SFIL Annual financial report 2018

Consolidated financial statements in accordance with IFRS I 3 109 Annual Financial Report 2018 SFIL Management report Report on corporate governance Consolidated financial statements in accordance with IFRS Annual financial statements in accordance with French GAAP Shareholders’ Meeting of May 29, 2019 General information First-time application of Stage 1 IFRS 9 Risk identified Our response As of January 1, 2018, the SFIL Group applies IFRS 9 “Financial instruments” to financial assets and liabilities. This standard introduces new classification and measurement rules for financial assets and liabilities (Stage 1). In respect of classification and measurement rules, the impacts of the first-time application of IFRS 9 “Financial instruments” (Stage 1) on the equity of the SFIL group as of January 1, 2018 are, in particular, comprised of: • Value adjustments related to the reclassification of non-SPPI loans at fair value through profit or loss (-EUR 241 million), • Value adjustments related to restructured loans which are derecognized and then recognized retrospectively in SPPI (EUR 199 million), • Cancellation of reserves representing the cumulative fair value changes in equity related to the reclassification of securities at amortized cost (EUR 127 million). The “Impact of the first-time application of IFRS 9 on the balance sheet as of January 1, 2018,” Note 8 to the consolidated financial statements of SFIL provides detailed disclosures on the transition of the balance sheet as of December 31, 2017 in IAS 39 to the opening balance sheet in IFRS 9 as of January 1, 2018. The qualitative disclosures are mainly described in Note 1 “Valuation methods and accounts presentation”. The determination of these impacts required the exercise of numerous assumptions and judgments. Considering the complexity for implementing Stage 1 of IFRS 9 and the disclosures provided in this respect by the SFIL Group in its consolidated financial statements, we considered the first-time application of IFRS 9 to be a key audit matter. We have, with the support of our experts who are part of our audit teams, familiarized ourselves with the measures deployed and the analyses conducted by the SFIL Group to implement IFRS 9. Regarding classification and measurement, our audit procedures notably consisted in: •  reviewing generic (business model, early redemption option, etc.) and specific (“SPPI” criterion) analyses carried out by the SFIL Group; •  reviewing the methodology applied to determine the accounting treatment of restructured loans as well as the methods for calculating the impact of the first-time application of IFRS 9 on these assets; •  reviewing the types of contracts associated with each category of financial asset; •  reviewing, from a selection of contracts for each category of financial asset, the analysis performed by the SFIL Group in respect of classification of these financial assets; •  reviewing the valuation methodology for non- SPPI loans; •  analyzing the formula used to value non-SPPI loans at fair value through profit or loss •  reviewing the impacts of the reclassification of financial assets and liabilities on the SFIL Group consolidated financial statements as of January 1, 2018. We have also examined the qualitative and quantitative disclosures on the first-time application of the standard published in the notes to the consolidated financial statements. Estimated impairment risk of customer loan portfolios Risk identified Our response In connection with its activities, the SFIL Group is mainly exposed to customer credit risk. The implementation of IFRS 9 as of January 1, 2018, resulted in a new approach for recording credit risk provisions based on expected losses on outstanding loans (versus an incurred losses approach under IAS 39). In accordance with this standard, SFIL records value adjustments in respect to expected credit losses (“Expected Credit Loss” or “ECL”) on performing (“Stage 1”), underperforming (“Stage 2”) or non-performing /credit-impaired (“Stage 3”) outstanding loans. Considering the importance of judgement in determining these value adjustments and the changes brought about by the implementation of the new standard (adapting the ECL calculation methods, defining the parameters integrating a prospective aspect, new control framework, etc.), we considered the estimate of ECL and the disclosures published in the notes to the consolidated financial statements, both as of the date of the first-time application of the new standard and as of December 31, 2018, to be a key audit matter. The loans and advances to customers at amortized cost are presented inNote 2.6 to the SFIL consolidated financial statements. We have examined the measures implemented by the Credit Risk Department to categorize the loans (Stage 1, 2 or 3) and measure the amount of ECL recorded to assess whether the estimates adopted are based on principles consistent with IFRS 9, and correctly documented and described in the notes to the consolidated financial statements. We have tested the key controls set up for updating the credit ratings, identifying underperforming or non-performing loans and valuing impairment. We have also familiarized ourselves with the main conclusions of the specialized committees in charge of monitoring underperforming or non-performing/credit-impaired loans. We have reviewed, with the support of our Public-Sector experts, the rating system for French local governments and public healthcare facilities. We have examined, with the support of our Credit Risk experts, the main methodologies adopted for the calibration of parameters and transfer criteria. We have recalculated the ECL, using a sample, and with the support of our Credit Risk experts, and verified application of segment rules (stage) as of January 1, 2018 and as of December 31, 2018. We have tested the quality of data comprising the calculation basis for ECL, by reconciling accounting records and by performing tests on the transfer criteria. We have analyzed the changes by stages and by type of portfolio as well as the changes in the related provisioning rate. As of December 31, 2018, based on a sample of loan files, we have reviewed the main assumptions adopted to estimate the individual impairment of loans classified in Stage 3. Finally, we have examined the disclosures provided in respect of credit risk hedging in the notes to the consolidated financial statements, including the effects of the first-time application of IFRS 9.