In accordance, with the requirements of the EU regulation on market abuse, Natixis has set up a framework for detecting transactions likely to constitute market abuse, incorporated within its internal control system. Alerts are processed and potential cases of market abuse are analyzed by a surveillance tool and dedicated teams. Transactions that could constitute market abuse are reported to the French Financial Markets Authority (AMF) and to local regulators, in accordance with the regulations in force. The framework is currently being updated, a process that should be completed by the end of 2019, to strengthen its analysis and detection capacity. The version upgrade of the Actimize tool (MSE) for CIB is also part of this process.
Reporting to Compliance management, the Financial Security Department manages the anti-money laundering and counter-terrorist financing (AML/CTF), corruption and fraud prevention framework, and ensures the compliance of Natixis and its subsidiaries with financial sanctions and embargoes.
The counter-terrorist financing aspect of the framework was strengthened in 2018. The CTF risk map was updated, based on an assessment of the exposure of Natixis’ functions and subsidiaries. This took into account the most recent typological information disseminated particularly by FATF, the French Treasury and Tracfin. A bimonthly geopolitical watch was
The CIB's framework was also reviewed from a tax viewpoint to reflect the various regulatory changes seen in 2018. The business lines’ exposure to tax risk was assessed in order to produce a risk map. This work resulted in the introduction of specific tax-related vigilance criteria for the most exposed business lines and the teams responsible for analyzing customer identification documents. The next phase of the action plan is in progress.
A preliminary study was carried out between mid-2017 and September 2018 to assess our international financial sanction compliance framework. This identified areas for improvement, for some of which action has already been taken, and resulted in the launching of three projects to strengthen the framework, including one in coordination with BPCE regarding transaction screening.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 157Natixis Registration Document 2018
The corruption aspects are also fully incorporated within the existing permanent control system, particularly through specific controls covering the high-risk situations and practices referred to above; In addition to the French regulations that apply to all Natixis entities, Natixis ensures strict compliance with the local regulations applicable to its foreign operations, such as the UK Bribery Act and the US Foreign Corrupt Practices Act.
Natixis has set up two lines of defense to manage cyber risk, whose effective interplay is guaranteed by the holding of regular meetings of a “Cyber security and business continuity” steering Committee. The IT Security Department (which reports to the IT Department) forms the first line of defense and implements all the operational measures for protecting Natixis’ IT system. The IT Systems Security and Business Continuity Department (ITSS-BC—reporting to the Compliance Department) forms the second line of defense. Both lines of defense share a common Security Operating Center (SOC) which works directly with Groupe BPCE’s Computer Emergency Response Team (CERT).
Natixis is also integrated within Groupe BPCE’s “IT Systems Security”, “Business continuity” and “Personal data protection” functions. As such, it applies the policies and methods defined by Groupe BPCE.
The risk-based approach also enabled the defining of the 2018-2020 strategic program. This program, named “NewSec”, is intended to convert the current model, which is mainly based on perimeter security, into an “airport”-type model. 2018 therefore saw the launching of key projects for improving the identification of Natixis’ IT assets.
Natixis’ business continuity framework combines management of incidents according to their consequences (unavailability of the IT system, sites or employees) with emergency measures specific to each scenario (overflowing of the Seine, etc.).
Natixis has taken steps to guarantee the protection of the personal data of both customers and employees.
The DPO took up their duties in May 2018, coordinating a community of data privacy liaisons distributed across Natixis’ entities. This new function’s purpose is to handle all regulations relating to personal data protection and especially to ensure compliance with the GDPR. A data privacy Committee meets regularly to monitor the function’s activities and manage the remaining alignment measures required. These include the launching by the IT Department of a multi-year project for the remediation of the relevant IT assets.
As assessed at December 31, 2018, the financial consequences of litigation deemed likely to have, or which have in the recent past had, a material impact on the financial situation of Natixis and/or Natixis and its consolidated subsidiaries as a whole, or on their profitability or their business, have been included in Natixis’ consolidated financial statements.
Outstanding assets exposed to the Madoff affair as expressed in euros were estimated at €543.4 million at December 31, 2018 and were fully provisioned for at that date. The effective impact of this exposure will depend on both the extent of recovery of assets invested in Natixis' name and the outcome of the measures taken by the bank, notably in terms of legal procedures. Furthermore, in 2011 a dispute emerged over the application of the insurance policy for professional liability in this case, which had been taken out with successive insurers for a total amount of €123 million. In November 2016, the Paris Court of Appeal vindicated the Commercial Court's prior ruling that primary insurers were liable to cover the losses incurred by Natixis due to the Madoff fraud, up to the amount for which the bank was insured. On September 19, 2018, the Court of Cassation subsequently annulled the judgment under appeal and referred the case back to the Paris Court of Appeal with a differently constituted bench.
position and protect its rights. Natixis has launched appeals, including a motion to dismiss the case on a preliminary basis, or prior to any ruling on the merits, and a motion to withdraw the reference to transfer certain matters to the United States district court. These proceedings have been subject to numerous rulings and appeals and are still ongoing. A November 2016 ruling by the bankruptcy court dismissed a number of restitution claims initiated by the trustee on the grounds of extraterritoriality. In September 2017, the Second Circuit Court granted the BMIS liquidator and the defendants the right to appeal the bankruptcy court's ruling on the grounds of extraterritoriality directly through the Second Circuit, thereby avoiding the need to file an intermediary appeal with the district court. In February 2019, the Court of Appeals for the Second Circuit overturned the bankruptcy court’s extraterritoriality ruling. Natixis is examining the possibility of appealing this decision. The case is ongoing.
In March 2009, the Paris public prosecutor’s office (Parquet de Paris) launched a preliminary investigation into a complaint filed by Natixis minority shareholders and coordinated by the Association de Défense des Actionnaires Minoritaires (ADAM—Association for the Defense of Minority Shareholders). As the plaintiffs have initiated civil proceedings, a judicial investigation opened in 2010. On February 14, 2017, Natixis came under investigation for two messages sent in the second half of 2007, at the beginning of the subprime crisis.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 159Natixis Registration Document 2018
On October 25, 2016, the Commercial Court of Paris ordered the two insurance schemes involved to honor, in respect of AEW S.A., the sanctions covered by the policies that may be ruled in favor of UMR in connection with the litigation and to cover the defense costs incurred by AEW S.A.. Several of the insurers concerned appealed this decision.
Since 2012, five separate legal proceedings regarding residential mortgage-backed security (RMBS) transactions executed between 2001 and mid-2007 have been initiated against Natixis Real Estate Holdings LLC before the New York Supreme Court.
Three of these five proceedings have been brought against Natixis, purportedly on behalf of certificate holders, alleging that Natixis failed to repurchase defective mortgages from certain securitization transactions. Natixis considers the claims brought against it before the New York Supreme Court to be without merit for multiple reasons, including that they are time-barred under the applicable statute of limitations (two proceedings have already been dismissed for these reasons but are open to appeal) and that the claimants do not have the legal standing to file the suit, and intends to defend itself vigorously.
Natixis and CEGC consider all of these claims to be unfounded.
Following an objection as to jurisdiction, the Tribunal of Siena referred the case to the Tribunal of Florence on February 23, 2016. The case is still in progress before the Tribunal of Florence.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIRisk management 160 Natixis Registration Document 2018
In December 2015 the South African Strategic Fuel Fund (SFF) entered into agreements to sell certain oil reserves to several international oil traders. Contango Trading S.A. (a subsidiary of Natixis) provided funding for the deal.
In March 2018, SFF filed a lawsuit before the South African Supreme Court (Western Cape division, Cape Town), primarily against Natixis and Contango Trading S.A., with a view to having the agreements invalidated, declared null and void, and to obtain fair and equitable compensation.
To manage market risk, the sources of return have been diversified, namely via investments in new asset classes (financing the economy, low-volatility equities, etc.). This diversification is managed by a strategic allocation, defined on a yearly basis, that takes into account regulatory constraints, commitments to policyholders and commercial requirements.
The general insurance underwriting risk to which Natixis Assurances is exposed is borne by its subsidiary BPCE Assurances: premium risk: to ensure that the premiums paid by thea policyholders match the transferred risk, BPCE Assurances implemented a portfolio monitoring policy whereby each policy is given a score based on its track record over three years. Factored in are types of claims, number of claims, their cost and other variables specific to the activity in question (degree of liability and bonuses/penalties for auto insurance, for instance). This monitoring policy also helps to detect potential risks arising from large claims, and to arrange adequate reinsurance coverage; risk of loss: each time inventory is taken, an actuariala assessment of the reserves for claims to be paid is conducted based on methods widely recognized by the profession and required by the regulator;
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 161Natixis Registration Document 2018 catastrophe risk: catastrophe risk is the exposure to an eventa of significant magnitude generating a multitude of claims (storm, risk of civil liability, etc.). This risk is therefore reinsured either through the government in the event of a natural disaster or an attack, for example, or through private reinsurers, specifically in the event of a storm or a civil liability claim, or through reinsurance pools.
Credit risk is defined as the risk of loss, due to non-payment by a debtor, of a receivable owed to a policyholder of the group. Coface manages credit risk through a number of procedures, whose scope includes the approval of the terms of policies relating to products, pricing, monitoring of credit risk hedges and portfolio diversification. Credit risk can be exacerbated due to the concentration of exposure (country, sector, debtor, etc.) and is modeled as premium risk, reserve risk and disaster risk. Traditionally, Coface makes a distinction between frequency risk and event risk: frequency risk represents the risk of a sudden materiala increase in delinquency by numerous debtors. This risk is measured for each region and country by monitoring the instantaneous loss ratio and the (1)monthly indicator that breaks down the changes in domestic/export credit by DRA and busi(2)ness sector, by acceptance rate on the DRA scale, or by product line (deposit, single risks). As regards exposure and portfolio monitoring, the Group has set up a refined management of its risks based on a sector/country breakdown. Accordingly, delinquent payments are analyzed weekly by the Senior Management Committee and monthly by Coface’s Underwriting Committee. This risk is mitigated by Coface Re S.A. reinsurance. Loss ratios for the different underwriting regions are also monitored at the consolidated Coface level; event risk represents the risk of abnormally high lossesa recorded for the same debtor or group of debtors, or of an accumulation of losses for the same country. Event risk is covered by Coface Re reinsurance.
The following chart shows the breakdown of debtors by total credit risk exposure incurred by Coface at December 31, 2018: €50m - 200m
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIRisk management 162 Natixis Registration Document 2018
In 2018 underwriting risk was managed effectively, reflected by a level of claims at 21% of earned premiums. The claims expense on loan guarantees for retail customers was particularly low this year.
The pricing of loan guarantees for retail customers was increased and implemented in April 2018.
Underwriting risk is the main risk incurred by CEGC. It is essentially a counterparty risk, as the commitments given by CEGC to beneficiaries of guarantees result in direct exposure to underwriters. These regulated commitments recorded on the liabilities side of the balance sheet amounted to €2.01 billion at December 31, 2018 (up 8.7% compared with end-2017). This increase was in line with fiscal year 2017, driven mainly by mortgage guarantees for individual customers.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 163Natixis Registration Document 2018
CEGC holds an investment portfolio of about €2.02 billion on its balance sheet as at December 31, 2018, hedging underwriting provisions. The portfolio is up 5.50% since the end of 2017. Market risk from the investment portfolio is limited by the Company’s investment choices.
The Company's risk limits are set out in the asset management agreement established with Ostrum. By collecting surety insurance premiums at the time of commitment, CEGC does not require funding. Neither does CEGC carry transformation risk: the investment portfolio is entirely backed by equity and technical reserves.
In the Corporate segments, the program is used to protect CEGC’s capital by hedging against high-intensity risks. It has been calibrated to protect against three individual loss events (loss related to a counterparty or a group of counterparties) which could have a significant impact on the Corporate segment’s income statement.
Reinsurer default risk is governed by counterparty concentration and rating limits. CEGC’s reinsurance programs are underwritten by a broad panel of international reinsurers with a minimum rating of A on the S&P scale.
The membership of these various bodies is presented in Chapter 2 of the 2018 Natixis registration document. The Internal Rules of the Board of Directors, including the procedure for calling meetings, can be found in Chapter 2 paragraph 2.3.1, of the registration document.
The identification and management of these risks are presented in Chapter 6 of 2018 Natixis registration document.
Natixis was exposed to the following risks at December 31, 2018.
In 2018, value adjustments went down by €40 million (excluding the effect of the BPCE guarantee) to €23 million at December 31, 2018, versus €63 million at December 31, 2017.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 165Natixis Registration Document 2018
Credit losses expected at one year and credit losses expected at maturity.(b)
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 166 Natixis Registration Document 2018
Basel 3 Pillar III disclosures3.3 Regulation (EU) No. 575/2013 of the European Parliament and Council of June 26, 2013 (Capital Requirement Regulation or CRR) requires reporting companies (notably lending institutions and investment firms) to publish quantitative and qualitative information on their risk management activities. The framework in place to manage Natixis’ risks and risk exposure is described in this section and in the “Risks Management” section of this registration document.
This regulatory framework, aimed at reinforcing the financial strength of banking institutions, has resulted in: a stricter definition of the capital items eligible to meeta regulatory capital requirements; reinforced regulatory capital requirements, in particular fora counterparty risk on derivatives; higher ratios to observe, specifically regarding CET1 capital anda capital buffers; a capital conservation buffer, which will have to representj 2.5% of total risk exposures by 2019, a countercyclical capital buffer, i.e. the average of thej countercyclical capital buffer of each country in which Natixis holds risk exposures, weighted by the amount of said exposures. The rate applied in France in 2018 is 0%, a systemic risk buffer, i.e. an additional requirement forj global systemically important banks (G-SIBs), such as BPCE. Natixis is not subject to this buffer, in addition, other mechanisms have been introduced, includinga mechanisms to limit dividend payouts, interest on Additional Tier One (AT1) subordinated debt and variable compensation (Maximum Distributable Amount, or MDA).
As under Basel 2, the Basel 3 regulatory provisions are divided into three pillars: Pillar I: a set of rules defining the measurement of risks anda capital based on various possible methodologies and minimum observable requirements; Pillar II: a mechanism governing the role of the bankinga supervisory authorities, allowing them to define specific regulatory capital requirements for each institution in accordance with their risks and internal governance and oversight systems; Pillar III: requires institutions to disclose a large number ofa items highlighting the level of risks incurred, capital adequacy and the adequacy of their management. This mechanism was considerably enhanced in 2016 with the publication of new guidelines by the EBA.
In accordance with Article 19 of the CRR, the regulatory consolidation scope is established based on the following principles: Entities, excluding insurance companies, that are fully consolidated or consolidated under the equity method in the statutory consolidation scope (see Note 19 of Chapter 5) are included in the regulatory consolidation scope; the Group’s insurance companies are accounted for under the equity method in the regulatory consolidation scope.
Financial assets at fair value through profit or loss 214,091 214,069 27,513 154,317 1,382 181,961
Deposits and loans due to banks and similar items 75,313 70,979 4,539 2,391 66,440
Revaluation adjustment on portfolios hedged against interest rate risk 110 110 110
Non-recyclable gains and losses recognized directly in equity (42) (42) (42)
DIFFERENCES IN THE SCOPES OF CONSOLIDATION (ENTITY BY ENTITY) (EU LI3) R
The table below lists the subsidiaries for which the method of regulatory consolidation is different from the method of accounting consolidation.
Nexgen Reinsurance Designated Activity Company Full consolidation Equity method Reinsurance Ireland
Coface Europe (formerly Coface S.A.) Full consolidation Equity method Credit insurance and related services France
Coface Kredit (formerly AK Coface) – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Germany
Cofacerating.de GmbH Full consolidation Equity method Receivables management and data Germany
Coface Austria – Branch (Coface Europe) Full consolidation Equity method Holding company Austria
Coface UK – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Great Britain
Coface UK Services Ltd Full consolidation Equity method Receivables management and data Great Britain
Coface Luxembourg – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Luxembourg
Coface Iberica – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Spain
Coface Nederland Services B.V. Full consolidation Equity method Receivables management and data Netherlands
Coface Sverige (formerly AKC Norden) – Branch (Coface Europe) Full consolidation Equity method Insurance Sweden
Coface RUS Insurance Company Full consolidation Equity method Credit insurance Russia
Coface Argentina – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Argentina
Coface Do brasil Seguros de Credito Full consolidation Equity method Credit insurance and related services Brazil
Seguradora Brasileira C.E (SBCE) Full consolidation Equity method Credit insurance and related services Brazil
Coface Ecuador – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Ecuador
Coface North America, Inc. (MGU) Full consolidation Equity method Credit insurance and related services United States
Coface Poland (formerly ÖKVC Poland) – Branch (Coface Europe) Full consolidation Equity method Insurance Poland
Coface Latvia – Branch (Coface Europe) Full consolidation Equity method Insurance Latvia
Coface Bulgaria – Branch (Coface Europe) Full consolidation Equity method Insurance Bulgaria
Coface Techology – Romania – Branch (Coface Europe) Full consolidation Equity method Data services Romania
Coface Hong Kong – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Hong Kong
Coface Israel (Branch Coface Europe) Full consolidation Equity method Credit insurance Israel
Coface Taiwan – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Taiwan
Nami Investment Full consolidation Equity method Insurance real estate investments France
Fructifonds Immobilier Full consolidation Equity method Insurance real estate investments France
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 171Natixis Registration Document 2018
In accordance with the provisions introduced by the CRR and with the national provisions defined by the ACPR, regulatory capital (calculated on the basis of book equity), comprises three categories, as described below.
AT1 capital comprises: subordinated debt instruments recognized as AT1 aftera applying phase-in arrangements; deductions made from this category ;a any surplus deduction of Tier 2 capital (see below).a
Detailed information on the debt instruments recognized in Additional Tier 1 capital and their characteristics at December 31, 2018, as required by Commission Implementing Regulation No. 1423/2013 (Annex II), is available on the Natixis website (www.natixis.com).
T2 capital comprises: subordinated debt instruments recognized as T2 capital aftera applying phase-in arrangements; deductions made from this category ;a any surplus provisions related to expected losses.a
Detailed information on debt instruments recognized in Tier 2 capital and their characteristics at December 31, 2018, as required by Commission Implementing Regulation No. 1423/2013 (Annex II) is available on the Natixis website (www.natixis.com).
