Significant deterioration of credit risk All Group entities must assess the credit risk deterioration for each financial instrument from the origin to each reporting date. Entities classify their transactions by risk category (Stages) based on this assessment of the change in credit risk. The Group plans to assess significant deterioration using a process based on two levels of analysis: - a first level based on rules and quantitative criteria - both relative and absolute – as well as qualitative Group criteria that are binding on Group entities (Forward Looking Central) - a second level linked to the assessment, based on the local Forward Looking expert opinion, of the risk borne by each entity on its portfolios, which may lead to an adjustment of the Group's criteria for downgrading to Stage 2 (switching the portfolio or sub-portfolio from 12-month ECL to lifetime ECL). Each financial instrument is monitored for significant deterioration, save for exceptional cases. No contagion is required for financial instruments from the same counterparty to be transferred from Stage 1 to Stage 2. Monitoring of significant deterioration must consider the change in the principal debtor’s credit risk without taking account of any guarantee, including for transactions with a shareholder guarantee. Projected losses in respect of amounts outstanding that consist of small debts with similar characteristics may be estimated on a statistical basis rather than on an individual counterparty basis. The assessment of a significant deterioration in credit risk under the first tier defined above for exposures covered by a rating model is based on the following two criteria: 1. Exemption on the basis of low credit risk: In accordance with current standards, the Group has chosen to apply the ‘low credit risk’ exemption to debt securities classified as Investment Grade (see IFRS 9.B5.5.23) and loan agreements where the probability of default is below a given threshold (i.e. 0.30% 2. Quantitative indicators: The Crédit Agricole Group has identified several quantitative criteria for classifying a downgrade as Stage 2; it should be noted that any one of these criteria is sufficient to trigger a downgrade to Stage 2. The categories of criteria are set out below: a. A relative measure that quantifies, at the contract level, the change in associated risk since the date of initial recognition. It measures the difference (expressed as a ratio) between a counterparty’s default risk as at the reporting date and the default risk assessed at the date of initial recognition. b. Three absolute criteria. The Group has defined: - An absolute threshold criterion based on Basel default probabilities to capture an absolute deterioration that is uncorrelated with economic conditions. In practice, it allows the two grades immediately preceding the failure – which are considered high-risk – to be captured, and these are therefore classified as Stage 2 for the purposes of ECL calculations. - An absolute threshold criterion based on the oneyear probability of default (Forward-Looking) as at the reporting date, designed to identify a significant absolute deterioration linked to economic conditions. - An absolute threshold criterion based on the number of days in arrears for more than 30 days to qualify for Stage 2 classification. 3. Qualitative indicators: The Group uses a set of qualitative indicators to trigger a downgrade to Stage 2; these indicators may relate to the contract, the counterparty or the portfolio, and enable the identification of exposures where a significant deterioration in credit risk has been observed. In the absence of an internal rating model, Groupe Crédit Agricole uses the absolute threshold of nonpayment for over thirty days as the ultimate threshold for significant deterioration and classification in Stage 2. 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 (Stage 1). To make up for the fact that certain significant deterioration factors or indicators may not be identifiable at financial instrument level, taken in isolation, the standard allows for the assessment of significant deterioration in regard to portfolios, groups of portfolios, or parts 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 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 loanto-value ratio) - the distribution system - the purpose of the funding, etc. Significant deterioration can therefore be differentiated per market (housing, consumer credit, credit for farmers or professionals, credit for businesses, ...). CFM Indosuez Wealth Management 86
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