“Regulated Intermediation Liability” (in three areas: Financiala Intermediation, Insurance Intermediation, Real Estate Transactions/Management) with a total maximum payout of €10 million per claim and per year; “Operating Liability” covering €100 million per claim, as wella as a “Subsidiary Owner Civil Liability”/“Post Delivery-Reception Civil Liability” coverage extension for up to €35 million per claim and per year of insurance; “Company Directors Liability” for up to €200 million per claima and per year of insurance; “Property Damage to Offices and to their content” (includinga IT equipment) and the consecutive “losses in banking activities”, for up to €400 million per claim; “Protection of Digital Assets against Cyber-Risks” & thea consecutive “losses in banking activities”, for up to €140 million per claim and per year of insurance.
All the insurance policies mentioned above were taken out with reputable, creditworthy insurance companies. All the insurance policies mentioned above are purchased with deductibles (accepted retention level) in accordance with Natixis' retention capacity.
Natixis’ structural balance sheet risks are managed and monitored under the authority of the Asset/Liability Management Committee (ALM Committee), which is chaired by the Chief Executive Officer and composed of the members of the Senior Management Committee in charge of Finance, Risks and the Corporate & Investment Banking division, the Head of the Joint Refinancing Pool, the Head of Financial Management and BPCE’s Head of Asset/Liability Management. The Committee meets every two months and is mainly responsible for: defining and monitoring Natixis’ ALM;a approving the major principles in terms of structural balancea sheet risks (structure, delegation of authority, fund transfer pricing, etc.) in compliance with the standard ALM framework set up by BPCE; validating ALM assumptions and conventions underlyinga calculations for metrics used to manage and monitor ALM risks; validating internal limits with respect to ALM indicators, thea overall Group limits being defined by BPCE; validating the overall funding policy in conjunction with thea BPCE ALM Committee; supervising structural balance-sheet risks, including managinga excessive leverage risk since 2015; supervising the main balance sheet aggregates and theira development; The ALM Committee monitors: the banking book of Natixis and its main credit subsidiaries fora overall interest rate risk; Natixis’ entire scope of consolidation for liquidity riska (excluding insurance subsidiaries, which do not present intrinsic liquidity risks and which are monitored and managed separately in respect of ALM risks); Natixis’ entire consolidation scope for structural foreigna exchange risk.
In the interest of fulfilling its duties and in order to apply the main principles of ALM management and control, the ALM Committee delegates certain operational tasks to: the Financial Management Department:a the ALM Department is responsible for updating the ALMj principles, standards, conventions and limits. It submits them to the ALM Committee for approval under the oversight of the Risk Division and supervises structural ALM risks on a consolidated basis while verifying the overall consistency of the ALM system. The department is also in charge of ALM, regulatory liquidity ratios and the leverage ratio (see Section 3.3.5), the Treasury Department and the joint refinancing pool,j which came under the authority of the Financial Management Department in 2017 (see Section 3.2.7.2), are responsible for covering the funding requirements of the business lines, providing operational management of liquidity risk in accordance with applicable risk mandates and limits, implementing the Natixis medium-term refinancing policy adopted by the ALM Committee, and operationally managing compliance with the regulatory liquidity ratio; the Risk Division, in charge or reviewing ALM conventionsa and limits, informing the Market Risk Committee of the validation of overall interest rate risk limits applied to Capital Markets activities within the banking scope, and performing Level 2 controls of ALM and the Treasury Department’s indicators; subsidiaries afforded a measure of leeway in terms ofa management and which implement local governance and a dedicated ALM mechanism, such as a local ALM Committee, and oversee their structural ALM risks, placed under the general supervisory authority of the ALM Committee.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIRisk management 148 Natixis Registration Document 2018
The purpose of the overall liquidity risk management policy is to: ensure that Natixis meets its loan commitments whilea ensuring that its funding needs and maturity transformation are in line with the Group’s short- and medium-term refinancing capacities; optimize funding costs within established risk constraints toa help reach profitability targets; observe the internal limits set in close cooperation with BPCEa and adapted to the Group’s ability to meet Natixis’ ultimate liquidity needs; comply with national and international regulations;a help diversify the sources of funding raised by Groupe BPCEa (by geographic area, product and counterparty); and specifically to promote inflows of non-financial resources.
Liquidity risk is controlled, managed and monitored as follows: management of each business line’s funding needs: toa manage the bank’s funding needs, liquidity budgets are allocated for each business line as part of the budgetary procedure and approved by the ALM Committee.
Consumption is monitored weekly for Corporate & Investment Banking business lines and monthly for other business lines; management of the bank’s contribution to Groupe BPCE’s neta market footprint: the objective is to match the liquidity allocation system with the Group’s strategic ambitions and operational oversight; management of short-term maturity transformation, which isa measured using liquidity gaps. This indicator is produced daily for a 365-day period in one-day intervals for all parent company transactions, including some subsidiaries. It is subject to four permanent limits approved by the ALM Committee and monitored daily, on overnight market exposure at opening, on the 60-day, 150-day and 330-day static liquidity gaps; management of medium-term maturity transformation, whicha is performed using coverage ratios that are defined by maturity tranche, such as the ratio of assets that have not yet matured to liabilities that have not yet matured. These ratios are calculated for long-term cash assets, credit subsidiaries housing medium-term activities, and for Natixis on a consolidated basis, and are restricted by the minimum coverage ratios approved by the ALM Committee and monitored monthly. Furthermore, in compliance with regulations and within the framework of the Bank’s risk appetite, since 2015 Natixis has set up governance as well as a global limit and an alert threshold applied specifically to a coverage ratio, proposed by the ALM Committee and validated by the Board of Directors; management of the Bank's contribution to the short-,a medium- and long-term transformation of Groupe BPCE. This is measured on the basis of Natixis’ consolidated liquidity gaps subject to limits at 60 days, 5 months, 11 months and 5 years. These indicators are produced on a monthly basis; simulations of liquidity stress scenarios: the purpose of thesea scenarios is to measure the Group’s ability to continue meeting its commitments and operating in the event of a liquidity crisis. Natixis periodically simulates its contribution to the Group’s stress results based on different crisis scenarios (systemic, specific, combined, etc.) and different levels of intensity (moderate, strong, extreme, etc.) over one-, twoand three-month periods for which assumptions are set by BPCE; funding structure: the funding structure is monitored toa ensure that resources are well diversified, by type of counterparty, by market segment and by geographic area, in order to mitigate all concentration risk (see section on funding principles and structure on the following page).
The aim of this Contingency Funding Plan (“CFP under Liquidity Stress”) is to ensure that, in the event of a liquidity crisis altering the Group's ability to obtain funding, all resources are used in a coordinated and optimized manner to allow the Group to meet its current and future financial obligations and thus maintain business continuity.
Given that Natixis is supervised by BPCE, in its capacity as the central institution, and given the close interactions between BPCE and Natixis in terms of liquidity management within the framework of the joint refinancing pool (see section 3.9.2.1), this plan is defined in accordance with the Groupe BPCE business continuity plan, in the event of a crisis affecting access to liquidity for Natixis, BPCE and/or the entire banking system.
Furthermore, since mid-2011, Natixis’ funding structure has relied on a Joint Refinancing Pool shared by Natixis and BPCE, as indicated in section 3.2.7.2. Placed under the authority of the Group ALM Committee, this platform was implemented in order to secure the Group’s financing and optimize the management and allocation of liquidity within the Group in accordance with predefined rules, with the aim of limiting the use of market financing and reducing funding costs.
The diversification strategy now needs to be taken on board at Group level; Natixis is not the Group's only strategic arm. The strategy aims to extend the Group’s financing sources by geographic zone, currency, product and counterparty, so as to limit its stock market footprint while restricting the so-called “market” liquidity needs of consumer business lines. As for Natixis, implementing this strategy will notably involve structured issues made via private placement, as well as deposit taking via corporate bonds in Europe and Asia.
BREAKDOWN OF GROSS FUNDING STRUCTURE BY ■ CURRENCY, AT CURRENT USD EXCHANGE RATES — 31/12/2018
BREAKDOWN OF GROSS FUNDING STRUCTURE BY ■ CURRENCY, AT CURRENT USD EXCHANGE RATES — 31/12/2017
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIRisk management 150 Natixis Registration Document 2018
Short-term funding 2018 was a year of stark contrasts on the financial markets. The euphoria at the start of the year, fueled by US fiscal stimulus plans, gradually gave way to concerns about the reorganization of world trade, political turmoil in Europe and the Brexit process.
This uncertain economic environment is putting pressure on the Fed’s decision to consider three further interest rate hikes in the
In Europe, the ECB still seems confident in its scenario of a gradual pick-up in inflation and confirmed the end of its balance sheet expansion in 2019. However, the global slowdown could stop it from implementing an exit from negative interest rates in the fall.
Until now, the monetary environment has favored the Group’s short-term dollar issues. This is likely to continue because, due to the flattening of the yield curve, many investors are abandoning the long end and buying shorter maturities instead. In the Euro zone, the search for yield will undoubtedly encourage money market investors wanting to limit the cost of negative rates to continue to favor the longer portion (around one year) of their investment universe.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 151Natixis Registration Document 2018
Long-term funding In 2018, the Fed was able to make four 25 bp increases in key rates on the back of the strength of the US economy (2018 growth expected to reach 2.9% and inflation 1.9%). Long-term rates (10Y US Treasuries) were on an upward path from the start of the year and reached a high of 3.24% in early November (+83 bp) before ending the year down at 2.68%. This fall at the end of the year reflects the markets’ expectations of a slowdown in the global economy in the coming months against a backdrop of US-China trade disputes. Recent macroeconomic figures for December confirm this downward trend, with the China Manufacturing PMI at 49.7 (a reading below 50 means that activity is contracting) and the US Manufacturing ISM index at 54.1 (vs. 59.3 in November).
In these market conditions, Natixis raised a gross total of €17.6 billion in funding in 2018 (excluding self-held securities) under its medium- and long-term refinancing program. As the only long-term issuer in the public issues segment, BPCE provided Natixis with financing for a total euro-equivalent amount of €4.8 billion.
ISSUES AND OUTSTANDINGS OF NATIXIS’ MEDIUM- AND LONG-TERM DEBT ISSUANCE PROGRAMSR
Given the presence of risk-weighted assets in foreign currencies (mostly USD), the aim of Natixis’ structural foreign exchange risk policy is to protect the Common Equity Tier 1 ratio (CET 1) against exchange rate fluctuations. To this end, it establishes a
The sensitivity of Natixis' main entities to interest rates variations represented a total of €2.44 million (for an immediate parallel shift of 1 bp on the yield curve) at December 31, 2018. This sensitivity is primarily due to the effect of the spread on USD accreting transactions.
(in thousands of euros) < 1 year 1-5 years > 5 years Total sensitivity
Period from 31/12/2017 to 31/12/2018 (in millions of euros) 31/12/2018 31/12/2017 31/12/2018 31/12/2017
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Risk management 153Natixis Registration Document 2018
rate variations under various stress scenarios in 2018 was relatively low and stable. In the event of a parallel upward shift of +200 bp in the yield curve, sensitivity, as calculated in Groupe
yield curves) would lead to a variation of -€633 million in the of CET1.