At December 31, 2018, the transition from shareholders' equity to regulatory CET1 capital, Tier 1 capital and total capital after applying phase-in arrangements, is summarized in the table below.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 172 Natixis Registration Document 2018
o/w portion not including tax loss carry-forwards and impact of netting 706
Pursuant to Commission Implementing Regulation (EU) No. 1423/2013, the audit trail of regulatory capital as described in Appendix VI of the regulation is provided below.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 173Natixis Registration Document 2018
Accumulated other comprehensive income (and other reserves, to include unrealized gains and losses under the applicable accounting standards) 2,315 26(1)
Amount of qualifying items referred to in Article 484 (3) and the related share premium accounts subject to phase out from CET1 0 486 (2)
Public sector capital injections grandfathered until January 1, 2018 483 (2)
6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 17,015 0
Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) (518) 36 (1) (C), 38, 472 (5) (130)
Holdings of the CET1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 0 36 (1) (g), 44, 472 (9) 0
20b o/w qualifying holdings outside the financial sector (negative amount) 0 36 (1) (k) (i), 89 à 91 0 20c o/w securitization positions (negative amount) 0 20d o/w free deliveries (negative amount) 0 36 (1) (k) (iii), 379 (3) 0
Regulatory adjustments applied to Common Equity Tier 1 in respect of amounts subject to pre-CRR treatment 26a Regulatory adjustments relating to unrealized gains and losses pursuant to Articles 467 and 468 0
28 Total regulatory adjustments to Common Equity Tier 1 (CET1) (5,064)
Additional Tier 1 (AT1) capital: instruments 30 Capital instruments and the related share premium accounts 1,775 51, 52 31 o/w classified as equity under applicable accounting standards 1,775 32 o/w classified as liabilities under applicable accounting standards
Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1 370 486 (3)
Public sector capital injections grandfathered until January 1, 2018 483 (3)
Additional Tier 1 (AT1) capital: regulatory adjustments 37 Direct and indirect holdings by an institution of own AT1 instruments (negative amount) 0 52 (1) (b), 56 (a), 57, 475 (2)
Holdings of the AT1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) 0 56 (b), 58, 475 (3)
Direct and indirect holdings by the institution of AT1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above the 10% threshold and net of eligible short positions) (negative amount) 0 56 (c), 59, 60, 79, 475 (4)
o/w significant investments in the capital of other financial sector entities 0 41b
o/w non-significant investments in the capital of other financial sector entities 0
o/w significant investments in the capital of other financial sector entities 0 41c Amount to be deducted from or added to Additional Tier 1 capital with regard to additional filters and deductions required pre-CRR 467, 468, 481 42 Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount) 56 (e)
44 Additional Tier 1 (AT1) capital 2,123 45 Tier 1 capital (T1 = CET1 + AT1) 14,074
Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties 0 87, 88, 480 49 o/w instruments issued by subsidiaries subject to phase out 0 486 (4)
Holdings of the T2 instruments and subordinated loans of financial sector entities where those entities have reciprocal cross holdings with the institution designed to artificially inflate the own funds of the institution (negative amount) 0 66 (b), 68, 477 (3)
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 175Natixis Registration Document 2018
Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) (761) 66 (d), 69, 79, 477 (4) 0
o/w significant investments in the capital of other financial sector entities 0 56b
Residual amounts deducted from Additional Tier 2 capital with regard to deduction from Tier 1 capital during the phase-in period pursuant to Article 475 of Regulation (EU) No. 575/2013 0
o/w significant investments in the capital of other financial sector entities 0 56c Amount to be deducted from or added to Tier 2 capital with regard to additional filters and deductions required pre-CRR 467, 468, 481 57 Total regulatory adjustments to Tier 2 (T2) capital (761)
Risk weighted assets in respect of amounts subject to pre-CRR treatment and phase-in treatments subject to phase out as prescribed in Regulation (EU) No. 575/2013 (CRR residual amounts) 0 o/w adjustment of the 15% threshold, share of significant CET1 investments, items not deducted from CET1 (Regulation (EU) No. 575/2013 residual amounts) 0 o/w adjustment of the 15% threshold, share of deferred tax assets, items not deducted from CET1 (Regulation (EU) No. 575/2013 residual amounts) 0
67a o/w global Systemically Important Institution (G-SII) or Other Systemically Important Institution (O-SII) buffer 0.000% CRD 131
Direct and indirect holdings by the institution of the CET 1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 700 36 (1) (i), 45, 48, 470, 472 (11)
Credit risk adjustments included in T2 in respect of exposures subject to standardized approach (prior to the application of the cap) 0 62 77 Cap on inclusion of credit risk adjustments in T2 under standardized approach 21,925 62
Credit risk adjustments included in T2 in respect of exposures subject to internal ratings-based approach (prior to the application of the cap) 34 62 79 Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach 42,771 62
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 176 Natixis Registration Document 2018
84 Current cap on T2 instruments subject to phase-out arrangements 875 484 (5), 486 (4) et (5)
In accordance with the Basel 3/CRR regulatory framework, under Pillar I these ratios must exceed the minimum limits of 4.5%, 6% and 8%, respectively, in addition to the cumulative safety buffers of 6.435%, 7.935% and 9.935%, respectively for 2018, and of
Consolidated shareholders’ equity Group share, net of DSNs and PSNs 17,938 17,563
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 177Natixis Registration Document 2018
GEOGRAPHICAL DISTRIBUTION OF CREDIT EXPOSURES USED IN THE COUNTERCYCLICAL BUFFER (CCYB1) R
(in millions of euros) Equity Interest rates Forex Credit Commodities Total o/w: in trading portfolio o/w: in bank portfolio
Amount of Common Equity Tier 1 (CET1) at end of period 11,951
Amount of Additional Tier 1 (AT1) capital at end of period 2,123
Holdings of own funds instruments of a financial sector entity where the institution has a significant investment not deducted from own funds (before risk-weighting) 3,440
Tier 2 capital was stable at €2.4 billion, the €0.3 billion issuance in the fourth quarter having been offset by the change in the excess of provisions over expected losses (-€0.1 billion) and the impact of phase-in arrangements over the period.
Operational risk was up €0.6 billion, as the benchmark indicator for fiscal year 2018 was replaced with that of fiscal year 2015 (standard practice is to calculate operational risk using the average indicator for the previous three years).
Accordingly, the New Dimension strategy plan is targeting a fully loaded CET1 ratio of 11.0% at the end of the plan by 2020 end. With a fully-loaded CET1 ratio excluding phase-in arrangements of 10.82% at December 31, 2018, Natixis is therefore in line with this benchmark.
The European MREL ratio introduced by the BRRD Directive is applicable to Natixis, unless otherwise stipulated, according to the methods still to be defined by the Single Resolution Board.
Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation (100,864) (94,937)
TOTAL ON-BALANCE SHEET EXPOSURES (EXCLUDING DERIVATIVES AND SFTS) (SUM OF LINES 1 AND 2) 233,104 262,955
9 Adjusted effective notional amount of written credit derivatives 11,238 16,194 10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) (8,766) (14,198)
11 TOTAL DERIVATIVE EXPOSURES (SUM OF LINES 4 TO 10) 18,914 19,828
Exempted exposures in accordance with CRR Article 429 (7) and (14) (on and off balance sheet)
EU-23 Choice on phase-in arrangements for the definition of the capital measure
Accordingly, Natixis established: a governance system under the authority of the ALMa Committee, chaired by the CEO, for managing and monitoring excessive leverage risk (see section 3.2.7.1); a dedicated risk policy for excessive leverage risk; notably, thea ALM Committee decided on early adoption of a target leverage ratio well above the 3% minimum requirement currently recommended by the Basel Committee, in keeping with the Bank’s transformation strategy towards an asset-light model, as advocated by the New Frontier plan;
In accordance with the operational oversight established by the Financial Management Department in partnership with the business lines, Natixis successfully achieved its target leverage ratio. This target ratio is higher than the regulatory requirement, which will enter into force in Europe on a still-unknown date. As such, Natixis maintained a leverage ratio of above 4% in 2018. As in 2017, management and oversight of this ratio were achieved by setting constraints for activities (such as repos and securities lending transactions, derivative contracts, etc.) that are not RWA-intensive but are balance sheet-intensive.
Regulations on the monitoring of large exposures were revised in 2014 and are now part of the CRR. They aim to prevent an excessive concentration of risks for sets of counterparties that are related in such a way that if one encountered financial problems, the others would also be likely to experience funding or repayment problems. The standard is based on a standing obligation: all risks associated with a single counterparty may not exceed 25% of the bank's total capital. Natixis complied with this requirement in 2018.
o/w the standardized approach 1,619 1,368 130 o/w the standardized approach 5,185 5,491 415
Amounts below the thresholds for deduction (subject to 250% risk weight) 1,750 2,035 140
Exposures to institutions and corporates with a short-term credit assessment 1 49 331 387 768
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 185Natixis Registration Document 2018
IRB – INTERNAL RATING – EFFECT ON RWA OF CREDIT DERIVATIVES USED AS CRM TECHNIQUES (CR7)R
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 187Natixis Registration Document 2018
(in millions of euros) Net exposure at the end of the period Average net exposure over the period*
Central government or central banks 20,289 2,122 697 184 45 284 226 7,500 109 368 489 548 111 835 571 3 34,381
Claims on institutions and corporates with a short-term credit assessment 480 7 6 43 175 711
(in millions of euros) Finance Services Administrations Oil & Gas Real estate Raw
Secured by real estate property 7 1 9 1 4 14 2 28 67
Equity exposures * Non-disclosed economic sector as of 31/12/18 because of exposures under threshold of €4 billion.
(in millions of euros) On demand <= 1 year > 1 year < = 5 years > 5 years Total
Secured by real estate property 1 9 53 62 o/w Non-SME
Exposures to institutions and corporates with a short-term credit assessment 252 446 698
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 191Natixis Registration Document 2018
For outstandings measured using the standardized approach, Natixis uses external rating systems of the agencies Fitch Ratings, Standard & Poor’s and Moody’s. The table below presents the breakdown of risk exposure by external agency for asset classes measured using the standardized approach, excluding: exposures to equities;a pool-based exposures (acquired portfolios) and third partiesa grouped into homogeneous risk classes; securitization positions;a unrated positions;a other items that do not represent a credit obligation.a
RISK WEIGHTS USED FOR SA EXPOSURES BY ASSET CLASS AND BY RATING GRADE (CRD-D)R
S&P Long term 1 AAA to AA- 20 3 BBB+ to BBB- 100 6 CCC, CC, R, SD/D 150
Secured by mortgages on immovable property 1,111 169 1,111 84 559 47%
Claims on institutions and corporates with a short-term credit assessment 660 14 640 3 413 64%
Central governments and central banks 2,299 1 1 3 112 1 509 2,928 1,101
Claims on institutions and corporates with a short-term credit assessment 101 312 209 22 643
Claims on institutions and corporates with a short-term credit assessment 100% 0% 0% 100% 20.1%
(% breakdown) EAD (in millions of euros) PD MP LGD MP
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 196 Natixis Registration Document 2018
IRB – CREDIT RISK EXPOSURES BY PORTFOLIO AND PD RANGE (CR6)R
Central governments and central banks 0.50 to <0.75 0.75 to <2.50
Sub-total Central governments or central banks 35,040 1,506 62% 35,978 0.1% 262 9% 722 340 1% 50 50
Sub-total Retail – Residential mortgage exposures 65 4 100% 69 23.6% 443 15% 2,948 13 19% 2 2
Sub-total – Other retail exposures 31 31 76.0% 13 28% 181 18 60% 7 21
Remaining maturity On-balance sheet amount Off-balance sheet amount Risk weight EAD RWA EL
EAD BY TYPE AND NATURE OF EXPOSURE (EXCLUDING IMPACT OF THRESHOLDS) (NX24)R
(in millions of euros) Equities Mutual fund investments Investments Total 31/12/2018 Total 31/12/2017
Claims on institutions and corporates with a short-term credit assessment 25 41 59 125
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 204 Natixis Registration Document 2018
Exposures for trades at QCCPs (excluding initial margin and default fund contributions); of which: 11,820 236
Securitization positions classified under “Available-for-sale assets” are measured at their market value and any changes, excluding income recognized using the effective interest method, are recorded in a specific line in equity. Securitization positions (classified as debt instruments) are tested for
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 207Natixis Registration Document 2018
EAD ACCORDING TO NATIXIS’ ROLE IN THE SECURITIZATION TRADING BOOK (NX31-B)R
SECURITIZATION EXPOSURES IN THE BANKING BOOK AND ASSOCIATED CAPITAL REQUIREMENTS – BANK ACTING R AS ORIGINATOR OR AS SPONSOR (SEC3)
o/w re-securitization o/w senior o/w non-senior o/w retail underlying o/w re-securitization o/w senior o/w non-senior
Synthetic securitization o/w securitization o/w retail underlying o/w wholesale o/w re-securitization o/w senior o/w non-senior
Backtesting is presented in Section 3.2.5 “Risk management – Market risks”.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 210 Natixis Registration Document 2018
(in millions of euros) RWA Capital requirements 1 Value at risk (Maximum of both values a and b) 1,169 94 a Previous day’s VaR (Article 365 (1)) 305 24 b Average of the daily VaR (Article 365 (1)) of the CRR on each of the preceding 60 business days x multiplication factor (in line with Article 366) 1,169 94 2 Stressed VaR (SVaR) 2,905 232 b Average of the daily SVaR (Article 365 (2)) of the CRR during the preceding 60 business days x multiplication factor (Article 366) 2,905 232 3 Additional default and migration risk 370 30 a Most recent IRC value (incremental default and migration risks calculated in accordance with Section 3 of Articles 370/371) 370 30 b Average of the IRC number over the preceding 12 weeks 324 26 4 Additional default risk on the correlation portfolio a Most recent risk number for the correlation trading portfolio (Article 377)
The following data are calculated on the basis of the median value for the four quarters of 2018.
Equity instruments 15,313 11,697 o/w securities issued by financial entities 7,056 7,056 3,007 3,007 o/w securities issued by financial entities 556 556 1,402 1,402
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 211Natixis Registration Document 2018
Debt securities 115,001 20,783 o/w secured bonds 1,842 880 o/w asset-backed securities 7,470 1,838 o/w government issues 101,570 10,664 o/w securities issued by financial entities 2,250 3,327 o/w securities issued by financial entities 1,245 4,527
Own debt securities issued besides own secured bonds or own asset-backed securities 0 2,357
Own secured bonds and asset-backed securities issued and not yet given as collateral 548
Template C – Sources of asset encumbrance Associated liabilities, contingent liabilities or securities lent
The concept of encumbered assets may differ from accounting standards relating to assets pledged as collateral or transferred: financial assets pledged as collateral for liabilities: variationa margins recorded in cash in respect of derivative transactions are encumbered but not considered transferred for accounting purposes. Assets deposited with central banks available for use as collateral for potential refinancing transactions are only encumbered for the amount of their effective use, whereas some accounting standards consider them to be fully collateralized; financial assets transferred but not derecognized: no differencea in accounting treatment; financial assets transferred and derecognized: continuinga involvement makes no difference to the transfer for accounting purposes but the assets are not recorded in the statement of encumbered assets (the assets are therefore considered unencumbered); encumbered assets not transferred: securities or debt pledgeda as collateral.
These new rules were enacted in the European Union through Regulation (EU) No. 575/2013 of June 26, 2013, which laid down the filing obligations in force during the observation period from January 1, 2014 and set forth the conditions of implementation of these prudential requirements. For the LCR, Delegated Regulation (EU) No. 2015/61, published on October 10, 2014, entered into force on October 1, 2015. The NSFR, which the Basel Committee wants to have applied as a minimum
The liquid asset buffer—in the regulatory sense—is the numerator of the LCR (HQLA) and predominantly consists of: Level 1 liquid assets, i.e. cash deposited with central banks;a other Level 1 liquid assets, consisting mainly of marketablea securities representing claims on, or guarantees by, sovereigns, central banks and public sector entities, and high-rated covered bonds; Level 2 liquid securities consisting mainly of covered bondsa and debt securities issued by sovereigns or public sector entities not eligible for Level 1, corporate debt securities and equities listed on active markets that satisfy certain conditions.
The data in the following table were calculated in accordance with European Banking Authority rules (EBA/GL/2017/11 guidelines), which the European Central Bank decided to enforce on October 5, 2017 by way of notification.
End of quarter (Month/Day/Year) 31/03/2018 30/06/2018 30/09/2018 31/12/2018 31/03/2018 30/06/2018 30/09/2018 31/12/2018
Retail deposits and deposits from small business customers: 1,863 1,682 1,924 2,049 186 168 192 205
Collateralized lending transactions (o/w reverse repos) 97,805 94,459 104,951 105,890 9,160 9,313 10,705 11,907
Inflows from fully performing exposures 19,751 20,736 23,900 23,035 17,430 18,494 21,364 20,420
Cash inflows (subject to 90% cap) 0 0 0 0 0 0 0 0
From an operational standpoint, Natixis has two liquidity reserves that contribute to BPCE Group’s reserves: a reserve of liquid assets eligible for central bank collateralizeda refinancing operations to secure intra-day settlements; this relatively stable reserve is made up of central bank loans and securities, and is located in Paris (about €4 billion in the 3G Pool) and New York (approximately $2 billion at the FRB discount window); a liquidity reserve established in advance to meet a liquiditya crisis similar to the one simulated by the LCR; the amount of this reserve ranges from €20 billion to €30 billion and is mainly reinvested with the ECB and the US Federal Reserve. Since 2015, a portion of assets in this reserve has been under “dedicated” management in special portfolios, with an allocation strategy focused on the list of financial instruments considered as Level 1 and Level 2 HQLA as defined by LCR regulations in force. The liquidity of the portfolios (mainly subject to delegated management by Natixis Ostrum and managed directly under a Natixis mandate since 2017) and the assets reinvested with central banks ensure the reserve can be mobilized immediately if needed.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 215Natixis Registration Document 2018
CROSS-REFERENCE TABLE BETWEEN ARTICLES OF THE CRR, BASEL COMMITTEE/EBA TABLES AND STATEMENTS, R AND THE PILLAR III REPORT
Article 435 (1) (EBA) CRA – General information about credit risk 124 to 131
Article 435 (1) (EBA) CCRA – Qualitative disclosure related to counterparty credit risk 125
Article 436 (b) EU LI1 – Differences between accounting and regulatory scopes of consolidation and mapping of financial statements with regulatory risk categories 167-168
Article 458 (BCBS March 2016) CCyB1 – Geographical distribution of credit exposures used in the countercyclical buffer 177
(BCBS March 2016) LR1 – Comparison of accounting exposures and leverage exposures 180
Art. 444 a), b) and c) NX11BIS – EAD by exposure class and by agency – Standardized approach 183
Art. 453 d) NX17 – Secured exposure by rating and by type of guarantor 183
Article 453 (a) (e) (EBA) EU CRC – Qualitative disclosure requirements related to credit risk mitigation techniques 129-130
Article 442 (c) (EBA) EU CRB-B – Total and average net amount of exposures 187
Article 452 (j) NX16 – Average weighted PD and average weighted LGD by geography 195
Article 439(e), (f) and (i) (EBA) EU CCR1 – Analysis of counterparty credit risk (CCR) exposure by approach 201
Article 452 (e) (EBA) EU CCR4 – CCR exposures by portfolio and PD scale 202 to 204
Article 439 (e) and (f) (EBA) EU CCR8 – Exposures to CCPs 205
(BCBS) SECA – Qualitative disclosure requirements related to securitization exposures 135
Art. 445 (EBA) EU MR1 – Market risk own funds requirements 209
Article 455 (d) (EBA) EU MR3 – IMA values for trading portfolios 209
Article 446 (BCBS) ORA – General qualitative data on operational risk management 142
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 216 Natixis Registration Document 2018
Transition from the accounting balance sheet to the regulatory balance sheet at December 31, 2018 172
EAD, RWA and capital requirement by approach and by Basel exposure category (NX01) 132
EAD by category and by agency – standardized approach (NX11 BIS) 183
IRB – Effect on RWA of credit derivatives used as CRM techniques (EU CR7) 185
Total and average amount of net exposures (EU CRB – B) 187
Risk weights used under SA by category of exposure and by rating grade (CRD-D) 192-193
Statements of credit risk exposure under the IRB approach (EU CR8) 195
Breakdown of equity exposures by main Natixis business line (NX23) 200
Analysis of exposure using counterparty credit risk approach (EU CCR1) 201
NI – CCR exposures by portfolio and PD scale (EU CCR4) 202 to 204
RWA flow statements of CCR exposures under Internal Model Method (IMM) (EU CCR7)
On and off-balance sheet EAD according to the role of Natixis in the banking book (NX31-A) 207
Securitization exposures in the banking book and associated capital requirements – Bank acting as investor (SEC4) 208
NII sensitivity and economic value of equity (IRRBB – Table B) 152
Other information Encumbered and unencumbered assets at 31/12/2018 (in millions of euros) 210-211
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 218 Natixis Registration Document 2018
INFORMATION 4.5 CONCERNING NATIXIS S.A. 235 Natixis S.A.’s parent company income 4.5.1 statement 235
Although global economic growth remained relatively buoyant, market conditions were particularly challenging in 2018, with most assets performing below 2017 levels. The causes for concern were both economic (monetary policy normalization and the Chinese economic slowdown) and political (China-US trade war, Brexit and elections in Italy).
