CFM INDOSUEZ Wealth Management - 2019 annual report

Material increase in credit risk On each reporting date, all CFM Indosuez Wealth Group entities must measure the increase in credit risk on each financial instrument since initial recognition. Entities classify their transactions by risk category (Buckets) based on this assessment of the change in credit risk. To determine a significant deterioration in credit risk, CFM Indosuez Wealth Group applies a process with two levels of analysis: • a first level using relative and absolute rules and criteria, applied to CFM Indosez Wealth Group entities; • a second level based on an expert appraisal, taking in account local forward looking data, of the risk incurred by each entity on its portfolios – this appraisal may lead to an adjustment of the Group’s criteria for reclassifying exposures into Bucket 2 (transfer of portfolio or sub-portfolio to lifetime ECL). Each financial instrument is monitored for a significant increase in credit risk, except in certain cases. No contagion is required for financial instruments from the same counterparty to be transferred from Bucket 1 to Bucket 2. Monitoring of the material increase in credit risk must cover the primary debtor, without taking into account guarantees, even for transactions guaranteed by the shareholder. For exposures comprised of small loans with similar characteristics, the review by counterparty may be replaced by a statistical estimate of expected losses. To measure the material deterioration in credit risk since initial recognition, it is necessary to retrieve the internal rating (from Crédit Agricole Group) and the probability of default applied on initial recognition. The date of initial recognition refers to the trading date, when the entity becomes a party to the financial instrument’s contractual provisions. For financing and guarantee commitments, the date of initial recognition is the date on which the irrevocable commitment is made. For exposures not covered by an internal rating model, CFM Indosuez Wealth Group uses amounts past due for more than 30 days as the ultimate threshold representing a material increase in credit risk leading to classification in Bucket 2. For outstanding amounts (with the exception of securities) covered by internal rating systems (in particular exposures monitored by authorised methods), CFM Indosuez Wealth Group considers that all the information included in the rating systems allows for a more relevant assessment than the sole criterion of amounts past due for more than 30 days. If the material deterioration in credit risk since initial recognition is no longer observed, the asset can be reclassified to 12-month expected credit losses (Bucket 1). In order to compensate for the fact that certain factors or indicators of a material deterioration are not identifiable at the level of a financial instrument considered separately, the standard allows the assessment of material increases portfolios, groups of portfolios or portions of portfolios of financial instruments. The establishment of portfolios for an assessment of collective impairment can be based on common characteristics such as: • the type of instrument; • the credit risk rating (including the Basel II internal rating for entities with an internal rating system); • the type of guarantee; • the date of initial recognition; • the remaining time to maturity; • the business sector; • the geographic location of the borrower; • the value of the asset securing the financial asset, if this affects the probability of default (for example, in the case of loans secured only by collateral in certain countries, or the loan-to- value ratio); • the distribution channel, the purpose of the loan, etc. It is therefore possible to separate instruments showing a material deterioration in credit risk by market (home loans, consumer credit, loans to farmers or professionals, business loans, etc.). The grouping of financial instruments for the purpose of assessing changes in credit risk on a collective basis may change over time as new information becomes available. For securities, CFM Indosuez Wealth Group applies an absolute level of credit risk, in accordance with IFRS 9, below which exposures are classified in Bucket 1 and provisioned on the basis of 12-month ECL. Thus, the following rules apply for monitoring a material deterioration in securities: • securities rated Investment Grade as of the reporting date will be classified in Bucket 1 and provisioned on the basis of 12-month ECL; • securities rated Non-Investment Grade as of the reporting date will need to be monitored for any significant deterioration in credit risk since initial recognition and be classified in Bucket 2 (lifetime ECL) in the event of a material increase in credit risk. The relative deterioration must be assessed before default occurs (Bucket 3). Restructuring due to financial difficulties Debt instruments restructured due to financial difficulties are those for which CFM Indosuez Wealth Group has modified the initial financial conditions (interest rate, maturity) for economic or legal reasons related to the borrower’s financial difficulties with new terms and conditions that would not have been considered in other circumstances. They concern all debt instruments, regardless of the category in which they are classified in respect of the increase in credit risk since initial recognition. In accordance with the definition given by the European Banking Authority (EBA), provided in the chapter on “Risk factors” in the Crédit Agricole SA Universal Registration Document, loan restructuring corresponds to all changes made to one or more credit agreements and refinancing granted due to financial difficulties experienced by the client. This notion of restructuring must be assessed at the level of the contract and not at the client level (no contagion). The definition of loans restructured due to financial difficulties therefore meets two cumulative criteria: • Contract amendments or debt refinancing; • A client in a difficult financial situation. The term “contract amendment” refers to situations in which: • There is a difference in the borrower’s favour between the amended contract and the previous conditions; • The changes to the contract grant the borrower concerned more favourable terms than other borrowers with a similar risk profile would have been able to obtain from the bank at the same time. “Refinancing” refers to situations in which a new loan is granted to the client to enable him to partially or fully repay another debt for which he cannot meet the contractual conditions due to his financial situation. The restructuring of a loan (performing or in default) assumes that there is a known risk of loss (Bucket 3). It is therefore necessary to analyse whether impairment needs to be recognised on the restructured loan (restructuring does not systematically result in impairment or classification as being in default). 64 CFM Indosuez Wealth Management