Financial liabilities at fair value through profit or loss 26.7 28.7 - 1.7 7.3 2.6 3.4 3.1 6.6 4.0
Reevaluation adjustments on portfolios hedged against interest rate risk 0.0 0.0 0.0
NB. The table does not take account of the run-off of insurance technical reserves, financial commitments or financial guarantees granted.
In accordance with accounting standard IFRS 7, it also excludes miscellaneous debts, accrued liabilities, general provisions, shareholders’ equity (including issues of tier one hybrid securities reclassified as equity in the consolidated accounts under IAS) and reserves.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIRisk management 154 Natixis Registration Document 2018
The Compliance Department oversees compliance risk prevention and mitigation measures, as well as corruption prevention measures. It also oversees IT Systems Security (including personal data protection) and business continuity. Its scope of action encompasses Natixis and its subsidiaries and branches in France and abroad, thanks to its functional structure.
It also performs a regulatory watch and works with the Human Resources Department on staff training. In 2018, the Compliance Department continued to step up its training and awareness-raising initiatives covering the many changes to the regulations in areas such as the prevention of money laundering and terrorist financing, the prevention of corruption, the general
The Compliance Department is responsible for coordinating first-level permanent controls of compliance risks. It sets up and implements second-level permanent controls to ensure that procedures are applied within the business lines and that compliance risks are mitigated, as part of a risk-based approach (see 3.2 Organization of Natixis’ internal control system). To this end, the Compliance Department maps compliance risks and ensures the resolution of anomalies detected by the relevant business lines.
The Compliance Department reports to the members of Natixis’ Senior Management Committee and the Board of Directors (Risk Committee) on the main risks detected, and on the implementation and effectiveness of the measures to address these risks. It helps draft the reports required by regulators and acts in accordance with the rules set out by Groupe BPCE.
The Compliance Department reports to the Corporate Secretary and functions independently of the operational departments. At Natixis S.A. level, the compliance managers of the business lines report hierarchically to Natixis’ Chief Compliance Officer. There is a direct reporting line between Natixis’ Chief Compliance Officer and the subsidiary compliance managers, and a strong functional link with the branch compliance managers (particularly for prior approval of the reporting line, appointment or withdrawal of subsidiary compliance managers, participation in annual performance and career advancement appraisals, approval of annual work plans, and with respect to the duty to alert and report to the Compliance Department).
The operating rules of the Compliance Department are set out in a charter approved by Natixis’ Senior Management Committee.
Conflicts of interest are prevented by: using risk maps to identify situations posing a risk of conflict ofa interest; setting up and monitoring of information barriers;a checking compensation policies;a being compliant with the rules of good conduct applicable toa Natixis staff; and staff training.a
Conflict of interest is managed through: compliance with the conflict of interest prevention framework;a cooperation among the business lines, Compliance anda Management in order to identify and manage conflicts of interest; close monitoring by Compliance with the help of aa transactional conflict detection tool; and an escalation process for mediating unresolved conflicts ofa interest if needed.
Information barriers are put in place and reviewed each time the organizational structure changes in order to prevent the unwarranted circulation of confidential information. These barriers function as partitions between business lines and departments, setting limits to the circulation of information on a need-to-know basis. As such, information is transmitted only in the customer’s interest and only to employees who absolutely require the information to carry out their duties. These barriers may be organizational, physical or electronic and may be permanent or temporary. Natixis has set up a permanent information barrier separating its Asset Management business activities within Natixis Investment Managers from its other activities.
Pursuant to regulations in force, the entry of sensitive transactions into ODEON allows Compliance to rapidly identify issuers to be placed on the watchlist or on the prohibition list, as well as employees to be placed on the insider list.
Accordingly, and in the interests of maintaining a high level of customer protection, at the end of 2017 Natixis began a cross-functional review of its permanent control system covering this theme. The review was completed in 2018 and resulted in the strengthening of procedures and the introduction of additional controls.
There is a customer information procedure encompassing all the MiFID 2 obligations on customer onboarding, as well as the preand post-trade information due to customers according to their MiFID category.
As part of its efforts to combat money laundering and terrorist financing, in 2018 Natixis enhanced its AML-CTF framework by integrating the new requirements resulting from the transposition into French law of the 4th EU AML-CTF Directive. Accordingly, Natixis’ AML-CTF framework includes: KYC and due diligence obligations, in line with a risk-baseda approach, on customer onboarding, periodic reviews and throughout the business relationship; a transaction monitoring and control system based ona automated tools or requests that escalates alerts and suspicions to Natixis’ Financial Security Department; a procedure for reporting “suspicious” transactions to thea relevant financial intelligence unit in a timely manner; appropriate training and regular information for employees toa ensure compliance with these obligations.
launched in order to communicate widely on this area with staff and provide guidelines on implementing appropriate vigilance measures and dedicated controls.
The framework draws on measures for verifying client databases and screening transactions with a view to identifying, on an ongoing basis, any person or entity subject to financial sanctions, specifically account freezes or restricted access to bank financing. It allows the introduction of account freezes against Natixis customers as quickly as possible. It is also able to prevent any transactions linked to sectors, goods or technologies that are subject to restrictions or bans pursuant to embargo measures. Jurisdictions subject to embargo undergo constant supervision and heightened diligence as part of a prudent and restrictive approach.
Anti-fraud measures are steered by the Anti-Fraud Coordination Unit in collaboration with the relevant business lines. This unit is also in charge of drafting and implementing standards and principles for fraud risk management and of coordinating the anti-fraud officers’ network across the subsidiaries and branches of Natixis in France and abroad.
More specifically, risk linked to capital market activities is closely monitored and subject to specific first- and second-level controls overseen and implemented by a dedicated team within the CIB Compliance Department. Social engineering-type payment fraud is also subject to constant vigilance and specific prevention measures, including dedicated training. Lastly, the risk of information leaks, which has become a major risk, is subject to specific controls and investigations employing the expertise of fraud and IT security experts as well as the legal and HR functions as necessary.
To ensure the dissemination and appropriation of these rules and procedures, compulsory e-learning training has been rolled out and specific training sessions have been held for the members of Natixis’ Executive Committee. More than 12,500 training actions were carried out as a result in 2018.
The anti-corruption framework as a whole is managed and coordinated by a dedicated team within the Financial Security Department. This relies on a network of anti-corruption correspondents within all of Natixis’ business lines, subsidiaries and branches, in France and abroad. Governance is provided through existing Risk Management and Control Committees and through the introduction of specific Committees.
The main corruption prevention program rules and procedures can be found in Natixis’ anti-corruption policy, available on the website www.natixis.com.
Natixis regularly tests the whole of this framework through firstand second-level controls, crisis management exercises and backup solution tests.
Natixis used the end of the project on the overflowing of the Seine and the roll-out of a large fleet of laptops as an opportunity to make changes to its user fallback system. The distribution of fallback sites was reviewed and the use of “Telecommuting” solutions was expanded.
This quest for efficiency also prompted an overhaul of the business continuity plan management tool and the crisis management mobile application.
The business continuity teams are now focusing most of their efforts on increasing resilience to successful cyber attacks.
A wide-reaching project aimed at compliance with the General Data Protection regulation (GDPR) was launched within Natixis. The work carried out enabled the drafting of policies and procedures, awareness-raising and training for employees, the identification of personal data processing operations and the necessary remediation actions, the alignment of the Asset Management business lines, the appointment of a Data Protection Officer (DPO) and the creation of a data privacy function.
The most significant disputes are described below. Their inclusion in the list does not indicate that they will necessarily have an impact on Natixis and/or its consolidated subsidiaries. The other disputes are deemed unlikely to have a material impact on Natixis’ financial situation or profitability and/or that of Natixis and its consolidated subsidiaries as a whole, or have not reached a stage where it can be determined whether they will have such an impact.
Irving H. Picard, the court-appointed trustee for Bernard L. Madoff Investment Securities LLC (BMIS), submitted a restitution claim concerning the liquidation of amounts received prior to the discovery of the fraud through a complaint filed with the United States Bankruptcy Court for the Southern District of New York against several banking institutions, including a $400 million claim against Natixis. Natixis denies the allegations made against it and has taken the necessary steps to defend its
Furthermore, the liquidators of Fairfield Sentry Limited and Fairfield Sigma Limited have initiated numerous proceedings against investors having previously received payments from these funds for redemptions of shares (over 200 proceedings have been filed in New York). Certain Natixis entities have been named as defendants in some of these proceedings. Natixis deems these proceedings to be entirely unfounded and is vigorously defending its position. These proceedings have been suspended for several years, and in October 2016 the bankruptcy court authorized the trustees to modify their initial claim. The defendants filed joint responses in May and June 2017. In August 2018, the bankruptcy court ruled on a motion to dismiss filed by the defendants (requesting that the case be dismissed on a preliminary basis and prior to any ruling on the merits). The judge only gave a ruling on one of the merits (that of personal jurisdiction), having fund that the latter was missing from the claim made against the defendants. In December 2018, the judge ruled on the motion to dismiss, rejecting the claims brought by liquidators founded on common law (unjust enrichment, money had and received, mistaken payment and constructive trust) as well as contractual claims. However, it overturned the motion to dismiss in respect of claims founded on British Virgin Islands’ law, while reserving the right to file a plea for the application of the Section 546(e) Safe Harbor provision. The judge is waiting for the defendants to submit their pleas in respect of the applicability of this safe harbor provision.
In April 2012, MMR Investment Ltd filed a joint claim against Natixis and the financial intermediary before the Commercial Court of Paris, claiming not to have received the bonds, despite having paid the subscription price to the financial intermediary. The claim mainly concerns the reimbursement of the subscription price of the bonds and, and as an alternative, the annulment of the subscription on the grounds of defect in consent. On February 6, 2017, the Commercial Court of Paris dismissed all of MMR Investment Ltd.'s claims, decision confirmed by the Court of Appeal of Paris on October 22, 2018.
On June 26, 2018, the Paris Court of Appeal ordered a stay of proceedings opposing AEW S.A. and its insurers, until a final ruling is issued on the case opposing UMR and AEW S.A., currently before the Commercial Court of Paris. The matter of the insurance cover provided by the insurers, as established by the Commercial Court of Paris ruling of October 25, 2016, and the coverage of AEW S.A.’s legal fees, were not challenged by the Paris Court of Appeal.
Two of these proceedings relate to accusations of fraud. One was dismissed in 2015 as time-barred. Some of the claims relating to the second case were also dismissed as time-barred and, in 2018, Natixis settled the outstanding claims before the court issued a final ruling on the merits of the case.
Through two new complaints filed on November 20, 2013, Selcodis and EDA also brought claims before the Commercial Court of Paris against Natixis, BRED and CEGC for unlawful agreements, alleging that such actions led to the refusal by CEGC to grant a guarantee to EDA and to the termination of various loans by BRED.
Following an inspection by the AMF (French Financial Markets Authority) in February 2015 with regard to Natixis Asset Management’s compliance with its professional obligations, particularly the management of its formula funds, the AMF's Enforcement Committee delivered its decision on July 25, 2017, issuing a warning and a fine of €35 million. The Enforcement Committee found a number of failings concerning the redemption fees charged to funds and structuring margins.
In addition, UFC-QUE CHOISIR, in its capacity as a consumers’ rights non-profit, brought claims before the Paris District Court (Tribunal de Grande Instance de Paris) on March 5, 2018 against the asset management company to obtain compensation for the financial losses suffered by the holders of the formula funds in question. The case is ongoing.
