Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS | SOCIETE GENERALE GROUP | PILLAR 3 - 2021 17 Shortly before the end of the transition period ended on 31 December 2020, the EU and the United Kingdom concluded the EU-UK Trade and Cooperation Agreement (TCA) on 24 December 2020. The TCA was approved by the British parliament and was transposed into UK law by the European Union (Future Relationship) Act 2020 and remains subject to ratification by the European Parliament. Even if the TCA avoided a “no deal” Brexit at the end of the transition period, certain aspects of the future relationship between the EU and the United Kingdom remain uncertain and the Group has had to adapt its economic model. The TCA does not replicate the market access that the UK had as a member of the EU’s single market and customs union, and the Group will now have to rely on the replacement of the passport regime with the EU’s existing general access regime for foreign banks, which relies heavily on granting market access through a series of equivalency determinations. It is still unclear when or if the European Commission will make further equivalence decisions. The Group will continue to face trade barriers between the UK and the EU, including compliance with two regulatory regimes and the need to respect local rules governing the provision of services. At the end of the transition period, the Group did not experience major disruptions related to market, counterparty or credit risks. Also, there was no significant increase in volumes over the year-end period, and IT systems functioned normally. At 31 December 2020, the Group had an Exposure at Default of EUR 50 billion in the United Kingdom (5% of the Group’s credit exposure). Despite the trade agreement, Brexit could lead to further disruption of the European and global economies and financial markets and thus have an impact on the Group’s activities and results. 2.2.1.6 Increased competition from banking and non-banking operators could have an adverse effect on the Group’s business and results, both in its French domestic market and internationally. risk of not being able to maintain or develop its market share in its various activities. This competition may also lead to pressure on margins, which is detrimental to the profitability of the Group’s activities. Due to its international activity, the Group faces intense competition in the global and local markets in which it operates, whether from banking or non-banking actors. As such, the Group is exposed to the In France and in the other main markets in which the Group operates, the presence of major domestic banking and financial actors, as well as new market participants (notably online banking and financial services providers), has increased competition for virtually all products and services offered by the Group (particularly our online banking activities, with Boursorama, which had more than 2,500,000 customers at the end of 2020). Driven by new market participants such as “fintechs” and new services that are automated, scalable and based on new technologies (such as blockchain) are developing rapidly and are fundamentally changing the relationship between consumers and financial services providers, as well as the function of traditional retail bank networks. Competition with these new actors could also be exacerbated by the emergence of substitutes for central bank currency (crypto-currencies, digital central bank currency, etc.). In this context, additional investments may be necessary for the Group to be able to offer new innovative services and to be competitive with these new actors. Consolidation in the financial services industry could result in the competitors benefiting from greater capital, resources and an ability to offer a broader range of products. Moreover, competition is also enhanced by the emergence of non-banking actors that, in some cases, may benefit from a regulatory framework that is more flexible and in particular less demanding in terms of equity capital requirements. To address these challenges, the Group has implemented a strategy, in particular with regard to the development of digital technologies and the establishment of commercial or equity partnerships with these new actors (such as Lumo, the platform offering green investments, or Shine, the neobank for professionals). This intensification of competition could, however, adversely affect the Group’s business and results, both on the French market and internationally. CREDIT AND COUNTERPARTY CREDIT RISKS 2.2.2 Risk-weighted assets (RWA) subject to credit and counterparty credit risks amounted to EUR 287.3 billion at 31 December 2020. 2.2.2.1 The Group is exposed to credit, counterparty and concentration risks, which may have a material adverse effect on the Group’s business, results of operations and financial position. Due to its financing and market activities, the Group is exposed to credit and counterparty credit risks. The Group may therefore incur losses in the event of default by one or more counterparties, particularly if the Group encounters legal or other difficulties in enforcing its collateral or if the value of this collateral is not sufficient to fully recover the exposure in the event of default. Despite the Group’s efforts to limit the concentration effects of its credit portfolio exposure, it is possible that counterparty defaults could be amplified within the same economic sector or region of the world due to the interdependence of these counterparties. Moreover, some economic sectors could, in the longer term, be particularly impacted by the measures implemented to promote energy transition or by the physical risks related to climate change. Consequently, the default of one or more significant counterparties of the Group could have a material adverse effect on the Group’s cost of risk, results of operations and financial position. For information, at 31 December 2020, the Group’s exposure at default (EAD, excluding counterparty credit risk) was EUR 887 billion, with the following breakdown by type of counterparty: 31% on sovereigns, 28% on corporates, 23% on retail customers and 7% on credit institutions and similar. Risk-weighted assets (RWA) for credit risk totalled EUR 261 billion. Regarding counterparty credit risks resulting from market transactions (excluding CVA), at the end of December 2020, the exposure value (EAD) was EUR 126 billion, mainly to corporates (44%) and credit institutions and similar entities (34%) and to a lesser extent to sovereign entities (19%). Risk-weighted assets (RWA) for counterparty credit risk amounted to EUR 23 billion. The main sectors to which the Group was exposed in its corporate portfolio included financial activities (accounting for 18.1% of exposure), commercial services (10.7%), real estate (10.1%), wholesale trade (7.6%), the transport, postal services and logistics sector (7.2%), collective services (6.3%) and the oil and gas sector (5.6%).