SFIL Annual financial report 2018

Management report I 1 33 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 Most of the loans and securities listed as assets of the SFIL Group meet these criteria (hold to collect model and SPPI characteristics) and continue to be recognized at amor‑ tized cost. However, some portfolios are now recognized at fair value: these are mainly securities held as cash surplus investments under a hold to collect and sell model (fair value recognized directly through other comprehensive income) and structured loans, which were previously recognized at amortized cost under IAS 39 and whose financial flows are not SPPI, resulting in recognition at fair value through profit or loss under IFRS 9. Furthermore, the sensitivity reduction transactions consisted in transforming non-SPPI loans into SPPI loans; these transactions are now systematically con‑ sidered to be capable of derecognition, which leads to: •  for transactions of this type occurring prior to January 1, 2018: recognition of the early repayment penalty in the 2018 opening equity to reflect the first-time application of IFRS 9; •  for transactions of this type occurring after January 1, 2018: immediate recognition of the early repayment penalty in profit or loss. Impairment In accordance with the new IFRS 9, loans and securities measured at amortized cost or at fair value through other comprehensive income, as well as financing commitments, are classified into one of three portfolios, referred to as “Stages”: •  Stage 1: performing outstandings with no significant credit risk deterioration since initial recognition; •  Stage 2: performing outstandings with significant credit risk deterioration since initial recognition; •  Stage 3: credit-impaired outstandings. Provisions are set aside for all of these assets and financ‑ ing commitments, including Stage 1 and Stage 2 performing outstandings. 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). In addition, changes in the credit risk of loans and securities recognized at fair value through profit or loss are included in their valuation. Lastly, the SFIL Group decided not to apply the option of spreading over time the impact on prudential capital asso‑ ciated with the standard’s first-time application and relating to the provisioning component. Hedge accounting Until the future macro-hedging standard takes effect, the SFIL Group has chosen to continue applying IAS 39 in this area. Impacts associated with the first-time application of IFRS 9 and expected impacts on future results The first-time application of IFRS 9 to the SFIL Group’s transactions as of January 1, 2018 had a limited impact on equity as regards the new provisioning methods, but a more significant impact from the classification and measurement standpoint. The following table shows the breakdown of financial assets by recognition method. EUR millions 1/1/2018 Non-SPPI financial assets recognized at fair value through profit or loss 6,951 SPPI financial assets recognized at fair value through other comprehensive income 942 SPPI financial assets recognized at amortized cost 52,293 TOTAL 60,186 The following table shows the impact on equity and the CET1 ratio of the first-time application of IFRS 9, all other things being equal. Impact on equity of the first-time application of IFRS 9 EUR millions 1/1/2018 Classification and measurement 86 Impairment (10) Hedge accounting - TOTAL before tax 76 TOTAL after tax 50 Impact on the fully loaded CET 1 ratio of the first-time application of IFRS 9, after prudential restatements (basis points) 1/1/2018 TOTAL 119 Lastly, IFRS 9 has an impact on future results due mainly to changes in the fair value of non-SPPI financial assets, a situ‑ ation which leads to increased income volatility. This stand‑ ard therefore increases net banking income volatility in a way unrelated to the SFIL Group’s activity, as its business model involves holding all loans until maturity. The SFIL Group therefore decided to isolate this impact within so-called non-recurring items in order to restate it in the analysis of the Group’s performance. 3. Annual financial statements prepared in accordance with French GAAP SFIL posted a net profit of EUR 43.9 million at the end of 2018, compared with a net profit of EUR 29.8 million at the end of 2017. This result includes the payment of a dividend from its subsidiary CAFFIL for EUR 50 million; adjusted for this item, SFIL’s result for the year was a loss of EUR 6.1 million. Net banking income amounted to EUR 149 million. It includes EUR 93 million in re-invoicing of costs to CAFFIL. The operating expenses, including depreciation, were of EUR 104 million. SFIL’s total assets came to EUR 10.9 billion and included mainly: •  the refinancing granted to its subsidiary Caisse Française de Financement Local in the amount of EUR 4.9 billion for the portion of over-collateralization required as a result of its SCF status; •  cash collateral paid in the amount of EUR 2.1 billion; •  outstanding loans of EUR 1.1 billion under its export refinanc‑ ing activity; •  SFIL’s portfolio of sovereign and banking securities held for cash management purposes, in the amount of EUR 1.4 billion; •  cash assets in the amount of EUR 0.7 billion.