Universal registration document and annual financial report 2020

2020 Universal registration document and annual financial report - BNP PARIBAS296

5 risks and CaPital adequaCy Pillar 3

Annual risk survey

4.3 Any downgrade of the Group s credit ratings could weigh heavily on the profitability of the Group.

Credit ratings have a significant impact on the BNP Paribas Group s liquidity. On 23 April 2020, Standard & Poor s confirmed the long-term rating of BNP Paribas SA s deposits and senior preferred debt rating as A+, confirmed its short-term rating as A-1 and revised the outlook from stable to negative. On 12 October 2020, Fitch maintained its long-term deposits and senior preferred debt rating for BNP Paribas SA at AA- and F1+, and withdrew its Negative Rating Watch and revised its outlook to negative. On 4 December 2020, Moody s confirmed its long-term deposits and senior preferred debt rating as Aa3, and confirmed its short-term rating as P-1, with a stable outlook. On 10 July 2020, DBRS confirmed BNP Paribas SA s senior preferred debt rating as AA(low), as well as its short-term rating as R-1(middle) with a stable outlook. A downgrade in the BNP Paribas Group s credit rating could affect the liquidity and competitive position of the Group. It could also increase the BNP Paribas Group s borrowing costs, limit access to the capital markets or trigger additional obligations under its covered bonds or under certain bilateral provisions in some trading, derivative or collateralized financing contacts.

In addition, the BNP Paribas Group s cost of obtaining long-term unsecured funding from market investors is also directly related to its credit spreads, which in turn depend to a certain extent on its credit ratings. Increases in credit spreads can significantly increase the BNP Paribas Group s cost of funding. Changes in credit spreads are continuous, market-driven, and subject at times to unpredictable and highly volatile movements. Credit spreads are also influenced by market perceptions of the BNP Paribas Group s creditworthiness. Furthermore, credit spreads may be influenced by movements in the cost to purchasers of credit default swaps referenced to the BNP Paribas Group s debt obligations, which are influenced both by the credit quality of those obligations, and by a number of market factors that are beyond the control of the BNP Paribas Group.

5. RISKS RELATED TO THE MACROECONOMIC AND MARKET ENVIRONMENT

5.1 Adverse economic and financial conditions have in the past had and may in the future have an impact on the BNP Paribas Group and the markets in which it operates.

The BNP Paribas Group s business is sensitive to changes in the financial markets and more generally to economic conditions in France (28% of the Group s revenues at 31 December 2020), other countries in Europe (47% of the Group s revenues at 31 December 2020) and the rest of the world (25% of the Group s revenues at 31 December 2020). The sharp deterioration in economic conditions in the Group s principal geographic markets as a result of the health crisis weighed on its results in 2020. The deterioration in economic conditions in the markets where the

BNP Paribas Group operates and in the economic environment has had, in 2020, and could in the future have some or all of the following impacts:

■ adverse economic conditions affect the business and operations of the BNP Paribas Group s customers, reducing credit demand and trading volume and resulting in an increased rate of default on loans and other receivables, in part as a result of the deterioration of the financial capacity of companies and households;

■ a decline in market prices of bonds, equities and commodities affect the businesses of the BNP Paribas Group, including in particular trading, Investment Banking and asset management revenues;

■ macroeconomic policies adopted in response to actual or anticipated economic conditions can have unintended effects, and are likely to impact market parameters such as interest rates and foreign exchange rates, which in turn can affect the BNP Paribas Group s businesses that are most exposed to market risk;

■ perceived favourable economic conditions generally or in specific business sectors can result in asset price bubbles, which could in turn exacerbate the impact of corrections when conditions become less favourable;

■ a significant economic disruption (such as the global financial crisis of 2008, the European sovereign debt crisis of 2011 or the Covid-19 pandemic since 2020) can have a severe impact on all of the BNP Paribas Group s activities, particularly if the disruption is characterized by an absence of market liquidity that makes it difficult to sell certain categories of assets at their estimated market value or at all. These disruptions, including those related to the measures taken in response to the Covid-19 pandemic, could also lead to a decline in transaction commissions and consumer loans;

■ a significant deterioration of market and economic conditions resulting from, among other things, from adverse political and geopolitical events such as natural disasters, geopolitical tensions (in particular protectionist measures), health risks such as the Covid-19 health crisis, the fear or recurrence of new epidemics or epidemics, acts of terrorism, societal unrest, cyber-attacks, military conflicts or threats thereof and related risks can affect the operating environment for the BNP Paribas Group episodically or for extended periods.

In 2021, economies and financial markets will be particularly sensitive to a number of factors, including the evolution of the Covid-19 pandemic and its economic consequences, in particular the increase in sovereign and corporate debt that was often high before the health crisis and has been aggravated by it, and the gradual and uneven recovery that is expected following the recession in the first half of 2020. The risks associated with the Covid-19 pandemic, in particular, are described in section 7.1, Epidemics and pandemics, including the ongoing coronavirus (Covid-19) pandemic and their economic consequences may adversely affect the Group s business, operations, results and financial condition.

In addition, tensions around international trade (protectionist measures, such as customs duties, in addition to the restrictions adopted in response to the Covid-19 pandemic), geopolitical tensions, political risks directly affecting Europe (including the consequences of the implementation of Brexit), a recessionary economic environment, volatility in commodity prices (itself affected by the above-mentioned factors) and, as discussed below, the evolution of monetary policy are factors that may impact the economy and financial markets in the coming months or years.