2018 REGISTRATION DOCUMENT AND ANNUAL FINANCIAL REPORT

2018 Registration document and annual fi nancial report - BNP PARIBAS352

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

Credit risk

➤ TABLE 32: BACKTESTING OF LGD

Portfolio

2017(*)

Arithmetical average of the estimated LGD

Historic arithmetic average of the observed LGD

Sovereigns and p ublic s ector e ntities 42% 27%

Institutions(**) 40% 29%

Large c orporate(***) 27% 8%

Individuals 26% 19%

Professionals and SME r etail (France and Italy) 36% 30%

SME c orporate (France and Italy) 41% 29%

SME r etail & SME c orporate (Belgium) 29% 23%

(*) Data based on the 2016 backtesting exercise for the Individuals, Professionals & SME r etail and SME c orporate portfolios. (**) Including the Banks, Insurance and Regulated funds & Agency arrangements portfolios. (***) Including the Large corporates, Real Estate n on-r etail in France, Project fi nancing and Energy and c ommodity fi nancing portfolios.

INTERNAL RATING SYSTEM SOVEREIGN, FINANCIAL INSTITUTION, CORPORATE AND SPECIALISED FINANCING PORTFOLIOS [Audited]

The IRBA for sovereigns, fi nancial institutions, corporates and specialised fi nancing portfolios is based on a consistent rating procedure in which RISK has the fi nal say regarding the rating assigned to the counterparty and the Global Recovery Rate (GRR) assigned to transactions. Credit Conversion Factors (CCF) of off-balance sheet transactions are automatically assigned according to counterparty and transaction type (see paragraph Rating system in the section Credit risk management policy).

The generic process for assigning a rating to each segment is as follows:

■ for large corporates and specialised fi nancing, an analysis is carried out by the unit proposing a rating and a Global Recovery Rate to the Credit Committee, using the rating models and tools developed by RISK . The rating and Global Recovery Rate are validated or revised by the RISK representative during the Credit Committee meeting. The C ommittee decides whether or not to grant or renew a loan and, if applicable, reviews the counterparty rating at least once a year;

■ for fi nancial institutions, the analysis is carried out by analysts in the RISK Function. Counterparty ratings and Global Recovery Rates are determined during review committees by geographical area to ensure comparability between similar banks;

■ for sovereigns, the ratings are proposed by the Economic Research Department and approved at Country Committee (Rating Committee) meetings which take place several times a year. The C ommittee comprises members of Executive Management, the RISK Function and the business lines;

■ for small and medium-sized companies (other than retail customers), a score is assigned by the RISK analysts.

For each of these sub-portfolios, the risk parameters are measured using a model certifi ed and validated by the RISK teams, based mainly on an analysis of the Bank s historical data. The model is supported as far as possible by Group-wide shared tools to ensure consistent use. The method is supplemented by expert judgement provided it can be justifi ed.

The method for assessing risk parameters is based on a set of common principles, and particularly the two pairs of eyes principle which requires at least two people, at least one of whom has no commercial involvement, to give their opinion on each counterparty rating and each transaction Global Recovery Rate.

The same defi nition of default is used consistently throughout the Group for each asset class, in accordance with regulations.

The chart below shows a breakdown by credit rating of performing loans and commitments for the asset classes: central governments and central banks, fi nancial institutions, corporates for all the Group s business lines, measured using the i nternal r atings b ased a pproach.

This exposure represented EUR 823 billion at 31 December 2018 compared with EUR 791 billion at 1 January 2018.

The majority of commitments are towards borrowers rated as good or excellent quality, refl ecting the heavy weighting of large multinational groups and fi nancial institutions in the Bank s client base. A signifi cant proportion of commitments to non-investment grade borrowers are highly structured or secured by high quality guarantees implying a high recovery rate in the event of default. They include export fi nancing covered by export credit insurance written by international agencies, project fi nance, structured fi nance and transaction fi nancing.