Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 15 The long period of low interest rates in the eurozone and the United States, driven by accommodating monetary policies, has affected, and could continue to affect, the Group’s net interest margin (which stood at EUR 3.9 billion in 2020 for Retail Banking in France). The growth in the volume of loans made to non-financial companies, already high before the pandemic, significantly increased in 2020 with the implementation of government-guaranteed loan programmes (such as the Prêts garantis par l’État programme in France). If the economic recovery is too slow, it may provoke a rise in the volume of non-performing loans and create a weak investment dynamic in a context where companies’ balance sheets are already fragile. The environment of low interest rates tends to lead to an increased risk appetite of some participants in the banking and financial system, lower risk premiums compared to their historical average and high valuation levels of certain assets. These favourable market conditions could change in the context of a gradual phase-out of highly expansionary central bank policies. The financial markets’ long-term expectations for inflation are still very low, but relative price changes are likely and the risk of inflationary pressures in the medium term cannot be excluded. Furthermore, the environment of abundant liquidity that has been at the origin of the upturn in credit growth in the eurozone and particularly in France, amplified by the implementation of the French government-guaranteed loan programme, could lead in the future to additional regulatory measures by supervisory authorities in order to limit the extension of credit or to further protect banks against a financial cycle downturn. In addition, the ongoing presence of geopolitical or political risks is another source of uncertainty which, if tensions are escalated, could impact global economic activity and credit demand, while increasing the volatility of financial markets. The Group’s results are significantly exposed to economic, financial and political conditions in the principal markets in which it operates. At 31 December 2020, Group’s exposures at default (EAD) to credit and counterparty credit risks were concentrated in Europe and the United States (together accounting for 90%), with a predominant exposure to France (47% of EAD). The other exposures concern Western Europe excluding France (accounting for 22%), North America (accounting for 13%), Eastern European members of the European Union (accounting for 6%) and Eastern Europe excluding the European Union (accounting for 2%). In France, the Group’s principal market, the good growth performance during the 2016-2019 period and low interest rates have fostered an upturn in the housing market. A reversal of activity in this area could have a material adverse effect on the Group’s asset value and business, by decreasing demand for loans and resulting in higher rates of non-performing loans. “low-carbon economy” could adversely affect fossil energy producers, energy-intensive sectors of activity and the countries that depend on them. In addition, capital markets (including foreign exchange activity) and securities trading activities in emerging markets may be more volatile than those in developed markets and may also be vulnerable to certain specific risks, such as political instability and currency volatility. These elements could negatively impact the Group’s activity and results of operations. The Group also operates in emerging markets, such as Russia (2% of the Group’s exposure to credit and counterparty credit risk at 31 December 2020) and Africa and the Middle East (4% of the Group’s credit exposure). A significant adverse change in the macroeconomic, health, political or financial environment in these markets could have a material adverse effect on the Group’s business, results and financial position. These markets may be adversely affected by uncertainty factors and specific risks, such as the significant decline in oil prices since the Covid-19 pandemic, which, if it were to last beyond several quarters, would deteriorate the financial health of producing countries. The correction of macroeconomic or budgetary imbalances that would result could be imposed by the markets with an impact on growth and on exchange rates. Another source of uncertainty comes from the enforcement of international sanctions against certain countries such as Russia. In the longer term, the energy transition to a 2.2.1.3 The Group’s failure to achieve its strategic plan and financial objectives disclosed to the market could have an adverse effect on its business, results of operations and value of its financial instruments. At the time of the publication of its annual results on 11 February 2021, the Group communicated new guidance on operating expenses, cost of risk and the solvency of the Group. The Group aims by 2023 to reduce its underlying costs compared to 2020. The Group has launched several initiatives expected to produce results starting from 2022, with a cost reduction target of approximately EUR 450 million in market activities as early as 2022-2023, a cost reduction target of approximately EUR 450 million in retail banking in France in 2025 compared to 2019 (of which approximatively 80% is expected by 2024) and other cost reductions through the finalisation of remediation actions and by standardising and digitalising certain processes. The Group expects a lower cost of risk in 2021 compared to 2020. The Group is aiming to achieve a 2021 CET1 ratio above target, at a value of more than 200 basis points above the Maximum Distributable Amount (MDA) at all times, including in a Basel IV environment. These expectations are based on a number of assumptions related to the health and macroeconomic context. A deterioration in the health situation could have an impact on the global macroeconomic situation, which may compromise the achievement of Group’s objectives and negatively affect the Group’s profitability. It should be noted that the Group regularly reports on its financial aggregates as part of its financial communication. More precisely, the Vision 2025 project anticipate the merger between the Retail Banking network of Societe Generale in France and Crédit du Nord. Although this project has been designed to enable a controlled deployment, the merger could have a short-term material adverse effect on the Group’s business, financial position and costs. System reconciliations could face unanticipated delays, delaying part of the expected merger benefits. The project could lead to the departure of a number of employees, requiring replacements and efforts related to new employee training, thus potentially generating additional costs. The merger could also lead to the departure of a portion of the Group’s customers, resulting in loss of revenue. The legal and regulatory aspects of the transaction could result in delays or additional costs. Furthermore, the Group is committed to becoming a leading bank in the field of responsible finance through, among others: a new commitment to raise EUR 120 billion for energy transition p between 2019 and 2023 (including EUR 100 billion in sustainable bond issues and EUR 20 billion earmarked for the renewable energy sector in the form of advisory and financing); a planned total exit from thermal coal; p the signing as co-founder of the Principles for a Responsible Banking p Sector, through which the Group undertakes to strategically align its business with the Sustainable Development Objectives set by the United Nations and the Paris Agreement on Climate Change. These actions (or similar actions that may be taken in the future) could in some cases decrease the Group’s results in the sectors concerned.