In this context of risk aversion, the nominal effective exchange rate of the dollar was up almost 10% in 2018 and ended the year up against all currencies excluding the yen. The euro was penalized by slower growth in the euro zone, the risks associated with the new political situation in Italy and persistently low inflation expectations. The uncertainties surrounding Brexit caused wild swings in the sterling in 2018, particularly at the end of the year. Last but not least, compared with the G10 currencies in 2018, emerging currencies in general underperformed due to the dollar's appreciation, interest rate hikes in the US and fresh idiosyncratic risks.
Against this backdrop, Natixis pursued its New Dimension strategic plan aimed at developing solutions offering high added value to its clients.
In Asset & Wealth Management, there were a number of major developments in the Asset Management business in 2018.
In the first half of the year Natixis Investment Managers underwent the following changes: Natixis Asset Management became Ostrum Asseta Management from April 3. As part of Natixis’ New Dimension strategic plan, Natixis Investment Managers began the process of aligning its brands. Ostrum—the Latin word for “purple”—pays tribute to the Company’s European roots and places it firmly within the Natixis and Groupe BPCE family. The name change also marks the business’ refocusing on its longstanding expertise in bond strategies, its targeted expertise in equity strategies, and its recognized expertise in insurance strategies, all underpinned by an active investment approach based on fundamental analysis; on January 1, 2018, Seeyond, Ostrum’s active quantitativea management specialist, became a separate asset management company. With just over €7 billion in assets under management at January 1, 2018, Seeyond plans to accelerate its growth by drawing on the international distribution platform of Natixis Investment Managers; in May 2018, Natixis formed a partnership with Ostrum Asseta Management, an affiliate of Natixis Investment Managers, that will give customers a single point of access to a vast range of real-asset finance solutions. Under this partnership, Natixis will be better aligned as a co-investor and customers will also have access to a premium European asset manager; Natixis Investment Managers acquired a minority stake ina specialist aircraft lease and asset management firm Airborne Capital in order to meet a growing demand for alternative and real assets. The deal gives Airborne access to a worldwide asset management platform that will help accelerate its development plans;
Natixis Investment Managers rounded out its global equitya offering and hired a team of senior thematic portfolio managers. In addition to the company's existing global equity offering, investors will have access to a wide range of highly active, high conviction thematic strategies. Themes will include water, security, artificial intelligence and robotics. Thematic investing meets a growing demand from investors to ensure their portfolios address the crucial challenges and trends transforming our world. Over the course of 11 years, this team of senior portfolio managers has developed and launched a range of thematic funds. Together, they were involved in the management of more than €21 billion. In 2019, they will launch a new range of thematic funds, starting with water, security, artificial intelligence and robotics.
Bruno Crastes, CEO of H20 AM, winner of Best Fundj Manager in the Global Flexible Bonds category,
for issuers and investors. It also renewed its broker-dealer license application in Mexico.
The Asia-Pacific platform strengthened its M&A advisory offering by acquiring a majority stake in Vermilion Partners in China. This investment broadens its range of investment banking expertise in the region. The platform won numerous awards in recognition of its market expertise: three awards from Structured Retail Products (“Best House, FX”, “Best House, Interest Rates”, “Best House, Taiwan”), three awards from Structured Products/Asia Risk (including “Interest rates house of the year”) and three awards from The Asset (“Oil & Gas Deal of the Year, Malaysia”, “Power Deal of the Year, Australia”, “Telecom Deal of the Year, Australia”).
Natixis signed a number of strategic cooperation agreements with corporate clients, such as Fosun International and Tsinghua, and with financial institutions, such as ICBC.
In addition, Natixis ramped up its expertise and commitment to developing green financing by becoming a sponsor and member of the Hong Kong Green Finance Association.
Natixis inaugurated its new offices in Singapore and Japan, bringing together its business lines under one roof.
This new structure is centered around four divisions: two “Solutions” divisions intended to encourage a closera commercial relationship with clients: “Cross Asset Solutions,” providing distributors, family offices, mutual insurers and pension funds with one-stop access to cross-asset solutions; and “Multi Asset Solutions,” addressing the needs of major institutional investors, asset managers and corporates; a single financial engineering division to offer clients innovativea hedging, investment and financing solutions across all asset classes; a Multi-Asset Client Servicing & Execution (MACSE) division toa coordinate flow products and digital offerings.
In July 2018, Natixis’ Cash Equity and Equity Research teams were transferred to broker ODDO BHF. This move was part of the long-term partnership between Natixis and ODDO BHF, in the interest of ensuring continuity of equity research and brokerage services to Natixis and Groupe BPCE clients. The Natixis-ODDO BHF teams were ranked No. 1 broker in France (source: Extel 2018).
OVERVIEW OF THE FISCAL YEAR Significant events of 2018 223Natixis Registration Document 2018
In the four strategic sectors, the teams are structured into sector-based groups of experts known as industry bankers. Natixis increased its support for its customers by providing a continuum of solutions ranging from financing and investment banking to advisory services. It also stepped up its originate-to-distribute (O2D) model and was named “Credit Portfolio Manager of the Year” by Risk Magazine for the innovative, integrated approach at the heart of its active portfolio management strategy. Natixis stood out for its ability to coordinate distribution among its three international platforms and for its ability to match institutional investors, particularly from Asia, with the deals it arranges. In the infrastructure sector, Natixis particularly stood out in the Americas, where it was named “Bank of the Year” by leading magazine PFI, which also gave Natixis several “Deal of the Year” awards for transactions arranged all over the world. Natixis also continued its commitment to green and SRI finance, as well its efforts to digitalize commodity trading, namely by joining forces with 14 other banks and industry players to create fintech komgo SA. In the Real Estate & Hospitality sector, Natixis was ranked No. 1 MLA and Bookrunner in France and Europe in 2018 (source: Dealogic), reflecting the vitality of its business and its positioning as a major arranger in the sector.
In June 2018 Global Transaction Banking was renamed Trade & Treasury Solutions (TTS), and since then has specialized in cash management solutions and trade finance. Natixis continued to digitalize its business, particularly with its new international transaction tracking service My Tracked Transfer and we.trade. Natixis also received the 2018 “Greenwich Share Leader” award for “Large Corporate Trade Finance” category in France (source: Greenwich Associates).
Natixis was ranked No. 1 bookrunner for sponsored loans and No. 5 for leveraged loans in the EMEA region (source: Thomson Reuters) at December 31, 2018.
in the UK (financial services), Vermilion Partners in China, and Clipperton in France (technology sectors). These new investments are helping Natixis speed up its business internationalization efforts, while furthering its expansion in Europe and Asia-Pacific. Corporate & Investment Banking also continued to grow its sector M&A teams specialized in the infrastructure, energy, natural resources and real estate sectors.
At the same time, there were ongoing projects that focused on innovation as a way of designing the business models of tomorrow and improving operational efficiency.
The dynamic sales momentum was accompanied by new growth drivers: Natixis Lease and Natixis Financement launched a Lease toa Own solution for individual customers; Natixis Financement launched a debt restructuring offer aimeda at internalizing Groupwide solutions used to reprofile customer debt; Natixis Factor implemented its straightforward,a commitment-free à la carte offering simplifying access to factoring solutions for professional customers.
Prepaid & Consumer, focused on issuing and distributingj bespoke prepaid solutions, but also on designing value-added services for end-customers (B2B2C).
The new structure has from this year activated the first synergies among the various entities: cross-selling between the Cado Card and Le Pot Commun and processing S-Money and PayPlug payments by Dalenys.
Sales momentum in 2018 was also outstanding. Natixis Payments demonstrated its ongoing service to major corporate clients through partnerships forged with: the Carrefour Group, by ensuring the interoperability of carda payment transactions by integrating the Nexo international payment acceptance standards on the Natixis platform; SNCF, which now has a fully integrated solution for itsa Personal Mobility Assistant, making it easier to offer in-app payment services in the future; Casino Group, by jointly developing an e-wallet to offera seamless, secure payments to Cdiscount customers; and Wynd, the omni-channel platform, to design a disruptivea solution to streamline the point-of-sale and payment experience through innovative sales channels, giving retailers a value-added omni-channel service.
This development of the business lines went hand-in-hand with strict financial management: liquidity needs remained under control over 2019 and posted aa 3% year-on-year increase; the consumption of Basel 3 RWA was down 1% year-on-yeara to €109.2 billion.
OVERVIEW OF THE FISCAL YEAR Management report at December 31, 2018 225Natixis Registration Document 2018
(in millions of euros) 2018 2017 pro forma Change 2018/2017 *
The Corporate Center’s net revenues stood at €699 million in 2018, of which €678 million for Coface. They include +€48 million for the return of foreign-currency DSNs to the historic exchange rate, versus -€104 million in 2017.
Meanwhile, revenue synergies achieved with the BPCE networks exceeded the strategic plan’s targets.
Headcount at the end of the period stood at 21,652 FTE, up 4% year-on-year, with a 3% increase in the business lines and 4% growth in the Corporate Center.
Under the New Dimension plan’s presentation of the divisions, the term “Net revenues generated by the business lines” now includes Asset &(1) Wealth Management, CIB, Insurance and SFS, and no longer includes Coface
Resulting from CIB's settlement of the legal dispute with Société Wallone du Logement in 2018, the capital gain for the Corporate Center from(2) the disposal of Caceis in 2017 and, as is customary, the impact of the return of foreign-currency DSNs to the historic exchange rate.
4 OVERVIEW OF THE FISCAL YEARManagement report at December 31, 2018 226 Natixis Registration Document 2018
Pre-tax profit therefore totaled €2,661 million in 2018 versus €2,651 million in 2017.
Consolidated management ROTE after tax (excluding non-recurring items) came to 12.0% in 2018, giving an accounting ROTE of 11.8%. Excluding non-recurring items and the impact of equity derivatives in Asia, Natixis’ ROTE is expected at 13.9%.
Gross operating income jumped 23.4% (26.5% at constant exchange rates) to €1,154.3 million.
CHANGE IN ASSETS UNDER MANAGEMENT ■ OVER THE YEAR (IN BILLIONS OF EUROS)(1)
At contant exchange rates: 2018 scope effects:(1) - Natixis IM Private Equity: acquisition of the asset management company MV Credit in Q3 2018 (+€1.7 billion); - Natixis IM Europe: disposal of VEGA IM in Q4 2018 (-€6.5 billion).
OVERVIEW OF THE FISCAL YEAR Management report at December 31, 2018 227Natixis Registration Document 2018
At December 31, 2018, AuM can be broken down as predominantly bond products (29.8%), followed by equity products (23.2%) and life insurance (21.6%).
At the same time, outstanding loans were up 14% to €2.0 billion.
In 2018, the business line’s net revenues were up 2% to €144.1 million (+€2.6 million) compared with 2017. Restated for non-recurring items in 2017 linked to the adjustment of the Group's distribution system and the Sélection 1818 scope effect, the decrease would be 3%. This decline is mainly attributable to the absence of incentive fees, which were substantial in 2017, and to the drop in fees on structured products (inauspicious markets conditions), partially offset by healthy net interest income and, to a lesser extent, fees on AuM.
Expenses stood at €150.3 million, representing growth of 5% compared with 2017. Restated for the scope effect and non-recurring items resulting from the disposal of Sélection 1818, the increase would be 4% mostly on account of fewer projects on hold over the period, higher fixed payroll costs (rise in average FTE), and consulting fees in connection with ongoing projects (digital, regulatory, business model review, etc.).
In 2018 Corporate & Investment Banking’s net revenues totaled €3,237 million, down 8.0% compared with 2017 at constant exchange rates. This includes income of €68 million for the settlement of the legal dispute with Société Wallone du Logement, reclassified as a non-recurring item under Investor Relations for the third quarter of 2018. Excluding this item, net revenues were down 10.0% compared with 2017 at constant exchange rates. And excluding the impact of equity derivatives in Asia, net revenues stood at €3,435 million, down 2.5% compared with 2017 at constant exchange rates.
Capital market revenues totaled €1,331 million in 2018, down 29.7% compared with 2017 at constant exchange rates. Excluding the impact of equity derivatives in Asia, revenues were down 15.7% compared with 2017 at constant exchange rates.
Revenues from syndication on the bond market fell 19.2% compared with 2017. The 12.1% increase in revenues generated on the primary bond market was more than offset by the unfavorable conditions on the secondary market. This affected the management of sovereign debt positions amid uncertainty in the European environment after the Italian elections.
Revenues from Investment Banking including M&A activities grew 3.9% at constant exchange rates compared with 2017 for cumulative revenues of €372 million.
In 2018, Corporate & Investment Banking’s expenses (€2,193 million) were stable at current exchange rates, a small 1.0% increase from 2017 at constant exchange rates. Excluding Transformation & Business Efficiency costs classified as a non-recurring item under Investor Relations, i.e. €14 million in 2018 and €3 million in 2017, expenses totaled €2,178 million in 2018, down 0.6% at current exchange rates and up slightly by 0.5% at constant exchange rates.
Gross operating income totaled €1,045 million, down 22.4% compared with 2017 at constant exchange rates. Excluding non-recurring items and the impact of equity derivatives in Asia, gross operating income totaled €1,256 million, down 7.1% at constant exchange rates. The cost/income ratio stood at 67.7% in 2018 (63.4% excluding non-recurring items and impact on auto-calls in Asia), slipping 6.4 points compared with 2017 (61.3%).
At €175 million, provision for credit losses grew 52.0% compared with 2017, including €71 million for the Madoff fraud, reclassified as a non-recurring item under Investor Relations in the third quarter of 2018. Excluding this item, the provision for credit losses was €104 million in 2018, down 9.9% compared with 2017.
In 2018, sales of personal protection and casualty insurance were particularly buoyant, while life insurance maintained a strong position.
With €9.6 billion in direct business premiums, life insurance inflows increased 1% compared with 2017, keeping the business robust despite a persistently low interest rate environment, higher inflation and financial market volatility at year-end. The business grew 60% in two years thanks to the deployment of the Caisse d’Epargne offering.
Premiums on personal protection and payment protection insurance (€886 million) continued to increase at a steady pace (+8%). Payment protection insurance maintained a growth rate of 6% without any material impact from the Bourquin amendment.
The non-life insurance portfolio grew by 5% to 5.8 million policies. Earned premiums on the Banque Populaire and Caisse d’Epargne networks gained 7% to reach €1,482 million. The automotive and multi-risk home insurance business saw 9% and 7% growth respectively.
Net revenues for Insurance businesses totaled €790 million, up 8% compared with 2017, resulting from: 7% net revenue growth in life insurance, propelled by thea increase in assets under management (+10%), driven in turn by the roll-out of the offer on the Caisse d’Epargne network. Despite the persistently low interest rate environment in 2018, lower bond yields were offset through the diversification of investment sources (private placements or the direct funding of the economy); 8% net revenue growth in personal protection insurance and ina payment protection insurance, reflecting the resilience of the business; 6% net revenue growth in property & casualty insurance:a claims remained under control despite the impact of extreme weather events and an exceptionally high volume of large automotive insurance claims. The combined ratio stood at 91.2%, an improvement on 2017.
At 29.0%, the division's ROE improved by 6.9 points compared with 2017.
4 OVERVIEW OF THE FISCAL YEARManagement report at December 31, 2018 230 Natixis Registration Document 2018
Consumer Finance achieved record sales with more than €12 billion in financing, up 7% over the year, 11% of which was for revolving loans and 6% for personal loans.
After two outstanding years, Sureties and Guarantees maintained strong business volumes on the loan guarantee market for retail customers despite a decrease in refinancing volumes.
Specialized Financing revenues picked up by 4%. Leasing posted 10% net revenue growth. Net revenues for Sureties & Financial Guarantees and Factoring gained 3% and 1% respectively year-on-year. Lastly, net revenues for Film Industry Financing increased sharply over the period after the inclusion of a special dividend.
Net revenues from the Corporate Center excluding Coface stood at +€21 million versus +€33 million in 2017. The key factors are as follows: exchange rate fluctuations of deeply subordinated notes issueda in dollars stood at +€48 million in 2018 compared with -€104 million in 2017; the sale of the equity interest in Caceis in 2017 generateda €74 million in capital gains; the equity interest in EFG Hermes was measured at fair valuea through profit or loss in 2018, with an impact of -€21 million over the year; FVA hedging had a -€55 million impact compared toa +€20 million in 2017 due mainly to wider funding spreads in 2018.
Expenses from the Corporate Center stood at €915 million in 2018 versus €883 million in 2017.
At €488 million, Coface expenses were down slightly by 1% compared with 2017, and up 3% at constant exchange rates when restated for non-recurring Fit to Win expenses.
Expenses from the Corporate Center excluding Coface were for: Single Resolution Fund contributions totaling €164 million ina 2018 versus €121 million in 2017; the expenses of Natixis Private Equity (Finance division) anda Natixis Algérie totaling €38 million in 2018 compared with €53 million in 2017, including six months' worth of expenses for Corporate Data Solutions, which was sold in June 2017; and the support function expenses not invoiced to the Natixisa business lines; these totaled €224 million in 2018 compared with €225 million in 2017.
The provision for credit losses of the Corporate Center stood at -€15 million versus -€71 million in 2017, which mainly consisted of a €60 million general provision for litigation.
4 OVERVIEW OF THE FISCAL YEARManagement report at December 31, 2018 232 Natixis Registration Document 2018
In accordance with IFRS 9 as applied on January 1, 2018, the provision for credit losses was -€215 million at December 31, 2018, of which -€333 million were in respect of non-performing loans and +€118 million in respect of performing loans. At December 31, 2017, the provision for credit losses totaled -€258 million (under IAS 39).
Strategic investment in Fenchurch Advisory Partners in the United Kingdom as part of the strategic enhancement of Natixis’ expertise in Mergers & Acquisitions advisory services
Long-term partnership to create a leading player in equity brokerage and equity capital markets in continental Europe.
Asset Management Acquisition of a minority stake in Airborne Capital, an aeronautics leasing and asset management specialist.
Asset Management Acquisition of a majority stake (51.9%) in Investors Mutual Limited, a well-known asset management company in Australia.
Insurance Acquisition of 40% of BPCE Assurances from Macif and Maif to become the sole shareholder
OVERVIEW OF THE FISCAL YEAR Post-closing events 235Natixis Registration Document 2018
Disposal of Sélection 1818, a major Wealth Management Advisor, as part of Natixis Wealth Management’s strategic repositioning. Signing of a partnership with the buyer, Nortia, for the distribution of funds on an open-architecture basis.
Asset management Disposals of the fund disposals platform Axeltis to MFEX, together with the signing of a long-term partnership to distribute funds on an open-architecture basis.
Corporate Center Disposal of Altus GTS Inc. and Graydon (as part of the disengagement of Corporate Data Solutions subsidiaries).
Post-closing events4.4 Refer to Note 15, “Post-Closing Events”, in Chapter 5.1, Consolidated Financial Statements and Notes.
Natixis' 2018 financial statements were approved by the Board of Directors on February 12, 2019. Since that date, there have been no material changes in the financial or trading position of Natixis.
Net interest income decreased by -€148 million: -€160 million for business in Mainland France and +€12 million for foreign branches. Net fee and commission income decreased by -€170 million, resulting from a -€247 million decrease in Mainland France and an increase of +€77 million in business recorded by foreign branches. This change in fee and commission income can be broken down into -€238 million in net fee and commission income on off-balance sheet transactions, +€86 million on transactions with customers and -€18 million in financial service or payment instrument transactions.
Dividends paid by Natixis subsidiaries increased by €756 million. €663 million of this increase can be attributed to the higher dividend paid by Asset Management subsidiary Natixis Investment Managers, €42 million to the higher dividend paid by subsidiary Compagnie Européenne de Garanties et Cautions and a €33 million increase on behalf of Natixis Private Equity.
