CFM INDOSUEZ Wealth Management - 2020 Annual Report

65 Forward-looking macro-economic data are taken into account in a methodological framework applicable at two levels: • at the level of theCrédit AgricoleGroup in determining a shared framework for taking into account forward looking data in the projection of PD and LGD parameters over the transaction amortisation period; • at the level of each entity with respect to its own portfolios. Material increase in credit risk On each reporting date, all CFM Indosuez Wealth Group entitiesmustmeasure the increase in credit risk on each financial instrument since initial recognition. Entities classify their transactions by risk category (Buckets) based on this assessment of the change in credit risk. To determine a significant deterioration in credit risk, CFM Indosuez Wealth Group applies a process with two levels of analysis: • a first level using relative and absolute rules and criteria, applied to CFM Indosuez Wealth Group entities; • a second level based on an expert appraisal, taking in account local forward looking data, of the risk incurredby each entity on its portfolios – this appraisal may lead to an adjustment of the Group’s criteria for reclassifying exposures into Bucket 2 (transfer of portfolio or sub-portfolio to lifetime ECL). Each financial instrument is monitored for a significant increase in credit risk, except in certain cases. No contagion is required for financial instruments from the same counterparty to be transferred from Bucket 1 to Bucket 2. Monitoring of the material increase in credit risk must cover the primary debtor, without taking into account guarantees, even for transactions guaranteed by the shareholder. For exposures comprised of small loans with similar characteristics, the review by counterparty may be replaced by a statistical estimate of expected losses. Tomeasure thematerial deterioration in credit risk since initial recognition, it is necessary to retrieve the internal rating (fromCrédit AgricoleGroup) and the PD (probability of default) applied on initial recognition. The date of initial recognition refers to the trading date, when the entity becomes a party to the financial instrument’s contractual provisions. For financing and guarantee commitments, the date of initial recognition is the date onwhich the irrevocable commitment ismade. For exposures not covered by an internal rating model, CFM Indosuez Wealth Group uses amounts past due for more than 30 days as the ultimate threshold representing amaterial increase in credit risk leading to classification in Bucket 2. For outstandingamounts (with theexceptionof securities) coveredby internal rating systems (inparticular exposures monitored by authorisedmethods), CFM IndosuezWealth Group considers that all the information included in the rating systems allows for a more relevant assessment than the sole criterion of amounts past due formore than 30 days. If the material deterioration in credit risk since initial recognition is no longer observed, the asset can be reclassified to 12-month expected credit losses (Bucket 1). In order to compensate for the fact that certain factors or indicatorsof amaterial deteriorationarenot identifiable at the level of a financial instrument consideredseparately, the standard allows the assessment ofmaterial increases portfolios, groups of portfolios or portions of portfolios of financial instruments. The establishment of portfolios for an assessment of collective impairment can be based on common characteristics such as: • the type of instrument; • the credit risk rating (including the Basel II internal rating for entities with an internal rating system); • the type of guarantee; • the date of initial recognition; • the remaining time to maturity; • the business sector; • the geographic location of the borrower; • the value of the asset securing the financial asset, if this affects the probability of default (for example, in the case of loans secured only by collateral in certain countries, or the loan-to-value ratio); • the distribution channel, the purpose of the loan, etc. It is therefore possible to separate instruments showing a material deterioration in credit risk by market (home loans, consumer credit, loans to farmers or professionals, business loans, etc.). The grouping of financial instruments for the purpose of assessing changes in credit risk on a collective basis may change over time as new information becomes available. For securities, CFM Indosuez Wealth Group applies an absolute level of credit risk, in accordance with IFRS 9, below which exposures are classified in Bucket 1 and provisioned on the basis of 12-month ECL. Thus, the following rules apply for monitoring amaterial deterioration in securities: • securities rated Investment Grade as of the reporting date will be classified in Bucket 1 and provisioned on the basis of 12-month ECL; • securities rated Non-Investment Grade as of the reporting date will need to be monitored for any significant deterioration in credit risk since initial recognition and be classified in Bucket 2 (lifetime ECL) in the event of amaterial increase in credit risk. The relative deterioration must be assessed before the default occurs (Bucket 3).