2019 Universal registration document and annual financial report - BNP PARIBAS 183

4Consolidated finanCial statements for the year ended 31 deCemBer 2019

4

Notes to the financial statements

3.g OTHER OPERATING EXPENSES

3.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;

■ 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 credit 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).

As a backstop, when an asset becomes 30 days past due, the credit risk is deemed to have increased significantly since initial recognition and the asset is therefore placed into stage 2.

Forward Looking Information

The Group considers forward-looking information both when assessing significant increase in credit risk and when measuring Expected Credit Losses (ECL).

Regarding the assessment of significant increase in credit risk, beyond the rules based on the comparison of risk parameters between initial recognition and reporting date (cf. significant increase in credit risk section), the determination of significant increase in credit risk is supplemented by the consideration of more systemic forward looking factors (such as macroeconomic, sectorial or geographical risk drivers) that could increase the credit risk of some exposures. These factors can lead to tighten the transfer criteria into stage 2, resulting in an increase of ECL amounts for exposures deemed vulnerable to these risk drivers.

Regarding the measurement of expected credit losses, the Group has made the choice to use 3 macroeconomic scenarios by geographic area covering a wide range of potential future economic conditions:

■ a baseline scenario, consistent with the scenario used for budgeting;

■ an adverse scenario, corresponding to the scenario used quarterly in Group stress tests;

■ a favourable scenario, allowing to capture situations where the economy performs better than anticipated.

In millions of euros Year to

31 Dec. 2019 Year to

31 Dec. 2018

External services and other operating expenses (9,495) (10,498)

Taxes and contributions(1) (1,844) (1,792)

TOTAL OTHER OPERATING EXPENSES (11,339) (12,290)

(1) Contributions to European resolution funds, including exceptional contributions, amount to EUR 646 million for the year ended 31 December 2019 compared with EUR 607 million for the year ended 31 December 2018.