NATIXIS - Universal registration document and financial report 2019

FINANCIAL DATA Consolidated financial statements and notes

The central scenario mainly draws on the outlook for: interest rates and certain indices (S&P 500 index, US stock market V volatility index VIX, etc.); certain macro-economic variables, such as GDP, inflation, the V unemployment rate and Brent prices. The best case and worst case economic scenarios aim to represent the uncertainty surrounding the estimated economic variables in the central scenario. More specifically, these scenarios are developed, where possible, based on the variability between the various contributions to the market consensuses (maximum and minimum values contributed by the various banks operating in the market place for a given variable). If a consensus is not available for a variable, the best case and worst case scenarios are developed from the observed historical variability of the variable. The variables defined in each of these scenarios mean that PD and LGD parameters can be altered and an expected credit loss can be calculated for each economic scenario. Parameters for periods longer than three years are projected on the principle of a gradual return to their long-term average. For consistency, the models used to alter the PD and LGD parameters are based on those developed in the stress test system. These economic scenarios are associated with probabilities of occurrence, ultimately making it possible to calculate an average probable loss used as the IFRS 9 impairment amount. The method for determining probabilities of occurrence is based on an analysis of the market economic consensus and a measurement of the distance between the Group’s economic scenarios and this market consensus. This means that the closer an economic scenario is to the consensus, the higher its probability of occurrence. All three scenarios are defined using the same organization structure and governance as for the budget process, with an annual review based on proposals from the Economic Research Department. The scenarios’ probability of occurrence is reviewed on a quarterly basis by drawing on the observed changes in the macroeconomic parameters used in the economic scenario. At December 31, 2019, the weightings of each scenario were as follows: central scenario: 80%; V The parameters thus defined allow credit losses for all rated exposures to be valued, regardless of whether they belong to a scope approved using an internal method or they are processed using the standard method for the calculation of risk weighted assets. However, certain entities whose own fund requirements are calculated using the standardized method and whose exposures are not integrated into a ratings system have implemented a methodology for calculating provisions on performing loans based on historical loss rates calibrated specifically by the entity. The mechanism for validating IFRS 9 parameters is fully integrated in the validation mechanism for existing models within Natixis and Groupe BPCE. As such, model validation undergoes a review process by an independent internal model validation unit. optimistic scenario: 10%; V pessimistic scenario: 10%. V

Calculating expected credit losses on Stage 3 assets

Impairments for expected credit losses on Stage 3 financial assets are determined as the difference between the amortized cost and the recoverable value of the receivable, i.e. the present value of estimated recoverable future cash flows, whether these cash flows come from the counterparty's activity or from the potential execution of guarantees. For short-term assets (maturity of less than one year), there is no discounting of future cash flows. Impairment is determined globally, without distinguishing between interest and principal. Expected credit losses arising from Stage 3 financing or guarantee commitments are taken into account through provisions recognized on the liability side of the balance sheet. Specific impairment is calculated for each receivable on the basis of the maturity schedules determined based on historical recoveries for each category of receivable. For the purposes of measuring expected credit losses, pledged assets and other credit enhancements that form an integral part of the contractual conditions of the instrument and that the entity does not recognize separately are taken into account in the estimate of expected cash flow shortfalls. Loans classified as Stage 3, which would not be impaired following an individual expected recovery analysis, are impaired or provisioned on the basis of a loan loss reserve ratio calibrated based on historical unexpected losses on unprovisioned loans.

6.4

Derivative financial instruments and hedge accounting

5

Derivative financial instruments are recognized at fair value on the balance sheet, regardless of whether they are held for trading or hedging purposes.

Derivative financial instruments held for trading purposes

Derivatives held for trading purposes are recorded in the balance sheet under “Financial assets at fair value through profit or loss” when their market value is positive, and under “Financial liabilities at fair value through profit or loss” when their market value is negative. After initial recognition, changes in fair value are recorded in the income statement under “Net gains or losses on financial instruments at fair value through profit or loss”. The interest accrued on such instruments is also included on this line. An embedded derivative is a component of a host contract which causes some or all of the cash flows of that contract to change in response to changes in an underlying (interest rate, share price, exchange rate or other index). When the hybrid instrument (host contract and derivative) is not measured at fair value through profit or loss, the embedded derivative is separated from the host contract if it meets the criteria for definition as a derivative and its economic characteristics and associated risks are not closely related to those of the host contract. Derivatives separated from host contracts in this way are included in assets and liabilities at fair value through profit or loss. Hedging instruments In line with the option offered by IFRS 9, Natixis has chosen to continue applying IAS 39 to account for its hedging transactions. Special case of embedded derivatives for financial liabilities

269

www.natixis.com

NATIXIS UNIVERSAL REGISTRATION DOCUMENT 2019