Société Générale / Risk report 2021 - Pillar 3 2020

6 CREDIT RISK IMPAIRMENT PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 80 IMPAIRMENT 6.4 Impairment includes impairments of performing loans (Stages 1 and 2) and impairments of non-performing loans (Stage 3). Exposures classified in stages The classification methods are described in the accounting principles and in the specific Covid-19 paragraph of Note 3.8 to the consolidated financial statements featured in Chapter 6 of the universal Registration Document. These were adjusted in 2020 to take into account the context of health and economic crisis linked to Covid-19. 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 A-IRB and F-IRB approaches, and the provisioning rate for exposures under the Standardised Approach). The Group’s portfolios have been segmented to ensure consistency in risk characteristics and a better correlation with both global and local macro-economic 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 macro-economic 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. reflects a slightly more degraded sensitivity compared to the central scenario, without being as severe as the stress. The expected credit losses were at 31 December 2019 calculated according to the probabilised average of three macroeconomic scenarios, established by the economists of the Group for all the entities of the Group. The basic and stress scenarios correspond to those used by the Group in its budget planning and its stress test exercise. As of 31 December 2020, the scenarios have been updated and reflect the current situation. In addition, to take into account the increased uncertainty, a fourth scenario has been defined, which The models used since the implementation of IFRS 9 and calibrated 40 based on historical correlations between defaults and economic variables are no longer adequate due to two specificities of the current crisis, the magnitude of the drop in GDP and the exceptional supporting measures. As a consequence, the inputs of the models have been adjusted to correspond to anticipated default increase from 2020 to 2022. The probabilities used as of 31 December 2019 were 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. As of 31 December 2020, the weights of the stress and optimistic scenarios have been kept rather unchanged (15% on the stress scenario and 10% on the optimistic scenario). The previous weight of the central scenario of 75% is split between the central scenario (65%) and the fourth scenario called “Extended scenario” 10%. 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. These adjustments concern cyclical economic sectors which have had default peaks in the past or which are particularly exposed to the current crisis and whose Group exposure exceeds a threshold determined and reviewed every year by Risk Department. Lastly, loss allowances based on expert opinion that increase or decrease expected credit loss have been retained and increased to factor in future risks which cannot be modeled (mainly legislative or regulatory changes) and in increased risks on portfolio under the simplified approach in which there is no modeled correlations between default and economic variables. These inputs are updated quarterly. 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 methods for estimating credit losses were revised in 2020 to take into account the context of health and economic crisis linked to Covid-19. In particular, Note 1 to the consolidated financial statements in Chapter 6 describes the characteristics of the macroeconomic scenarios used and the specific Covid-19 paragraph of Note 3.8 to the consolidated financial statements specifies the model adjustments.