SFIL Annual financial report 2018

1 I Management report 32 SFIL Annual Financial Report 2018 1. Consolidated financial statements in accordance with IFRS The SFIL Group reported consolidated net income as of December 31, 2018, of EUR 63 million for total balance sheet assets of EUR 72.7 billion at that date. The Group’s fully loaded CET1 ratio stood at 25.1%, confirming its financial stability. Income as of December 31, 2018, also incorporated non-recur‑ ring item (1) (2) linked to (i) the volatility of the valuation of the derivatives portfolio for EUR 7 million, (ii) the impact of the (1) Restated non-recurring items are as follows : • Fair value adjustments concerning hedges : as a reminder, since 2013, book value adjustments affect hedging operation set up by SFIL Group to cover its interest rate and foreign exchange risks. These adjustments basically concern accounting for adjustments linked to the application of IFRS 13, which mainly introduced the recognition of valuation adjustments with reference to CVA (Credit Value Adjustment) and DVA (Debit Value Adjustment). These accounting valuation adjustments are recorded in the income statement as net gains or losses on financial instruments at fair value through profit and loss. • The variations in the valuation of a non-SPPI loan portfolio (valued on the basis of JVR in IFRS 9 although destinated to be kept) linked to the variation of its credit spread. • In 2017, SFIL took into account legislative measures and its effect of changes in the income tax rate with the reduction in corporate income tax to 25% as of 2022. To this end in 2017, it reduced its deferred tax assets and recorded a non-recurring expense of EUR -2 million in its accounts. • As of the end of 2018, tax authority had levied adjustments relating to the 2012 and 2013 tax audit. It nevertheless reduced the amount of the adjustment relating to the add-back of the results of the former branch in Ireland, but maintained the principle of taxation of these results in France. Caisse Française de Financement Local settled this adjustment and reversed the relevant provisions. It kept in its account the amount of the provision set aside in respect of sums not yet paid. These factors had a positive impact of EUR 14 million in 2018. (2) Not should be taken that the SFIL Group was able as of the first half of 2017 to refine in a reasonable and prudent manner its provisioning method according to the model of likely losses anticipated by IAS 39. The refinement led to the accounting recognition in 2017 of a reversal of provision of EUR 31 million, which resulted in an improvement in the interest margin. application of IFRS 9 as concerns the volatility in the valua‑ tion of non-SPPI loans on the balance sheet for EUR -5 mil‑ lion, and (iii) the recognition of a provision reversal and the readjustment of deferred taxes related to the collection of amounts arising from the tax audit of the 2012 and 2013 fiscal years, for EUR 14 million. Restated to account for these non-recurring items, recurring net income as of December 31, 2018, stood at EUR 49 million compared with net income restated for the same items as of December 31, 2017 of EUR 64 million. Operating results SFIL – CONSOLIDATED IFRS FINANCIAL STATEMENTS EUR millions 12/31/2017 12/31/2018 Accounting income Restated non-recurring items Recurring income Accounting income Restated non-recurring items Recurring income Fair value adjustment on hedging Adjustment of deferred tax assets Fair value adjustment on hedging Fair value adjustment of non-SPPI financial assets Tax adjustment e ects Net banking income 184 (12) 196 186 7 (5) 184 Operating expenses (113) (113) (111) (111) Gross operating income 71 (12) 83 74 7 (5) 73 Cost of risk 22 22 (5) (5) Net income before taxes 93 (12) 105 69 7 (5) 68 Income tax (39) 4 (2) (41) (6) (2) 1 14 (20) NET INCOME 54 (8) (2) 64 63 5 (4) 14 49 • Group operating expenses and amortization totaled EUR 111 million, and were down by EUR 2 million from 2017. This decrease was mainly attributable to a reduction in taxes and duties, since the rise in IT charges was amortized by the decrease in other operating expenses; • A significant provision reversal related to the success of the loan sensitivity reduction policy was also recognized in the cost of risk as of December 31, 2017. 2. First-time application of IFRS 9 The new IFRS 9, which relates to financial instruments and replaces IAS 39, is applicable from January 1, 2018. It com‑ prises three main components: classification and measure‑ ment, impairment and hedge accounting. Its application to the SFIL Group’s activity is presented below. Classification and measurement The new standard now provides for only three categories of financial assets: those recognized at amortized cost, those rec‑ ognized at fair value through profit or loss and those recog‑ nized at fair value through other comprehensive income. This classification depends on both the business model in which the financial asset is used and the characteristics of its con‑ tractual cash flows. A financial asset is at amortized cost if: •  the sole purpose of holding it is to collect the associated contractual cash flows; •  these contractual cash flows represent solely payments of principal and interest (SPPI (3) ). (3) SPPI : Solely Payments of Principal and Interest An item-by-item analysis of this change shows the following: • Net banking income stood at EUR 184 million for 2018, as compared with EUR 196 million in 2017, down EUR 12 mil‑ lion from the previous year. Nevertheless, since a reversal of EUR 31 million in specific provisions subsequent to the refinement of the method of valuation of recoverable flows of doubtful loans (2) were recorded as of December 31, 2017, restated for this reversal of provision, net banking income was up by EUR 19 million mainly as a result of the improvement in SFIL’s conditions of financing;