2019 Universal registration document and annual financial report - BNP PARIBAS260

4 Consolidated finanCial statements for the year ended 31 deCemBer 2019

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, 3.h, 5.e, 5.f and 5.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.

Since 1 January 2018, these impairment losses have been determined in accordance with IFRS 9 and the expected credit losses model.

The measurement of expected credit losses on customer loan portfolios requires management to exercise judgement, in particular in order to:

■ assess the significant deterioration of credit risk to classify outstandings in stage 1, stage 2, or stage 3;

■ estimate the amount of expected losses according to the different stages;

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

At 31 December 2019, total outstanding customer loans exposed to credit risk amounted to EUR 827 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 to assess credit risk, in particular as regards credit granted to companies given the potentially substantial amounts of the outstanding loans concerned.

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 more sensitive economic sectors or geographic regions. We assessed the relevance of BNP Paribas internal control system and tested the manual and computerised controls for assessing credit risk and measuring expected losses.

During our work, we focused on: ■ classification of outstandings by stage: we assessed the relevance and the correct application of the indicators applicable to the various business lines to measure significant increases in credit risk, in particular as regards the rating of corporate counterparties;

■ 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 of said projections into the information system and the effectiveness of the data quality controls,

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

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