2020 Universal registration document and annual financial report - BNP PARIBAS302

5 risks and CaPital adequaCy Pillar 3

5

Annual risk survey

its participation in State-guaranteed loan programmes (given its residual exposure), with more than 120,000 state-guaranteed loans granted as at 31 December 2020 and the existence (as well as the potential extension or renewal) of forbearance periods limiting credit-protection measures (such as payment acceleration) under health emergency legislation in various markets. The sectors most adversely affected to date include the travel and tourism sectors; the Group s exposure to the aircraft sector (airlines, lessors, etc.) and to the tourism sector each represented approximately 1% of its total gross credit exposures as of 31 December 2020. The non-food retail sector has been affected by the lockdown measures; this sector represented less than 1% of the Group s total gross credit exposures as of 31 December 2020. The transportation & storage (excluding shipping) sector, which represented approximately 3% of the Group s total gross credit exposures as of 31 December 2020, has been affected by the lockdown measures and the disruption in global trade. The oil and gas sector has been affected by a decrease in demand resulting from the pandemic concomitant, in the early stages of the health crisis, with an increase in supply due to the temporary unraveling of the OPEC/ Russia production cooperation; this sector represented approximately 2% of the Group s total gross credit exposures as of 31 December 2020. The Group s results and fi nancial condition could be adversely affected to the extent that the counterparties to which it has exposure in these sectors (and more generally, to the extent the negative effect on credit quality is more widespread) could be materially and adversely affected, resulting in particular in an increase in the Group s cost of risk.

The Group s results and financial condition could also be negatively affected by adverse trends in financial markets to the extent that the pandemic initially led to extreme market conditions (market volatility spikes, sharp drop in equity markets, tension on spreads, specific asset markets on hold, etc.), along with market volatility. This situation had and could again before the end of the crisis have an adverse impact on the Group s market activities, which accounted for 15.4% of its consolidated revenues in 2020, in particular trading or other market-related losses resulting, among other reasons, from restrictions implemented in response to the health crisis such as on short-selling and dividend distributions (notably EUR 184 million of losses in the first quarter of 2020 related to the European authorities restrictions on payment of dividends in respect of the 2019 fiscal year). Moreover, certain of the Group s investment portfolios (e.g. in its insurance subsidiaries) are accounted for on a mark-to-market basis and thus were impacted by adverse market conditions in the second quarter of 2020 and could be impacted again in the future.

Finally, the current health crisis could increase the probability and magnitude of various existing risks faced by the Group such as: i) pressure on revenues due in particular to (a) a further reduction in market interest rates and a likely prolongation of the low interest rate environment and (b) lower asset management inflows and hence revenues from fees and commissions; ii) an increased risk of a ratings downgrade following sector reviews by rating agencies; iii) a deterioration in the Group s liquidity due to various factors including increased customer drawdowns and/ or lower deposit balances and iv) higher risk-weighted assets due to the deterioration of risk parameters, which would affect the Group s capital position.

Uncertainty as to the duration and extent of the pandemic s remaining course makes the overall impact on the economies of the Group s principal markets as well as the world economy difficult to predict.

The extent to which the economic consequences of the pandemic will continue to affect the Group s results and financial condition will indeed depend largely on i) periodic and local reimpositions of lockdowns, as well as various restrictive measures that have been put in place and that could be renewed or reintroduced, as has been done in Europe, ii) the timing and extent of a return to pre-pandemic lifestyles, business operations and economic interactions, (iii) the effects of the measures taken to date or future measures that may be taken by governments and central banks to attenuate the economic fallout of the pandemic and iv) the duration and extent of the pandemic s remaining course, including the prospect of new waves or the appearance of new strains of the virus and, consequently, a reinstatement of lockdown measures or other restrictions in the Group s various markets, as well as the pace of deployment of vaccines and their effectiveness against all new strains of the coronavirus. In addition, while central bank and government actions and support measures taken in response to the pandemic have to date and may well continue to help attenuate its adverse economic and market consequences, central banks and regulators have also issued and may issue additional restrictions or recommendations in respect of banks actions. In particular, they have limited and may continue to limit or seek to limit banks flexibility in managing their business and taking action in relation to capital distribution, capital allocation and remuneration policies. In this respect, on 27 March 2020, the ECB issued a temporary and exceptional recommendation to banks not to pay dividends; the period covered by this recommendation was extended to 1 January 2021 by an announcement of 28 July 2020. Consequently, in a press release dated 15 December 2020, the ECB called on banks not to distribute dividends, or to limit them to 15% of cumulative profits for fiscal years 2019 and 2020 and 20 basis points of the CET1 ratio, until 30 September 2021, as well as to show extreme moderation regarding variable remuneration .

7.2 Should the BNP Paribas Group fail to implement its strategic objectives or to achieve its published financial objectives, or should its results not follow stated expected trends, the trading price of its securities could be adversely affected.

In February 2017 the BNP Paribas Group announced a strategic plan for the 2017-2020 period and updated it in respect of 2020 upon announcing its first quarter 2020 results to reflect the economic impact of the COIVD-19 pandemic. Due to the pandemic, the preparation of the Group s next strategic plan was postponed to 2021. The BNP Paribas Group is preparing a strategic plan for the 2022-2025 period, which it expects to announce in early 2022. As a result, the Group has not set any new targets for 2021. In connection with announcing its full-year 2020 results on 5 February 2021, the Group announced a number of trends for 2021. The financial objectives of strategic plans are established primarily for purposes of internal planning and allocation of resources, and are based on a number of assumptions with regard to business and economic conditions. The BNP Paribas Group s actual results could vary significantly from these trends for a number of reasons, including the occurrence of one or more of the risk factors described elsewhere in this section, in particular as a result of the consequences of the Covid-19 health crisis which have had and could continue to have major repercussions