Operating expenses were up €66 million, including -€4 million in payroll costs, +€33 million in external services net of reinvoicing and +€37 million in regulatory taxes and costs (including +€42 million for the contribution to the Single Resolution Fund). Changes in external services were mainly concentrated in external services provided by Group companies (+€15 million, net of rebilled expenses), consulting fees (-€8 million) and external assistance fees (+€28 million).
Together, these items brought operating income to +€1,532 million, up €426 million.
for Contango Trading S.A. shares and a €69 million provision for Natixis Factor. The balance for fiscal year 2017 was attributable to the capital gain earned on the disposal of CACEIS securities for €84 million before tax and to the downward adjustment of the provision recorded on Coface equity investments (reversal of provision of €111.9 million).
Net income after tax was +€1,834 million versus +€1,678 million in 2017.
At December 31, 2018, the balance sheet totaled €406,868 million versus €410,598 million at December 31, 2017.
The third resolution that will be put before the General Shareholders’ Meeting on May 28, 2019, proposes to: pay an ordinary dividend of €945,086,577.60;a pay a special dividend of €1,512,138,524.16;a allocate the remaining distributable earnings to retaineda earnings, i.e. €1,002,143,341.70.
It should be noted that the distribution of the special dividend depends on Natixis' plan to sell its Factoring, Sureties & Financial Guarantees, Leasing, Consumer Finance and Securities Services business lines to BPCE, and that if this sale cannot be completed before the date of the General Shareholders' Meeting, the Board of Directors will amend the text of the third draft resolution to provide for (i) the payment on June 4, 2019, of the ordinary dividend in an amount equal to that initially proposed for the ordinary dividend above and (ii) the subsequent payment (at a date after the planned sale is completed) of the "special" dividend in an amount equal to that initially proposed for the special dividend above.
(for reference) 1 to 30 days 31 to 60 days 61 to 90 days 91 days and more (1 day and more)
Total amount of invoices affected, including tax (in millions of euros) 71.9 5.3 1.1 0.5 6.4 13.3
Outlook for Natixis4.6 Global growth is expected to cool in 2019 but will nevertheless exceed its potential to total around 3.4%. In the US, growth should remain robust at 2.4% (versus 2.9% in 2018), whereas the deceleration will be felt more strongly in the euro zone at 1.2% (versus 1.9% in 2018). While we can expect a slowdown of the Chinese economy, growth will remain moderate (6.3%) thanks to the government’s determination to shore up growth with fiscal and monetary policies.
Political risks will continue to loom large this year. Despite the 90-day truce signed by the US and China at the G20 meeting at the end of November, we still cannot rule out the risk of rising China-US trade tensions—a risk that would have grave consequences for global trade. In Europe, with the uncertainty surrounding the Brexit impasse, the European elections at the end of May and probable political instability in Italy, 2019 looks to be another difficult year.
In 2019 Natixis will pursue the implementation of the New Dimension strategic plan and its three powerful initiatives to give its clients a broader range of high added-value solutions: deepening the business model transformation that it successfully
As a reminder, the strategic priorities for Natixis’ various divisions break down as follows: Asset & Wealth Management: confirming our position as aa world leader in active investment strategies in terms of size, profitability and capacity for innovation; Corporate & Investment Banking: becoming a benchmark banka in four key sectors (energy and natural resources, aerospace, infrastructure, real estate and hospitality), with a reputation for offering innovative solutions; Insurance: consolidating our position as a top-tier insurer ina France; Specialized Financial Services: becoming a pure play in thea European payments industry and accelerating its digital transformation.
In accordance with European regulation 809/2004 relating to information contained in prospectuses, the financial statements for the year ended December 31, 2015, that were published in the 2016 registration document filed with the AMF on March 21, 2017, are included for reference in this document.
The plan to sell Natixis’ retail activities to BPCE has no impact on this registration document’s presentation of the divisions’ 2018 performance.
In addition, the standards used to assess the performance of the divisions are those defined for the New Dimension plan: regulatory capital allocated to the business lines on the basis ofa 10.5% of Basel 3 average RWA; 2% rate of return on capital;a
The conventions applied to determine the earnings generated by the various business lines are as follows: the business divisions record the return on regulatory capitala allocated to them. By convention, the rate of return on regulatory capital is 2%; the return on share capital of the entities comprising thea divisions is eliminated; the cost of Tier Two subordinated debt is now charged to thea divisions in proportion to their regulatory capital; the divisions are invoiced for an amount representing the bulka of Natixis’ expenses. The uninvoiced portion accounts for less than 3% (excluding the Single Resolution Fund) of Natixis' total expenses. The Single Resolution Fund (SRF) contribution is covered by the Corporate Center and is not charged back to the divisions.
Natixis’ ROTE is determined using, as the numerator, neta income (Group share) minus the post-tax interest expense on DSNs. The equity used is average shareholders’ equity (Group share) under IFRS, after distribution of dividends, excluding average hybrid debt, average intangible assets and average goodwill.
STATUTORY AUDITORS’ REPORT 5.4 ON THE PARENT COMPANY FINANCIAL STATEMENTS 442
Net gains or losses on financial instruments at fair value through profit or loss 7.3 1,764 2,784
Gains and losses on financial assets at fair value through other comprehensive income 7.4 6
Net gains or losses resulting from the derecognition of financial instruments at amortized cost 7.5 (3)
Depreciation, amortization and impairment on property, plant and equipment and intangible assets (254) (242)
Net income/(loss) for the period 1,880 1,861 o/w Group share 1,577 1,669 o/w attributable to non-controlling interests 304 192
Net income/(loss) attributable to shareholders (see Note 10.1.2)—Group share—per share, calculated on the basis of the average number of shares over the period, excluding treasury shares and including shares that could be issued on the exercise of stock options and bonus shares 0.47 0.50
Revaluation of financial assets (debt) instruments) at fair value through other comprehensive income (b) (61)
Gains and losses recognized directly in other comprehensive income (after income tax) 277 (728)
Including impairment of debt instruments recognized in “Financial assets at fair value through other comprehensive income” recorded as “Other (b) items of comprehensive income” on the first-time application of IFRS 9 as at January 1, 2018, for an amount of €1.1 million (gross of tax).
Corresponds to the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (see Note 3.6 and 6.9).(c)
Corresponds exclusively to insurance activities as at December31, 2018 (see Note 2.10)(d)
FINANCIAL DATA Consolidated financial statements and notes 243Natixis Registration Document 2018
Revaluation of financial assets (debt instruments) at fair value through other comprehensive income recyclable to income (61) 18 (43)
Financial assets at fair value through other comprehensive income 8.4 10,798 9,981
Loans and receivables due from customers at amortized cost 8.6.2 69,279 84,512 136,768
The information reported at December 31, 2017 has not been restated for the impact of the first-time application of IFRS 9 “Financial (a) Instruments”, in accordance with the provisions of this standard. The impact of the first-time application of IFRS 9 on the opening balance sheet at January 1, 2018 is presented in detail in Note 1.
FINANCIAL DATA Consolidated financial statements and notes 245Natixis Registration Document 2018
Financial liabilities at fair value through profit or loss 8.1 208,183 221,321 144,885
Revaluation adjustments on portfolios hedged against interest rate risk 108 138 138
Non-recyclable gains and losses recorded directly in equity (42) (333) (318)
Equity component of share-based payment plans 10 2016 dividend paid in 2017 (1,098)
Interest paid on perpetual deeply subordinated notes and preference shares (94)
Appropriation to a reserve of income from the sale of equity instruments at FV though other comprehensive income that cannot be reclassified completed during the period (4)
Revaluation of equity instruments at fair value through other comprehensive income
In 2017, other reclassifications included -€87 million relating to the elimination of capital gains on reclassification following the (e) redemption of a line of perpetual deeply subordinated notes.
At December 31, 2018, shareholders' equity Group share included the following:(f) - the impact of the recognition of new put options granted to minority shareholders relating to acquisitions, for -€49.5 million. These put options concern the M&A business line, with the acquisitions of Vermilion (-€14.1 million) and Fenchurch (-€26.8 million), and the payments business line, with the acquisition of Alter CE (-€8.6 million); - the impact of existing put options granted to minority shareholders at the start of the year, for -€68.9 million. This impact was partly due to the change in the fair value of these put options for -€63.6 million, generated by the revaluation of financial debt for -€32.3 million, and for -€31.3 million by the effects of the unwinding of the discount on this financial debt, and partly due to the transfer of the change in the share of the net minority position of the entities representing these put options, for -€5.3 million; - the effect of changes in the percentage of ownership without a loss of control of consolidated entities, for -€5.8 million. This mainly concerned the increase in the percentage of ownership of the consolidated entity Caspian PE (from 55% to 72%), for €3.4 million, and the fall in the percentage of ownership of the consolidated entity Ossiam (from 83% to 75%), for -€1.1 million; - the recognition of goodwill from BPCE IE directly in equity, in accordance with the accounting treatment of the acquisitions of jointly-controlled entities, for -€1 million; - the effects of translation adjustment recycling for -€56.5 million following the repayment by the Singapore, New York and Asia Ltd branches of part of their capital in order to reduce the Group’s global exposure to USD/EUR and HKD/EUR foreign exchange risk. At December 31, 2018, other reclassifications included -€43.2 million related to the elimination of capital gains on reclassification (g) following the redemption of two lines of perpetual deeply subordinated notes issued in 2008.
Changes in cash generated by operating activities consist of cash flows generated by Group activities, with the exception of those related to held-to-maturity financial assets and investment property.
= Total non-cash items included in pre-tax profit and other adjustments 5,496 5,556
Cash flow on assets and liabilities held for sale (d) (350) (1)
- cash flows related to held-to-maturity assets (+€616 million); - cash flows related to investments in consolidated associates totaling -€144 million for the purchase of 100% of MV Credit (-€75 million), 51% of Fenchurch (-€37 million), 51% of Vermilion (-€11 million), 70% of Alter CE (-€20 million), 100% of BPCE Immobilier Exploitation (€3 million), the acquisition of an additional 5% stake in PayPlug (-€2 million), and an additional 18% in Natixis Caspian Private Equity (-€3 million), +€31 million in cash acquired (including +€12 million on the acquisition of BPCE Immobilier Exploitation, +€6.5 million on Fenchurch, +€4 million on Vermilion and +€2 million on Alter CE), the disposal of Axeltis (+€60 million), Selection 1818 (+€26 million) and Cofacrédit (+€14 million), -€33 million of cash transferred following the disposal of Axeltis, and the partial exercise of a put option on DNCA (-€125 million); - cash flows related to investments in non-consolidated associates in the amount of +€186 million, including +€186 million for the disposal of the 8% stake in AUSTIN FINANCE.
The products involved are indexed to the worst performance of an underlying basket of shares or index and allow investors to receive enhanced periodic coupons in return for a risk of loss of capital at maturity, with the possibility that the product may expire early.
The sale should take place before the end of the first quarter of 2019, subject to the lifting of conditions precedent, and in particular the completion of a capital increase by BPCE subscribed to by the Banque Populaire banks and Caisses d'Epargne and the obtaining of the regulatory authorizations.
Breakdown of the impact of the 1.2 first-time application of IFRS 9 253
IFRS standards and 2.1 IFRIC interpretations applied by the Group 259 Presentation of the consolidated 2.2 financial statements 261
Consolidation scope 3.1 262 The notion of control 3.2 and consolidation methods 262
Net fee and commission income 7.2 297 Gains and losses on financial 7.3 instruments at fair value through profit or loss 298 Gains and losses on financial assets at 7.4 fair value through other comprehensive income 298 Net gains or losses resulting from 7.5 the derecognition of financial instruments at amortized cost 299
Gains or losses on other assets7.9 302 Reconciliation of the tax expense in 7.10 the financial statements and the theoretical tax expense 302
FINANCIAL DATA Consolidated financial statements and notes 251Natixis Registration Document 2018
Financial assets and liabilities at fair 8.1 value through profit and loss 303
Hedging derivatives8.2 307 Offsetting of financial assets 8.3 and liabilities 309 Financial assets at fair value through 8.4 comprehensive income 311 Fair value of financial assets and 8.5 liabilities carried at fair value in the balance sheet 313
Financial assets at amortized cost8.6 327 Other information relating to financial 8.7 assets 331
Credit risk and counterparty risk11.2 361 Market risk, overall interest rate risk, 11.3 liquidity risk and structural foreign exchange risk 363
From January 1, 2018, Natixis has applied IFRS 9 “Financial instruments”, which replaced IAS 39 “Financial instruments: Recognition and Measurement” with new rules for classifying and measuring financial assets and a new impairment model for expected credit losses. Note that Natixis opted for the early adoption of IFRS 9 for its financial liabilities (see Note 2.1). Natixis has chosen to continue to apply IAS 39 for insurance entities, as authorized by the amendment to IFRS 4 (see Note 2.1) and for hedging, as permitted by IFRS 9. The main impacts of the first-time application of IFRS 9 (with the exception of the impact of the provisions relating to financial liabilities, which have been applied since January 1, 2016) on the opening balance sheet at January 1, 2018 are as follows: Classification and measurement
For first-time application, in addition to an SPPI analysis (see Note 6.1.2) and a credit risk analysis of securitization fund units, an SPPI analysis of the pool of underlying assets was carried out and did not call into question the meeting of SPPI criteria by the securitization fund units.
At January 1, 2018, securitization fund units measured at fair value through profit or loss and reclassified to this category amounted to €23 million; Natixis’ other positions will continue to be recognized at amortized cost.
Reclassifications between categories of financial assets measured at amortized cost and fair value through profit or loss or through other comprehensive income had an impact on Natixis’ consolidated equity at January 1, 2018 owing to the different measurement methods applicable to these assets and to the retroactive application of the standard. Nevertheless, as these reclassifications are limited or affect assets whose fair value does not vary significantly from their value at cost due notably to the residual maturity of the transactions in question, these reclassifications had an impact of €3 million (after tax) on Natixis’ opening equity at January 1, 2018. The reclassifications between different categories under IAS 39 and IFRS 9 are presented in Notes 1.2.1 and 1.2.2.
The classification and measurement principles applied to financial instruments are described in Notes 6.1 and 6.3.
Under IAS 39, there was a separate provisioning model for: (i) instruments measured at amortized cost, (ii) debt instruments recognized in “Available-for-sale assets”, (iii) equity instruments recognized in “Available-for-sale assets”, and (iv) instruments recognized at cost. In contrast, under IFRS 9, there is just one provisioning model. This model applies equally to instruments measured at amortized cost and to debt instruments measured at fair value through recyclable other comprehensive income. Additionally, under IFRS 9, equity instruments are no longer impaired since they are either measured at fair value through profit or loss or at fair value through non-recyclable other comprehensive income.
The principles of the new impairment model applied pursuant to IFRS 9 are described in Note 6.3.
Breakdown of the impact of the first-time application of IFRS 9 1.2
This table gives a detailed presentation of the impact of the transition from IAS 39 to IFRS 9 on balance sheet items due to reclassifications of instruments and the application of the new impairment method.
Loans and receivables due from banks 45,289 (4,278) (446) 5 40,570
Amounts due to banks 104,318 (9,827) 94,491 Due to banks and similar items
Amounts due to customers 94,571 (53,783) 49 40,837 Amounts due to customers
Other reclassifications mainly correspond to changes in the balance sheet presentation of insurance activities and guarantee deposits in (b) accordance with ANC recommendation 2017-02, and the impact of the first-time application of IFRS 15 corresponding to the reclassification of commodity stocks on the balance sheet. These reclassifications had no impact on Natixis’ opening equity.
This table provides a summary of the reclassifications between IAS 39 and IFRS 9 by category of instruments.
Financial assets under IAS 39 Classification under IFRS 9 Note 01/01/2018
Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss 184,497 225,663
Of which fair value through profit or loss of instruments held for trading 113,615
Derivative instruments Financial assets at fair value through profit or loss
Variable-income securities Financial assets at fair value through profit or loss
Fixed-income securities Financial assets at fair value through profit or loss
Fixed-income securities Financial assets at fair value through profit or loss (a)
Variable-income securities Financial assets at fair value through profit or loss (b)
Fixed-income securities Financial assets at fair value through profit or loss (e)
Loans and receivables Loans and receivables due from customers at amortized cost 3 3
Finance leases Loans and receivables due from customers at amortized cost 11,336 11,202
Financial assets at fair value through profit or loss (c) 17,721
Of which fair value through profit or loss of instruments held for trading 85,937
Other liabilities Financial liabilities designated at fair value through profit or loss 57 57
Other liabilities Financial liabilities designated at fair value through profit or loss 3,440 3,440
Financial liabilities designated at fair value through profit or loss (b) 63,620
Financial liabilities designated at fair value through profit or loss 12,999
Revaluation adjustment on portfolios hedged against interest rate risk 138 138
Securities sold under repurchase agreements classified as “Financial liabilities under the fair value option” under IAS 39 and managed under a (a) trading business model were classified as “Financial liabilities at fair value through profit or loss” under IFRS 9, for €34,974 million.
TABLE SHOWING THE IMPACT OF THE CHANGE IN IMPAIRMENT METHOD R
This table gives a detailed presentation of the impact of changes related to the application of the new impairment model under IFRS 9.
Loans and receivables due from banks Loans and receivables due from banks at amortized cost (69) (64) 5
Loans and receivables due from customers Debt securities at amortized cost
Impact of the first-time application of IFRS 9 on shareholders’ equity1.2.3
Gains and losses recognized directly in other items of comprehensive income
Balance at 31/12/2017 (after appropriation of income) 6,159 637 637 6,796 1,192 7,988
Reclassification to financial assets at fair value through equity 43 (70) 40 (13) (43)
Impact of change in impairment of financial assets at fair value through equity
Impact of change in impairment of financial receivables at amortized cost (27) (27) (3) (29)
FINANCIAL DATA Consolidated financial statements and notes 259Natixis Registration Document 2018
They are presented with a comparison against December 31, 2017 prepared in accordance with IAS 39. A comparison as at January 1, 2018 after the application of IFRS 9 is provided for detailed information about balance sheet items.
The financial statements presented for comparative purposes were published by Natixis in the 2017 registration document filed with the Autorité des Marchés Financiers (AMF—French Financial Markets Authority) on March 23, 2018. In accordance with European regulation 809/2004 relating to information contained in prospectuses, the financial statements for the year ended December 31, 2016, which were published in the 2016 registration document filed with the AMF on March 21, 2017, are included for reference in this registration document.
Under the option available in IFRS 9, Natixis elected not to restate data for previous fiscal years published as comparative information for its financial statements.
IFRS 15 replaces current standards and interpretations regarding revenue recognition and now imposes a single model for accounting for revenue arising from contracts with customers.
The complete body of standards adopted by the European Union may be consulted on the European Commission website at:(1)
IFRS 15 thus introduces a new five-stage general approach for the recognition of income: identification of contracts with customers,j identification of specific performance obligations (or items) toj be recognized separately from one another, determination of overall transaction price,j allocation of transaction price to the various specificj performance obligations, recognition of income when performance obligations arej met.
Accordingly, Natixis did not recognize any material impact relating to the first-time application of IFRS 15, on either opening equity at January 1, 2018 or on income and expense items in 2018. Only one change was made to the presentation of the balance sheet at January 1, 2018, involving the reclassification of commodity stocks in “Financial assets at fair value through profit or loss” in the amount of €242 million; this had no impact on Natixis’ opening equity.
FINANCIAL DATA Consolidated financial statements and notes 261Natixis Registration Document 2018
Liabilities under these contracts, which are currently valued at historical cost, will have to be recognized at present value under IFRS 17. As such, insurance contracts will be valued based on their future cash flows, including a risk margin in order to factor in the uncertainty relating to these cash flows. IFRS 17 also introduces the concept of the contractual service margin. This represents the insurer's unearned profit and will be released over time as services are rendered to the insured. The standard demands a more detailed level of granularity in calculations than previously as it require estimates by group of contracts.
