NATIXIS - 2018 Registration document and annual financial report

RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management

This Committee is organized by the Risk division and chaired by the Chief Executive Officer and assembles the Chief Risk Officer, members of the Senior Management Committee in charge of the businesses, the Accounting and Ratios division and the heads of the relevant support functions. It draws on a structure of preparatory Committees that are jointly steered by the Risk division and each of the bank’s business lines. Provisions for expected credit losses In addition to individual provisions, Natixis records provisions for expected credit losses (ECL) at initial recognition. These financial assets are divided into three categories depending on the increase in credit risk observed since their initial recognition. An impairment charge is recorded on outstanding amounts in each category. Performing loans for which credit risk has increased materially since initial recognition are classified in Stage 2 (S2). The impairment or the provision for credit risk is determined on the basis of the instrument’s expected credit losses at maturity (lifetime ECL). Measurements of an increase in credit risk resulting in S2 classification are based on a combination of quantitative and qualitative criteria. The quantitative criterion is based on the change in rating since initial recognition. Additional qualitative criteria are used to categorize as Stage 2 any contracts included on a non-S3 watchlist, undergoing adjustments due to financial hardship (forbearance) or more than 30 days past due. Additional criteria based on the sector rating and level of country risk are also used. The sector and country rating process is centered on a Geo-Sector Committee comprising the Finance division, the Risk division and CIB representatives. The main objective of this Committee, established for the purpose of implementing IFRS 9, is to validate sector ratings as well as country and sovereign scores on a quarterly basis. These ratings then serve as a basis for calculating ECL. Sector ratings in particular are based on the results of the semi-annual economic environment reports.

Stress tests The credit stress test system covers Natixis scopes subject to the A-IRB, F-IRB and standardized approaches. It is based on choosing scenarios that replicate plausible crisis situations and high degrees of severity, in keeping with market practices, while taking past events, market trends and the environment into account so that purely historical or theoretical scenarios are eliminated. The system is a true risk management tool, with scenarios that are regularly introduced and revised. The Risk division regularly works on improving the methods used and adding to the scopes defined for the stress scenarios, with particular attention paid to the market stress requirements. New scenarios were reviewed in 2018 and presented to the Global Risk Committee as well as to the Senior Management Committee. These internal credit stress test scenarios are defined based on: macroeconomic assumptions prepared in collaboration with a the economic research and country risk teams and with Groupe BPCE, and comprising three scenarios for the 2019-2021 period: a baseline scenario and its practical adaptation via the bank’s provisioning policy, and two credit scenarios (a tech stock crisis and a sharp interest rate hike scenario); specific business scenarios to factor in risks that would not a have been covered by the macroeconomic scenarios. Standard scenarios are therefore defined (an average of three per business) based on business types (Banks, Corporates, Insurance, Aerospace, etc.). This stress testing is regularly calculated for the Natixis consolidation scope to evaluate the risk generated in the event of an adverse trend in the economic and financial data. The results are regularly presented to the Global Risk Committee, which also validates the selected scenarios. The stress-testing approach factors in counterparty ratings and default rates (stressed PD scales, migration matrices, specific downgrades per sovereign counterparty, and so on) and includes stresses on the unsecured LGD (Corporates, Banks and Sovereigns, etc.) and the secured LGD (asset or collateral values by business line). The scenarios, as well as the models and methods selected to assess their impact, are documented, and this documentation is reviewed on each update.

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Natixis Registration Document 2018