All of SWL's claims were dismissed in a ruling by the Charleroi Commercial Court on November 28, 2014. On September 12, 2016, the Mons Court of Appeal annulled the contested swap agreement and ordered Natixis to repay to SWL the amounts paid by SWL as part of the swap agreement, less any amounts paid by Natixis to SWL under the same agreement and taking into account any amounts that would have been paid had the previous swap agreement not been terminated. The Cour de Cassation of Belgium overturned this ruling on June 22, 2018. In February 2019, SWL lodged an appeal procedure with a Court of Appeal.
Given the predominance of the Investment Solutions activity, the main risks to which Natixis Assurances is exposed are financial. The Company is also exposed to underwriting risks (life and non-life), as well as counterparty risk.
Market risk is in large part borne by the subsidiary BPCE Vie on the financial assets that underpin its commitments with guaranteed principal and returns (euro-denominated policies: €53.8 billion on the main fund balance sheet). The Company is exposed to asset impairment risk (fall in the equity or real estate market, widening spreads, interest rate hikes) as well as the risk of lower interest rates which would generate insufficient income to meet its guaranteed principal and returns. To deal with this risk, BPCE Vie has only sold policies with a minimum guaranteed return in recent years: more than 94% of the policies have a zero minimum guaranteed return. The minimum guaranteed return averages 0.15%.
Credit risk is monitored and managed in compliance with Natixis Assurances’ standards and internal limits. As of December 31, 2018, 63% of the fixed-income portfolio is invested in securities rated higher than A-.
The counterparty risk to which Natixis Assurances is exposed mainly concerns reinsurance counterparties. The selection of reinsurers is a key component of managing this risk: Natixis Assurances deals with reinsurers that are subject to aa financial rating by at least one of the three internationally recognized rating agencies, and that have a Standard & Poor’s equivalent rating of A- or higher; using several reinsurers ensures counterparty diversificationa and limits counterparty risk.
Through its activities, Coface is exposed to five types of risk: strategic risk, credit risk, financial risk, operational risk and compliance risk, and reinsurance risk. The two main types of risk are credit risk and financial risk.
In addition to weekly and monthly monitoring of each region and country, Coface has implemented a system based on: the centralization of reserves for claims exceeding a certaina amount per debtor which are then analyzed ex-post to improve the information, underwriting and recovery activity’s performance; monitoring at the risk underwriting level, which, above a givena level of DRA-based outstandings, generates an approval and the establishment of an overall budget by Coface’s Underwriting Department; and a DRA-based risk assessment system covering all debtors.a
The instantaneous loss ratio is a weekly indicator that reproduces the change in the loss ratio. It is monitored for each region and each country and(1) is reported weekly by Coface to allow underwriters to monitor the change in their portfolio and detect any deterioration and therefore introduce corrective actions as early as possible.
Coface has implemented an investment policy that incorporates the management of financial risk through the definition of its strategic allocation, regulations governing insurance companies and constraints related to the management of its liabilities. Management of financial risks is thus based on a rigorous system of standards and controls which is regularly reviewed: interest rate risk and credit risk: The majority of Coface'sa allocations are in fixed-income products, ensuring stable and recurring revenues. The overall maximum sensitivity of the bond portfolio has been deliberately capped at 4 and stood at 3.5 at December 31, 2018. Coface still has no exposure to Greek sovereign debt, while investments were made in Portugal over the course of the year. The Group continued to increase its international diversification in 2018, particularly in the developed countries of Asia and in the euro zone, in order to benefit from higher rates of return and to accommodate the various interest rate hikes or lower the cost of current hedging. Interest rate hedges were applied to a portion of exposure to European sovereign debt; foreign exchange risk: the majority of Coface’s investmenta instruments are denominated in euros. Subsidiaries and branches using other currencies must observe the same principles of congruence. In 2018, Coface systematically set up hedges against the euro in the portfolio combining its European entities, to protect investments in bonds denominated in dollars, Pound sterling, Canadian dollars and Australian dollars; equity risk: exposure is capped at less than 10% of thea portfolio and is concentrated in the euro zone, in connection with its core business. At December 31, 2018, listed equities represented 6% of the investment portfolio. These investments were subject to hedging for 30% of the invested portfolio through the purchase of put options on Eurostoxx indices. This hedging can be adjusted in line with investments and the amount of unrealized capital gains or losses on shares held; counterparty risk: the maximum exposure to any givena counterparty is set at 5% of assets under management, with exceptional exemptions for short-term exposures. More than 90% of the bonds are Investment Grade and therefore have a median rating equal to at least BBB-; liquidity risk: liquidity risk; At December 31, 2018, 51% of thea bond portfolio had a maturity of less than three years. The vast majority of the portfolio is listed on OECD markets and carries a liquidity risk that is currently considered as low.
Compagnie Européenne de Garanties et Cautions is the Group’s multiple business line security and guarantee platform. It is exposed to underwriting risk, market risk, reinsurer default risk and operational risk.
Under the Solvency II supervisory regime, which came into effect on January 1, 2016, CEGC uses a partial internal model. The ACPR (French Prudential Supervisory Authority for the Banking and Insurance Sector) approved the model in March 2017. It meets the specific requirement applicable to mortgage loan guarantors to improve the robustness of the French banking system for home loans. Significant changes to the model were presented and approved at the Board of Directors Meeting in November 2018.
Balance sheet value, net of provision % breakdown Mark to market
Strategy risks is defined as: the risk inherent to the strategy chosen;a or resulting from Natixis’ inability to implement its strategy.a
The identification and management of risks linked to social and climate change are presented in Chapter 6 of 2018 Natixis registration document.
Portfolio of financial assets at fair value through profit or loss 0 23 23 27 49
The reclassifications relating to the first-time application of IFRS 9 are detailed in Note 1 of Chapter [5.1] “Financial data” of the Update to the (a) 2018 registration document.
At December 31, 2018, exposures to sovereign risk in countries receiving financial aid or facing uncertainties (political, currency, etc.) were as follows: 31/12/2018 (a) 31/12/2017 (a)
At December 31, 2018, exposure to non-government risk, in particular Greece and countries facing uncertainties (political, currency, etc.), directly held by Natixis stood as follows: Gross exposure at December 31, 2018 (a) Total gross exposure
Expected credit losses (b) Net exposure Gross exposure at December 31, 2017 (a) Total gross exposure Provisions Net exposure
Exposure corresponds mainly to the “shipping finance” sector amounting to €29 million at December 31, 2018 versus €82 million at (c)
As a result of the SREP 2018 process, Natixis must observe a phased-in CET1 ratio of 8.44% in 2018, 2% of which in respect of Pillar II (excluding P2G) and 1.875% in respect of the capital conservation buffer, and 0.06% in respect of the countercyclical capital buffer (in 2017, the phased-in CET1 ratio required was 7.75%, of which 1.25% in respect of the capital conservation buffer).
Financial assets at fair value through other comprehensive income 10,798 10,798 10,798 1,302
Loans and receivables due from banks and similar items at amortized cost 27,707 26,814 25,899 914 0
Customer loans and receivables at amortized cost 90,295 91,687 88,435 3,253 345 947
Financial liabilities at fair value through profit or loss 208,183 205,668 (0) 148,463 382 166,001 36,804
Deposits and loans due to customers 38,141 38,390 0 63 0 38,328
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 169Natixis Registration Document 2018
Entity name Method of accounting consolidation Method of regulatory consolidation Description of the entity Country
Fonds Lausanne S.A. Full consolidation Equity method Mutual fund investments Switzerland
Coface Debitoren (formerly ADGC) Full consolidation Equity method Receivables management and data Germany
Cofacerating-Holding GmbH Full consolidation Equity method Receivables management and data Germany
Coface Ireland – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Ireland
Coface UK Holdings Limited Full consolidation Equity method Holding company Great Britain
Coface Belgium – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Belgium
Coface Portugal – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Portugal
Coface Switzerland – Branch (Coface Europe) Full consolidation Equity method Insurance Switzerland
Coface Nederland – Branch (Coface Europe) Full consolidation Equity method Insurance Netherlands
Coface Danmark – Branch (Coface Europe) Full consolidation Equity method Insurance Denmark
Coface Seguro de Credito Mexico Full consolidation Equity method Insurance Mexico
Coface North America Insurance Company Full consolidation Equity method Credit insurance and related services United States
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 170 Natixis Registration Document 2018
Coface Central Europe Holding Full consolidation Equity method Holding company Austria
Coface Hungary (formerly ÖKVC Fióktelepe) – Branch (Coface Europe) Full consolidation Equity method Insurance Hungary
Coface Lithuania (formerly LEAID) – Branch (Coface Europe) Full consolidation Equity method Insurance Lithuania
Coface Romania Insurance – Branch (Coface Europe) Full consolidation Equity method Insurance Romania
Coface Czech Insurance – Branch (Coface Europe) Full consolidation Equity method Insurance Czech Republic
Coface Slovakia Insurance – Branch (Coface Europe) Full consolidation Equity method Insurance Slovakia
Coface Japan – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Japan
Coface South Africa Services Full consolidation Equity method Insurance South Africa
Coface Australia – Branch (Coface Europe) Full consolidation Equity method Credit insurance and related services Australia
NATIXIS ASSURANCES Full consolidation Equity method Insurance company holding company France
REAUMUR ACTIONS Full consolidation Equity method Insurance investment mutual fund France
Ostrum Ultra Short Term Bonds Plus SI (C) Full consolidation Equity method Insurance investment mutual fund France
BPCE RELATION ASSURANCES (GIE) Full consolidation Equity method Service provider France
Fructifonds Profil 6 Full consolidation Equity method Insurance investment mutual fund France
SELECTIZ PLUS Full consolidation Equity method Insurance investment mutual fund France
Allocation Pilotée Equilibre C Full consolidation Equity method Insurance investment mutual fund France
Compagnie Européenne de Garanties et Cautions Full consolidation Equity method Insurance France
Until 2021, regulatory capital is subject to phase-in arrangements and grandfathering provisions to support the roll-out of the CRR.
CET1 is calculated using shareholders’ equity (excluding reclassified hybrid securities), with the following restatements: deductions not subject to phase-in arrangements:a estimated dividend,j goodwill and intangible assets,j recyclable unrealized gains and losses on hedgingj derivatives, own credit risk on debts issued and financial instrumentsj (Debit Value Adjustment), prudent valuation adjustments,j expected loss on equity positions and shortfall of provisionsj on expected losses on credit positions, revaluation adjustments on defined-benefit planj commitments; non-bank minority interests;j bank minority interests exceeding the limits set byj regulations; recyclable gains or losses on available-for-sale assets;j company-controlled stock and cross-shareholdings;j amount exceeding threshold 1 on non-material holdings ofj capital instruments issued by financial entities; amount exceeding threshold 2 on material holdings of capitalj instruments issued by financial entities; amount exceeding threshold 2 on deferred tax assetsj dependent on future earnings and resulting from temporary differences; amount exceeding threshold 3 common to amounts notj deducted in respect of threshold 2; any surplus deduction of Additional Tier One capital (seej below); deductions subject to phase-in arrangements:a deferred tax assets dependent on future earnings, but notj related to temporary differences.
