SFIL Annual financial report 2018

Management report I 1 21 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 1. Overall risk management system The SFIL Group has implemented a comprehensive risk man‑ agement system aimed at (i) identifying, monitoring, man‑ aging and measuring risks using specific methodologies, (ii) deciding on limits to be implemented, (iii) deciding on delegations to assign to the front office teams, (iv) decid‑ ing on the amount of provisions required, and (v) informing the competent committees regarding changes in these risks and actively warning them in the event that a limit or alert threshold is exceeded. The level of risk that is acceptable for SFIL and Caisse Française de Financement Local is defined by SFIL’s General Management and Risks Committee based on SFIL and CAF‑ FIL’s risk appetite. It is approved by SFIL’s Risks and Internal Control Committee and ultimately by its Board of Directors and CAFFIL’s governing bodies. Within this framework, poli‑ cies have been defined for the entire scope, as well as limits and rules for delegating decisions. The Risks division moni‑ tors these limits and, where appropriate, proposes measures to General Management to ensure compliance therewith. A quarterly risk review (QRR) is presented to the Risks and Internal Control Committee by the Chief Risk Officer. This document provides a summary view of the Group’s main risks (credit, balance sheet, market and operational) and any changes therein during the quarter as well as changes in regulations over the period. The Risks division relies on several committees, the respon‑ sibilities and composition of which have been approved by SFIL’s Risks and Internal Control Committee. They are either cross-divisional — the Risks Committee, the Methods and Models Validation Committees and the New Products Com‑ mittee — or specialized, dealing with credit risk, balance sheet and market risk, and operational risk, as described below. The Risks Committee defines the SFIL Group’s risk profile, validates the risk management systems and ensures compli‑ ance therewith. In particular, it is in charge of defining dele‑ gations for the granting of loans, approving the SFIL Group’s risk policies concerning all types of risks and approving the limits defined by the Risks division. The Market Validation Committee is responsible for validat‑ ing and implementing market risk and derivatives valuation models. The Credit Validation and Quality Assurance Com‑ mittee is responsible for validating and implementing the internal rating systems (IRS) used to calculate regulatory capital, the IFRS 9 impairment models and the economic capital models. The New Products Committee (CNP), chaired by the Chief Risk Officer, examines all new products and management pro‑ cesses and any change to existing products and processes. This committee notably studies new products intended for financing, refinancing or hedging customer risks, as well as the development of any existing product or service to the extent that it substantially modifies the SFIL Group’s risk profile or internal processes. It also determines and assesses the compliance risks associated with the creation of new products and material changes to existing products or new services based on the compliance opinion submitted to it. 2. SFIL Group key risks The SFIL Group’s risk profile is low: •  on the one hand, CAFFIL’s balance sheet contains mostly public sector borrower exposures (1) , and on the other hand all export credit loans on SFIL’s balance sheet have a Bpi‑ france Assurance Export guarantee covering 100% of the loan principal; •  interest rate risk is also low given the Group’s hedging pol‑ icy, pursuant to which its fixed rate balance sheet items are systematically hedged by taking out new or cance‑ ling existing hedging instrument positions (interest rate derivatives); •  liquidity risk is, on the one hand, strictly managed using various internal liquidity stress tests, and on the other hand limited, as the Group mainly finances itself over the long term by issuing covered bonds – liquid instruments that offer investors a protective legal framework. Furthermore, the Group continues to diversify its sources of financing, SFIL having begun to issue on the market by positioning itself as a State agency. Lastly, the majority of its assets are eligible for refinancing with the Banque de France; •  foreign exchange risk is marginal, as foreign currency out‑ standings are systematically hedged as soon as they enter the balance sheet; •  operational risk is governed by protective procedures; •  the Group has no trading portfolio. Following the supervisory review and evaluation process (SREP) conducted by the European Central Bank in 2018, SFIL’s common equity tier 1 (CET1) capital requirement on a consolidated basis was set at 7.75% as of January 1, 2019. It consists of: •  4.50% in respect of Pillar 1 common equity tier 1 capital, the level applicable to all institutions; •  0.75% in respect of the Pillar 2 requirement (P2R), unchanged compared with last year following the 2018 SREP; •  2.50% in respect of the conservation buffer, the level appli‑ cable to all institutions. The tier 1 capital requirement, meanwhile, is set at 9.25%, and the total capital requirement at 11.25%. As of July 1, 2019 (see decision of France’s High Council for Financial Stability), the rate that all institutions must apply to their relevant credit exposures located in France will be 0.25%. As of December 31, 2018, the SFIL Group’s consolidated phased-in CET1 and total capital ratios were 25.1% and 25.9%, respectively, representing more than double the min‑ imum required level set by the European supervisor. As regards the minimum requirement for own funds and eli‑ gible liabilities (MREL), while the Single Resolution Board has not yet formally informed SFIL of its final requirement, the Group already comfortably complies with the minimum indicative level provided to it, which is lower than its equity. (1) On an ancillary basis, CAFFIL may also hold credit institution exposures on its balance sheet, as replacement securities. These exposures must be ranked in one of the top two tiers for credit quality and replacement security outstandings may not exceed 15% of covered bonds outstandings. CAFFIL may also enter into derivative contracts with credit institutions, solely to hedge its interest rate and currency risks. Risk management