By way of exception to the thresholds described above, and in order to comply with Article 19 of (EU) regulation 575/2013, the consolidation threshold was €10 million (total balance sheet and off-balance sheet commitments excluding derivatives) for entities that meet the definition of financial institutions or ancillary services undertakings.
The consolidation scope includes all the material entities over which Natixis exercises exclusive control, joint control or significant influence. The IFRS standards stipulate three types of control: exclusive control, joint control and significant influence. Determining the type of control that exists is not limited to identifying the voting rights held, but also involves an analysis of the economic and legal relations between the various entities being analyzed.
The entities controlled by Natixis are consolidated using the full consolidation method, in accordance with IFRS 10. This standard defines a single audit model applicable to all entities, whether they are traditionally governed entities or structured entities (see Note 5). The control of an entity will be analyzed using three cumulative criteria: power over the entity’s relevant activities;a exposure or entitlement to variable returns by virtue of itsa relations with the entity; the ability to exercise its power over the entity to influence thea variable returns obtained.
If this is not the case, control is determined through the exercise of judgment and by taking into account all facts and circumstances, such as: the objectives, terms and circumstances surrounding thea creation of the entity; the nature of the entity’s relevant activities and thea decision-making processes concerning these activities; the scope of Natixis’ decision-making rights (from voting rightsa or contractual agreements) over the management of the entity’s relevant activities (i.e. activities having a significant impact on the entity’s returns); exposure to variability in the entity’s returns (the significance ofa the returns received by Natixis compared with the returns received by the other investors, etc.); rights held by other parties (withdrawal rights, earlya redemption rights, rights regarding the dissolution of the entity, etc.).
IFRS 11 distinguishes between two types of partnerships: joint ventures and joint operations.
Joint ventures are partnerships in which the parties exercisinga joint control over the Company have rights over that company’s net assets. They are consolidated using the equity method. Consolidation using the equity method involves replacing the carrying amount of investments in the owner’s financial statements with Natixis’ interest in the shareholders’ equity and income of the entity owned. Investments are recognized at this reassessed value on the asset side of the consolidated balance sheet in “Investments in associates”. The difference between the investments’ historical value and their reassessed value is recognized on the liability side of the balance sheet under “Shareholders’ equity Group share”, and in income under “Share in income of associates” in the consolidated income statement, and under “Share in gains/(losses) of associates recorded directly in equity” in the statement of net income/(loss) and other comprehensive income. Goodwill related to joint ventures is included in the carrying amount.
These investments are subject to an impairment testa whenever there is objective evidence of impairment. If the recoverable value of the investment is lower than its carrying amount, an impairment is recorded under “Share in income of associates” in the consolidated income statement.
Natixis’ stake in EFG Hermès, held through DF EFG 3 Limited, was analyzed as subject to consolidation using the equity method even though the share of voting rights held represents 12.9%, due particularly to the number of seats held until December 12, 2018 by Natixis on the Company’s Board of Directors. Until this date, it was not consolidated in the financial statements, however, due to the lack of consolidated financial statements in IFRS format.
The change in Natixis’ stake, with the abandoning of a director’s post, resulted in a loss of significant influence and the reclassification of the securities held as securities at fair value through other comprehensive income at their fair value on the issue date.
In the event of an increase in Natixis’ percentage of ownership in an already-controlled entity, the difference between the acquisition cost of the additional percentage interest and the share in the entity’s net assets acquired at this date is recorded in “Consolidated reserves”. In the event of a decrease in Natixis’ percentage of ownership in an entity without a loss of control, the difference between the selling price and the carrying amount of the percentage interest sold is also recorded in “Consolidated reserves”.
The assumption of control through successive purchases of securities from an entity previously recognized in financial assets at fair value (through profit or loss or other comprehensive income) is shown as two transactions taking place upon the assumption of control: the disposal of securities previously recognized in assets at faira value through profit or loss; and the acquisition of all the securities held after the assumption ofa control.
Income generated from minority interests subject to put options is presented in “Net income/(loss for the period—share attributable to minority interests” in the consolidated income statement.
The following accounting treatment is applied to business combinations giving rise to control: IFRS 3 before revision if they are prior to January 1, 2010,a except for those that occurred before January 1, 2004. On the initial application date of IFRS, Natixis chose the option offered by IFRS 1 “First-Time Adoption” to not retrospectively restate business combinations previous to January 1, 2004 pursuant to IFRS 3; Revised IFRS 3 (IFRS 3R) if they occur after January 1, 2010.a IFRS 3R can be applied prospectively to business combinations if their acquisition date is the same or later than the adoption date of IFRS 3R.
Application of IFRS 3R to business combinations carried outa after January 1, 2010: for each business combination, Natixis chose to determinej minority interests: either based on their share in the identifiable net assets ofj the acquired entity, measured at their fair value at the purchase date, and therefore without recognizing goodwill on the minority interests (partial goodwill method), or based on their fair value at the purchase date, resultingj in the recognition of goodwill, both for the Group share and the minority interests (full goodwill method); hence, goodwill is a residual item determined as thej difference between (i) the sum of the purchase price, the fair value at the purchase date of the percentage interest held in the acquired entity prior to the purchase date, and the amount of the minority interests (determined using the partial goodwill method, in the majority of cases, or the full goodwill method) and (ii) the net amount of the assets and liabilities assumed, measured at their fair value at the purchase date.
FINANCIAL DATA Consolidated financial statements and notes 265Natixis Registration Document 2018
Principles adopted for the measurement and recognition of the transactions resulting in the creation of Natixis in 2006
In 2018, goodwill increased by +€129 million, excluding translation adjustments (+€67 million).
At December 31, 2018, as in 2017, the CGUs are the same as the divisions in the “New Dimension” strategic plan, i.e. “Asset & Wealth Management”, “Corporate & Investment Banking”, “Insurance” and “Specialized Financial Services”.
A 30 bp increase in discount rates (assumption based on the historical annual variability observed over one year using 2012-2018 historical data) combined with a 50 bp reduction in perpetual growth rates would reduce the value in use of CGUs by: -9.7% for the Asset & Wealth Management CGU;a -5.0% for the Corporate & Investment Banking CGU;a -7.6% for the Insurance CGU;a -5.3% for the Specialized Financial Services CGU;a -4.8% for the Coface CGU;a and would not lead to the recognition of any impairment losses for these CGUs.
Similarly, the sensitivity of future business plan cash flows to changes in key assumptions does not significantly affect the recoverable value of the CGUs:
The assets and liabilities of subsidiaries which Natixis intends to sell within a maximum period of 12 months, and for which it is actively seeking a buyer, are identified separately on two specific lines of the consolidated balance sheet as non-current assets and liabilities (see Note 6.9).
The proposed sale to BPCE S.A. of certain SFS entities currently controlled by Natixis S.A. was announced in September 2018 and the work required to complete this deal continued in the fourth quarter of 2018. The transaction should take place in the first quarter of 2019 after a capital increase by BPCE, which is a prerequisite for the deal’s completion, and the obtaining of the necessary authorizations from the supervisory authorities.
At December 31, 2018, Natixis continued to fully consolidate the subsidiaries concerned and, in accordance with the provisions of IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, combined the assets and liabilities of these entities in two separate balance sheet line items: “Non-current assets held for sale” and “Liabilities associated with non-current assets held for sale”. In accordance with IFRS 5, the figures for fiscal year 2017 for these subsidiaries have not been restated (see Note 8.9).
Natixis has also begun negotiations for the sale of its subsidiary Natixis Brazil. This fully consolidated entity’s assets and liabilities, at December 31, 2018, were not recognized, in line with IFRS 5, in non-current assets held for sale and liabilities associated with non-current assets held for sale, given that the amounts in question are not material. The sale should also lead to the recycling in profit or loss of a translation adjustment of -€21 million recognized at December 31 in “Recyclable other comprehensive income”.
FINANCIAL DATA Consolidated financial statements and notes 267Natixis Registration Document 2018
In the event of the total or partial disposal of an entity or the capital repayment of an entity, translation gains or losses are reclassified as income in proportion to the cumulative amount of the exchange differences recognized in recyclable other comprehensive income under “Translation adjustments”.
Natixis owns 51% of the capital of Fenchurch, exercises control over it within the meaning of IFRS 10, and fully consolidates this entity.
The main changes in scope since January 1, 2018 are as follows: Corporate & Investment Banking4.2.1
Deconsolidation of Nexgen Capital Ltd as of January 1, 2018 asa the percentage interest fell below eligible levels (see Note 3.1); Liquidation of Natixis Luxembourg Investissements in thea second quarter of 2018.
In the second quarter of 2018, the interest in Natixis Partnersa increased from 84% to 87% following the buying back of shares from executive officers.
The interest in DNCA Finance, DNCA Courtage, DNCAa Luxembourg and DNCA Finance Milan branch increased from 72% to 82% after Société de Cadres’ percentage interest in DNCA Finance rose from 6% to 9% on January 1, 2018, and some of the put options held by DNCA Finance’s managers were exercised in the second and third quarters; The interest in DNCA Management increased from 42% toa 72% after some of the put options held by DNCA Management’s managers were exercised in the second and third quarter; The interest in Purple Finance Clo 1 decreased from 100% toa 89% after 11% of the fund's equity was sold to outside investors; The interest in Natixis Caspian Private Equity LLC increaseda from 55% to 73% following the buying back of units from a manager who left the Company in the first quarter of 2018; The change in the net carrying amount of consolidated mutuala funds and seed money investments resulted in changes in percentage interests over the period, without affecting the principle behind fund consolidation (maintaining of the percentage interest above eligible thresholds). The affected funds were: DNCA Archer Mid-Cap Europe (interest decreased from 35% to 24%) and ASG Managed Futures (interest decreased from 53% to 25%); The percentage of ownership of Euro Private Equity and Euroa Private Equity France increased from 94% to 100% following the exercising of the last put options held by the structure’s managers in the third quarter of 2018; In the fourth quarter of 2018, Natixis Investment Managers solda part of its shares to the structure’s management as part of the reorganization of Seventure’s share ownership, reducing the percentage of ownership from 70% to 59%; As part of the reorganization of Ossiam’s share ownership, thea management increased its stake in the structure in the fourth quarter of 2018, reducing Natixis Investment Managers’ percentage of ownership from 83% to 75%.
Consolidation of the Allocation Pilotée Equilibre C Fund in thea first quarter of 2018 after the percentage interest rose above eligible levels (see Note 3.1); Consolidation of the Tulip Fund in the third quarter of 2018a after the percentage interest rose above eligible levels (see Note 3.1); Consolidation of the Mirova Europe Environnement C fund ina the fourth quarter of 2018 after the percentage interest rose above eligible levels (see Note 3.1).
In the first quarter of 2018, the interest in Lakooz decreaseda from 100% to 96% following a capital increase reserved for the founders; In the second quarter of 2018, the interest in Paypluga increased from 79% to 84% following the acquisition of an additional 5% of the capital from the founders; In the second quarter of 2018, the interest in Coficinéa decreased from 96% to 91% after a free share allocation plan was introduced for its executive officer.
The activities of the OPCI Natixis Lease Investment werea taken over by Natixis Bail in the third quarter of 2018.
Consolidation of the Coface Technologie Romania branch ina the first quarter of 2018.
Natixis Altair IT Shared Services’ activities were taken over bya Natixis S.A. on April 3, 2018; BPCE Immobilier Exploitation’s activities were taken over bya Natixis Immo Exploitation as from October 1, 2018.
At December 31, 2018, as at December 31, 2017, the main material subsidiary in which the Group had a non-controlling interest was Coface.
Impact of changes in percentage holdings in subsidiaries still under control 4.3.2 at December 31, 2018
The buying by Natixis of minority shareholders’ investments 60.00 100.00 (94) (179)
Impact of the loss of control during 4.3.3 the period of a subsidiary in which an interest has been retained
Natixis is subject to liquidity risk supervision, which requires the creation of a liquidity reserve limiting the use of the assets of which it is composed (see Note 3.2.87 “Balance sheet management” in Chapter [3], “Risk factors, risk management and the pillar III report”, of the registration document).
Natixis Financement is a stakeholder in partnerships in the form of sociétés en participation (SEPs) in which Natixis Financement and an institution from the Caisse d’Epargne or Banque Populaire network are associates.
Through these partnerships, the various associates contribute human and material resources and expertise. The associates remain the owners of the property or rights available for use by the Company (even in the event of the Company’s liquidation). The Company’s income is shared in accordance with allocation criteria set out in the bylaws. Decisions concerning the relevant activities of the SEPs are made unanimously. These partnerships are joint operations as defined in IFRS 11.
Natixis does not have interests in joint ventures that have a material impact on Natixis’ consolidated financial statements.
Natixis’ main investment consolidated using the equity method at December 31, 2018 is the EDF Investment group (EIG) entity.
The data for EIG established at December 31, 2018 and December 31, 2017 comply with IFRS as adopted by the European Union on that date and with the accounting principles and valuation methods applied to Natixis’ consolidated financial statements as presented in Note 6.
See below the financial information reconciliation table with the carrying amount calculated using the equity method.
variable returns associated with the performance of another entity. Interests in other entities may be evidenced by, among other things, ownership of equity instruments or debt securities, as well as by other links, such as financing, cash loans, credit enhancement and the issuing of guarantees or structured derivatives.
272 Natixis Registration Document 2018 a restricted scope of interests held in real estate funds andj external Private Equity funds for which Natixis acts simply as a minority investor.
In accordance with IFRS 10, consolidation analyses of structured entities are performed taking into account all the criteria referred to in Note 3.2.1.
1. Non-guaranteed mutual funds In the context of mutual funds, relevant activities are investment and divestment activities involving securities in fund assets. These activities are managed in a discretionary manner on behalf of investors by Natixis Investment Managers’ and Natixis Wealth Management’s management companies.
and incentive fees are obtained on the market and are consistent with the services rendered, since the asset management activity takes place on a competitive and international market.
As with non-guaranteed mutual funds, guaranteed mutual funds are subject to consolidation under IFRS 10 whenever Natixis acts as principal (e.g. Natixis acts as a non-revocable manager and holds a material interest). Guaranteed mutual funds subject to consolidation but not consolidated due to their materiality are listed in Note 19.1.
The relevant activities of these funds are those involving the investment and divestment of real estate assets. These funds are managed on behalf of investors by Natixis Investment Managers’ management companies (AEW Europe, AEW Central Europe, etc.).
As part of its Private Equity operations, Natixis makes equity investments in unlisted companies via Private Equity investment vehicles (Fonds Communs de Placement à Risque—FCPRs—Private Equity investment funds and SICARs—Sociétés d’Investissement à Capital Risque—venture capital companies) and limited partnerships which it typically manages.
The analysis criteria for IFRS 10 consolidation applied to Private Equity funds are the same as those applied to real estate funds. A fund is subject to consolidation if Natixis acts as principal (e.g. Natixis is a manager and is not revocable by a limited number of people and holds material variable returns). Private Equity funds subject to consolidation but not consolidated due to their materiality are listed in Note 19.1.
The following types of securitization are encountered at Natixis and involve structured entities: transactions through which Natixis (or a subsidiary) transfersa credit risk relating to one of its asset portfolios to a dedicated vehicle in cash or synthetic form; securitization transactions on behalf of third parties. Thesea transactions consist in placing the assets of a third-party company in a dedicated structure (generally a special purpose entity (SPE) or a conduit). The SPE issues units that may in some cases be subscribed to directly by investors, or subscribed to by a multi-seller conduit which refinances the purchases of its units by issuing short-maturity “notes” (treasury notes or commercial paper).
Natixis is mainly involved in these entities in its capacity as: structurer/arranger of securitization transactions;a originator of securities or loans held as assets pendinga securitization; credit risk intermediary between the market and thea securitization entity.
In 2018, as in 2017, Natixis disposed of a portfolio of loans granted to French and European companies by purchasing protection in the form of a perfectly collateralized on-demand guarantee.
In contrast, given that Natixis is not part of the governing body holding the power to decide on the Magenta conduit’s relevant activities, it is not consolidated in Natixis’ financial statements.
The Coface sub-group’s credit enhancement operations consist of insuring receivables securitized by a third party for investors via a structured entity for losses in excess of a predefined amount. A distinction must be made between the policies taken out by the German branch Coface Deutschland and those taken out by Compagnie Française d’Assurance pour le Commerce Extérieur: under the German policies, the credit insurer is only liable fora losses in excess of a deductible termed the aggregate first loss. This first loss tranche contractually defines the amount of first losses that are not covered by the credit insurer. The coverage provided by Coface Kredit via these policies is similar to “Natural disaster” type coverage. An analysis of these structures shows that the amount of the first loss is systematically higher than the expected loss, namely the average losses expected over the year. Furthermore, the activity of the structured entity is not conducted on behalf of the credit insurer, which is only a protection seller. Coface Kredit does not sponsor the securitization structures. Coface Kredit does not play any role in determining the activity of the structured entity, nor in its operational or administrative management. Coface Kredit has no power over the relevant activities of the securitization vehicle (selecting receivables comprising the portfolio, managing receivables, etc.). As the criteria for powers and significant exposure to returns are not met, these funds are not subject to consolidation;
The Natixis Lease sub-group owns a certain number ofa structured entities which own real estate assets. One of them is consolidated as Natixis has power over the relevant activities and is significantly exposed to the variability of returns. Entities subject to consolidation but not consolidated due to their lack of materiality are listed in Note 19.1.
Natixis Coficiné has relationships with:a structured entities created by producers to host a filmj production. Coficiné is involved only as a lender. It has no stake in the entity, which is wholly owned by the producer. Coficiné does not participate in managing the entity, as activity falls within the remit of the producer. Coficiné, and therefore Natixis, has no power over the relevant activities of these structured entities and has no control under IFRS 10; management fees at market rates consistent with the services rendered. Natixis does not hold any other interests in these structured entities. They are therefore not subject to consolidation under IFRS 10.
The table below shows the (i) carrying amount of interests held by Natixis in structured entities, broken down by major activities, as well as (ii) the maximum exposure to the risk of loss attributable to these interests.
Financial assets at fair value through profit or loss 450 1,170 1,021 399 3,040
Financial assets at fair value through equity - - 3 0 3
Notional amount of sales of options and CDS - - - - -
Financial instruments measured using the fair value option 21 5,065 213 - 5,298
Notional amount of sales of options and CDS 425 286 2,380 922 4,013
MAXIMUM EXPOSURE TO RISK OF LOSS 9,614 20,720 17,168 2,565 50,066
For Asset Management entities, guarantees given correspond to capital and/or performance guarantees given to mutual funds (see Note 5.1.3).
With respect to information that must be disclosed under IFRS 12, Natixis sponsors a structured entity when the two following indicators are both met: Natixis is involved in the creation and structuring of thea structured entity; Natixis contributes to the entity’s success by transferringa assets to it or by managing the structured entity’s relevant activities.
Net gains or losses on instruments at fair value through profit or loss 5 5 5 5
In accordance with IFRS 9 “Financial instruments”, on initial recognition, financial assets are recorded at amortized cost, at fair value through other comprehensive income, or at fair value through profit of loss. For debt instruments, the classification depends on the business model applicable to the instruments in question and the characteristics of their contractual cash flows (whether they represent Solely Payments of Principal and Interest (SPPI) or not).
IFRS 9 provides for three business models: Hold to collect model: in this model, financial assets are helda in order to receive contractual cash flows over the life of the assets. This model, under which the concept of “holding” is relatively similar to holding to maturity, remains valid if sales are made under the following conditions: the disposals are due to an increase in credit risk, j the disposals occur just before maturity and at a price thatj reflects the contractual cash flows that are still owed, other disposals may also be compatible with the “hold toj collect” model’s objectives if they are infrequent (even if their value is significant) or if their value is insignificant when considered both individually and overall (even if they are frequent).