TRANSITION FROM SHAREHOLDER’S EQUITY TO PRUDENTIAL CAPITAL AFTER APPLYING PHASE-IN ARRANGEMENTSR
Other instruments to be reclassified as Additional Tier 1 capital 1,978
Own credit risk: liabilities and derivatives net of deferred taxes (109)
Common Equity Tier 1 capital: instruments and reserves 1 Capital instruments and the related share premium accounts 9,291
Common Equity Tier 1 capital: regulatory adjustments 7 Additional value adjustments (negative amount) (383) 34, 105 8 Intangible assets (net of related tax liability) (negative amount) (3,910) 36 (1) (b), 37, 472 (4) 0 9 Empty set in the EU
11 Fair value reserves related to gains or losses on cash flow hedges 105 33 (a) 0 12 Negative amounts resulting from the calculation of expected loss amounts (77) 36 (1) (d), 40, 159, 472 (6) 0 13 Any increase in equity that results from securitized assets (negative amount) 0 32 (1) 0
Gains or losses on liabilities valued at fair value resulting from changes in own credit standing (253) 33(b) 0 15 Defined-benefit pension fund assets (negative amount) 0 36 (1) (e ), 41, 472 (7) 0 16 Direct and indirect holdings by an institution of own CET1 instruments (negative amount) (27) 36 (1) (f), 42, 472 (8) 0
Direct and indirect holdings by the institution of CET1 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
Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability where the conditions in 38 (3) are met) (negative amount) 0 22 Amount exceeding the 15% threshold (negative amount) 0 48 (1) 0 o/w direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a significant investment in those entities; 0 24 Empty set in the EU
25 o/w deferred tax assets arising from temporary differences 0 25a Losses for the current financial year 36 (1) (a), 472 (3)
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 174 Natixis Registration Document 2018
(C) Amounts subject to pre-regulation or prescribed residual amount in virtue of regulation (EU) No. 575/2013
26b Amount to be deducted from or added to Common Equity Tier 1 capital with regard to additional filters and deductions required pre-CRR 0 481 27 Qualifying AT1 deductions that exceed the AT1 capital of the institution (negative amount) 0 36 (1) (j)
Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interests not included in row 5) issued by subsidiaries and held by third parties 0 85, 86, 480 35 o/w instruments issued by subsidiaries subject to phase out 486 (3) 0 36 Additional Tier 1 (AT1) capital before regulatory adjustments 2,145
Direct, indirect and synthetic holdings of AT1 instruments 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) (22) 56 (d), 59, 60, 79, 475 (4) 0
Regulatory adjustments applied to Additional Tier 1 in respect of amounts subject to pre-CRR treatment and phase-in treatments and which will be gradually phased out in accordance with Regulation (EU) No. 575/2013 (CRR residual amounts)
Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Tier 2 capital during the phase-in period pursuant to Article 475 of Regulation (EU) No. 575/2013 0 477, 477 (3), 477 (4) (a)
43 Total regulatory adjustments to Additional Tier 1 (AT1) capital (22)
Tier 2 (T2) capital: instruments and provisions 46 Capital instruments and the related share premium accounts 3,085 62, 63
Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2 46 486 (4)
Public sector capital injections grandfathered until January 1, 2018 0 483 (4)
Direct and indirect holdings by an institution of own T2 instruments and subordinated loans (negative amount) 0 63 (b) (i), 66 (a), 67, 477 (2) 0
Direct and indirect holdings of the T2 instruments and subordinated loans of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) 0 66 (c), 69, 70, 79, 477 (4)
Regulatory adjustments applied to Additional Tier 2 in respect of amounts subject to pre-CRR treatment and phase-in treatments subject to phase out in accordance with Regulation (EU) No. 575/2013 (iCRR residual amounts)
o/w items not deducted from AT1 items (Regulation (EU) No. 575/2013 residual amounts)
o/w items not deducted from T2 items (Regulation (EU) No. 575/2013 residual amounts)
Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of risk exposure amount) 10.9% 92 (2) (a), 465 62 Tier 1 (as a percentage of risk exposure amount) 12.9% 92 (2) (b), 465 63 Total capital (as a percentage of risk exposure amount) 15.1% 92(2) (C)
Common Equity Tier 1 available to meet buffer requirements (as a percentage of risk exposure amount) 4.44% CRD 128 69 (not relevant in EU Regulation)
Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) 292
Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability where the conditions in Article 38 (3) are met) 509 36 (1) (c), 38, 48, 470, 472 (5)
Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 0 484 (3), 486 (2) et (5)
83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 0 484 (4), 486 (3) et (5)
85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) 0 484 (5), 486 (4) et (5)
The 2018 CET1, Tier 1 and total ratios are presented below by major component. The same ratios for 2017 are shown by way of comparison.
Dividends proposed to the General Shareholders’ Meeting and expenses (944) (1,160)
The change in prudential capital under Basel 3/CRR over the period is shown below: CHANGES IN REGULATORY CAPITAL AFTER THE APPLICATION OF PHASE-IN ARRANGEMENTS OVER THE PERIODR
(in millions of euros) 2018 Incl. impact of first application of IFRS 9
Impact of phase-in arrangements (59) 18 o/w impact of changes in phase-in rate (31) 0 o/w impact of change in basis subject to phase-in arrangements (28) 18
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 179Natixis Registration Document 2018
The following changes in Basel 3/CRR regulatory capital were recorded in 2018, after applying phase-in arrangements: Common Equity Tier 1 (CET1) capital totaled €12 billion at December 31, 2018, up €0.1 billion over the year.
Over the course of the year, the increase stemmed notably from the net income net of dividend forecast at €0.6 billion, the impact of which was partially offset by the increase in regulatory deductions relating to goodwill and intangible assets (impact of -€0.3 billion), prudential value adjustments (-€0.1 billion), and deferred tax assets on losses carried forward (-€0.1 billion).
Tier 1 capital declined by €0.1 billion, primarily as a result of the early redemption of two issuances for -€0.3 billion. The balance was primarily due to the change in the phase-in rate applied on items deducted from AT1 capital, as well as the items subject to these provisions.
At €109.2 billion, risk-weighted assets decreased by €1.5 billion in 2018.
(in billions of euros) Credit risk CVA Market risk Operational risk Total RWA
The €2.4 billion decrease in credit risk over the period was primarily due to the following factors: the impact of the dollar’s appreciation (+€0.7 billion);a an increase in outstandings (+€3.8 billion) concentrated ina Corporate & Investment Banking and Specialized Financial Services; the impact of risk inputs (-€4.7 billion), mainly due to changesa in weightings and exposure maturities.
The €0.5 billion increase in CVA can primarily be attributed to changes in risk inputs, these being offset by lower exposures at end 2018.
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 180 Natixis Registration Document 2018
The capital planning system adapts all processes with the aim of ultimately meeting the requirements of the supervisory authorities, shareholders and investors: continuously maintaining the targets set in terms of capitala adequacy; developing an internal approach for measuring capitala requirements and overseeing Natixis’ resilience under stress scenarios (ICAAP); projecting capital requirements specific to business linea activity, within the framework of Natixis’ overall capital adequacy policy; anticipating regulatory changes and their impact on Natixis’a various business lines; implementing a system for analyzing the capital consumptiona of the businesses and their profitability on the basis of Basel 3/CRR risk-weighted assets; allocating capital to the business lines, within the framework ofa strategic plan and annual budget procedures, taking into account business requirements, profitability and balance between the core business divisions.
Together with BPCE Group as a whole, Natixis contributed to collecting detailed information on liabilities, as required by the SRB in 2018. As the BRRD Directive is currently under review, the mechanisms for managing and preparing for this new ratio are not yet finalized.
Under Pillar II, the leverage ratio must be calculated and reported to the supervisor as of January 1, 2014. Its publication is mandatory as of January 1, 2015.
Adjustment for securities financing transactions (repurchase transactions and other types of collateralized loans) (17,774) (19,927)
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 181Natixis Registration Document 2018
Replacement cost associated with all derivative transactions (i.e. net of eligible cash variation margin) 6,686 7,442
Add-on amounts for PFE associated with all derivatives transactions (mark-to-market method) 21,353 21,650
Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the applicable accounting framework
Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions 99,107 97,341 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) (23,939) (25,782)
EU-14a Derogation for SFTs: Counterparty credit risk exposure in accordance with Article 429b (4) and 222 of regulation (EU) No. 575/2013 15 Agent transaction exposures
16 TOTAL SECURITIES FINANCING TRANSACTION EXPOSURES (SUM OF LINES 12 TO 15A) 81,332 77,414
Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amount 95,529 93,169 18 (Adjustments for conversion to credit equivalent amounts) (55,914) (57,090)
19 OTHER OFF-BALANCE SHEET EXPOSURES (SUM OF LINES 17 AND 18) 39,614 36,079
EU-19a (Exemption of intra-group exposures (solo basis) in accordance with Article 429 (7) of regulation (EU) No. 575/2013 (on and off balance sheet))
Capital and total exposures 21 Total leverage ratio exposures (sum of lines 3, 11, 16 and 19) 372,964 396,276
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 182 Natixis Registration Document 2018 an overall limit and an alert threshold applied to Natixis’a leverage ratio, proposed by the ALM Committee and approved by the Risk Committee.
Credit risk (excluding CCR) 71,894 73,837 5,751 o/w the standardized approach 19,383 16,164 1,551 o/w the foundation IRB (F-IRB) approach 3,193 7,316 255 o/w the advanced IRB (A-IRB) approach 34,810 35,845 2,785 o/w equity IRB under the simple risk-weighted approach or the IMA 14,507 14,513 1,161 o/w mark to market 1,678 4,697 134 o/w original exposure o/w the standardized approach o/w internal model method (IMM) 2,338 187 o/w risk exposure amount for contributions to the default fund of a CCP 185 256 15
SMEs included in exposures secured by mortgages on immovable property category 64 64
Exposures to institutions and corporates with a short-term credit assessment 652 20 20 3 2
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 186 Natixis Registration Document 2018
Claims on institutions and corporates with a short-term credit assessment 674 674
Central governments or central banks 34,381 33,176 o/w Specialized Lending 23,485 22,257
Exposures to institutions and corporates with a short-term credit assessment 711 565
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 188 Natixis Registration Document 2018
Central government or central banks 1,868 2 65 390 16 414 38 9 2 2 2 2,808
Secured by mortgages on immovable property 1,235 17 5 19 1 1 1,279
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 189Natixis Registration Document 2018
Secured by mortgages on immovable property 64 69 67 21 521 30 21 138 4 345 1,279
Exposures to institutions and corporates with a short-term credit assessment 275 18 2 3 10 8 77 113 13 191 711
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 190 Natixis Registration Document 2018
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 192 Natixis Registration Document 2018
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 193Natixis Registration Document 2018
FITCH Long term 2 A+ to A4 BB+ to BB- 100
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 194 Natixis Registration Document 2018
Exposures before CCF and CRM Exposures post-CCF and CRM RWA and RWA density
Of which €33,901 million in exposure to BPCE Group affiliates and excluding exposures to the French Government at 31/12/2018.*
% of RWA % of exposure class involved in Roll-Out planSA FI IA Total
Exposures secured by mortgages on immovable property 97.7% 0% 2.3% 100% 0.0%
RWA FLOW STATEMENTS OF CREDIT RISK EXPOSURE UNDER THE IRB APPROACH (CR8)R
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 197Natixis Registration Document 2018
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 198 Natixis Registration Document 2018
Sub-total Corporates – Specialized Lending 12,059 8,515 70% 18,012 2.9% 1,040 13% 1,992 4,744 26% 153 170
Sub-total Retail – qualifying revolving 111 89 46% 152 17.9% 37 38% 181 49 32% 15 16
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 199Natixis Registration Document 2018
Other retail exposures 0.15 to <0.25 0.25 to <0.50 0.50 to <0.75 2.50 to <10.00
IRB – SPECIALIZED LENDING AND EQUITIES UNDER THE SIMPLE RISK WEIGHT METHOD R (EXCLUDING IMPACT OF THRESHOLDS) (CR10)
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 200 Natixis Registration Document 2018
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 201Natixis Registration Document 2018
Internal Model Method (for derivatives and SFTs) 8,245 1.4 11,543 2,327
SA – CCR EAD BY REGULATORY PORTFOLIO AND RISK WEIGHT (CCR3)R
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 202 Natixis Registration Document 2018
NI – CCR EXPOSURES BY PORTFOLIO AND PD SCALE (CCR4) R
Institutions 0.25 to <0.50 0.50 to <0.75 0.75 to <2.50 10.00 to <100.00 100.00 (default)
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 203Natixis Registration Document 2018
RWA FLOW STATEMENTS OF CCR EXPOSURES UNDER INTERNAL MODEL METHOD (EU CCR7)R
RWAs as at the end of the previous reporting period (31/12/2017) 0 0
RWAs as at the end of the current reporting period (31/12/2018) 2,177 174
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 205Natixis Registration Document 2018
Unfunded default fund contributions: B – Capital requirements and risk-weighted assets
(See Consolidated financial statements and notes–Note 6 Accounting principles and valuation methods.)
