isolation, the standard allows for the assessment of significant deterioration in regard to portfolios, groups of portfolios, or parts of portfolios of financial instruments. Portfolios for a collective deterioration assessment may share 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 sector of activity; · 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 financing, etc. The grouping of financial instruments for the purpose of assessing credit risk on a collective basis may change over time as new information becomes available. For securities, CFM Indosuez Wealth applies an absolute level of credit risk, in accordance with IFRS 9, below which exposures are classified in Stage 1 and depreciated on the basis of 12-month ECL. Restructuring due to financial difficulties Debt instruments restructured due to financial difficulties are those for which CFM Indosuez Wealth has modified the initial financial conditions (interest rate, maturity, etc.) for economic or legal reasons related to the borrower’s financial difficulties with new terms and conditions that would not have been considered in other circumstances. They therefore apply to all debt instruments, regardless of the debt instrument's classification category based on the deterioration in credit risk observed since initial recognition. In accordance with the EBA (European Banking Authority) definition set out in the "Risk management" section restructuring of receivables due to the debtor's financial difficulties corresponds to all modifications made to one or more credit agreements in this respect, as well as refinancing granted due to the customer's financial difficulties. This concept of restructuring must be assessed at agreement level and not at customer level (no contagion). The definition of loans restructured due to financial difficulties therefore meets two cumulative criteria: - Contract amendments or debt refinancing (concessions); - A customer in a difficult financial situation (debtor experiencing, or about to experience, difficulties in meeting financial commitments). The term “contract amendment” refers to situations in which: - There is a difference in the borrower’s favour between the amended contract and the previous conditions; - The changes to the contract grant the borrower concerned more favourable terms than other borrowers with a similar risk profile would have been able to obtain from the bank at the same time. “Refinancing” refers to situations in which a new loan is granted to the customer to enable them to partially or fully repay another debt for which they cannot meet the contractual conditions due to their financial situation. The restructuring of a loan (performing or in default) assumes that there is a known risk of loss (Stage 3). The need to recognise impairment on the restructured exposure must therefore be analysed accordingly (restructuring does not automatically result in the recognition of impairment for proven losses or classification as default). The classification as a “restructured loan” is temporary. Once the restructuring operation, as defined by the EBA, has been completed, exposure retains this “restructured” status for a minimum period of 2 years, if the exposure was healthy at the time of restructuring, or a minimum period of 3 years if the exposure was in default at the time of restructuring. These periods are extended if certain events occur, (e.g. further incidents). If there is no derecognition related to this type of event, the reduction in future flows granted to the counterparty or the postponement of these flows to a more distant horizon during the restructuring gives rise to the recording of a discount in cost of risk. This represents the loss of future cash flow, discounted at the original effective rate. It is equal to the difference observed between: - The book value of the loan; - And the sum of theoretical future cash flow from the “restructured” loan, discounted at the original effective interest rate (defined at the financing commitment date). In the event of a waiver of part of the share capital, this amount shall constitute a loss to be recorded immediately in cost of risk. The discount recognised when a loan is restructured is accounted for under cost of risk. Upon reversal of the discount, the portion due to the passage of time is recorded in Net Banking Income. CFM Indosuez Wealth Management 74
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