For Natixis, the hold to collect model applies mainly to financing activities (excluding the loan syndication activity) carried out by Corporate & Investment Banking and Specialized Financial Services; Hold to collect and sell model: a mixed business modela under which assets are managed with the objective of both receiving contractual cash flows and selling financial assets. In this model, financial assets are sold to achieve the purpose of the activity.
Natixis applies the “hold to collect and sell” model primarily to portfolio management activities for securities in the liquidity reserve.
This business model applies to the loan syndication activity and the Capital Markets activities carried out by Corporate & Investment Banking.
A financial asset is considered as basic if its contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest on the outstanding amount due.
Natixis has introduced the operational procedures necessary to analyze the SPPI status of financial assets when they are initially recognized. A specific cash flow analysis is also carried out for securitization fund units or any other financial assets issued by structures that establish an order of payment priority between bearers and create concentrations of credit risk (tranches). Determining the SPPI status of these instruments requires an analysis of the contractual cash flows and credit risk of the assets concerned and of the portfolios of underlying financial assets (according to the look-through approach).
On subsequent balance sheet dates, they are measured at amortized cost using the effective interest method.
Interest accrued or received on debt instruments is recorded in income under “Interest and similar income” using the effective interest rate method. If the instruments are sold, the gain or loss is recorded in the income statement under “Net gains or losses arising from the derecognition of instruments at amortized cost”.
The accounting treatment of transactions recognized at amortized cost under IFRS 9 described above is similar to the treatment previously applied under IAS 39 for transactions recorded as loans and receivables.
If the discount is not material, the effective interest rate of the restructured loan is changed and no discount is recognized.
For restructured loans either fully or partially converted into a substantially different asset (such as an equity instrument or an instrument changing from fixed rate to variable rate and vice versa) or that have given rise to a change of counterparty: the new instruments are booked at fair value;a the difference between the carrying amount of thea derecognized loan and the fair value of the assets received in exchange is recorded in income under the provision for credit losses; any provision previously recorded on the loan is adjusted anda fully reversed if the loan is fully converted into a new asset.
Financial assets recognized at fair value through other comprehensive income mainly correspond to debt instruments: government securities and bonds.
For the record, the treatment of “Available-for-sale assets” under IAS 39 was identical to the accounting treatment to be applied under IFRS 9, with the exception firstly of the treatment of income from the sale of equity instruments, which was transferred from equity to income under “Gains or losses on available-for-sale financial assets” under IAS 39, and with the exception secondly of the provisions relating to impairment.
Financial assets recorded in the fair value category correspond to: financial assets held for trading: these are debt and equitya instruments acquired or originated by Natixis principally to be sold in the near term and those forming part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Guarantee deposits and the corresponding margin calls relating to securities sold under repurchase agreements and derivatives transactions recorded under liabilities in the balance sheet are also included in this item; financial assets under the fair value option: these are SPPIa instruments not held for trading. They are designated at fair value through profit or loss on initial recognition under IFRS 9 only if this option reduces a measurement inconsistency with a related financial asset/liability in income (referred to as an accounting mismatch under IAS 39); financial assets at fair value through profit or loss because ofa their characteristics: these are debt instruments that do not meet the SPPI criteria (see Note 6.1.2), for example mutual fund units, which are considered debt instruments without SPPI characteristics under IFRS 9. Non-SPPI debt instruments held for trading are presented with assets held for trading.
IAS 17, which sets forth the accounting treatment of leases, gives five examples of situations where substantially all of the risks and rewards incidental to ownership are transferred to the lessee: the lease transfers ownership of the asset to the lessee by thea end of the lease term; the lessee has the option to purchase the asset at a price thata is expected to be sufficiently below the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; the lease term is for the major part of the economic life of thea asset; at the inception of the lease, the present value of the minimuma lease payments amounts to at least substantially all of the fair value of the leased asset; the leased assets are of such a specialized nature that only thea lessee can use them without major modifications.
IAS 17 requires that non-guaranteed residual value be reviewed on a regular basis. If there has been a reduction in the estimated non-guaranteed residual value, the allocation of revenues over the lease term is revised (revised depreciation schedule) and any reduction in respect of amounts accrued is recognized immediately.
For consolidation purposes, property, plant and equipment used in the business and held under finance leases is restated and reported under “Property, plant and equipment” if it is material. At the inception of the lease term, leased property, plant and equipment is recognized at the lower of fair value and the present value of the minimum lease payments, with a corresponding entry under debt on the liability side of the balance sheet.
Debt instruments classified as financial assets at amortized cost or at fair value through other comprehensive income, loan commitments and financial guarantee contracts that are not recognized at fair value through profit or loss, as well as lease receivables, are impaired or covered by a provision for expected credit losses (ECL) as of the date of initial recognition.
These are performing loans for which credit risk has not increased materially since initial recognition. Impairment or provision for credit risk on these loans is recorded in the amount of 12-month expected credit losses. Interest income on these loans is recognized through profit or loss using the effective interest rate method applied to the gross carrying amount of the instrument before impairment.
Loans that are “impaired” as defined by IFRS 9 are transferred to this category. These are loans for which there is objective evidence of impairment loss due to an event that represents a counterparty risk occurring after the initial recognition of the instrument in question. This generally concerns, as was the case under IAS 39, receivables for which a default event has been identified as defined in Article 178 of the EU regulation of June 26, 2013 on regulatory requirements for credit institutions. The impairment or provision for credit risk is calculated according to the losses expected over the instrument’s residual lifetime (expected losses at maturity) based on the recoverable value of the receivable, i.e. the present value of the estimated recoverable future cash flows after taking the impact of any collateral into account. Interest income is recognized through profit or loss based on the effective interest method rate applied to the net carrying amount of the asset after impairment.
In addition, the standard makes a distinction between purchased or originated credit-impaired (POCI) assets, which correspond to financial assets purchased or created and already impaired for credit risk at their initial recognition and for which the entity does not expect to recover all the contractual cash flows at the date of initial recognition. POCI are impaired based on lifetime expected losses at the reporting date immediately following initial recognition.
The principles for measuring the increase in credit risk and expected credit losses applicable to most of the Group's exposures are described below.
More specifically, the change in credit risk is measured on the basis of the following criteria: for Large Corporates, Banks and Sovereigns loan books: ana increase in credit risk is measured based on a combination of quantitative and qualitative criteria. The quantitative criterion is based on the change in rating since initial recognition. Additional qualitative criteria are used to categorize as Stage 2 any contracts included on a non-S3 watch list, undergoing adjustments due to financial hardship (forbearance) or more than 30 days past due (the assumption that payments are more than 30 days past due was therefore not refuted). Additional criteria based on the sector rating and level of country risk are also used; measurement of the change in 12-month probability of default since initial recognition (probability of default measured as a cycle average). Additional qualitative criteria are used to categorize as Stage 2 any contracts rated at-risk, included on a watch list, undergoing adjustments due to financial hardship (forbearance) or more than 30 days past due (the assumption that payments are more than 30 days past due was therefore been refuted). Additional criteria based on the sector rating and level of country risk are also used.
Individual Customer, Professional Customer, SME, Publica Sector and Social Housing loan books: an increase in credit risk is measured based on a combination of quantitative and qualitative criteria. The quantitative criterion is based on the
Accordingly, loans and receivables are categorized as Stage 3 if both of the following conditions are met: there is objective evidence of impairment on an individual ora portfolio basis: there are “triggering events” or “loss events” identifying counterparty risk occurring after the initial recognition of the loans in question. On an individual basis, probable credit risk arises from default events defined in Article 178 of European regulation 575-2013 dated June 26, 2013 relating to prudential requirements applicable to credit institutions. Objective evidence of impairment includes any payments that are past due by at least three months, or regardless of whether any payment has been missed, the observation of financial hardship experienced by the counterparty leading to the expectation that some or all of the amounts owed may not be recovered or to the initiation of legal proceedings; these events are liable to lead to the recognition of incurreda losses, that is, expected losses for which the probability of occurrence has become certain.
Impairments for expected credit losses on Stage 3 financial assets are determined as the difference between the amortized cost and the recoverable value of the receivable, i.e. the present value of estimated recoverable future cash flows, whether these cash flows come from the counterparty's activity or from the potential execution of guarantees. For short-term assets (maturity of less than one year), there is no discounting of future cash flows. Impairment is determined globally, without distinguishing between interest and principal. Expected credit losses arising from Stage 3 financing or guarantee commitments are taken into account through provisions recognized on the liability side of the balance sheet. Specific impairment is calculated for each receivable on the basis of the maturity schedules determined based on historical recoveries for each category of receivable.
IFRS 9 parameters must be forward-looking and take intoa account the expected economic environment over the projection period, whereas prudential parameters correspond to the cycle’s average estimates (for PD) or bottom-of-the-cycle estimates (for LGD and the flows expected over the lifetime of the instrument). The PD and LGD prudential parameters are therefore also adjusted based on the expected economic environment.
The central scenario mainly draws on the outlook for the following macro-economic variables: the growth rate of the various economies (especially the G7a countries); the change in the interest rate curves;a the forecast change in French real estate prices.a
Parameters for periods longer than three years are projected on the principle of a gradual return to their long-term average. For consistency, the models used to alter the PD and LGD parameters are based on those developed in the stress test system. These economic scenarios are associated with probabilities of occurrence, ultimately making it possible to calculate an average probable loss used as the IFRS 9 impairment amount.
The mechanism for validating IFRS 9 parameters is fully integrated in the validation mechanism for existing models within Natixis and BPCE Group. As such, model validation undergoes a review process by an independent internal model validation unit.
For debt instruments recognized on the asset side of the balance sheet at amortized cost, impairments are recorded against the line on which the asset was initially shown at its net value (regardless of whether the asset is S1, S2, S3 or POCI). Impairment charges and reversals are recorded in the income statement under “Provision for credit losses”.
Overall hedging of interest rate risk Cash flow hedges are mainly used to hedge Natixis’ overall interest rate risk.
Prospective hedge effectiveness tests involve establishing (by index and currency): cumulative variable-rate borrowings and fixed-rate borrower swaps by maturity bracket, and cumulative variable-rate loans and fixed-rate lender swaps, by maturity bracket.
Accounting for cash flow hedges The effective portion of the gain or loss on the hedge is recognized directly in equity, while the ineffective portion is taken to income at each reporting date under “Net gains or losses on financial instruments at fair value through profit or loss”. No specific entries are made to hedged items (other than those that would be made if they were not hedged).
If a hedging relationship is discontinued, for example when hedge effectiveness is outside the 80%-125% range, the derivative must be reclassified in financial instruments at fair value through profit or loss, while the cumulative amount relating to the effective portion of the hedge that has been carried directly in recyclable other comprehensive income under “Unrealized or deferred gains or losses” is recycled to income when the hedged item itself affects income.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the spot rate prevailing at the reporting date. All of the resulting foreign exchange gains and losses are recognized in income, except in two cases: only the portion of the foreign exchange gains and lossesa calculated based on the amortized cost of financial assets at fair value through other comprehensive income is recognized in income, the remainder being recognized in “Gains and losses recognized directly in equity”; foreign exchange gains and losses from monetary itemsa designated as cash flow hedges or part of a net investment in a foreign entity are recognized in “Gains and losses recognized directly in equity”.
The mid-market price is obtained based on: the quoted price if the instrument is quoted on an active market.a A financial instrument is regarded as quoted on an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring transactions on an arm’s length basis on the main market or, failing that, the most advantageous market; valuation techniques if the market for a financial instrument isa not active. The techniques used must maximize the use of relevant observable entry data and minimize the use of non-observable entry data. They may refer to observable data from recent transactions, the fair value of similar instruments, discounted cash flow analysis and option pricing models, proprietary models in the case of hybrid instruments or non-observable data when no pricing or market data are available.
Additional valuation adjustments incorporate factors related to valuation uncertainties, such as market, credit and liquidity risks in order to account, in particular, for the costs resulting from an exit transaction on the main market. Similarly, a Funding Value Adjustment (FVA) aiming to account for—through assumptions—costs associated with the funding of future cash flows of uncollateralized derivatives or imperfectly collateralized derivatives is also taken into account.
Value adjustment for own credit risk (Debit Valuation Adjustment – DVA) and funding valuation adjustment (FVA)
Fair values determined by reference to external quoted prices or market parameters are validated by an independent unit (the Market Data Control Department). Second-level controls are carried out by the Risk Department.
The factors taken into account include the following: the origin of the external source (stock market pages, contenta contribution services, etc.); the consistency of the various sources; a the frequency at which the data are updated;a the representative nature of inputs based on recent marketa transactions.
Financial assets and liabilities measured and presented at fair value are categorized based on the following scale: level 1: market value is determined directly using prices quoteda on active markets for identical assets and liabilities; level 2: market value is determined using valuation techniquesa based on significant data that may be directly or indirectly observed on the markets; level 3: market value is determined using unrecognized modelsa and/or models based on non-observable market data, where they are liable to materially impact the valuation.
Financial assets and liabilities categorized according to the fair value hierarchy and a description of the key models are presented in Note 8.5.
Guarantee mechanism for the assets 6.7 of the former GAPC hive-off vehicle
FINANCIAL DATA Consolidated financial statements and notes 287Natixis Registration Document 2018
As soon as they are in a condition to be used by Natixis in the manner in which they were intended, property, plant and equipment and intangible assets are depreciated or amortized over their estimated useful lives on a straight-line, declining or increasing balance basis, whichever best reflects the pattern in which the economic benefits are consumed. The residual value of the asset is deducted from its depreciable or amortizable amount when it can be measured reliably. Natixis does not believe it can
In line with IAS 16, a specific depreciation schedule is defined for each significant component of an item of property, plant and equipment which has a different useful life or is expected to consume future economic benefits differently from the item as a whole. For buildings used in the business and investment property, the following components and depreciation periods have been identified: Component Depreciation period
Other items of property, plant and equipment are depreciated over their estimated useful lives, generally five to ten years.
The charge to write-down or amortization is recognized in the consolidated income statement under the heading “Depreciation, amortization and impairment of property, plant and equipment and intangible assets”.
Gains or losses on disposals of assets used in the business are recognized in the income statement under “Gains or losses on other assets”, while gains and losses on disposals of investment property are recorded within “Income from other activities” or “Expenses from other activities”.
A group held for sale may be a group of CGUs, a CGU or part of a CGU. The Group may include the entity’s assets and liabilities, including current assets, current liabilities and assets that are outside the scope of the measurement provisions under IFRS 5. If a non-current asset within the scope of the measurement provisions under IFRS 5 is part of a group held for sale, the measurement provisions under IFRS 5 apply to the Group as a whole, which means that the Group is measured at the lower of its carrying amount or its fair value net of selling costs.
The subsidiaries for which Natixis has committed to a plan to sell assets are listed in Note 3.6 “Subsidiaries held for sale”.
These are financial liabilities held for trading (including derivatives) or classified in this category on a voluntary basis at initial recognition using the fair value option available under
Securities valued under this irrevocable option fall into one of the following three categories: instruments that are part of a group of financial assetsa measured and managed at fair value: the option applies to liabilities managed and measured at fair value, provided the management follows a fair value risk management policy; instruments showing an accounting mismatch with a relateda financial asset/liability: applying the option enables the elimination of accounting mismatches stemming from the application of different valuation rules to instruments managed under a single strategy; hybrid instruments with one or more significant, separablea embedded derivatives: an embedded derivative is the component of a financial or non-financial hybrid instrument that qualifies as a derivative. The option allows the entire instrument to be measured at fair value, and therefore avoids the need to extract, recognize or separately measure the embedded derivative.
290 Natixis Registration Document 2018 a) Provisions for restructuring A provision for restructuring costs is recognized when the following standard criteria for recognizing provisions and the two following conditions are met: there is a detailed formal plan for the restructuring on thea closing date, identifying at least: the operations or part of the operations concerned,j the principal locations affected,j the location, function, and approximate number ofj employees who will be compensated upon termination of their services, the expenditures that will be undertaken,j and the date the plan will be implemented;j
b) Provisions for risks and litigation A description of the main risks and litigation to which Natixis is exposed is given in Section 3.2.9 of Chapter [3], “Risk factors, risk management and the pillar III report”.
The provisions booked on the liability side of Natixis’ financial statements as at December 31, 2018 and as at December 31, 2017, are presented in Note 8.17 “Summary of provisions”, and the possible allocations are set out in Note 7.6 “Other income and expenses”, Note 7.7 “Operating expenses” and Note 7.8 “Provision for credit losses”.
In accordance with IAS 19, employee benefits are classified in one of four categories: “short-term benefits”, including salaries, social securitya contributions, annual leave, employee profit-sharing, incentive plans, top-up contributions and bonuses payable for the period; “severance payments”, comprising employee benefitsa granted in return for termination of a staff member’s employment before the normal retirement age, resulting from a decision by the entity, or a decision by the employee to accept a severance package in exchange for terminating their employment; “post-employment benefits”, such as pensions, othera supplementary retirement benefits applicable to the banking industry, end-of-career awards and other contractual benefits payable to retirees; “other long-term employee benefits”, including long-servicea awards and deferred compensation payable in cash under Employee Retention and Performance Recognition Plans.
Revaluation adjustments for actuarial debt related to changes in actuarial assumptions and experience adjustments (impact of differences between actuarial assumptions and actual experience) are booked under items not recycled to comprehensive income among “Gains and losses recognized directly in other comprehensive income”.
FINANCIAL DATA Consolidated financial statements and notes 291Natixis Registration Document 2018
deeply subordinated notes and preference shares are classifieda in equity in light of the 2009 renegotiation of a clause making the payment of interest non-optional in the event of positive consolidated income and which has since become discretionary; the change over the fiscal year is presented in Note 6.17a “Changes in subordinated debt over the period”, and in Note 13.3 “Capital management”; however, if an instrument is considered equity:a its compensation is treated as a dividend and thereforej affects equity, as do the taxes related to this compensation, if issued in foreign currencies, it is fixed at its historical valuej resulting from converting it to euros on the date it was initially classified under equity; the share of third party investors in the net assets of dedicateda mutual funds included in Natixis’ consolidation scope comprises a financial liability recorded on the balance sheet under “Financial liabilities at fair value through profit or loss”. The share of third party investors in the profits of the mutual funds is recorded in “Net gains or losses on financial instruments at fair value through profit or loss” in the consolidated income statement; the units held by third party investors in dated funds, which area fully consolidated by Natixis, entitling the unit-holders to the repayment of a share of the fund’s net assets upon its liquidation, are classified in liabilities on the consolidated balance sheet under “Accruals and other liabilities”. The share of third party investors in the fund’s profits is recorded under “Interest and similar expenses” on the consolidated income statement.
The main assumptions applied for valuing the advantages related to capital increases reserved for employees are provided in Note 12.2.4.
The method of accounting for fees and commissions received depends on the end purpose of the services rendered and the method of accounting for the financial instruments to which the service relates.
If uncertainty remains regarding the measurement of a fee amount (performance fee for asset management, variable financial engineering fee, etc.), only the amount for which the Group’s entitlement is already assured given the information available on the reporting date is recognized.
The tax expense for the year comprises: tax payable by French companies at the rate of 34.43% for thea fraction of the profit exceeding €500,000 (28% of €0 to €500,000) or at the rate in force locally for foreign companies and branches; deferred taxes arising from temporary differences between thea carrying amount of assets and liabilities and their tax basis, which are calculated using the balance sheet liability method.
The tax rate applied to deferred tax assets in France takes into account the tax cuts voted for under the 2017 and 2018 Finance Acts. These acts provide for a gradual reduction of corporate tax, which (excluding the impact of the 3.3% social security contribution) will fall to 31% in 2019 and 28% in 2020, 26.5% in 2021 and 25% in 2022 and thereafter.
