2018 Registration document and annual fi nancial report - BNP PARIBAS286

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

Climate-related issues

Climate change is a fi nancial risk for the Group. Climate change-related risks may affect the Group, either directly on its own operations, or indirectly via its fi nancing and investment activities. These risks mainly concern the physical risks related to the consequences of climate change and the carbon risks resulting from the transition to a low-carbon economy.

Demographic risk

The ageing population is a major underlying trend in many countries. In the years and decades to come, it will signifi cantly impact economic growth (this is already visible), as well as health care and retirement budgets, or savings and consumption behaviours.

AREAS OF SPECIAL INTEREST IN 2018

United Kingdom

On 23 June 2016, the United Kingdom held a referendum which resulted in a majority vote to leave the European Union ( Brexit ) with uncertain economic consequences.

The BNP Paribas Group operates in the United Kingdom through several branches and subsidiaries (see section 8.6 Locations by country in chapter 8 General Information). Its business, which it carries out mainly with corporations through its BNP Paribas SA branch in the United Kingdom, is of limited size for the scale of the Group and does not include a r etail b anking network in that country. At 31 December 2018, BNP Paribas generated 6.1% of its pre-tax operating income in the United Kingdom (see section 8.6 Profi t and loss account items and headcount by country in chapter 8 General Information).

With respect to exposure to counterparties whose main business is in the United Kingdom, commercial commitments at 31 December 2018 represent 4.7% of the Group s total gross commitments, on- and off- balance sheet (see Table 26 Credit risk exposure by geographical region). Similarly, exposure to British sovereign risk is contained at 5.5% of the banking book s sovereign exposure (see Appendix 1 Sovereign exposures). The Bank s structural foreign exchange and interest rates position in pounds sterling is very moderate: outstanding loan amounts are low and funding in pounds sterling is largely matched.

The Group has prepared for Brexit with a view to ensuring the continuity of its activities. Its diversifi ed business model in Europe in terms of both business lines and countries provides it with a high degree of fl exibility to adapt to this new environment.

In practice, the Group is working with the British and European regulators in order to ensure the continuity of its operational systems and has prepared various adaptation measures to enable clients, whether based in the United Kingdom or in Europe, to continue to benefi t from the Group s broad range of banking products and services.

Turkey

In Turkey, the steady growth of GDP in the fi rst half of 2018 suffered a signifi cant slowdown in the second half, with the drop in the Turkish lira one of its most visible manifestations. Highly volatile foreign exchange and interest rates refl ected hesitation among investors.

From the third quarter, however, the institutions the Ministry of Finance and the Central Bank were able to reassure the fi nancial markets with the announcement of necessary measures, resulting in an upturn in the Turkish lira and a drop in risk premiums.

Over the next few months, however, economic growth is likely to remain weaker in comparison with past performances. Despite a narrowing of the defi cit and stabilisation of infl ation, certain risks could continue to weigh on the Turkish economy. BNP Paribas s presence in Turkey is primarily through its TEB subsidiary (ranking No. 10 in Retail Banking in Turkey with a market share of approximately 3%). At 31 December 2018, the Group generated 3.1% of its pre-tax operating income in this country (see section 8.6 Locations, Profi t and loss account items and headcount by country in chapter 8 General information). TEB had a solvency ratio of 16.7% as at 31 December 2018, in excess of the regulatory requirements.

In 2018, TEB Group signifi cantly strengthened its balance sheet liquidity with a Liquidity Coverage Ratio (LCR) of 294% at 31 December 2018, up from 171% on 1 January 2018. With outstanding loans of TRY 65.7 billion and deposits of TRY 64.2 billion , TEB Group s fi nancing structure is balanced.

With respect to exposure to counterparties whose main business is in Turkey, commercial commitments as at 31 December 2018 represent 1.6% of the Group s total gross commitments, on- and off-balance sheet (see Table 26 Credit risk exposure by geographical region). Exposure to Turkish sovereign risk is contained at 1.3% of the banking book s sovereign exposure and is essentially borne by TEB Group.

As a reminder, the slowdown in growth for TEB in Turkey resulted in a write-down of the full amount of goodwill on TEB in the amount of EUR 172 million in 2017 (see note to the fi nancial statements 5.o).

Others

Geopolitical tensions abated in Asia (Korean peninsula) but remain high in certain areas, particularly in the Middle East, with the potential involvement of Western powers to varying degrees, and in Latin America. Even if the possible consequences of such risks are hard to assess, the regional economies in question, and the global economy, could be impacted through different channels (confi dence, trade ties, and commodity prices).

The risks associated with changes in the macroeconomic and market environment are described in section 5.1 Risk factors(1).

The analyses relating to the sectors (particularly shipping fi nance and leveraged fi nance) are set out in the Industry diversifi cation paragraph in section 5.4.

The risk principles are presented in the Risk Appetite Statement approved by the Board of directors (see Risk appetite in section 5.3).

(1) In particular the risk factor Given the global scope of its activities, the Bank may be vulnerable to certain political, macroeconomic or fi nancial risks in the countries and regions where it operates .