2020 Universal registration document and annual financial report - BNP PARIBAS194

4 Consolidated finanCial statements for the year ended 31 deCemBer 2020

4

Notes to the financial statements

2.g OTHER OPERATING EXPENSES

In millions of euros Year to

31 Dec. 2020 Year to

31 Dec. 2019

External services and other operating expenses (8,848) (9,495)

Taxes and contributions(1) (1,961) (1,844)

TOTAL OTHER OPERATING EXPENSES (10,809) (11,339)

(1) Contributions to European resolution fund, including exceptional contributions, amount to EUR 760 million for the year ended 31 December 2020 compared with EUR 646 million for the year ended 31 December 2019.

2.h COST OF RISK The Group general model for impairment described in note 1.e.5 used by the Group relies on the following two steps:

■ assessing whether there has been a significant increase in credit risk since initial recognition; and

■ measuring impairment allowance as either 12-month expected credit losses or lifetime expected credit loss (i.e. loss expected at maturity).

Both steps shall rely on forward looking information.

Significant increase in credit risk

The assessment of increase in credit risk is done at instrument level based on indicators and thresholds that vary depending on the nature of the exposure and the type of the counterparty.

The internal credit rating methodology used by the Group is described in chapter 5. Pillar 3 of the Universal registration document (section 5.4 Credit risk).

Wholesale (Corporates/Financial institutions/ Sovereigns) and bonds The indicator used for assessing increase in credit risk is the internal counterparty rating of the obligor of the facility.

The deterioration in credit quality is considered significant, and the facility is therefore placed in stage 2, if the difference between the counterparty rating at origination and the one as at the reporting date is equal or superior to 3 notches (for instance, a downgrade from 4- to 5-).

The low risk expedient permitted by IFRS 9 (i.e. whereby bonds with an investment grade rating at reporting date are considered as stage 1, and bonds with a non-investment grade rating at reporting date are considered as stage 2) is used only for debt securities for which no ratings are available at acquisition date.

SME Corporates facilities and Retail As far as SME Corporates exposures are concerned, the indicator used for assessing increase in credit risk is also the internal counterparty rating of the obligor of the facility. Due to a higher volatility in the rating system applied, deterioration is considered significant, and the facility is therefore placed in stage 2, if the difference between the counterparty rating at origination and the one as at the reporting date is equal or superior to 6 notches.

For retail exposures, two alternative risk indicators of increase in credit risk can be taken into consideration:

■ probability of default (PD): changes in the 1-year probability of default are considered as a reasonable approximation of changes in the lifetime probability of default. Deterioration in credit quality is considered significant, and the facility is therefore placed in stage 2, if the ratio (1 year PD at the reporting date/1 year PD at origination) is higher than 4;

■ existence of a past due within the last 12 months: in the consumer credit specialised business, the existence of a past due that has occurred within the last 12 months, even if regularised since, is considered as a significant deterioration in credit risk and the facility is therefore placed into stage 2.

Furthermore, for all portfolios (except consumer loan specialised business):

■ the facility is assumed to be in stage 1 when its rating is better than or equal to 4- (or its 1 year PD is below or equal to 0.25%) at reporting date, since changes in PD related to downgrades in this zone are less material, and therefore not considered as significant ;

■ when the rating is worse than or equal to 9+ (or the 1 year PD is above 10%) at reporting date considering the Group s practice in terms of credit origination, it is considered as significantly deteriorated and therefore placed into stage 2 (as long as the facility is not credit- impaired).

2.f NET INCOME FROM OTHER ACTIVITIES

In millions of euros

Year to 31 Dec. 2020

Year to 31 Dec. 2019

Income Expense Net Income Expense Net

Net income from investment property 92 (54) 38 155 (34) 121

Net income from assets held under operating leases 10,754 (9,140) 1,614 10,648 (9,090) 1,558

Net income from property development activities 679 (574) 105 1,069 (867) 202

Other net income 1,669 (1,585) 84 1,630 (1,307) 323

TOTAL NET INCOME FROM OTHER ACTIVITIES 13,194 (11,353) 1,841 13,502 (11,298) 2,204