The securitization positions classified as “Loans and receivables” are measured at amortized cost using the effective interest rate method as described in Note 6.1 to the accounting principles which can be found in Note 5.1 “Consolidated financial statements and notes” to Chapter 5 “Financial data” of the consolidated financial statements. They are tested for impairment at each reporting date and an impairment charge is recorded in the income statement under “Provision for credit losses”.
impairment at each reporting date and an impairment charge is recorded under “Provisions for credit losses”.
Positions classified under “Fair value through profit or loss” are measured at market value.
EAD AND RWA ACCORDING TO NATIXIS’ ROLE IN THE BANKING BOOK (NX31-A)R
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 208 Natixis Registration Document 2018
Exposure values (by RW bands) Exposure values (by regulatory approach) RWA (by regulatory approach) Capital requirements
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 209Natixis Registration Document 2018
Market risk measurement methodologies are described in Section 3.2.5. “Risk management – Market risks”.
The measurement of interest rate risk is presented in “Risk management—Overall interest rate risks”.
The operational risks control system is presented in “Risk management—Operational risks”.
Fair value of encumbered collateral and own encumbered debt securities issued
At December 31, 2018, total balance sheet assets and encumbered guarantees received totaled €198,230 million. These can be broken down by type and source of liabilities: securities transactions, including in particular securities lendinga and repurchase agreements, for a total of €171,191 million; encumbered receivables securing covered bond vehiclesa (Natixis Pfandbriefbank), for a total of €1,230 million; encumbered receivables in vehicles other than covered bonda asset pools, such as central bank refinancing or other market vehicles, for a total of €5,095 million; assets encumbered by the payment of margin calls ona derivative positions, for a total of €12,446 million.
Natixis considers that the following assets may not be encumbered in the normal course of its business: call loans (€33,424 million at 31/12/2018, a i.e. 10% of unencumbered assets); derivatives (€57,480 million at 31/12/2018, a i.e. 16% of unencumbered assets).
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 212 Natixis Registration Document 2018 requirement from 2018, is still under review; talks are underway under draft regulation CCR2 with a view to its implementation in the European Union.
To date, European regulations require: compliance with the LCR as from October 1, 2015; requireda minimum ratio of 80% on January 1, 2017 and 100% from January 1, 2018; quarterly statements on stable funding, which are entirelya descriptive (amounts and terms) without any weighting applied.
requirements (availability of assets, diversification, etc.) in a 30 calendar day liquidity stress scenario.
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 213Natixis Registration Document 2018
Non-operational deposits (all counterparties) 55,824 50,740 55,099 51,382 44,875 40,520 44,094 40,700
Outflows related to derivative exposures and other collateral requirements 5,719 5,199 5,733 6,034 5,608 4,946 5,339 5,560
Cash inflows (subject to 75% cap) 121,883 117,618 130,486 128,866 42,421 41,765 46,966 47,033
3 RISK FACTORS, RISK MANAGEMENT AND PILLAR IIIBasel 3 Pillar III disclosures 214 Natixis Registration Document 2018
HQLA assets reported in the LCR numerator also include unencumbered HQLA securities temporarily carried by the Capital markets activities. These securities are not considered as part of the ringfenced liquidity reserve and are not meant to be held over the long term. The outstanding amount and composition of these portfolios may vary considerably from one reporting date to the next, as prices fluctuate. However, they can be monetized on the repo and securities borrowing/lending market, and this monetization may be forced in the event the Group liquidity-stressed BCP is activated and executed.
In addition to these buffers, the aim of the internal policy governing the investment of residual surplus liquidity is either to reserve this liquidity for the deposit facility to ensure its continuous availability, with the result that this surplus liquidity is also included in the amount of assets reported in the LCR numerator, or to give it to the central institution.
Oversight of the short-term liquidity ratio the LCR above 100% with a safety buffer of around €5 billion in order to deal with any last-minute contingencies, through BPCE adjustments. The structural over-hedge of the Group's LCR above the 100% threshold (regulatory limit), is borne by BPCE.
In June 2013, Natixis established a governance system for the management of the LCR (see section 3.3.5), having set an LCR limit higher than 100% from the end of 2013 (greater than the regulatory requirements in force). The oversight of the LCR is part of a BPCE Group framework under the aegis of the BPCE Group Finance division. Natixis’ LCR hedging is organized in close cooperation with BPCE and is managed by the Joint Refinancing Pool, acting with the authorization of the Financial Management Department on the basis of its forecasts. Within this framework, the strategy for the Natixis scope aims to hedge
In the event the Bank’s external credit rating is downgraded, it may be required to provide additional collateral to investors under agreements that include rating triggers. In particular, in calculating the liquidity coverage ratio (LCR), the amounts of these additional cash outflows and additional collateral requirements are measured. These amounts comprise the payment the bank would have to make within 30 calendar days in the event its credit rating were downgraded by as much as three notches.
They are covered under the LCR management policy and were estimated at €2 billion at 31/12/2018, the same figure as at 31/12/2017.
The compensation policy items required in respect of regulation (EU) 575-2013 (CRR) are provided in Chapter 2 of the present registration document.
CRR Article Basel Committee/EBA tables and statements Registration document page number
Article 435 (1) (EBA) EU OVA – Bank risk management approach 116 to 124
Article 436 (b) EU LI3 – Differences between consolidation scopes (entity by entity) 169-170
Article 436(b) EU LIA – Explanations of differences between accounting and regulatory exposure amounts 166 to 170
Article 438 (c) (f) (EBA) EU OV1 – Overview of RWA 182
Art. 438 c), d), e) and f) NX01 – EAD, RWA and EFP by approach and by Basel exposure class 132
Art. 442 d), e) and f) NX05 – EAD by geography and by exposure class 133
Article 442 (a) and (b) CRBA – Additional disclosure related to the credit quality of assets 131; 277 to 296
Article 442 (c), (g) and (h) (EBA) EU CR1 – Credit quality of assets 186
Article 442 (d) (EBA) EU CRB-C – Geographical breakdown of exposures 188
Article 444 (a) (d) (EBA) EU CRD – Qualitative disclosures on banks’ use of external credit ratings under the standardized approach for credit risk 126-127
Article 453 (f) and (g) (EBA) EU CR4 – Standardized approach – credit risk exposure and Credit Risk Mitigation (CRM) effects 193
Article 444 (e) (EBA) EU CR5 – EAD by asset class and risk weight 193
Article 452 (a) (c) (EBA) EU CRE – Qualitative disclosures related to IRB models 126 to 129
Article 452 (e)(h) and (j) (EBA) EU CR6 – IRB – Credit risk exposures by portfolio and PD range 196 to 199
Article 453 (g) (EBA) EU CR7 – Internal rating – Effect on RWA of credit derivatives used as CRM techniques 185
(EBA) EU CCR7 – RWA flow statements of CCR exposures under the IMM
Article 444 (e) (EBA) EU CCR3 – Standardized approach of CCR exposures by regulatory portfolio and risk weight 201
Article 439 (g) and (h) (EBA) EU CCR6 – Credit derivative exposures 204
(BCBS) SEC3 – Securitization exposures in the banking book and associated regulatory capital requirements – bank acting as originator or as sponsor 208
(BCBS) SEC4 – Securitization exposures in the banking book and associated regulatory capital requirements – bank acting as originator or as investor 208
Art. 449( k) NX33BIS – Banking book EAD by agency 206
Article 105 and Article 455 (c) (EBA) EU MRB A – Qualitative disclosures for banks using the Internal Models Approach (IMA) 136-137
Article 455 (a) and (b) (EBA) EU MRB B – Qualitative disclosures for banks using the Internal Models Approach (IMA) 136-137
Article 455 (g) (EBA) EU MR4 – Comparison of VaR estimates with gains/losses 140
Article 377 (6) and Article 105 (BCBS) PV1 – Prudential valuation adjustments 177
Differences between accounting and regulatory scopes of consolidation and the mapping of financial statement categories with regulatory risk categories (EU LI 1) 167-168
Changes in regulatory capital after application of phase-in arrangements over the period 178
Guaranteed exposures by type and internal rating of guarantor (NX17) 183
Indicative correspondences between internal ratings based on expert judgment and external agency ratings (corporates, banks, specialized financing institutions) 126
Main internal models: PD, LGD, CCF and volatility discounts (EU CRE) 129
IRB – Credit risk exposures by portfolio and PD range (EU CR6) 196 to 199
IRB – specialized lending and equities using the simple risk-weighted asset method (excluding impact of thresholds) (EU CR10) 199
RISK FACTORS, RISK MANAGEMENT AND PILLAR III Basel 3 Pillar III disclosures 217Natixis Registration Document 2018
EAD according to the role of Natixis in the trading book (NX31-B) 207
Securitization exposures in the banking book and associated capital requirements – Bank acting as originator or as sponsor (SEC3) 208
VaR, stressed VaR and IRC within the regulatory scope (MR3) 209
The macroeconomic environment nevertheless held steady to generate average global growth of 3.7% during the first three quarters of the year. However, widening growth gaps sent global trade on a gradual decline: while business levels in the US were boosted by tax breaks and higher public spending, they slowed down in China and in the euro zone. Throughout the year, the prospect of ratcheting China-US trade tensions posed the biggest risk to the global economy.
Inflation in developed countries accelerated before reaching 2.3% globally, mainly on the back of rising oil prices that stabilized in October. Central banks continued normalizing monetary policy, with the Fed raising its rates by 25 bps per quarter in 2018 to reach a target federal funds range of 2.25-50%. In Europe, December 2018 marked the end of the ECB’s net Asset Purchase Programme (APP). The APP will nevertheless continue in the form of €212 billion in reinvestments in 2019. In contrast, the monetary policies of the Bank of Japan and the Bank of England remained loose (despite the BoE’s 25 bp key rate hike in August).
