BPCE - Risk Report - Pillar III 2020

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CREDIT RISKS

CREDIT RISK MANAGEMENT

PROVISIONING METHODS Debt instruments classified as financial assets at amortized cost 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 systematically impaired or covered by a provision for expected credit losses (ECL). Impairment is recorded, for financial assets which have not been individually subject to ECL, based on observed past losses but also on reasonable and supportable DCF forecasts. Financial instruments are divided into three categories (Stages) depending on the increase in credit risk observed since initial recognition. A specific credit risk measurement method applies to each category of instrument:

To reflect the delay observed in the impact of the crisis on the expected increase in credit risk, a lag of nine months was introduced in the NBI parameters used to calculate the IFRS 9 provisions, in line with the duration of the state-guaranteed loans and moratoria. The high level of uncertainty in the economic forecasts has also widened the gap between the baseline scenario and the optimistic and pessimistic scenarios. This change was approved by the Group Model Committee. In addition, the rating of customers having benefited from state-guaranteed loans and moratoria included in the calculation of provisions for performing loans was reviewed. The partly artificial improvement in ratings brought about by state-guaranteed loans and moratoria does not reflect either the current situation or expectations of the level of credit risk. It was therefore decided, for each customer having benefited from a state-guaranteed loan or a moratorium, to use the lowest of their scores in January 2020 and September 2020 to calculate the IFRS 9 provisions.

1. Stage 1 (S1)

2. Stage 2 (S2)

3. Stage 3 (S3)

Loan oustandings for which credit risk has not increased materially since the initial recognition of the financial instrument. The impairment or the provision for credit risk corresponds to 12-month expected credit losses.

Performing loans for which credit risk has increased materially since the initial recognition of the financial instrument are transferred to this category. The impairment or the provision for credit risk is determined on the basis of the financial instrument’s lifetime expected credit losses.

Impaired exposures, within the meaning of IFRS 9, for which there is objective evidence of impairment loss due to an event which represents a known credit risk occurring ( e.g. non-repayment of the loan at its normal term, collective proceeding, past due payments recorded by the customer, customer unable to finance an investment in new equipment, etc.) after the initial recognition of the instrument in question. This category covers receivables for which a default event has been identified, as defined in Article 178 of the EU regulation of June 26, 2013 on prudential requirements for credit institutions.

IMPAIRMENT UNDER IFRS 9 Impairment for credit risk amounts 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 is used to assess the increase in credit risk. A significant increase in credit risk is measured on an individual basis by taking into account all reasonable and supportable information and by comparing the default risk on the financial instrument at the reporting date with the default risk on the financial instrument at the date of initial recognition. Any significant increase in credit risk shall be recognized before the transaction is impaired (Stage 3). In order to assess a significant increase in credit risk, the Group implemented a process based on rules and criteria which apply to all Group entities: for the individual customer, professional customer 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 corporate, bank and specialized financing loan • books, it is based on the change in rating since initial recognition;

The Group implements a provisioning policy for its corporate customers. This policy lays the foundations for the calculation of loan impairment and defines the methodology for determining individual impairment based on expert opinion. It also defines the components (credit risk measurement, accounting principles on the impairment of customer receivables under 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. A corporate provisioning policy for Group exposures of less than €15 million has been defined and implemented. The methodology section for determining individual impairment based on expert opinion defines impairment approaches: going concern, gone concern, combined approach. Groupe BPCE applies the contagion principle when identifying groups of customer counterparties, through the ties binding the groups together. A methodology concerning the practice of applying haircuts to the value of collateral, taking into account inevitable contingencies, has been defined and implemented.

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RISK REPORT PILLAR III 2020 | GROUPE BPCE

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