2020 Universal registration document and annual financial report - BNP PARIBAS 273

4Consolidated finanCial statements for the year ended 31 deCemBer 2020

4

Statutory Auditors report on the consolidated financial statements

Assessment of credit risk and measurement of impairment losses (stages 1, 2 and 3) on customer loan portfolios (See Notes 1.e.5, 1.e.6, 1.o, 2.h, 4.e, 4.f and 4.p to the consolidated financial statements)

Description of risk How our audit addressed this risk

BNP Paribas recognises impairment losses to hedge the credit risks inherent to its banking intermediation activities.

The Covid-19 pandemic has caused a health and economic crisis affecting the repayment ability of borrowers, companies and individuals, with contrasting situations across geographical regions and industries.

In response to this crisis, extended periods of governmental measures were introduced, specific to each country, including the furlough scheme, various benefit schemes, State-guaranteed loans, and moratoriums. Certain regulators have also adapted their prudential framework to facilitate the support given by banks to businesses.

In this environment marked by considerable uncertainty relating to the evolving context of the pandemic, the measurement of expected credit losses for customer loan portfolios required the BNP Paribas Group to exercise greater judgement and to take into account assumptions, in particular in order to:

■ assess the significant deterioration in credit risk to classify outstandings in stage 1, stage 2, or stage 3 according to geographical region and industry;

■ prepare macro-economic projections which are integrated into both the criteria for recognising deterioration and in the measurement of expected losses;

■ estimate the amount of expected losses according to the different stages, considering the support measures and the absence of any comparable historical situation.

At 31 December 2020, total outstanding customer loans exposed to credit risk amounted to EUR 831 billion, while total impairment losses stood at EUR 21 billion.

We deemed the assessment of credit risk and the measurement of impairment losses to be a key audit matter insofar as management is required to exercise judgement and make estimates as regards credit granted to companies, particularly in the context of the uncertainty linked to the pandemic and its effects on the actual default level of businesses in the years to come.

We concentrated our work on the most significant outstandings and/or customer loan portfolios at the reporting date as well as on the credit granted to companies operating in economic sectors or geographic regions most impacted by the change in risks and in particular by the Covid-19 pandemic.

We assessed the relevance of BNP Paribas internal control system, particularly its adaptation to the Covid-19 context, and tested the manual and computerised controls for assessing credit risk and measuring expected losses.

Our work was stepped up to take into account the change of risks and greater level of uncertainty and focused in particular on:

■ classification of outstandings by stage: we assessed whether the change of risks was taken into account in estimating the indicators applicable to the various business lines to measure the significant deterioration in credit risk, particularly the rating of corporate counterparties. We paid particular attention to the geographical regions and the sectors impacted by the Covid-19 crisis as well as counterparties having benefited from support measures.

■ measurement of expected losses (stages 1, 2 and 3):

■ assisted by our credit risk experts and relying on the internal system for independent validation of BNP Paribas models, we assessed the methodologies as well as the assumptions underlying the macro- economic projections used by BNP Paribas across the various business lines, the proper integration o f said projections into the information system and the effectiveness of the data quality controls; we paid particular attention to the adjustments made during the year to the models to factor in, based on available information, the effects of the Covid-19 crisis on the sectors at risk and the prospective macro- economic projections;

■ with regard to impairment losses on outstanding loans to companies classified in stage 3, we verified that a periodic review of the credit risk of counterparties under surveillance had been carried out by BNP Paribas and, based on a larger sample due to the context, we assessed the assumptions and data used by management to estimate impairment;

■ lastly, we verified that the measures granted to clients in the context of the crisis (moratoriums, State-guaranteed loans, etc.) had been duly factored into the risk assessment.

In addition, we examined the disclosures in the notes to the consolidated financial statements with respect to credit risk in the evolving context of the pandemic and particularly the disclosures required by IFRS 9 regarding credit risk.