While 2017 was a bumper year for share prices, in 2018 the equity markets slumped to a 10-year low (MSCI World Index -11% and MSCI Emerging Markets Index -19.7%). Most of the major indices, other than those in the US, underperformed in February and then stagnated amid fears of a global slowdown and tightening of monetary and financial conditions.
Parallel to this, and after a steady climb during the first 10 months of the year, oil prices tumbled in October, with Brent crude closing the year at under €60 per barrel.
in the rest of the world, inflation (HICP) in France was impacted by per-barrel oil prices, which rose until October, and stayed above inflation in the euro zone throughout the year (average of 2.1% versus 1.7% in the euro zone) thanks to higher taxes on tobacco and energy. By successfully lowering its public debt to below 3% of GDP in 2017 (-2.7% of GDP), in June 2018, France officially exited the European excessive debt procedure opened against it in 2009. Nevertheless, 10-year OAT yields rose at the end of the year to come close to 50 bps above the German benchmark.
After posting vigorous growth of 2.3% in 2017, economic activity in France slowed down sharply in 2018. This downturn is expected to total around 1.5%, and is primarily the result of lower household purchasing power. Private consumption fell sharply while corporate investment remained relatively dynamic as it continued to benefit from favorable financing conditions. As
OVERVIEW OF THE FISCAL YEAR Significant events of 2018 221Natixis Registration Document 2018 on June 26, 2018, Natixis Investment Managers announced itsa acquisition of MV Credit. The deal broadens Natixis’ private debt capabilities to help investors’ need for diversification and alternative investment solutions. Founded in 2000, MV Credit is a recognized European credit specialist based in London and Luxembourg. Its team boasts 18 years of investment experience across all credit cycles and sets itself apart with an investment philosophy built on two core principles: rigorous credit analysis and active portfolio management. Over the years, MV Credit has invested more than €5 billion in nearly 500 financing solutions and have delivered a consistent top quartile track record.
In the second half of the year, Natixis Investment Managers pursued its development through the following events, projects and initiatives: Ostrum's subsidiaries (H20, Dorval, Mirova and Seeyond) werea repositioned as subsidiaries of Natixis IM; launch of Europa, a project to create a single entity in Francea that covers all the distribution support functions in order to improve client services and minimize costs. In early October 2018 the Natixis IM Distribution and Ostrum teams and resources were merged into a new Paris-based entity; in early September, Natixis Investment Managers announceda the creation of Dynamic Solutions as well as the appointment of James Hughes to head up the venture. The team brings together Natixis Investment Managers’ diverse expertise to develop customized investment solutions and offers a single point of access to a wide range of solutions within the multi-affiliate structure; the Natixis Investment Managers Summit was held ona November 6 and 7, 2018 at the Centre Pompidou and Palais Brongniart in Paris. Over the two days, we showcased our Active Thinking platform with the aim of making the summit a can't-miss event, thus positioning Natixis as a market leader and demonstrating its values and expertise. Topics covered ranged from renewable energies, the financial crisis, migration, cybersecurity and social media. Some 70 speakers from 19 countries and six continents were invited to give their perspective on controversial issues and global events. Over 600 people attended the event, including 40 journalists, representatives from all Natixis Investment Managers subsidiaries as well as Natixis’ sales and senior management teams; sustainable growth opportunities for its clients. Flexstone Partners is dedicated to institutional investors (pension funds, insurance companies, foundations, financial institutions and family offices) across the globe; in mid-December 2018, Natixis Investment Managersa announced the launch of Flexstone Partners, a world-class private equity specialist that brings together three subsidiaries of Natixis Investment Managers (Euro-PE, Caspian Private Equity and Eagle Asia) in a single entity to offer investors dynamic and truly global private equity solutions. This gives investors access to international expertise on the private equity market. Flexstone Partners has a total of $6.7 billion in assets under management and advisory, and draws on an international team of more than 40 private equity specialists in its offices in Pairs, New York, Singapore and Geneva. Flexstone Partners is specialized in selecting and providing access to the best fund managers in private equity, private debt, real estate and infrastructure, whether in North America, Europe or Asia. It has also signed the United Nations Principles for Responsible Investment (PRI) and strives to tap into
McDonnell Investment Management, LLC and Loomis, Saylesa & Company, L.P announced that they will be merging. Both companies are subsidiaries of Natixis Investment Managers. Based just outside Chicago, McDonnell specializes in municipal bond and taxable bond strategies and has $11.7 billion in assets under management. This merger will offer McDonnell's clients an enhanced range of products and services, thanks to the extensive investment, research and operating capacities of Loomis Sayles; in the fourth quarter of 2018, Natixis Investment Managersa sold its Axeltis fund distribution platform to MFEX. The sale is in line with Natixis Investment Managers’ dynamic management of its business portfolio and allows it to concentrate on developing its Asset Management business lines.
Natixis IM earned the following distinctions in the second half of 2018: Cerulli Associates Top 50 asset management companies:a Natixis Investment Managers was ranked 16th-largest global asset management company, down one rung; the 2018 Citywire France Awards took place in Paris ona September 18, 2018. Natixis Investment Managers received a number of awards including: Best Asset Management Company in the Global Flexiblej Bonds category,
Louis Bert and Stéphane Furet, CIO and CEO of Dorval AM,j won Best Fund Manager in the French Equity category; the Natixis Investment Managers brand took top honors at thea Broadridge Distribution Achievement Awards in Europe by being named “Rising Star” in the brand category.
Natixis Wealth Management continued to leverage its impressive sales performance to successfully complete in 2018 the first step in streamlining its business model, which is now focused on the wealth management segment.
Natixis Wealth Management has also invested significantly in digital technology and is gradually integrating new features into its digital onboarding interface. Parallel to this, the Company is working on the “augmented banking” concept and is rolling out Compositeur Digital software, which allows bankers to conduct client meetings remotely, with all the necessary tools provided on a tablet.
Corporate & Investment Banking’s 2018 highlights included the roll-out of the New Dimension strategic plan (2018-2020) targets aimed at achieving the following goals: to be recognized as a bank that offers innovative solutions and to become a benchmark bank in four key sectors (energy and natural resources, aerospace, infrastructure, real estate and hospitality).
There was also a major development in Corporate & Investment Banking's four strategic sectors and M&A, allowing it to maximize its origination and distribution expertise. It also fleshed out its offering of innovative solutions, especially in the green market in the form of renewable energy financing, green bonds and “climate equity” investment solutions. Natixis was named “Most Innovative Investment Bank for Climate & Sustainability” by The Banker.
Its three international platforms continued to expand while extending their expertise and increasing their visibility: The EMEA platform pursued its growth, particularly in M&A advisory services, by acquiring a majority stake in Fenchurch Advisory Partners in the UK and a minority stake in Clipperton in France. The London branch delivered a strong performance despite difficult market conditions and the political instability surrounding a potential Brexit. This year, the performance of Capital Markets in London was driven by GSCS and GSF’s Solutions business. The Dubai branch went from strength to strength, particularly in the strategic sectors of infrastructure and energy & natural resources. Natixis also strengthened its franchise in real estate finance in Germany and in advisory services in Italy and Spain. In Madrid, Natixis inaugurated its new offices, which now house all its business lines under one roof.
The Americas platform delivered a solid performance in all its business sectors. It continued to enhance its product range and cement its expertise, particularly in structured finance and acquisitions, M&A advisory services and securitization, ranking as No. 9 Loan Contributor to CMBS deals in the US (source: Commercial Mortgage). It consolidated its positioning in Latin America, where it ranked as No. 1 Leading Underwriter for Latin America Loans in the fourth quarter of 2018 (source: Thomson Reuters) by developing its arrangement and distribution offering
The platform finally launched DANA, Diversity@Natixis Asia-Pacific, an internal network to promote equal opportunity and embed practices in favor of diversity within the Company.
In Capital Markets, Natixis pursued its strategy based on an innovative service offering that adapts to the specific needs of customers, and continued to develop digital tools designed to improve the customer experience.
To offer the most appropriate solutions for clients’ needs in the form of a comprehensive offer, the Global Markets business line decided to merge its Equity Derivatives and Fixed Income financial engineering and sales teams. The aim is to get the financial engineering, innovation and pricing teams involved in sales discussions early in the process.
In Investment Banking, Strategic and Acquisition Finance maintained a high level of activity in 2018 by arranging a wide variety of innovative, landmark transactions.
In addition, its partnership with ODDO-BHF in 2017 strengthened the position of its Equity Capital Markets teams on the primary equity market. Having led the two biggest IPOs of the year, Natixis tied for No. 1 IPO Bookrunner on the IPO market by volume and number of deals (source: Bloomberg). In share buybacks, Natixis strengthened its franchise with its customers in all segments. Natixis(1) was also ranked No. 2 bookrunner in the equity-linked market in France by number of deals and by volume at December 31, 2018 (excluding ABB) (source: Bloomberg).
Private Equity Magazine named Natixis Partners “Advisor of the year—M&A Large Cap” in 2018. Natixis and its affiliate Natixis Partners ranked fifth by number of deals at December 31, 2018 (source: Mergermarket).
In Personal Insurance, the new multi-site, multi-brand client relationship model developed under the Move#2018 transformation program was rolled out in June. Client relationship structure, tools and processes are now identical across the Banque Populaire banks and Caisses d'Epargne. A platform for managing estates was also created. As part of the Cultural Transformation program, all Paris-based staff were moved to the same premises, while other locations were converted into innovative workspaces and agile methodologies for strategic projects were rolled out.
In non-life insurance, three major strategic projects were launched: the Purple#Care plan to transform and digitalize claims management was successfully deployed in June and September for two-wheel and four-wheel vehicles; the #Pop’Timiz project to pool non-life insurance middle and back office operations for the Banque Populaire banks and Caisses d’Epargne was implemented in November when the APS platform was rolled out in three Banques Populaires; lastly, the #INNOVE2020 program was launched with the goal of making BPCE Assurances the sole non-life insurance platform for both Banque Populaire and Caisse d’Epargne retail customers by 2020.
On November 14, 2018, the International Accounting Standards Board voted in favor of postponing the effective date of IFRS 17 from 2021 to 2022. The standard will be submitted for public review in 2019. Natixis Assurances’ preparation for the application of this standard is ongoing.
In keeping with the strategic plan's targets, the Specialized Financial Services (SFS) business lines (excluding Payments) continued to build closer relationships with the BPCE networks and commenced a front-to-back overhaul of the customer experience. The idea is to design tools and solutions that can help optimize the customer experience and respond to changes in distribution methods in an increasingly digital world. The purpose of this new program is to accelerate the transformation of the business lines to make them 100% digital.
The Payments business line, whose entities are now merged as Natixis Payments, continued to ramp up its development in 2018 with: an increasingly dynamic external growth strategy featuring:a the acquisition of Comitéo (Alter CE) in April. The companyj provides works councils with a software platform that combines business line functions (management, accounting, finance, employee communication tools, and a private social network), as well as a market place with multiple listings (show tickets, movie tickets, gift cards and certificates, etc.), the acquisition of Banque Postale’s 50% stake in Titresj Cadeaux, making Natixis the sole shareholder. This comprehensive high-value product for the prepaid gift market rounds out Natixis Payments’ Benefits offering; the effective implementation of a new structure to bettera arrange and streamline operations through three business units (BU): Services & Processing, offering processing services toj financial institutions and the Groupe BPCE networks,
Merchant Solutions, which includes Dalenys and PayPlugj and aims to develop comprehensive acceptance and acquiring solutions,
In light of the earnings generated over the course of 2018, an ordinary dividend payment of €0.30 per share, i.e. 64% of distributable earnings, will be proposed at the General Shareholders’ Meeting that will take place on May 23, 2019.
