SFIL Annual financial report 2018

1 I Management report 22 SFIL Annual Financial Report 2018 status, and classes defaults as either actual or technical. It also approves the list of counterparties with non-performing exposures and that of counterparties experiencing financial difficulties and subject to related concessions. This commit‑ tee meets quarterly; • Every quarter, the Impairment Committee sets the amount of expected credit losses (ECLs) for each of the three Stages, in the case of Stage 3 based on the collection scenarios that the Watchlist Committee determines; •  The Rating Committee ensures the proper application of the internal rating systems and the appropriateness of the rat‑ ing processes. This committee meets quarterly. Although it is an integral part of the credit risk management process, this committee is organized by the head of the Credit Model Validation and Quality Assurance team, who reports directly to the Chief Risk Officer so as to ensure the independence of the control process. 2.1.3. Breakdown of exposures based on Basel III weightings The quality of SFIL’s and CAFFIL’s portfolio can also be seen in the risk weighted asset (RWA) weightings assigned to their assets to calculate the Group’s solvency ratio. For most of its assets, the Group has opted for the advanced method of calculating regulatory capital requirements. As of December 31, 2018, the breakdown of exposures by risk weighting (calculated on the basis of the counterparty’s prob‑ ability of default and the Group’s loss given default) was as follows: Basel III risk weightings of the SFIL Group’s portfolio as of December 31, 2018 (consolidated basis) [0%-2%] ]2%-5%] ]5%-20%] ]20%-50%] > 50% 68.4% 7.5% 19.9% 1.9% 2.4% SFIL risk weighting The metric used is exposure at default (EAD) This breakdown confirms the quality of the assets in SFIL’s portfolio, for which the average weighting is 6.3% and of which only 4.3% has a weighting of more than 20%. Weighted exposure with respect to credit risk amounts to EUR 4,713 million. Including weighted assets associated with the credit valuation adjustment (CVA) volatility risk and with operational risk (risk weighted assets associated with market risk are zero), total risk weighted assets came to EUR 5,471 million. Based on a non-phased-in CET1 level of EUR 1,358 mil‑ lion, SFIL had a fully loaded Basel III CET1 ratio of 24.8% as of December 31, 2018. In addition, one of the prudential indicators introduced under European regulations is a leverage ratio, which corresponds to the amount of Tier 1 capital as a proportion of the total exposure of the institution concerned. Data collection in accordance with the regulatory format began in 2014 and institutions have published their leverage ratio since the fiscal year starting January 1, 2015, without this ratio being subject to a specific quantitative regulatory requirement. 2.1 – CREDIT RISK 2.1.1. Definition and management of credit risk Credit risk represents the potential loss that may affect the SFIL Group owing to deterioration of a counterparty’s solvency. The Risks division defines the policies, guidelines and proce‑ dures relating to credit risk. It is responsible for developing the decision-making process (mainly as regards the granting of loans) and the delegation framework, and for supervising the analysis and internal rating process. The Risks Commit‑ tee ultimately approves the credit risk policies. Within the framework of its credit risk monitoring function, the Credit Risks division: •  defines the credit risk policies in accordance with SFIL and CAFFIL’s risk appetite; •  defines the limits by counterparty type, setting the max‑ imum exposure considered to be acceptable for a given counterparty; •  proactively monitors limits, with the possibility of reduc‑ ing them at any time depending on changes in the related risks; •  defines delegations by counterparty type and monitors compliance with lending rules; • manages the lending process for both new commitments and restructured loans by carrying out credit analyses and assigning internal ratings (by using either the internal rat‑ ing systems or expert advice); • monitors the credit risk of all SFIL and CAFFIL portfolios (local public sector in France, international, bank counter‑ parties, export refinancing, etc.) by generating credit anal‑ yses and reviewing portfolio ratings annually; •  identifies assets with downgraded risks for potential addi‑ tion to the watchlist; •  proposes specific or sector-based provisions for the portfolio. The Risks division is also in charge of maintaining and develop‑ ing internal rating systems (including statistical models) for the French and Italian local public sectors, banks and sovereigns, and the Pillar II models (economic capital). Lastly, it is respon‑ sible for stress testing. 2.1.2. Governance Credit risks are governed via a number of specialized committees: •  The Credit Committee approves new commitments (1) by CAF‑ FIL and SFIL (loans and market transactions) and restruc‑ tured loans on CAFFIL’s balance sheet. It sets credit limits when certain predefined thresholds are exceeded. Each file presented to the Credit Committee contains an independ‑ ent analysis conducted by the Risks division. At each meet‑ ing, the Credit Committee is also informed of commitments made within the framework of delegations granted to the Risks division, the Customer Debt Management division, the Financial Markets division or the sales and marketing teams of La Banque Postale. This committee meets every week. •  The Watchlist Committee is in charge of monitoring assets kept under particular scrutiny because of an associated risk downgrade, and proposing specific provisions if necessary. This committee meets quarterly; •  The Non-Performing Exposures and Forbearance Com‑ mittee decides whether a loan should enter or exit default (1) Not delegated to the Risk division, the Customer Debt Management division or the sales and marketing teams of La Banque Postale.