Société Générale / Risk report 2021 - Pillar 3 2020

2 RISK FACTORS RISK FACTORS PILLAR 3 - 2021 | SOCIETE GENERALE GROUP | 18 In addition, the sectors particularly impacted by the Covid-19 pandemic are described in the risk factor 2.2.1.1 “The coronavirus pandemic (Covid-19) and its economic consequences could adversely affect the Group’s business and financial performance”. In terms of geographical concentration, the five main countries in which the Group was exposed at 31 December 2020 were France (47% of the Group’s total EAD, mainly related to retail customers and sovereigns), the United States (12% of EAD, mainly related to corporates and sovereigns), the United Kingdom (5% of EAD, mainly related to corporates and sovereigns), the Czech Republic (4% of the Group’s total EAD, mainly related to retail clients, corporates and sovereigns) and Germany (4% of the Group’s total EAD, mainly related to corporates and retail customers). For more details on credit and counterparty credit risks, see sections 6.6 Quantitative information and 7.3 Counterparty credit risk main measures of the present document. 2.2.2.2 The financial soundness and conduct of other financial institutions and market participants could adversely affect the Group. Financial institutions and other market players (commercial or investment banks, mutual funds, alternative funds, institutional clients, clearing houses, investment service providers, etc.) are important counterparties for the Group in capital or inter-bank markets. Financial services institutions and financial players are closely interrelated as a result of trading, clearing, counterparty and funding relationships. In addition, there is a growing involvement in the financial markets of players with little or no regulation (hedge funds, for example). As a result, defaults by one or several actors in the sector or a crisis of confidence affecting one or more actors could result in market-wide liquidity scarcity or chain defaults, which could adversely affect the Group. The Group is exposed to clearing institutions and their members because of the increase in transactions traded through these institutions, induced in part by regulatory changes that require mandatory clearing for over-the-counter derivative instruments standardised by these clearing counterparties. For information, the Group’s exposure to clearing houses amounted to EUR 28 billion of EAD at 31 December 2020. The default of a clearing institution or one of its members could generate losses for the Group and have an adverse effect on the Group’s business and results of operations. disposal price may not cover the entire exposure in credit and counterparty credit risks. These assets are subject to periodic monitoring and a specific management framework. The Group is also exposed on assets held as collateral for credit or derivatives instruments, with the risk that in the event of failure of the counterparty, some of these assets may not be sold or that their For information purposes, at 31 December 2020, the Group’s exposure (EAD) to credit and counterparty credit risks on financial institutions amounted to EUR 106 billion, representing 11% of the Group’s EAD in respect of credit risk. 2.2.2.3 The Group’s results of operations and financial position could be adversely affected by a late or insufficient provisioning of credit exposures. The Group regularly records provisions for doubtful loans in connection with its lending activities in order to anticipate the occurrence of losses. The amount of provisions is based on the most accurate assessment at the time of the recoverability of the debts in question. This assessment relies on an analysis of the current and prospective situation of the borrower as well as an analysis of the value and recovery prospects of the debt, taking into account any security interests. In some cases (loans to individual customers), the provisioning method may call for the use of statistical models based on the analysis of historical loss and recovery data. Since 1 January 2018, the Group has also been recording provisions on performing loans under the IFRS 9 accounting standard. This assessment is based on statistical models for assessing probabilities of default and potential losses in the event of default, which take into account a prospective analysis based on macroeconomic scenarios. IFRS 9 accounting standard principles and provisioning models could be procyclical in the event of a sharp and sudden deterioration in the environment, which has resulted in a significant increase in the net cost of risk in 2020 in anticipation of the future degradations on the basis of a multi-scenario economic approach. Such a deterioration in the operating environment could lead to a significant and/or not-fully-anticipated variation in the cost of risk and therefore in the Group’s results of operations. At 31 December 2020, the stock of provisions relating to outstanding amounts (on- and off-balance sheet) amounted to EUR 3.6 billion on performing assets and EUR 9.3 billion on assets in default. Outstanding loans in default (Stage 3 under IFRS 9) represented EUR 18.3 billion, including 49% in France, 19% in Africa and Middle East and 16% in Western Europe (excluding France). The gross ratio of doubtful loans on the balance sheet was 3.3% and the gross coverage ratio of these loans was approximately 52%. The Group’s cost of risk stood at 64 basis points in 2020, against a cost of risk of 25 basis points in 2019.