2020 Universal registration document and annual financial report - BNP PARIBAS360

5 risks and CaPital adequaCy Pillar 3

5

Credit risk

Industry risks are monitored in terms of gross exposure(1) and risk- weighted assets. Certain sectors, of which those considered sensitive to the consequences of the health crisis, are monitored more closely and are specifically reviewed, in particular:

■ the leveraged finance sector:

The Group s exposure to Leverage Buy-Out transactions ( LBO ) rises to EUR 15.1 billion at 31 December 2020, or 0.8% of the Group s gross balance sheet and off-balance sheet commitments. These exposures are individually very small with an average amount of EUR 5 million per loan (EUR 17 million taking account of all business group exposures), and mainly concern European counterparties.

Moreover, in accordance with the ECB Guidelines, the Group has put in place a system for monitoring companies whose leverage ratio exceeds the threshold set by the regulator;

■ the shipping sector:

The shipping sector covers a set of segments with very different dynamics: bulk, oil and gas tankers, container carriers, oil services, and cruises. In 2020, the consequences of the health crisis had various impacts on the shipping industry. Cruise business is the most-impacted segment with a near total docking of fleet at present. Offshore business continues to suffer from strong oversupply and lack of new projects, whereas Container carriers are enjoying a positive dynamic, thanks to changes in consumptions flows and logistic disorganisation. Bulk and Tankers segments are experiencing high market volatility.

In 2020, the shipping industry faced new environmental constraints (International Maritime International Maritime Organisation (IMO) standards) involving investment efforts combined with a temporary immobilisation of the fleet.

At 31 December 2020, the gross exposure to the shipping sector represented EUR 19.2 billion, i.e. 1.1% of the Group s on and off- balance sheet exposures. This exposure is predominantly driven by CIB (89%) and for the rest by Domestic Markets (10%), with a good geographical diversification of its clients. Doubtful loans represent 5.7% of Group exposure to the shipping sector and stage 3 provisions represent EUR 377 million;

■ the aviation sector:

Business activity in this sector is evenly split between airlines and aircraft leasing companies. The gross exposure is EUR 13.2 billion at 31 December 2020, i.e. 0.7% of the Group s total gross on- and off-balance sheet commitments. New origination financing is focused on the technologically latest-generation aircraft, which are more efficient and have a lower environmental impact (the average age of the fleet financed by the Group is 6.8 years, compared with 11.4 years for the industry). Although the sector has been strongly affected by the consequences of health crisis, the amount of doubtful loans remains low at 31 December 2020 representing 3.3% of the sector s outstandings. As aircraft financing is a highly collateralised business, stage 3 provisions are very low and represent EUR 54 million. In addition, collateral valuation was updated in 2020 in the context of the health crisis.

■ the oil and gas sector:

BNP Paribas exposure to this sector is diversified. The commitments cover the entire value chain of the oil industry and concern major players (majors, national oil companies) in many countries. As a reminder, BNP Paribas stopped financing stakeholders whose main business is related to the unconventional hydrocarbons sector in 2017 and sold its dedicated financing business in the United States (Reserve Based Lending) in 2012. At 31 December 2020, the gross exposure of the portfolio amounted to EUR 35.1 billion (i.e. 2.0% of the Group s total gross on- and off-balance sheet commitments), nearly 54% of which are the majors and national oil companies. Close to 80% of counterparties are rated Investment Grade and commitments to non-Investment Grade counterparties have good collateral coverage. The outstanding amounts classified as doubtful represented 2.2% of the sector and stage 3 provisions amounted EUR 428 million at 31 December 2020;

■ the hotel, tourism and leisure sector:

At 31 December 2020, this sector represented EUR 17.3 billion of gross exposure (i.e. 1.0% of the Group s total gross on- and off-balance sheet commitments). The business covers various segments such as cruises, hotels, casinos and cafés and restaurants, with a strong geographical diversification. Exposure to doubtful loans represented 4% of the Group s exposure to this sector and stage 3 provisions accounted EUR 317 million at 31 December 2020;

■ the non-food distribution sector (excluding e-commerce):

At 31 December 2020, this sector represented EUR 12.2 billion (0.7% of the Group s total gross balance sheet and off-balance sheet commitments), with the impact of the lockdowns and restrictions put in place (administrative closures, etc.) varying according to the products, region and size of the players. Nearly 55% of counterparties have an Investment Grade rating and 4.8% of outstandings are classified as doubtful. At 31 December 2020, provisions for stage 3 amounted to EUR 311 million.

■ the commercial real estate sector:

The commercial real estate sector comprises a set of sub-segments with very different dynamics depending on the destination of the asset (logistics, office properties, accommodation and tourism, shopping centre, etc.) and the nature of the owner (institutional or specialist investor, industrial, promoter, etc.). At 31 December 2020, the gross exposure to the commercial real estate sector is EUR 71.1 billion (i.e. 3.9% of the Group s total gross on- and off-balance sheet commitments), mainly in Europe. This exposure is highly diversified between the various market segments, countries and entities of the Group. Furthermore, 44% of the commercial real estate counterparties have an Investment Grade rating. Doubtful loans represented 2.3% of the sector s total gross exposure. The segments most impacted by the health crisis are shopping centres (14% of the commercial real estate portfolio) and the hotels (6% of the commercial real estate portfolio) and are closely monitored. Stage 3 provisions represented EUR 462 million at 31 December 2020.

The Group remains diversified. No sector makes up more than 10% of total corporate lending or more than 4% of total lending at 31 December 2020.

(1) Gross credit risk exposures across all regulatory exposure classes.