Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 14 Within the Corporate portfolio, the most impacted sectors to date have been the automotive sector (0.9% of the Group’s total exposure as at 31 December 2020), hotels, catering and leisure (0.6% of the Group’s total exposure), non-food retail distribution (the entirety of the retail distribution sector representing 1.6% of the Group’s total exposure), air transport and aeronautics (less than 0.5% of the Group’s total exposure) and maritime transport (less than 1% of the Group’s total exposure). The oil and gas sector has been strongly impacted by a drop in demand due to the pandemic and by the initially uncoordinated actions on supply from several producing countries, including Opec countries and Russia, resulting in a sharp drop in the price per barrel and increased price volatility. Within the Corporate portfolio, this sector represented approximately 1.9% of the Group’s total exposure at 31 December 2020. This context led to a significant increase in the Group’s cost of risk in 2020. This increase takes into account the adjustment in our outlook in accordance with IFRS 9 principles and expert analyses resulting in complementary overlays. The Group’s cost of risk could be affected by its participation in the French government-guaranteed loan programmes (in respect of the unguaranteed residual exposure) and by the implementation in various jurisdictions of moratoria periods delaying the recognition of defaults. The cost of risk in 2020 reached a higher level than in previous years. For information purposes, the cost of risk was 54 basis points for the fourth quarter of 2020 and 64 basis points over the full year 2020. At 31 December 2020, the non-performing loan ratio stood at 3.3%. Due to the Covid-19 pandemic, the Group’s results and financial position were affected by unfavourable developments in global financial markets, especially in March and April 2020 (extreme volatility and dislocation of term structure, alternate sharp declines and rapid rebounds in the equity markets, widening of credit spreads, unprecedented declines in dividend distributions, etc.). These exceptional conditions have particularly affected the management of structured financial instruments whose underlyings are equity products. These activities have since been adapted, and are continuously being adapted, in order to improve their risk profiles. The situation in financial markets improved in the second half of 2020 as a result of recovery plans announced by governments, accommodating central bank policies and the decline in political instability in the US following the election of the democrat Joe Biden. However, the new epidemic wave and the related uncertainties, despite the progressive deployment of vaccine programmes, may result in a further adverse impact on the Group’s capital markets activities, including decline in activity, higher hedging costs, trading losses, increase in market risk reserves, reduction in liquidity on certain markets, operational losses related to capital markets activities, etc. For information purposes, risk-weighted assets (RWA) related to market risks were thus up 6% at the end of 2020 compared to the situation at the end of December 2019, to EUR 15.3 billion. The Global Markets and Investor Services sector, which mainly concentrates the Group’s market risks, represented a net banking income of EUR 4.2 billion, or 19% of the Group’s total revenues, over the full year 2020. Restrictive measures have led the Group to massively implement remote working arrangements, particularly in a significant part of its market activities. This organisation, which was deployed in immediate response to the crisis, increases the risk of operational incidents and the risk of cyber-attacks faced by the Group. In addition, all employees remain subject to health risks at the individual level. Prolonged remote working also increases psychosocial risk, with potential impacts in terms of organisation and business continuity in the event of prolonged absence of such individuals. The unprecedented environment resulting from the Covid-19 pandemic could alter the performance of the models used within the Group (particularly in terms of asset valuation and assessment of own funds requirements for credit risk), due in particular to calibration carried out over periods that are not comparable to the current crisis or to assumptions that are no longer plausible, leading the models beyond their area of validity. The temporary decline in performance and the recalibration of these models could have an adverse impact on the Group’s results. The Group’s dividend distribution policy could be influenced in 2021 by the recommendations made by the ECB to banks under its supervision in light of the Covid-19 pandemic and their consequences on the economic and financial situation. Uncertainty as to the duration and impact of the Covid-19 pandemic makes it difficult to predict its impact on the global economy. The consequences for the Group will depend on the duration of the pandemic, the measures taken by national governments and central banks and developments in the health, economic, financial and social context. 2.2.1.2 The global economic and financial context, as well as the context of the markets in which the Group operates, may adversely affect the Group’s activities, financial position and results of operations. As a global financial institution, the Group’s activities are sensitive to changes in financial markets and economic conditions generally in Europe, the United States and elsewhere around the world. The Group generates 44% of its business in France (in terms of 2020 net banking income), 35% in Europe (excluding France), 7% in the Americas and 14% in the rest of the world. The Group could face a significant deterioration in market and economic conditions resulting from, in particular, crises affecting capital or credit markets, liquidity constraints, regional or global recessions, sharp fluctuations in commodity prices (notably oil), currency exchange rates or interest rates, inflation or deflation, rating downgrades, restructuring or defaults of sovereign or private debt, or adverse geopolitical events (including acts of terrorism and military conflicts). Such events, which can develop quickly and thus potentially may not be anticipated and hedged, could affect the Group’s operating environment for short or extended periods and have a material adverse effect on its financial position, cost of risk and results of operations. The situation related to the Covid-19 crisis is an aggravating factor in these risks and represents the main source of uncertainty. It is detailed in the risk factor 2.2.1.1 “The coronavirus (Covid-19) pandemic and its economic consequences could adversely affect the Group’s business and financial performance”. In recent years, the financial markets have thus experienced significant disruptions resulting notably from concern over the trajectory of the sovereign debt of several eurozone countries, the Brexit situation (refer to the risk factor 2.2.1.5 “Brexit and its impact on the financial markets and the economic environment could have repercussions on the Group’s activity and results of operations.”), the persistence of commercial and political tensions (especially between the United States and China) or fears of a major slowdown growth in China. The crisis related to the Covid-19 pandemic is unprecedented in nature and its potential effects on the financial markets are not yet fully understood. These factors are likely to weaken several economic sectors and consequently the credit quality of the actors concerned, which could negatively affect the Group’s activities and results. Geopolitical risks also remain high and the accumulation of different risks is an additional source of instability, which could also weigh on economic activity and demand for credit, while increasing the volatility of financial markets.