SFIL Annual financial report 2018

Management report I 1 23 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 Stage 3 outstandings correspond mainly to customers: • with an outstanding unpaid for more than 90 days; •  that were in a situation of real (i.e. non-technical) default and for which outstandings unpaid for more than 90 days were settled. After all unpaid outstandings have been settled, they are kept at Stage 3 for a minimum period of one year, known as the “probation period”; • whose financial situation is such that, even in the absence of an unpaid outstanding, it is possible to conclude that there is a known risk (unlikely to pay). The definition of credit impairment (Stage 3) under IFRS accounting standards thus covers a wider scope than the concept of non-performing and litigious loans under French accounting standards and is very close to the regulatory con‑ cept of non-performing exposures (NPE), which, in addition to Stage 3 assets, includes non-performing assets that are recognized at fair value through profit or loss (i.e. non-per‑ forming assets not classified as solely payment of principal and interest (SPPI)). Provisions are set aside for all of these outstandings, includ‑ ing Stage 1 and Stage 2 outstandings, for expected credit losses. The related impairment is based on forward looking scenarios (defined by probability of occurrence), and takes into account expected losses over the next 12 months (Stage 1) or the outstanding’s life (Stages 2 and 3). The value of these assets and the related provisions are pre‑ sented in the table below: IFRS net carrying amout Impairments EUR millions 1/1/2018 12/31/2018 1/1/2018 12/31/2018 Stage 1 46,332 48,551 7 6 Stage 2 5,441 6,294 39 46 Stage 3 1,518 1,096 11 10 TOTAL SPPI ASSETS 53,291 55,941 57 62 Non-performing exposures 1,601 1,454 As of December 31, 2018, IFRS provisions for expected credit losses amounted to EUR 62 million and were broadly unchanged from January 1, 2018, as calculated under the first- time application of IFRS 9. In 2018, the positive impact of the structured loan sensitivity reduction policy was reflected in the significant and simulta‑ neous decrease in arrears and in non-performing and litigious loan outstandings under French accounting standards, and in Stage 3 outstandings under IFRS accounting standards. 2.2 – MARKET RISK 2.2.1. Definition and scope of market risk Market risk is defined as the risk of loss, whether recognized on the income statement or directly through equity, that may result from fluctuations in the price of the financial instru‑ ments that make up a specific portfolio. Regulatory market risk involves daily monitoring of the portfolio’s risk and result indicators if the transactions that make up that portfolio are entered into for trading purposes. Changes in the value of trading portfolios directly impact the income statement. As a public development bank, the SFIL Group is not intended to carry out transactions for trading purposes and is therefore not subject to market risk in the regulatory sense of the term. In November 2016, the European Commission published a proposal to amend Regulation 575/2013 of June 26, 2013 to provide for the introduction of a minimum leverage ratio requirement of 3%, as well as measures to recognize the specific nature of public development banks – including the possibility for these banks to exclude certain assets from their leveraged exposure. These measures were confirmed and strengthened by the European Council and the European Parliament. SFIL will therefore benefit from specific, appropriate calculation rules for determining these ratios when these new requirements enter into force (two years after the text’s definitive adop‑ tion and publication, which are expected in the first half of 2019). Based on the methodological principles currently in force, as of December 31, 2018, SFIL’s leverage ratio was 1.92% taking into account regulatory transitional provisions, and 1.90% using fully loaded Basel III criteria. In the event of deduction of public development bank assets in accordance with the proposed amendment to Reg‑ ulation 575/2013, SFIL’s leverage ratio would be far higher than the minimum requirement of 3% provided for by the draft regulation. 2.1.4. Arrears, non-performing loans and provisions Total arrears amounted to EUR 66 million as of December 31, 2018. They fell by 2% compared with December 31, 2017 (EUR 67.5 million) and were concentrated on a few, exclu‑ sively French counterparties. As a reminder, at the level of CAFFIL and pursuant to French accounting standards, non-performing and litigious loans amounted to EUR 384 million as of December 31, 2018, i.e. 0.7% of CAFFIL’s cover pool, which attests to the portfolio’s excellent quality. They fell by 31% compared with December 31, 2017 (EUR 558 million) and break down as follows: •  EUR 347 million of receivables classified as non-perform‑ ing (1) , corresponding to loans granted to customers whose total arrears came to EUR 28 million; •  EUR 37 million in receivables classified as litigious, cor‑ responding to unpaid interest subject to ongoing legal proceedings. Pursuant to IFRS accounting standards, and more specifi‑ cally to the coming into force on January 1, 2018 of IFRS 9, all financial assets recognized at amortized cost and at fair value through other comprehensive income, as well as financing commitments, must be classified into three impair‑ ment stages and provisioned for expected credit losses: Stage 1: performing assets with no significant credit risk deterioration since initial recognition; Stage 2: performing assets with significant credit risk dete‑ rioration since initial recognition; Stage 3: credit-impaired assets. (1) A loan is considered as non-performing when it presents one of the following characteristics: • a probable or certain risk that it will not be repaid (unpaid for more than nine months for local government borrowers, and for more than three months for other counterparties); • the existence of a known counterparty risk (worsening of financial situation, alert procedure). When a customer is classified in default in terms of credit risk the outstanding amount of all its loans is automatically classified as non-performing, in addition to its existing past dues. A receivable is considered to be litigious when it is unpaid and is the subject of legal proceedings.