NATIXIS_PILLAR_III_2017_EN

9 OVERALL INTEREST RATE, LIQUIDITY AND STRUCTURAL FOREIGN EXCHANGE RISKS Management of liquidity and funding risk

Bank funding 9.2.4.2 Short-term funding The year 2017 was marked by strong global growth, with inflation remaining moderate in the developed economies. The stock markets rose throughout the year, boosted by prospects of lower taxes and deregulation by the US administration. One notable highlight was the relatively mild reaction by the financial markets to political shakeups like the French elections, geopolitical tension between the United States and North Korea and difficulties faced by the Trump administration. The dangers of sudden deflation subsided over the year, allowing central banks to proceed more confidently with the monetary policy normalization called for by the current economic environment. The Federal Reserve hiked its key rate on three occasions in 2017, raising it to 1.5%, while the Bank of England made do with just one 0.25% increase.

While the European Central Bank (ECB) has yet to start raising its key rates, it cut in half its asset purchasing program (to €30 billion a month) effective the beginning of 2018. For now, the impact of these moves by central banks on long rates has remained modest and yield curves have significantly flattened, suggesting that the markets are awaiting the moment when economic activity calls for significant, long-lasting monetary stimulus. Investor interest in bank issues has remained strong in this context of regular and abundant liquidity. Search for yield in money market funds in the current low interest rate environment favors liabilities with maturities above six months. Natixis has scaled down the use of its refinancing programs. Outstandings on its short-term programs fell by €13.42 billion compared with the end of 2016 (a reduction of €5.45 billion on CDs and €7.97 billion on ECP), reflecting a reduction in its external financing requirements.

NATIXIS’ SHORT-TERM ISSUANCE PROGRAM OUTSTANDINGS R

Certificates of Deposit

Commercial Papers

(in millions of euros or euro equivalents)

Program amount

45,000* 20,897**

24,507

Outstandings at 12.31.2017

5,312

NEU CP program only. * Outstandings of the NEU CP and US CD programs. **

to September 2018 while reducing its monthly purchases from €60 billion to €30 billion. The yield on the 10-year Bund, which was at -0.18% at the start of the year, ended the year at 0.43%. There was high volatility in the 10Y yield in the first half of the year mainly due to France-related risk in the months preceding the presidential election. On the European credit market, bank spreads on unsecured senior debt continued to narrow throughout the year. The five-year credit spread of French banks on senior unsecured preferred debt ended the year at Euribor3M+15 bp, a decline of 29 bp from 2017. For the first time, the volume of non-preferred debt (MREL/TLAC eligible) issued by European banks (€104 billion) exceeded that of preferred debt (€80 billion). Against this market backdrop, Natixis raised a total of €22.3 billion in funding in 2017 under its medium- and long-term refinancing program. As the only long-term issuer in the public issues segment, BPCE provided Natixis with financing for a total euro-equivalent amount of €6.5 billion.

Long-term funding In 2017, growth figures for the United States and Europe reaffirmed the strength of their respective economies, with the IMF estimating GDP growth of 2.2% in the United States and 2.1% in Europe in 2017. However, the accommodative monetary policies of the Federal Reserve and ECB have yet to achieve target inflation (PCE US price index 1.8%, Eurozone PCI 1.5%). The persistent weakness of inflation can be largely attributed to moderate rises in wages and oil prices. In the United States, the positive economic situation led the Federal Reserve to gradually raise interest rates (+25 bp in March and again in June and December). On the long end of the curve, 10-year US Treasuries dropped 4 bp to 2.41% in 2017. The near-stagnant performance of long rates is due to low inflation. The curve's flattening is attributable to doubts surrounding US policy and its effect on medium-term growth. In Europe, the ECB announced in October 2017 that it would extend its quantitative easing program an additional nine months

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NATIXIS Risk report Pillar III 2017