Société Générale / Risk Report - Pillar III

6 CREDIT AND COUNTERPARTY CREDIT RISK IMPAIRMENT

Estimation of expected credit losses The methodology for calculating Stage 1 and 2 expected credit losses is based on the Basel framework, which served as the basis for determining the methods for setting calculation inputs (probability of default and loss given default for exposures under the AIRB and FIRB approaches, and the provisioning rate for exposures under the standardised method). The Group's portfolios have been segmented to ensure consistency in risk characteristics and a better correlation with both global and local macroeconomic variables. This segmentation allows to deal with all the specifics of the Group. This segmentation is consistent or similar to that defined in the Basel framework in order to guarantee the uniqueness of default and credit loss. IMPAIRMENT OF PERFORMING LOANS (STAGES 1 AND 2) Impairment is recorded on performing loans based on estimates of 12-month expected credit losses (general case) or lifetime expected

credit losses (contracts on which the credit risk has deteriorated since the loan was granted). This impairment is calculated using assumptions on default rates and losses on default. It takes into account macroeconomic forecasts or forecasts specific to the business sector or country. The assumptions are calibrated by homogenous groups of assets based on each group’s specific characteristics, its sensitivity to the economic environment and historical data. The assumptions are reviewed periodically by the Risk Division. IMPAIRMENT OF NON-PERFORMING LOANS (STAGE 3) Impairment is recorded on the counterparties concerned when there is objective evidence of default. The amount of impairment depends on the probability of recovering the amounts due. The expected cash flows are based on the financial position of the counterparty, its economic prospects and the guarantees called up or which may be called up.

The variables and segmentations are described in the table below:

Scope

Macroeconomic variables

French growth rate French inflation rate French unemployment rate 10Y Yield France Romanian growth rate Exchange rate EUR/RON Romanian unemployment rate

France

Retail

Romania

Italy

Italian unemployment rate

Spread EURIBOR - EONIA swap 3 months US growth rate

Financial institutions

Brazilian growth rate Indian growth rate Chinese growth rate Russian growth rate Japanese growth rate US growth rate Euro zone growth rate

Very large enterprises

Profit margins of companies France French growth rate

Non retail

Middle-market companies France

Local communities

French growth rate

Profit margins of French companies French growth rate Romanian growth rate Romanian unemployment rate

SMEs France

SMEs (excluding France)

Euro zone growth rate Norwegian growth rate Swedish growth rate

The expected credit losses are calculated using the probabilised average of three macroeconomic scenarios established by Group economists for all entities of the Group (base scenarios and current stress scenarios, plus an optimistic scenario). The base and stress scenarios correspond to those used by the Group in its budget plan and its stress test. The probabilities used are based on past observations, spanning a 25-year period, of differences in outcome between the base scenario and the actual scenario (positive and negative differences) which

corresponds at 31 December 2019 to: 74% for the central scenario, 16% for the stress scenario and 10% for the optimistic scenario. The method is quarterly updated according to the base scenario evolution and annually updated according to the observations evolution. The method is supplemented with a sector adjustment that increases or decreases expected credit loss in an effort to better anticipate defaults or recoveries in certain cyclical sectors. These sector adjustments are

quarterly reviewed and updated.

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PILLAR 3 - 2020 | SOCIETE GENERALE GROUP |