The reduction of the federal corporate tax rate from 35% to 21% voted for in the United States in December 2017 is applicable from January 1, 2018. The implementation of federal income tax reductions also includes a measure limiting the deduction of tax loss carryforwards and the implementation of a minimum profit-based tax (Base Erosion and Anti-abuse Tax [BEAT] payment). Neither of these changes were deemed likely to have a significant impact on the income gained from the reduction in the federal tax rate.
The Employment Competitiveness Tax Credit (CICE) was considered to fall under IAS 19—Employee Benefits. As a result, this tax credit is presented as a deduction from the related payroll costs.
Financial guarantees given are stated initially at fair value, then subsequently at the higher of: the amount initially recognized upon inception less, wherea appropriate, the amount of amortization recorded in line with the principles outlined in IAS 15 “Revenue from Contracts with Customers”. This amortization represents the deferred recognition of the fees received over the period covered by the guarantee; and the amount of the provision determined according to thea provisions of the expected credit loss model (see Note 6.3).
All the financial guarantees issued by insurance subsidiaries that also meet the definition of an insurance contract were accounted for in line with the requirements of IFRS 4 “Insurance Contracts” (see Note 9).
Specific case of guarantees issued to mutual funds Natixis guarantees the capital and/or returns on units in certain mutual funds. These guarantees are executed solely in the event that the net asset value of each of the units in the fund at maturity is lower than the guaranteed net asset value.
There are no IFRS standards covering financial guarantees received (other than derivatives or insurance contracts). In the absence of specific guidance, the accounting treatment applied must be determined by analogy with the accounting treatment prescribed by other standards in similar situations. Accordingly, guarantees received meeting the definition of a financial guarantee for an issuer are accounted for in accordance with: losses associated with financial assets must in fact take into account the flows generated by guarantees considered an integral part of the debt instrument; IAS 9, for guarantees received in respect of financial assetsa (debt instruments). The measurement of the expected credit
The specific treatment applied to the guarantee granted to Natixis by BPCE regarding former GAPC hive-off assets is disclosed in Note 6.7.
The vast majority of the financing commitments granted by Natixis give rise to loans granted at market rates at the grant date and recognized at amortized cost. As such, and in accordance with IFRS 9, the commitment to lend and the loan itself are considered successive stages of one and the same instrument. The commitment to lend does not, therefore, fall within the scope of IFRS 9: it is treated as an off-balance sheet transaction and is not revalued. Financing commitments are eligible for the provisioning mechanism under IFRS 9, however (see Note 6.3). IFRS 9 provides that the issuer of a financing commitment must apply provisioning criteria to loan commitments that do not fall within the scope of this standard. The provisions recognized in respect of these commitments are presented in Note 8.17 “Summary of provisions”.
In accordance with delegated regulation 2015/63 and implementing regulation 2015/81 supplementing the BRRD Directive on ex-ante contributions to financing mechanisms for the resolution, the Single Resolution Board set the level of contributions to the Single Resolution Fund for 2017. Contributions paid to the fund may be made in cash security deposits recognized as assets on the balance sheet (15% in cash security deposits) and in contributions recorded in income as “Taxes and regulatory contributions” (see Note 7.7).
The impairment model for expected credit losses is based on parameters and assumptions that affect provisions and value adjustments for losses. These parameters and assumptions are based on current and/or historical data, which also include reasonable and justifiable forecasts such as the estimating and weighting of future economic scenarios. Natixis also considers the opinions of its experts when estimating and applying these parameters and assumptions.
Natixis calls on independent actuaries to calculate its principal employee benefits. These commitments are determined using assumptions such as the salary growth rate, discount rates and rates of return on plan assets (see Note 12.2.3). These discount rates and rates of return are based on observed market rates at the end of each calculation period (e.g. the yield curve on AA Corporate bonds for discount rates). When applied to long-term benefit obligations, these rates introduce uncertainty into the valuations.
FINANCIAL DATA Consolidated financial statements and notes 295Natixis Registration Document 2018 for credit insurance, claims reserves include an estimate ofa claims reported but not settled at the reporting date. In addition to the amount of claims payable, a provision is set aside for unknown claims, calculated on a statistical basis in reference to the final amount of claims to be paid following settlement of risks and any debt recovery measures. Provisions for debt recovery procedures, representing estimates of expected recoveries, are calculated by applying a terminal recovery rate to all subscription periods not yet settled.
In the event of a deferred profit-sharing asset, a recoverability test is carried out to verify that liquidity requirements arising from an unfavorable economic environment do not force the sale of assets and generate unrealized losses. This recoverability test relies on projected future cash flows based on various economic assumptions about historical redemptions and inflows (see
Given this situation, Natixis has prepared for the various possible scenarios and is monitoring the progress of the negotiations and their potential consequences, to incorporate them, where necessary, in the assumptions and estimates made when preparing the consolidated financial statements.
European regulation (EU) 2016/1011 of June 8, 2016 on the indices used as benchmarks (“the Benchmarks regulation” or “BMR”) introduces a common framework aimed at guaranteeing the accuracy and integrity of the indices used as benchmarks for financial instruments and contracts, or to measure the performance of investment funds within the European Union.
The purpose of the Benchmarks regulation is to regulate the provision of benchmarks, the provision of data underlying benchmarks, and the use of benchmarks, within the European Union. It provides for a transition period for administrators, who have until January 1, 2020 to be approved or registered. After this date, the use by entities supervised by the EU of benchmarks whose administrators are not approved or registered (or, if they are not located in the EU, are not subject to equivalent or otherwise recognized or approved regulations) will be prohibited.
Work in the euro zone to propose new indices is not yet complete.
Since the first half of 2018, Natixis has had a project structure tasked with anticipating the impact of the benchmarks’ discontinuation in the near future, from a legal, commercial, financial and accounting viewpoint. Regarding this last aspect, particularly close attention is being paid to the issues of fair value, the application of the SPPI criterion, hedging relationships and derecognition.
Diluted earnings/(loss) per share corresponds to net earnings/(loss) for the period attributable to the Group, divided by the weighted average number of shares, adjusted for the maximum impact resulting from the conversion of dilutive instruments into ordinary shares. Stock options issued are taken into account in calculating diluted earnings/(loss) per share. The conversion of these instruments does not impact net income/(loss) used to calculate diluted earnings/(loss) per share.
Net earnings/(loss) attributable to shareholders (in millions of euros) (a) 1,480 1,575
Average number of shares used to calculate earnings/(loss) per share 3,141,934,648 3,135,991,405
Average number of ordinary shares outstanding over the period 3,144,191,001 3,137,311,715
Average number of shares used to calculate diluted earnings/(loss) per share 3,150,384,808 3,142,072,388
The difference between net income (Group share) and net income/(loss) attributable to shareholders corresponds to the interest generated on (a) deeply subordinated notes and on preference shares, i.e. -€96.5 million at December 31, 2018 and -€94 million at December 31, 2017.
Financial instruments to be valued at fair value through profit or loss 81 81
FINANCIAL DATA Consolidated financial statements and notes 297Natixis Registration Document 2018
Interest accrued on impaired receivables (incl. restructured items) 34 0 34
Of which €1,371 million of NII in December 2017 for the insurance entities.(a)
The first-time application of IFRS 15 did not have an impact on the accounting principles applicable to fee and commission income and expenses.
Of which performance fees in the amount of €426 million (of which €420 million for Europe) at December 31, 2018, versus €287 million (of which (a) €266 million for Europe) at December 31, 2017.
Of which net fee and commission income of -€1,170 million at December 31, 2018, versus -€765 million at December 31, 2017, for insurance (b) activities, for which the related income is presented as “Net income from insurance activities”.
Gains and losses on financial instruments at fair value through profit or loss7.3
Net gains/(losses) on financial assets and liabilities under the fair value option 1,374 495
“Net gains/(losses) on financial assets and liabilities held for trading” include:(b)
Furthermore, credit risk adjustments related to the valuation of counterparty risk (credit valuation adjustments or CVA) on financial assets amounted to -€27.4 million (expense) at December 31, 2018, versus income of +€78.2 million at December 31, 2017 ; - the Funding Valuation Adjustment (FVA) used on uncollateralized derivatives or imperfectly collateralized derivatives is also recognized on this line in the amount of -€64.1 million (expense) at December 31, 2018, versus income of €24.7 million at December 31, 2017; - at December 31, 2018, a net expense of €86 million was recorded for the portfolio of specific products in Asia referred to in the key events. The additional reserves set aside for this portfolio amounted to €173 million; Of which a +€891 million insurance contribution in 2017, including +€676 million from adjustments to investments in unit-linked products. These (c) transactions are presented in net insurance activity investments in 2018.
Unrealized gains and losses recognized over the period are presented in the “Statement of net income (loss) and gains and losses recorded directly in other comprehensive income”.
This line item includes gains and losses resulting from the derecognition of debt securities and loans and receivables recognized at amortized cost, including the impact of hedging instruments.
Including an expense of €25 million recorded for a legal dispute concerning formula-based investment funds at December 31, 2017.(a)
Gains or losses on disposals 16 (32) (16) 34 (61) (26)
Other related income and expenses 173 (155) 18 166 (145) 20
Credit management services generated €39 million at December 31, 2017. They are presented in “Net income from insurance activities” from (b)
Operating expenses7.7 in accordance with IFRS 2. A breakdown of these expenses is provided in Note 12.
Operating expenses mainly comprise payroll costs, including wages and salaries net of rebilled expenses, social security expenses and employee benefits such as pensions (defined benefit plans), and expenses relating to share-based payment recognized
The amount recognized for 2018 in respect of the retention and performance plans includes an expense of €27 million (versus €76 million at (b) December 31, 2017) for the portion of compensation paid in cash and indexed to the Natixis share price, and an additional expense of €17 million (versus €9 million at December 31, 2017) for the portion of compensation settled in Natixis shares.
Of which €1.8 million in expenses at December 31, 2018, versus €1.5 million in expenses at December 31, 2017 for the Coface restructuring (c) plan.
FINANCIAL DATA Consolidated financial statements and notes 301Natixis Registration Document 2018
This line item primarily includes income related to the recognition of credit risk as defined by IFRS 9: cash flows on provisions and impairments for 12-month anda lifetime expected credit losses related to: debt instruments recognized at amortized cost or at fairj value through other comprehensive income, lease receivables,j loan or guarantee commitments given that do not fit thej definition of derivative financial instruments; losses on irrecoverable loans, and recoveries of loansa previously recognized as losses.
Provisions for impairments of financial assets (1,114) 1,019 (70) 14 (152)
Unimpaired financial assets—12-month expected credit losses (70) 61 0 0 (10)
Unimpaired financial assets—Lifetime expected credit losses (326) 418 0 0 92
This line item mainly reflects net risk recorded on lending transactions and any impairments recorded in respect of proven default risks associated with counterparties of OTC financial instruments.
Net capital gains/(losses) on disposals 49 5 54 53 (4) 48
Of which +€3.6 million following the disposal and scrapping of intangible assets, and +€1.3 million following the disposal and scrapping of (b) property, plant and equipment.
Of which +€21.5 million related to the disposal of Ellisphère and IJCOF, and +€9.9 million related to the disposal of the two Caspian Private (c) Equity companies.
Reconciliation of the tax expense in the financial statements and the theoretical tax 7.10 expense
= Consolidated net income/(loss) before tax, goodwill amortization and share in income of associates 2,632 2,624
Financial assets and liabilities at fair 8.1 value through profit and loss
The table below shows the breakdown of financial assets at fair value through profit and loss by instrument type.
Financial assets designated under the fair value option (c) Total (e)
Derivative instruments not eligible for hedge accounting (d) 57,161 0 0 57,161 60,014 0 0 60,014
Financial instruments that must be measured at fair value through profit or loss include non-SPPI debt instruments in the amount of (b) €2,263 million at December 31, 2018, and equity instruments totaling €752 million at December 31, 2018 that we have opted not to recognize in other comprehensive income.
Only in the case of an accounting mismatch as defined by IFRS 9 (see Note 6.1.5).(c)
Conditions for classification of financial liabilities under 8.1.2.1 the fair value option
Financial liabilities are designated at fair value through profit and loss when this choice provides more pertinent information or when the instruments incorporate one or more significant and separable embedded derivatives (see Note 5).
The use of the fair value option is considered to provide more pertinent information in two situations: where there is an accounting mismatch between economicallya linked assets and liabilities. In particular, the fair value option is used when hedge accounting conditions are not met: in such cases, changes in the fair value of the hedged item automatically offset changes in the fair value of the hedging derivative; where a portfolio of financial assets and liabilities is manageda and recognized at fair value as part of a documented policy of asset and liability management.
Under IAS 39, liabilities designated at fair value also mainly consisted of long-term structured repos indexed to a basket of equities whose risks are managed globally and dynamically. These liabilities, which follow a trading business model as defined by IFRS 9, were recategorized as financial assets at fair value through profit or loss.
Financial liabilities under the fair value option for which credit risk is recognized in shareholders’ equity.
The fair value, determined using the calculation method described in Note 8.5, recorded in respect of internal credit risk on Natixis issues, totaled (b) -€114.9 million at December 31, 2018, versus €274.8 million at December 31, 2017. Besides changes in the outstanding amount, this difference reflects changes in the Natixis spread since the close of the previous year’s accounts.
Natixis has contracted Total Return Swaps (TRS) with BPCE. These instruments are used to hedge changes in the fair value recognized since (a) July 1, 2009 on instruments previously linked to the former GAPC hive-off carried at fair value through profit or loss at December 31, 2018 and are included on this line for an amount of €0.1 million in assets (versus €4.5 million at December 31, 2017) and €11.7 million in liabilities (versus €10.3 million at December 31, 2017).
Natixis has contracted a call option with BPCE for the purpose of recovering in 10 years’ time any net gains in fair value transferred to BPCE via (b) TRS. The call option was recognized on this line in assets for €569.6 million at December 31, 2018, versus €559.5 million at December 31, 2017.
FINANCIAL DATA Consolidated financial statements and notes 307Natixis Registration Document 2018
Gross amount of financial liabilities recognized in the balance sheet *
Financial liabilities designated at fair value through profit or loss 158,619 28,977 129,641 97,428 23,310 74,118
Net exposure Financial instruments Guarantees given in cash Financial instruments Guarantees given in cash
Corresponds to unimpaired financial assets for which value adjustments are calculated based on 12-month expected credit losses (Stage 1) or (a) lifetime expected credit losses (Stage 2).
Unimpaired assets for which expected credit losses are measured over 12 months
Contracts fully repaid or sold during the period (3,473) 0 (4) (3,477) 0
Investments in unlisted and unconsolidated companies (a) 126 2 0 12 (4)
The total amount of changes in fair value reclassified as “Retained earnings” over the period that was related to disposals was -€4 million for (a) fiscal year 2018.
Of which €44,444 million for insurance activities at December 31, 2017.(a)
In 2017, the permanent impairment of variable-income securities stood at €27 million. This relates to insurance portfolios for €15 million, the (c) impact of which was neutralized by a respective 89% given the profit-sharing mechanism. The 2017 expense can be broken down into additional impairment on securities previously impaired for €18 million, including €7 million for insurance portfolios and an allowance of €9 million for newly impaired securities in accordance with the application of analysis criteria, as defined in the accounting principles and methods, primarily applicable to insurance portfolios.
For financial reporting purposes, the fair value of financial and non-financial instruments has been broken down in accordance with a fair value hierarchy that reflects the observability of data used to make these assessments (see Note 6.6). The three levels of the fair value hierarchy are presented below.
Financial assets held for trading 152,037 31,342 117,806 2,889 o/w debt instruments in the form of securities 12,190 7,976 4,139 75 o/w loans and receivables 99,184 96,370 2,814 o/w security deposits paid 17,903 665 17,238
Derivative instruments not eligible for hedge accounting (positive fair value) 57,161 1,449 53,162 2,548
Financial instruments to be valued at fair value through profit or loss 4,886 1,308 2,088 1,490 o/w debt instruments in the form of securities 2,263 1,134 268 862 o/w loans and receivables 1,871 1,820 51
The data at December 31, 2018 regarding the fair value measurements for the insurance activities are presented in Note 9.4.4.
Financial liabilities held for trading 33,485 20,690 12,796 o/w securities issued for trading purposes 21,062 20,690 373 o/w security deposits received 12,423 12,423
Derivative instruments not eligible for hedge accounting (negative fair value) 57,161 1,036 54,071 2,054
Financial assets designated under the fair value option 70,882 14,438 53,110 3,334
Other financial assets under the fair value option 52,219 22 51,398 799
Hedging derivatives (assets) 339 339 0 o/w interest rate derivatives 339 339 0
Derivative instruments not eligible for hedge accounting (negative fair value) 59,783 590 57,249 1,945
Instruments measured using Level 2 inputs also include: securities that are less liquid than those classified as Level 1,a whose fair value is determined based on external prices put forward by a reasonable number of active market makers and which are regularly observable without necessarily being directly executable (prices mainly taken from contribution and consensus databases); where these criteria are not met, the securities are classified as Level 3 fair value; securities not quoted on an active market whose fair value isa determined based on observable market date. E.g. use of market data published by listed peer companies or the multiple method from techniques commonly used by market participants; Greek sovereign securities, whose fair value was recordeda under Level 2 given the wide bid-ask price spread on market prices; mutual fund units whose NAV is not determined and publisheda on a daily basis, but are subject to regular reporting or offer observable data from recent transactions; debt issues measured under the fair value option. Thea valuation of the “issuer credit risk” component is based on the discounted cash-flow method, using inputs such as yield curves, revaluation spreads, etc. For each issue, this valuation represents the product of its remaining notional amount and its sensitivity, taking into account the existence of calls, and based on the difference between the revaluation spread (based on BPCE’s cash reoffer curve at December 31, 2018, as on previous reporting dates) and the average issue spread. Changes in the issuer spread are generally not material for issues with an initial maturity of less than one year.
Complex instruments Some more hybrid and/or long-maturity financial instruments are measured using a recognized model on the basis of market inputs derived from observable data such as yield curves, implied volatility layers of options, market consensus data or active over-the-counter markets.
The main models for determining the fair value of these instruments are described below by type of product: Equity products: complex products are valued using:a market data;j the “payoff”, i.e. a calculation of positive or negative cashj flows attached to the product at maturity; a model of changes in the underlying asset.j
Fixed-income products: fixed-income products generally havea specific characteristics which justify the choice of model. The valuation of the payoff will take into account all underlying risk factors.
SBGM and Hunt Kennedy models are used to value fixed-income products that are sensitive to volatility smiles (i.e. implied change in volatility relative to the exercise price) and to autocorrelation (or correlation between interest rates).
The margin generated when these instruments begin trading is immediately recognized in income.
Level 3 comprises instruments measured using unrecognized models and/or models based on non-observable market data, where they are liable to materially impact the valuation. This mainly includes: unlisted shares whose fair value could not be determined usinga observable inputs; Private Equity securities not listed on an active market,a measured at fair value with models commonly used by market participants, in accordance with International Private Equity Valuation (IPEV) standards, but which are sensitive to market fluctuations and whose fair value determination necessarily involves a judgment call; structured or representative of private placements, held by thea insurance business line; hybrid interest rate and currency derivatives and credita derivatives that are not classified in Level 2; loans in the syndication process for which there is noa secondary market price; loans in the securitization process for which fair value isa determined based on an expert appraisal; investment property whose fair value is obtained using aa multi-criteria approach based on the capitalization of rents at the market rate combined with a comparison with market transactions; instruments with a deferred day-one margin;a mutual fund units for which the fund has not published aa recent NAV at the valuation date, or for which there is a lock-up period or any other constraint calling for a significant adjustment to available market prices (NAV, etc.) given the low liquidity observed for such securities; instruments carried at fair value on the balance sheet and fora which data are no longer available due to a freeze in trading in the wake of the financial crisis, which were not reclassified as “Loans and receivables” pursuant to the amendment to IAS 39 and IFRS 7 published on October 13, 2008 (see below). When there is a significant drop in trading in a given market, a valuation model is used based on the only available relevant data.