Natixis’ net revenues stood at €9,616 million at December 31, 2018, up 3.1% from 2017 at constant exchange rates.
Recurring expenses totaled €6,823 million, up 4.2% at constant exchange rates compared with 2017. At constant exchange rates, costs increased 7% for the Asset & Wealth Management division, 1% for the CIB division, 2% for the Insurance division and 7% for SFS. Corporate Center expenses were up €915 million in 2018 compared with €883 million in 2017. They include €488 million in expenses for Coface and €164 million for the Single Resolution Fund contribution.
Gross operating income stood at €2,793 million in 2018, a slight increase of 0.5% at constant exchange rates versus 2017.
Revenues from Associates climbed to €29 million in 2018 versus €26 million in 2017.
Gains or losses on other assets totaled €54 million in 2018, €31 million from the sale of Axeltis by the Asset Management business and €11 million from the sale of Sélection 1818 by the Wealth Management business line. In 2017 this item totaled €48 million, including €21.5 million from the disposal of the Ellisphere subsidiary (Financial Investments) and €18 million following the liquidation of a holding company.
The recurring tax expense came to €781 million in 2018. The effective tax rate was 29.7% in 2018.
After incorporating -€304 million in non-controlling interests, net income (Group share) amounted to €1,577 million in 2018, down 5.5% compared with 2017.
Consolidated management ROE after tax (excluding non-recurring items) came to 9.4% in 2018, giving an accounting ROE of 9.2%.
Expenses also rose, but to a lesser degree, by 4.0% (up 6.6% at constant exchange rates).
The business had zero net inflows for the year with diverging results: net inflows in Europe totaled €10.7 billion on the back of bonda products (H2O and DNCA), diversified products (H2O, Ostrum and Vega IM), equities (Seeyond and Ostrum) and real estate products (AEW Europe), partially offset by outflows in life insurance (Ostrum); in the US, net outflows of €10.1 billion were largely attributablea to Loomis debt and equity products and to diversified products (primarily Harris); there were limited net outflows of €641 million from privatea equity companies, mainly from Euro Private Equity and Naxicap Partners.
At €832.9 billion, average assets under management at December 31, 2018, were up (+3.9%) compared with 2017 (at constant EUR exchange rates). The rate of return on AuM was up 6.3% to 31.0 points compared with December 31, 2017 at constant exchange rates.
At December 31, 2018, net revenues stood at €3,274.5 million, up 10% year-on-year (i.e. up 13% at constant exchange rates), driven by higher fees on AuM across the regions due to the increase in average AuM and in the commission rate over the period as well as the rise in incentive fees of European asset management companies.
large part driven by operating costs (communication and advertising), consulting fees (implementation of strategic projects), and IT costs.
Expenses stood at €2,114.0 million, up 4% compared with December 31, 2017 (up 7% at constant exchange rates). This increase was mainly attributable to the variable compensation costs of asset management companies in the US and in Europe for the most part and, to a lesser extent, to fixed payroll costs linked to the increase in average headcount and pay raises. Excluding internal payroll costs, the increase in expenses was in
In 2018 the Wealth Management business recorded strong sales despite sensitive market conditions. Net inflows totaled €2.0 billion and was largely attributable to wealth management in France and abroad, and to the dynamism of the networks’ B2B private wealth management activities.
Assets under management came to €26.1 billion, down 17% year-on-year due to a €5.7 billion scope effect resulting from the disposal of Sélection 1818. Restated for this effect, AuM increased 1% despite unfavorable market conditions in the second half of the year.
4 OVERVIEW OF THE FISCAL YEARManagement report at December 31, 2018 228 Natixis Registration Document 2018
Revenues from Fixed Income, Forex, Credit, Commodities and Treasury activities stood at €1,158 million in 2018, down 10.8% on 2017 at constant exchange rates. The following changes were observed in each segment: Fixed Income and Forex revenues were down 14.1%, witha Fixed Income falling 28.2%. This is explained by less robust sales, especially in the second half of the year due to more challenging market conditions. Meanwhile, Forex was up 31.5%, thanks to sharp currency fluctuations, especially starting in the second quarter as the Italian elections triggered an increase in flow volumes; Credit revenues dipped by 1.1% compared with 2017. Thea decline in the management of positions was partially offset by the growth in securitization that continued into 2018, up 2.5% on 2017 at constant exchange rates; Revenues from repo activities, which were split evenlya between Fixed Income and Equity, fell 11.5% compared with 2017 on account of tighter margins caused by a more competitive market.
Revenues from joint ventures (i.e. with income shared equally between Global Markets and Investment Banking to ensure team alignment) were mixed in 2018.
Compared with a record 2017, Strategic & Acquisition Finance’s revenues were down 9.5% as the leveraged finance market showed the first signs of stress.
brought the Equity business line's revenues down to a total of €24 million compared with 2017. Excluding the impact of equity derivatives in Asia, the revenues of the Equity Derivatives business dropped 24.1% to €427 million. Sales bore the brunt of a more challenging market environment, especially at the end of the year.
At €170 million, Equity fell 71.0% at constant exchange rates compared with 2017 at constant exchange rates. Excluding the impact of equity derivatives in Asia, net revenues stood at €437 million, down 26.1% from 2017 at constant exchange rates. The discontinuation of the Equity Brokerage business in the US and the UK at the end of 2017 and then in France from July 1, 2018, after the business was transferred to Oddo,
At €1,411 million, Financing revenues including TTS (Trade & Treasury Solutions, the new name for Global Transaction Banking) gained 8.9% compared with 2017 at constant exchange rates.
Revenues from Real Assets rose 26.7% compared with 2017, driven by the performance of its strategic sectors: Real Estate Finance in the US, with a high volume of securitizations in the first half of the year, and Infrastructure, which was also very buoyant following a number of major deals. Commodities finance (Energy & Natural Resources) revenues pushed higher to 8.3% at constant exchange rates on a stronger average per-barrel oil price than last year, boosting the Trade Finance business. The revenues of the Distribution & Portfolio Management (DPM) financing portfolio contracted by 1.0% at constant exchange rates in a context of pressure on margins.
OVERVIEW OF THE FISCAL YEAR Management report at December 31, 2018 229Natixis Registration Document 2018
Premiums on unit-linked assets totaled €3.2 billion (-4%) and made up 33% of total gross inflows, down 2 points year-on-year and 5 points higher than the market average at end-December. Inflows invested in the euro fund totaled €6.4 billion, up 3%.
Operating expenses edged up 2% to €448 million. The increase in expenses, which remained below net revenue growth (+8%), reflects the cost of developing the businesses and implementing the New Dimension plan’s strategic ambitions: deployment of a new multi-site, multi-brand customer relationship model in personal insurance (Move#2018); ongoing strategic non-life insurance projects (#Innove2020, Purple#Care and #Pop’Timiz) and the wind-down of the Assurément#2016 and Impulse initiatives.
Securities Services continued to expand its range of services for the networks.
OVERVIEW OF THE FISCAL YEAR Management report at December 31, 2018 231Natixis Registration Document 2018
Revenues from Financial Services excluding Payments were up 2%, with net revenues on Employee Savings Plans up 4%.
Payments revenues increased by 16% year-on-year. This growth was driven by the performance of historical businesses (Flows, Electronic Banking and Service Vouchers) and by acquisitions carried out over the last two fiscal years which accelerated business expansion. Accordingly, Merchants Solutions profited from the surge in business volumes generated from recent acquisitions made by Natixis Payment Solutions (Dalenys and PayPlug).
Provision for credit losses was down significantly to €23 million thanks to effective overall risk management and better-quality data that have an impact on IFRS9 provisions.
Net operating income stood at €445 million, up 20%, and ROE at 14%.
Net revenues from the Corporate Center stood at €669 million versus €657 million in 2017.
Coface net revenues in the first half of 2018 totaled €678 million, a sharp increase of 9% (+11% at constant exchange rates) compared with 2017.
OVERVIEW OF THE FISCAL YEAR Management report at December 31, 2018 233Natixis Registration Document 2018
Appendix to 4.2.2 – Consolidated Results 1 – MANAGEMENT RESULTS RECLASSIFIED AS CONSOLIDATED RESULTS IN 2018R
In line with the strategy of the New Dimension plan, in 2018 Natixis pursued a policy of targeted acquisitions in Asset Management, CIB and Payments.
Asset Management Acquisition of European credit specialist MV Crédit as part of the expansion of Natixis Investment Managers’ private debt offering
Strategic investment in Vermillion Partners in China as part of the strategic enhancement of Natixis’ expertise in Mergers & Acquisitions advisory services
This partnership includes: the transfer of Natixis’ equity brokerage and equity research activities in France to ODDO BHFa the reunion of both players’ equity capital markets activities in France under Natixisa
Payments Acquisition of 46% of the remaining shares in Dalenys, following a takeover bid and squeeze-out
Asset Management Mirova's acquisition of a majority stake (51%) in Althelia Ecosphère, an asset management company specialized in impact investing.
Payments Acquisition of a majority stake (78.5%) in PayPlug, a French start-up offering online payment solutions for online retailers
Acquisition of 51% of Peter J. Solomon Company, a New York-based firm specialized in providing independent advisory services on mergers & acquisitions, capital structure and restructurings to public and private corporations.
Asset Management Merger of asset management firms AEW Europe and Ciloger as part of a strategic partnership with La Banque Postale
Asset management Disposal of a 25% stake in IDFC, bought by the Indian group IDFC who owned the remaining 75%.
Corporate Center Disposal of the 15% stake in Cacais to Crédit Agricole S.A., making it the sole shareholder once the transaction is complete. This disposal is entirely consistent with the objectives of the New Dimension strategic plan for 2018-2020, particularly the objective of reducing the Corporate Center’s RWA.
Gains or losses on fixed assets 35 (89) (2) (36) 33 (90) 320 (3) 317
Funding/reversal of funding for general banking risks and regulated provisions 0 N/A 0 N/A 0 N/A 0 0 0
Gains on trading book transactions decreased by €113 million, i.e. -€100 million for Mainland France and -€13 million for transactions carried out by foreign branches.
The net provision for credit losses was down €20 million (of which -€25 million for the branches) to -€228 million.
At December 31, 2018, net gains/(losses) on fixed assets amounted to +€33 million. The balance for fiscal year 2018 is mainly attributable to the €151 million capital gain earned on the NUSHI share swap, a €71 million provision over the fiscal year
Pursuant to Article D.441-4 of the French Commercial Code, supplier invoices that have been received but remain unpaid at the reporting date (for a total amount including tax of €85.2 million) are as follows: INVOICES RECEIVED BUT STILL UNPAID AT THE END OF THE PERIODR
Percentage of the total amount of purchases, including tax, for the period 3.89% 0.29% 0.06% 0.03% 0.35% 0.72%
For debt and receivables associated with Natixis S.A. clients, please refer to Note 37 of Chapter 5.3 on assets and liabilities by maturity, which provides information on their residual maturity.
began under the New Frontier plan, allocating a significant portion of its investments to digital technologies and differentiating itself by taking the lead in the areas where Natixis’ teams are recognized for their exceptional skills.
