Impairment / provisions for credit risk Scope of application In accordance with IFRS 9, CFM Indosuez Wealth Group recognises impairment for Expected Credit Losses (ECL) on the following exposures: - financial assets in the form of debt instruments carried at amortised cost or at fair value through other comprehensive income recyclable to income (loans and receivables, debt securities); - financing commitments that are not measured at fair value through profit or loss; - financial guarantee commitments under IFRS 9 that are not measured at fair value through profit or loss; - lease receivables under IFRS 16; and - trade receivables generated by transactions under IFRS 15. Equity instruments (at fair value through profit or loss or through other comprehensive income on items that may not be reclassified) are not affected by impairment provisions. Derivatives and other financial instruments measured at fair value through profit or loss are subject to a counterparty risk calculation that is not covered by the ECL model. Credit risk and impairment/ provisioning stages Credit risk is defined as the risk of losses related to default by a counterparty leading to its inability to meet its commitments to the Group. The credit risk provisioning process follows a threestage model: - First stage (Stage 1): upon initial recognition of the financial instrument (loan, debt security, guarantee, etc.), CFM Indosuez Wealth recognises the expected credit losses over 12 months - Second stage (Stage 2): if the credit quality of a given transaction or portfolio deteriorates significantly, CFM Indosuez Wealth recognises lifetime expected credit losses; - Third stage (Stage 3): when one or more default events involving the transaction or counterparty occur and adversely affect estimated future cash flows, CFM Indosuez Wealth recognises a lifetime credit loss. Subsequently, if the conditions for classifying financial instruments in stage 3 are no longer met, the financial instruments are reclassified to stage 2 and then stage 1 according to subsequent improvements in the quality of the credit risk. Default definition The definition of default for the purposes of ECL provisioning is identical to that used in management and to calculate regulatory ratios. Thus, a borrower is considered to have defaulted when at least one of the following two conditions is met: - a payment arrears that is generally greater than 90 days unless particular circumstances justify that the arrears are due to causes unrelated to the debtor's situation; - CFM Indosuez Wealth considers it unlikely that the debtor will fully settle its credit obligations without it having to apply measures such as the enforcement of a security. An outstanding loan (Stage 3) is depreciated when one or more events have an adverse effect on the estimated future cash flows of that financial asset. Indications of impairment of a financial asset include observable data regarding the following: significant financial difficulties for the issuer or borrower; - a breach of contract, such as a default or overdue payment; - the granting by the lender(s) to the borrower, for economic or contractual reasons related to the borrower’s financial difficulties, of one or more favours that the lender(s) would not have considered in other circumstances; - an increasing probability of bankruptcy or financial restructuring of the borrower; - the disappearance of an active market for the financial asset due to financial difficulties; - the purchase or creation of a heavily discounted financial asset which reflects the credit losses suffered. A particular event can not necessarily always be isolated, as the financial asset's impairment could potentially result from the combined effect of several events. The defaulting counterparty returns to a sound situation only after an observation period (90 days) that validates that the debtor is no longer in default (assessment by the Risk Department). The notion of expected credit loss (ECL) ECL is defined as the weighted expected probable value of the discounted credit loss (principal and interest). It represents the present value of the difference between the contractual cash flows and expected cash flows (including principal and interest). The ECL approach is aimed at anticipating the recognition of expected credit losses as early as possible. ECL governance and measurement The governance of the IFRS 9 measurement mechanism is based on the organisation implemented within the framework of the Basel system. The Group’s Risk Management Department is responsible for defining the methodological framework and for supervising the system for making provision for amounts outstanding; The Group primarily relies on the internal rating system and current Basel processes to generate the IFRS 9 parameters that are required to calculate ECL. The assessment of the change in credit risk is based on an expected loss model and extrapolation based on reasonable scenarios. All available, relevant, reasonable and justifiable information, including information of a forward-looking nature, must be retained. The calculation formula includes the parameters for Probability of Default, Loss Given Default, and Exposure at Default. CFM Indosuez Wealth Management 72
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