in April. The particularities of the Covid crisis and government support for economies required adjustments to the pre-existing IFRS 9 methodology. In the second and third quarters of 2020, the valuation of the amount of provisions for performing loans was based on a detailed sector approach and on the corresponding projected cost of risk over two years. In the fourth quarter, various adjustments were made to pre-crisis IFRS 9 calculation methods. For retail and SME portfolios, the macroeconomic variables taken into account were adapted to the specific nature of the Covid crisis: To moderate the pro-cyclical nature of IFRS 9 and incorporate massive support measures (in particular state-guaranteed loans and moratoria), it was estimated that the government would bear around 60% of the cost of the crisis. This mitigating factor was applied to net banking income projections for 2020, 2021, and 2022. It was determined by an expert and confirmed by two independent studies (a note from the OFCE of July 2020 estimating that the government could absorb 55% of the cost of the crisis, and one from the Banque de France published in December 2020 and raising the level to 62%).

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RISK REPORT PILLAR III 2020 | GROUPE BPCE