Under IAS 9, day-one profit should be recognized only if it is generated by a change in the factors that market participants would consider in setting a price, i.e. only if the model and parameters input into the valuation are observable.
Volatility cap/floor Black & Scholes Interest rate vol. for currencies absent from Totem or long maturities
Hybrid model coupling an equity diffusion, a FX diffusion and a fixed income diffusion
At December 31, 2018, as explained in the key events, a portfolio of derivatives in Asia underwent a transfer to Level 3 in the fair value hierarchy. For the record, these are products which are indexed to the worst performance of an underlying basket of shares (indices and shares) that allow investors to receive enhanced periodic coupons in return for a risk of loss of capital at maturity, with the possibility that the product may expire early. The outstandings in question have a fair value recorded on the asset side of the balance sheet of €130 million at December 31, 2018.
The bearish market in Asia revealed the limitations of the business model associated with these products and led to the supplementing of the reserve mechanism by introducing an additional reserve to allow for the model’s shortcomings. As this reserve requires judgment (specifically the anticipation of changes in market conditions, portfolio behavior, and so on), the valuation of the products to which it relates is no longer directly observable, and so the latter have been transferred to fair value Level 3 from Level 2, where they were classified previously, due to the unobservability of the parameters, the model used and the liquidity observed.
Other instruments not exposed to US housing risk measured b) by Natixis using a valuation model
FINANCIAL DATA Consolidated financial statements and notes 319Natixis Registration Document 2018
Financial assets and liabilities at fair value measured using level 3 of the fair value hierarchy8.5.1
Financial assets held for trading 151 2,448 0 2,598 60 88 0 7,550 (7,482) (0) 14 (0) 0 61 2,889 o/w debt instruments in the form of securities 151 (12) 0 139 (68) 1 0 56 (68) (0) 14 (0) 0 2 75
Derivative instruments not eligible for hedge accounting (positive fair value) 2,981 (11) 0 2,970 (38) (129) 0 172 (366) (206) 148 (2) 0 0 2,548
Financial instruments to be valued at fair value through profit or loss 0 1,448 0 1,448 94 21 (0) 183 (427) (0) 160 8 0 4 1,490 o/w debt instruments in the form of securities 0 358 0 358 47 22 0 105 (230) 0 160 401 0 0 862
Available-for-sale financial assets 427 (427) 0 0 0 0 0 0 0 0 0 0 0 (0) 0
Financial liabilities under the fair value option through profit or loss 1,469 (1,097) 0 373 (15) 1 0 11 (190) - 1 0 4 1 185 o/w securities under the fair value option 373 0 0 373 (14) 1 0 11 (190) - 1 0 0 1 182 o/w other financial liabilities under the fair value option 1,097 (1,097) 0 0 (1) 0 0 0 0 - 0 0 4 0 3
TOTAL FINANCIAL LIABILITIES RECOGNIZED AT FAIR VALUE 3,414 (11) 0 3,404 495 (559) 0 1,602 (1,370) (176) 14 2 4 1 3,415
FINANCIAL DATA Consolidated financial statements and notes 321Natixis Registration Document 2018
Fixed-income securities held for trading 257 (3) (1) 95 (70) (122) 1 (6) 151
Derivative instruments not eligible for hedge accounting (positive fair value) 2,949 141 (123) 160 (1,218) (24) 1,103 (4) 3 (1) 2,985
Financial assets designated under the fair value option through profit or loss 2,891 72 19 2,008 (1,611) (0) 9 (54) 3,334
Available-for-sale financial assets 3,962 1 94 187 324 (600) (157) 143 17 21 (10) 3,982
Available-for-sale securities – Equity investments 879 (4) 97 (20) 40 (438) 0 1 21 (8) 569
Financial liabilities at fair value through profit and loss – Trading 830 (306) (13) 360 (206) (55) 1,335 0 1,945
Financial liabilities under the fair value option through profit or loss 771 72 (79) 1,261 (607) 51 (0) 1,469
Securities under the fair value option 93 (6) (0) 243 (8) 51 (0) 373
Sensitivity of the fair value of financial instruments measured using unobservable inputs was estimated at December 31, 2018. With the aid of probable assumptions, this sensitivity was used to estimate the impacts of market fluctuations in uncertain economic environments. This estimate was performed using: adjustments to a “standardized(1)” variation in unobservablea inputs related to additional funding value adjustment assumptions for fixed income, currency and equity instruments. The resulting sensitivity was €192.9 million; a flat variation of:a
(in millions of euros) Level 3 closing balance at 31/12/2017 IAS 39 Impact of change 01/01/2018
FINANCIAL DATA Consolidated financial statements and notes 323Natixis Registration Document 2018
Financial assets at fair value through profit or loss 111 235 322 206
Financial instruments to be valued at fair value through profit or loss 160 o/w debt instruments in the form of securities 160
From Level 1 Level 2 Level 2 Level 3 Level 3
Other available-for-sale securities 209 689 143 157 o/w variable-income securities 104
FINANCIAL DATA Consolidated financial statements and notes 327Natixis Registration Document 2018
Loans classified as “Loans and receivables” and amounts payable under finance leases
less and current accounts. The corresponding receivables are classified in Level 2 of the fair value hierarchy. Loans and receivables granted to affiliates are also classified in Level 2 of the fair value hierarchy.
The measurement of the fair value of Natixis’ borrowings and debt securities is based on the discounted cash flow method using inputs at the reporting date such as the underlying’s interest-rate curve and the spread applied to lending/borrowing between Natixis and Group entities. The fair value of debts maturing in less than one year is considered to be the same as their carrying amount; these debts are classified in Level 2 of the fair value hierarchy, as are debts payable to affiliates.
Value adjustments for credit losses (2) (48) (50) (4) (61) (64)
RECONCILIATION TABLE FOR LOANS AND RECEIVABLES DUE FROM BANKS AT AMORTIZED COSTR
Variations linked to changes in credit risk parameters (excluding transfers) (2,745) 1 (52) (0) 5 (4) (2,792) (4)
Of which €20,194 million at January 1, 2018 for the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (c) (see Notes 3.6 and 6.9).
Of which mainly the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (see Notes 3.6 and 6.9).(a)
Of which €1,535 million at January 1, 2018 for the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (c) (see Notes 3.6 and 6.9).
Value adjustments for credit losses (6) (132) (137) (3) (113) (116)
The table below shows, inter alia, the carrying amount of: the underlying assets of the covered bond issues;a financial instruments (securities and receivables) depositeda with central banks and assignable as collateral to guarantee refinancing operations at any time.
Transferred financial assets that are not derecognized are essentially composed of the following instruments: repurchase agreements;a securities lending backed by cash remittals;a dry securities lending;a securitization for which the counterparties to the associateda debts have recourse only to the transferred assets.
They are kept on the asset side of the consolidated balance sheet because virtually all the benefits and risks are maintained, since the securities must be returned to Natixis (unless Natixis defaults).
Financial assets at fair value through profit or loss 2,071 1,656
At December 31, 2017, €333 million (€349 million at December 31, 2016) in bonds self-underwritten by Natixis and eliminated on consolidation were lent or sold under repurchase agreements.
8.7.2.2 Fully derecognized transferred financial assets for which continuing involvement is maintained
The data reported in 2017 includes late payments identified by The contribution of the SFS entities classified as non-current the factoring entities amounting to €1,596 million. These data assets held for sale as at December 31, 2018 (see Notes 3.6 and refer to all outstandings rather than the unpaid amount alone. 6.9) was €1,584 thousand as at December 31, 2017.
Other sources of deferred tax through profit or loss (121) (282)
TOTAL SOURCES OF DEFERRED TAX THROUGH PROFIT OR LOSS 3,542 1,416 398 3,248 1,557 523
TOTAL SOURCES OF DEFERRED TAX 3,193 1,456 505 3,185 1,622 616
(in millions of euros) 31/12/2018 31/12/2017 Legal carryforward period Max. recognition period
The table below presents a breakdown of the “Non-current assets held for sale” and “Liabilities associated with assets held for sale” items by major category.
Loans and receivables due from customers at amortized cost 8.9.1 21,016
The fair value of investment property at December 31, 2018 was €130 million. At December 31, 2017, the net carrying amount of investment (b) property was €124 million and the associated fair value was €190 million.
Corresponds to unimpaired financial assets for which value adjustments are calculated based on 12-month expected credit losses or lifetime (a) expected credit losses.
The fair value of loans and receivables due from customers at amortized cost was €20,949 million at December 31, 2018. This is classified in (c) Level 2 of the fair value hierarchy.
8.9.1.1 Reconciliation table for loans and receivables due from customers at amortized cost
Changes in contractual cash flows not giving rise to derecognition (59) 2 (3) (0) (0) (0) 0 0 (62) 1
Variations linked to changes in credit risk parameters (excluding transfers) (961) 20 (407) 26 (56) (11) 11 (1) (1,413) 33
The data reported in 2018 includes late payments identified by the factoring entities amounting to €1,062 million. These data refer to all outstandings rather than the unpaid amount alone.
Present value of minimum lease payments receivable 2,408 5,883 3,261 11,552
The basis adjustment model is optional under IAS 39 and mandatory under IFRS 9.*
Of which €125 million in contract liabilities (deferred income) at December 31, 2018.(a)
- €240 million at December 31, 2018 and €180 million at December 31, 2017 for the Asset & Wealth Management division; - €86 million at December 31, 2018 and €105 million at December 31, 2017 for the Corporate & Investment Banking division; - €158 million at December 31, 2018 and €139 million at December 31, 2017 for the Insurance division (excluding investment property); - €123 million at December 31, 2018 and €241 million at December 31, 2017 for the Specialized Financial Services division (mainly Natixis Payments Solutions); - €67 million at December 31, 2018 and €64 million at December 31, 2017 for Coface; - €4.4 million at December 31, 2018 and €2 million at December 31, 2017 for the Corporate Center.
Of which €145 million at January 1, 2018 for the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (see (b) Notes 3.6 and 6.9).
Corresponds to the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (see Notes 3.6 and 6.9).(a)
Acquisitions during the period IFRS 5 allocations Disposals Write-downs Translation adjustments Reclassifications Other changes Closing balance
Of which +€20 million in goodwill recorded on the acquisition of Alter CE (Comitéo). A reclassification in the “Financial assets held (c) for sale” aggregate was also recognized in accordance with IFRS 5 in the amount of -€27.5 million: -€9.5 million for Natixis Financement, -€12.2 million for CEGC, -€5.2 million for Midt Factoring and -€0.6 million for Natixis Factor.
Opening balance Acquisitions during the period Disposals Write-downs Translation adjustments Reclassification and other activity Closing balance
Under the new strategic plan, New Dimension (see Note 10), and in line with the creation of the new Insurance business line, the Investment (a) Solutions CGU was split into two separate CGUs: “Asset & Wealth Management” and “Insurance”. Goodwill associated with the entities comprising the Asset & Wealth Management and Insurance divisions was mainly reallocated to these two new CGUs according to the entities to which they report, with each entity assigned to only one CGU.
Of which +€3.2 million in goodwill recorded on the acquisition of Althelia Ecosphere.(b)
Certain goodwill recorded for the United States gives rise to a tax amortization over 15 years due to the difference between the carrying amount of the goodwill and its tax value. This difference in treatment generated a deferred tax liability of €310.8 million as at
Amounts due to banks and customer deposits are presented by type of deposit (demand or term deposits). They are measured in accordance with IFRS 9 within other financial liabilities using the amortized cost method.
Of which €4,715 million for the insurance entities at December 31, 2018, versus €3,521 million at January 1, 2018.(a)
Of which €15,341 million at January 1, 2018 for the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (b) (see Notes 3.6 and 6.9).
The fair value of debts due to banks is provided in Note 8.5.4.
Of which €0.448 million for the insurance entities at December 31, 2018, versus €0.467 million at January 1, 2018.(a)
FINANCIAL DATA Consolidated financial statements and notes 341Natixis Registration Document 2018
The main features of the subordinated notes issues are outlined in Chapter [14] of the Pillar III report.
(in millions of euros) 01/01/2018 Issues (a) Redemptions Translation adjustments Changes in scope Other (b) 31/12/2018
(in millions of euros) 31/12/2016 Issues Redemptions (a) Translation adjustments Changes in scope Other (b) 31/12/2017
Other changes mainly pertained to the revaluation of debts subject to hedging and variations in intra-group securities held by Natixis Funding for (b) the purposes of market making with respect to Natixis’ debt on the secondary market.
Of which €543.4 million of provisions at December 31, 2018 for Madoff fraud exposure (see Section 3.2.9 of Chapter [3] “Risk factors, risk (a) management and the pillar III report”).
Of which €11.4 million of provisions for restructuring costs at December 31, 2018 in respect of the Coface plan.(b)
FINANCIAL DATA Consolidated financial statements and notes 343Natixis Registration Document 2018
The technical provisions of insurance companies, which, for the most part are equivalent to demand deposits, are not shown in the table below.
Financial assets at fair value through other comprehensive income 1 1 1 5 3 0 11
Debt instruments at amortized cost 0 0 0 0 0 0 1
Assets at fair value through profit and loss—excluding trading derivatives 0 0 0 1 1 21 22
Amounts due to credit institutions 20 15 9 24 2 4 73 o/w secured debt
Other financial liabilities at fair value through profit and loss 22 11 2 7 14 29 86 o/w senior debt o/w senior debt
Amounts due to credit institutions 35 18 20 25 7 0 104 o/w secured debt
FINANCIAL DATA Consolidated financial statements and notes 345Natixis Registration Document 2018
Natixis opted to continue applying the provisions set out in IAS 39 for insurance entities (see Note 2.1).
The “Insurance business investments” line on the asset side of the balance sheet consists of insurance business assets representative of: Financial investments (i.e. in financial instruments) includinga advances to policyholders; Financial investments in unit-linked products;a derivative instruments;a revaluation differences on interest rate risk-hedged portfolios.a
The income statement line item “Net income from insurance activities” mainly covers: premiums written and the change in unearned premiuma reserves; investment income including income from investmenta properties; investment expenses;a changes in fair value of investments at fair value through profita or loss, as well as gains and losses on the sale of investments, including investment property; impairment charges and reversals on investments at amortizeda cost or at fair value through other comprehensive income; amortization of acquisition costs; a external expenses on policy benefits; a income and expenses net of reinsurance transfers.a
These are instruments held for trading purposes or designated at fair value through profit or loss on initial recognition in accordance with the fair value option amendment to IAS 39 (published by the IASB in June 2005 and adopted by the European Union on November 15, 2005).
Securities held for trading purposes are those acquired by Natixis principally to be sold in the near term and those forming part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking.
Securities valued under this option fall into one of the following three categories: hybrid instruments that contain one or more significant anda separable embedded derivative features; instruments belonging to a group of financial assets valued anda managed on a fair value basis; instruments that present an inconsistency in accountinga treatment with a related financial liability.
These are non-derivative financial assets with fixed or determinable payments and fixed maturities that Natixis has the clear intention and ability to hold through to maturity, other than those that are designated on initial recognition as at fair value through profit or loss (fair value option) or available-for-sale, and those that meet the definition of loans and receivables.
On initial recognition, available-for-sale financial assets are measured at fair value including transaction costs. After initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method and tested for impairment at each reporting date. Where necessary, an impairment charge is recorded in income under “Provision for credit losses”. Transactions intended to hedge interest rate risk on these securities are not permitted under IFRS.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, other than those designated as at fair value through profit or loss or available-for-sale. This excludes assets for which the holder cannot recover the majority of the initial investment other than because of a credit deterioration, which should be classified as available-for-sale.
When loans are granted at below-market interest rates, a discount corresponding to the difference between the face value of the loan and the sum of future cash flows discounted at the market interest rate is deducted from the face value of the loan. The market rate of interest is the rate applied by the vast majority of financial institutions at any given time for instruments and counterparties with similar characteristics.
Insurance offered primarily covers death, disability, work disability, dependency, damage to persons or property, health, legal protection and financial loss. Related technical reserves are calculated using specialized tables (life, experience and Bureau Commun des Assurances Collectives/BCAC tables).
Pursuant to paragraph 30 of IFRS 4, insurance policies and investment contracts with discretionary participation (life insurance) are measured using shadow accounting, which consists in recognizing the portion of unrealized gains or losses potentially attributable to policyholders as a deferred profit-sharing reserve. The deferred profit-sharing reserve thus reflects the potential entitlement of policyholders to unrealized gains for Financial investments or their portion of unrealized losses. Considering the pay-out ratio in the 2018 budget and in accordance with the pay-out ratio recorded for 2017, the deferred profit-sharing rate adopted at December 31, 2018 was 88% compared with 89% at December 31, 2017.
Deferred profit-sharing assets and liabilities arise mainly on: the revaluation of “available-for-sale financial assets” anda “financial assets at fair value through profit or loss”; the revaluation of real estate assets held to cover insurancea policies; the restatement in the consolidated financial statements of thea capital reserve and the liquidity risk reserve.
The change in the deferred profit-sharing asset and liability is recognized: in equity when it relates to changes in the value ofa “available-for-sale assets”; in income when it relates to changes in the value of assets “ata fair value through profit or loss” or investment property held to cover insurance policies, as well as changes in provisions for prolonged declines in value in “available-for-sale assets”.
The following table shows a reconciliation between insurance companies’ financial statements as presented and how they would translate into the banking format.
Change in fair value of investments carried at fair value through profit or loss (1,016) (1,013) (3) 0 (1,016) 0 0 0 (1,016)
FINANCIAL DATA Consolidated financial statements and notes 349Natixis Registration Document 2018
Financial assets at fair value through profit or loss 9.4.1 22,328 22,410
Share held by cedents and retrocessionaires in liabilities relating to insurance policies and financial contracts 13,015 11,412
The use of the fair value option is considered to provide more pertinent information in two situations: where there is an accounting mismatch between economicallya linked assets and liabilities. This arises for example in the case of an asset and a hedging derivative when the criteria for hedge accounting are not met; where a portfolio of financial assets and liabilities is manageda and recognized at fair value as part of a documented policy of asset and liability management.
Loans and receivables due from customers 0 0 0 0 2,011 2,011 0 0
Debt instruments in the form of securities 2,353 843 0 1,510 2,541 972 0 1,569
The table below shows available-for-sale financial assets by type of instrument (fixed-income securities, variable-income securities). It discloses the gross value before impairment, the amount of impairment and the carrying amount net of impairment.
FINANCIAL DATA Consolidated financial statements and notes 351Natixis Registration Document 2018
Changes in fair value give rise to the symmetrical recognition of a deferred profit-sharing reserve equal to 88% of the related base amount on average at December 31, 2018, compared with 89% at December 31, 2017 (see Note 9.2.5).
Financial assets designated under the fair value option through profit or loss 1,461 (29) (2) 0 o/w debt instruments in the form of securities 1,461 (29) (2)
TOTAL FINANCIAL ASSETS RECORDED AT FAIR VALUE 5,021 (24) (5) (63)
Financial assets at fair value through profit and loss —Trading 0 2 0 0 (1)
FINANCIAL DATA Consolidated financial statements and notes 355Natixis Registration Document 2018
Fair value of financial assets valued at amortized cost on the balance sheet9.4.7
Technical reserves relating to financial contracts with a discretionary profit sharing feature 20,118 20,227
The information about debt securities required by IFRS 7 is presented in Note 8.15.
The information about subordinated debt required by IFRS 7 is presented in Note 8.16.
table does not include financial assets recognized at fair value through profit or loss, or reinsurance activities.This
Coface, Private Equity (proprietary activity retained until it is put into run-off, and portion of sponsored funds) and Natixis Algeria are considered non-strategic and are now grouped within the Corporate Center.