2018 Registration document and annual fi nancial report - BNP PARIBAS 293

5RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Annual risk survey

planning and allocation of resources, and are based on a number of assumptions with regard to business and economic conditions.

The Bank s actual results could vary signifi cantly from these targets and objectives for a number of reasons, including the occurrence of one or more of the risk factors described elsewhere in this section.

Additionally, as part of the Bank s commitment to environmental responsibility within its CSR policy, it has announced a number of initiatives to support the energy transition towards a low-carbon economy, including a reduction in fi nancing for energies with the most negative environmental impact. These measures (and any future ones along similar lines) may in certain cases adversely affect the Bank s results in the relevant sectors.

The Bank may experience diffi culties integrating acquired companies and may be unable to realize the benefi ts expected from its acquisitions.

The Bank makes acquisitions on a regular basis. Integrating acquired businesses is a long and complex process. Successful integration and the realization of synergies require, among other things, proper coordination of business development and marketing efforts, retention of key members of management, policies for effective recruitment and training as well as the ability to adapt information and computer systems. Any diffi culties encountered in combining operations could result in higher integration costs and lower savings or revenues than expected. There will accordingly be uncertainty as to the extent to which anticipated synergies will be achieved and the timing of their realization. Moreover, the integration of the Bank s existing operations with those of the acquired operations could interfere with the respective businesses and divert management s attention from other aspects of the Bank s business, which could have a negative impact on the business and results of the Bank. In some cases, moreover, disputes relating to acquisitions may have an adverse impact on the integration process or have other adverse consequences, including fi nancial ones.

Although the Bank undertakes an in-depth analysis of the companies it plans to acquire, such analyses often cannot be complete or exhaustive. As a result, the Bank may increase its exposure to doubtful or troubled assets and incur greater risks as a result of its acquisitions, particularly in cases in which it was unable to conduct comprehensive due diligence prior to the acquisition.

RISKS RELATED TO THE MANAGEMENT OF THE BANK S BUSINESS The Bank is exposed to credit risk and counterparty risk.

As a credit institution, the Bank is exposed to the creditworthiness of its customers and counterparties. These risks impact the Group s consolidated fi nancial statements when a customer or counterparty is unable to honour its obligations and when the book value of these obligations in the Bank s records is positive. The customer or counterparty may be a bank, a financial institution, an industrial or commercial enterprise, a government and its various entities, an investment fund,

or a natural person. If the level of customer or counterparty defaults increases compared to recent historically low levels, the Bank may have to record signifi cant charges for possible bad and doubtful debts, affecting its profi tability.

While the Bank seeks to reduce its exposure to credit risk and counterparty risk by using risk mitigation techniques such as collateralization, obtaining guarantees, entering into credit derivatives and entering into netting agreements, it cannot be certain that these techniques will be effective to offset losses resulting from counterparty defaults that are covered by these techniques. Moreover, the Bank is exposed to the risk of default by the party providing the credit risk coverage (such as a counterparty on derivatives) or to the risk of loss of value of any collateral. In addition, only a portion of the Bank s overall credit risk and counterparty risk is covered by these techniques. Accordingly, the Bank has signifi cant exposure to these risks.

A substantial increase in new provisions or a shortfall in the level of previously recorded provisions could adversely affect the Bank s results of operations and fi nancial condition.

In connection with its lending activities, the Bank regularly establishes provisions for loan losses, which are recorded in its profi t and loss account under cost of risk . The Bank s overall level of provisions is based on its assessment of prior loss experience, the volume and type of lending being conducted, industry standards, past due loans, economic conditions and other factors related to the recoverability of various loans or statistical analysis based on scenarios applicable to different asset classes. Although the Bank seeks to establish an appropriate level of provisions, its lending businesses may have to increase their provisions for loan losses substantially in the future as a result of deteriorating economic conditions or other causes. Any significant increase in provisions for loan losses or a signifi cant change in the Bank s estimate of the risk of loss inherent in its portfolio of non-impaired loans, as well as the occurrence of loan losses in excess of the related provisions, could have a material adverse effect on the Bank s results of operations and fi nancial condition.

The Bank s hedging strategies may not prevent losses.

If any of the variety of instruments and strategies that the Bank uses to hedge its exposure to various types of risk in its businesses is not effective, the Bank may incur losses. Many of its strategies are based on historical trading patterns and correlations. For example, if the Bank holds a long position in an asset, it may hedge that position by taking a short position in another asset where the short position has historically moved in a direction that would offset a change in the value of the long position. However, the hedge may only be partial, or the strategies used may not protect against all future risks or may not be fully effective in mitigating the Bank s risk exposure in all market environments or against all types of risk in the future. Unexpected market developments may also reduce the effectiveness of the Bank s hedging strategies. In addition, the manner in which gains and losses resulting from certain ineffective hedges are recorded may result in additional volatility in the Bank s reported earnings.