BPCE - 2018 Registration document

FINANCIAL REPORT IFRS Consolidated Financial Statements of Groupe BPCE as at December 31, 2018

value recorded on the asset side of the balance sheet of € 130 million at December 31, 2018. The bearish market in Asia revealed the limitations of the business model associated with these products and led to the supplementing of the reserve mechanism by introducing an additional reserve to allow for the model’s shortcomings. As this reserve requires judgment (specifically the anticipation of changes in market conditions, portfolio behavior, and so on), the valuation of the products to which it relates is no longer directly observable, and so the latter have been transferred to fair value Level 3 from Level 2, where they were classified previously, due to the observable nature of the inputs, the model used and the liquidity observed. At December 31, 2017, in accordance with this procedure, certain foreign currency options, along with volatility caps/floors, were transferred to Level 3 of the fair value hierarchy depending in their liquidity horizons, determined by underlying currencies (see Note 10.1.3). Instruments affected by the financial crisis Instruments affected by the financial crisis and carried at fair value on the balance sheet are essentially held by Natixis, which calculates their fair value using the models described below: CDS CONTRACTED WITH CREDIT ENHANCERS (MONOLINE INSURERS AND CDPCS) Since December 31, 2015, the valuation model used to measure write-downs on CDS contracted with monoline insurers has been similar to the Credit Valuation Adjustment (CVA) used for counterparty risk. It also takes into account the expected amortization of exposures and the counterparty spread implicit in market data. OTHER INSTRUMENTS NOT EXPOSED TO US HOUSING RISK MEASURED BY NATIXIS USING A VALUATION MODEL The section below describes the underlying principles used to value assets resulting from securitization transactions for which no market prices could be identified and which were therefore measured using valuation models: Trust Preferred Securities (TruPS) CDOs The valuation model is based on projected future cash flows and default rates determined according to a statistical approach that deduces the default probability of banks according to their financial ratios. For other sectors, default rates are estimated considering the current ratings of assets. Private Finance Initiative CDS (PFI CDS) The valuation model used for Private Finance Initiative (PFI) CDS is based on an approach calibrated to the market prices of underlying PFI bonds and the use of a uniform collection rate. INSTRUMENTS NOT CARRIED AT FAIR VALUE ON THE BALANCE SHEET Instruments not carried at fair value on the balance sheet IFRS 13 requires disclosure in the notes to the financial statements of the fair value, and the associated fair value levels, of all financial instruments carried at amortized cost, including loans. The valuation methods used to determine the fair value disclosed in the notes to the financial statements are described below.

ASSETS AND LIABILITIES OF NATIXIS BUSINESS LINES, THE CASH MANAGEMENT POOL, BPCE, AND THE CAISSES D’EPARGNE FINANCIAL PORTFOLIOS Credit and loans recognized at amortized cost and amounts payable under finance leases The fair value of these instruments is determined by discounting future cash flows. The discount rate applied for a given loan is the rate at which the Group would grant a loan with similar characteristics to a similar counterparty at the reporting date. The interest rate and counterparty risk components are re-assessed. The fair value of repurchase agreements is calculated by discounting expected cash flows at the market rate on the closing date and adding a liquidity spread. If there is a quoted price that meets the criteria of IFRS 13, the quoted price is used. The fair value of loans with an initial term of less than one year is considered to be their carrying amount. This is generally the case for financial assets with a term of one year or less and current accounts. The corresponding receivables are classified in Level 2 of the fair value hierarchy. Loans and receivables granted to affiliates are also classified in Level 2. Borrowings and savings At Natixis, the assessment of the fair value of securities borrowings and debts is based on the method of discounting future cash flows using inputs on the reporting date such as the interest rate curve of the underlyings and the spread at which Natixis lends or borrows. The fair value of debts maturing in less than one year is considered to be the carrying amount. In this situation, they are classified in Level 2 of the fair value hierarchy, as are debts payable to affiliates. The fair value of other amounts due to credit institutions and customers with a term of over one year is deemed to be equal to the present value of future cash flows discounted at the interest rate observed at the balance sheet date, plus the own credit risk of Groupe BPCE. Investment property recognized at cost The fair value of investment property (excluding investment property held by insurance companies) is determined by reference to the capitalization of rents, a method widely used by real estate professionals. The capitalization rate applied to the property depends on a number of factors such as location, the quality and type of building, use, type of ownership, quality of lessee and characteristics of the lease, the interest rate and competition in the real estate market. FINANCIAL INSTRUMENTS OF THE RETAIL BANKING BUSINESS LINES For financial instruments not measured at fair value on the balance sheet, fair value calculations are provided for information purposes and must only be interpreted as estimates. In most cases, the values indicated are not liable to be realized and generally may not be realized in practice. These fair values are thus only calculated for information purposes in the notes to the financial statements. They are not indicators used in the interest of overseeing retail banking activities, for which the management model is mainly based on collection of contractual cash flows.

5

349

Registration document 2018