This year Natixis will also continue to transform its business model as part of the plan announced in 2018 to sell its retail banking-focused activities (Consumer Finance, Leasing, Sureties & Financial Guarantees, Factoring and Securities Services) to BPCE. With this transaction, Natixis can expand its strategic development capacity to create the flexibility it needs to accelerate the deployment of its asset-light model, while consolidating the high added-value areas of expertise that set it apart from the competition but are light on capital expenditure and low on cost of risk.
In addition, to comply with the requirements of the French law on the separation of banking activities, the Short-Term Treasury and Collateral Management activities, which used to be part of Global Markets, were transferred to the Finance Department on April 1, 2017. Nevertheless, to ensure comparability, in this management report CIB refers to CIB including Short-Term Treasury and Collateral Management activities.
As a reminder, the earnings of the Natixis business lines have been presented in accordance with Basel 3 regulations. Capital allocation specific to the insurance businesses is based on the Basel 3 accounting treatment for investments in insurance companies, as enacted in the CRD4 and CRR (“Danish compromise”). The capital allocated to CEGC takes into account its exclusion from the “Danish compromise”. It is based on a 250% risk weighting of the value of the securities held by CEGC, which is the prudential treatment under the threshold mechanism applied to holdings of equity instruments issued by financial entities.
ROE and ROTE for Natixis and the business lines are calculated as follows: the profit measure used to determine Natixis’ ROE is 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, and eliminating unrealized or deferred gains and losses recognized in equity; Business line ROE is calculated based on:a as the numerator, the business line’s pre-tax profit, as perj the aforementioned rules, to which a normative tax is applied. The normative tax rate is determined for each of the divisions while taking into account the tax liability conditions of Natixis’ companies in the jurisdictions where they operate. It is determined once a year and does not factor in potential changes over the year linked to deferred taxes; as the denominator, regulatory capital, calculated on thej basis of 10.5% of RWA assigned to the division, plus goodwill and intangible assets related to the business line.
INTERNAL CONTROL 5.5 PROCEDURES RELATING TO ACCOUNTING AND FINANCIAL INFORMATION 447
FINANCIAL DATA Consolidated financial statements and notes 241Natixis Registration Document 2018
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 0.47 0.50
Share of gains and losses recognized directly in the equity of associates recyclable to income (2) (3)
Revaluation of hedging derivatives of equity financial assets recognized at fair value through other comprehensive income -
Share of gains and losses recognized directly in the equity of associates not recyclable to income -
Revaluation of own credit risk on financial liabilities at fair value through profit or loss 384 (110) 275
Revaluation of equity instruments recognized at fair value through other comprehensive income (7) 1 (7)
Shares in unrealized or deferred gains/(losses) of associates (4) 2 (2)
Loans and receivables due from banks and similar items at amortized cost 8.6.1 27,285 40,570 45,289
Shareholders’ equity at December 31, 2016 after appropriation of income 5,019 5,956 1,611 1 6,098 Capital increase 0 (0)
Equity component of share-based payment plans 17 2017 dividend paid in 2018 (1,160)
Total activity related to relations with shareholders 21 39 0 (3) (1,148) Issuance and redemption of perpetual deeply subordinated notes and preference shares (254)
Issue premiums, legal reserve, contractual reserves, long-term capital gains reserve and other Natixis reserves.(a) Other equity instruments issued: refers to perpetual deeply subordinated notes. At December 31, 2018, a redemption of perpetual deeply (b) subordinated notes issued in 2008 was recorded in the amount of -€254 million. At December 31, 2017, two new issues of perpetual deeply subordinated notes subscribed to by BPCE for a total amount of €897 million, and a redemption of -€276 million of perpetual deeply subordinated notes issued in 2007, were recognized. Realized and unrealized “changes in fair value attributable to own credit risk on financial liabilities at fair value through profit or loss” (c) recognized in shareholders' equity at December 31, 2018 totaled +€385.8 million (gross amount, with an associated tax impact of -€111.4 million). Balancing payments related to the early redemption of Natixis issues recognized in shareholders' equity at December 31, 2018 totaled +€5.3 million (gross amount, with an associated tax impact of -€1.7 million). Realized and unrealized “changes in fair value attributable to own credit risk on financial liabilities at fair value through profit or loss” recognized in shareholders' equity at December 31, 2017 totaled -€185.3 million (gross amount, with an associated tax impact of +€48.5 million). Balancing payments related to the early redemption of Natixis issues recognized in shareholders' equity at December 31, 2017 totaled +€5.3 million (gross amount, with an associated tax impact of -€1.8 million). In 2017, the shareholders' equity Group share included the following:(d) - €111 million for the revaluation and unwinding of the discount on call options granted to minority shareholders of DNCA France (-€63.1 million), Ciloger (-€16.1 million), Dorval (-€29 million), Darius (-€6.7 million) and Lakooz (+€3.8 million); - €38 million for the acquisition of the 100% stake held by BPCE in S-Money and its subsidiary Lakooz, which occurred in two stages (51% in the first half of 2017 and 49% in the second half of 2017); + €18 million for the acquisition of BatiLease and InterCoop from Crédit Coopératif; - €94 million for the buyback of 40% of BPCE Assurances from minority interests (Macif and Maif); + €8 million for the disposal of Ellisphère; - €62 million in call options granted to minority shareholders in Dalenys; - €56 million in call options granted to minority shareholders in IML (Investors Mutual Limited); - €4 million in call options granted to minority shareholders in PayPlug.
FINANCIAL DATA Consolidated financial statements and notes 247Natixis Registration Document 2018
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.(h)
The balance of cash and cash equivalents consists of the net balances of cash and amounts due from central banks, as well as on-demand deposits with and loans from credit institutions.
Changes in cash related to investment operations result from cash flows related to acquisitions and disposals of investments in consolidated and non-consolidated associates, tangible and intangible fixed assets, and acquisitions and disposals of investment property, property provided under operating leases and financial assets held to maturity.
+/- Net charge to depreciation and amortization of property, plant and equipment and intangible assets 341 320
+/- Net charge to other provisions (including insurance companies’ technical reserves) 5,778 7,536
+/- Decrease/(increase) in financial assets and equity interests (a) 620 200
+/- Decrease/(increase) in property, plant and equipment and intangible assets (361) (324)
Impact of exchange rate fluctuations on cash and cash equivalents 373 (1,981)
Decrease/(increase) in financial assets and investments in associates, included in particular: (a)
Cash flows received from/(paid to) shareholders included dividends paid to BPCE in the amount of -€824 million and dividends paid to non-Group (b) entities for -€505 million.
Cash flows from financing activities can be broken down as follows:(c)
- €254 million paid on perpetual deeply subordinated notes, corresponding to the reimbursement of two issues made in 2008; +€300 million subordinated debt issue underwritten by BPCE; - the redemption of debt held by Morgan Stanley for -€10 million; - interest paid on subordinated notes for -€82 million; - interest paid on deeply subordinated notes recorded in equity for -€97 million.
Related to the announced sale of some SFS business lines to BPCE (also see notes 3.6 and 6.9).(d)
FINANCIAL DATA Consolidated financial statements and notes 249Natixis Registration Document 2018
During the fourth quarter of 2018, Natixis recognized a decrease in earnings of €259 million in connection with its “Equity derivatives” activities, due to the occurrence of an exceptional risk related to the deterioration of the Asian markets.
This decrease in earnings is exceptional and regards an activity whose revenues did not significantly contribute to the medium-term plan. In no way does it therefore call into question the objectives of the “New Dimension” strategic plan presented in the introduction to the registration document.
Planned sale by Natixis and acquisition by BPCE S.A. of the Factoring, Sureties & Financial Guarantees, Leasing, Consumer Finance and Securities Services business lines
On September 12, 2018, Natixis and BPCE announced the planned sale by Natixis and acquisition by BPCE S.A. of the Factoring, Sureties & Financial Guarantees, Leasing, Consumer Finance and Securities Services business lines, for €2.7 billion.
IMPACT OF THE FIRST-TIME APPLICATION NOTE 1 OF IFRS 9 AS OF JANUARY 1, 2018 252
Subsidiaries held for sale 3.6 266 Standardization of individual data and 3.7 treatment of intra-group transactions 266
Natixis’ institutional operations3.8 266 Currency conversion 3.9 of the statements of foreign subsidiaries and branches 267
Interests in subsidiaries4.3 269 Interests in partnerships 4.4 and associates 270
Impairment of assets at amortized 6.3 cost and at fair value through other comprehensive income and provisions for financing and guarantee commitments 280 Derivative financial instruments 6.4 and hedge accounting 283
Fair value of financial instruments6.6 285 Guarantee mechanism for the assets 6.7 of the former GAPC hive-off vehicle 286 Property, plant and equipment, 6.8 intangible assets (excluding goodwill) and investment property 287 Non-current assets held for sale and 6.9 discontinued operations 288 Financial liabilities at fair value through 6.10 profit or loss 288
Share-based payments6.17 291 Treasury shares and treasury share 6.18 derivatives 292
Tax expenses6.20 292 Financing and guarantee 6.21 commitments 293 Contributions to banking resolution 6.22 mechanisms 293
Deferred tax assets and liabilities8.8 333 Non-current assets and liabilities held 8.9 for sale 334 Accrual accounts, other assets and 8.10 liabilities 337 Property, plant and equipment and 8.11 intangible assets 338 Assets obtained by taking possession 8.12 of guarantees 338
Net revenues, pre-tax profit, taxes and 18.2 headcount by country at December 31, 2018 385
Most financial assets that were measured at amortized cost under IAS 39 continue to meet the conditions for measurement at amortized cost under IFRS 9. Similarly, most financial assets measured at fair value under IAS 39 (available-for-sale financial assets and financial assets at fair value through profit or loss) continue to be measured at fair value under IFRS 9. As of January 1, 2018, the main reclassifications were: for financing portfolios:a repurchase agreements classified as loans and receivablesj and liabilities measured at amortized cost under IAS 39 and considered part of a trading business model under IFRS 9 were reclassified as “Financial assets at fair value through profit or loss” for €47,328 million, and as “Financial liabilities at fair value through profit or loss” for €63,620 million, and are now measured at fair value through profit or loss, repurchase agreements designated under the fair valuej option under IAS 39 for the purpose of comprehensive management at fair value and considered part of a trading business model were classified as “Financial assets at fair value through profit or loss” under IFRS 9, for €44,695 million. This reclassification had no impact on the balance sheet, since assets designated under the fair value option through profit or loss and assets held for trading were measured in the same way and presented in the same line of the balance sheet under IAS 39; for securities portfolios:a debt securities held in the liquidity reserve, which underj IAS 39 were recognized as “Available-for-sale assets”, are managed under a hold to collect and sell business model and were therefore reclassified as “Financial assets at fair value through other comprehensive income” (recyclable to income), for €9,466 million, as a result they are recognized as “Financial assets at fair value through profit or loss”, for €1,645 million,
Mutual fund and venture capital mutual fund units, except forj those in the insurance business, classified as equity instruments under IAS 39 and recognized as “Available-for-sale assets” or as “Financial assets under the fair value option”, are considered to be debt instruments with non-basic (non-SPPI) characteristics under IFRS 9, and investments in associates recognized as available-for-salej assets under IAS 39, which, as allowed under IFRS 9, are either recognized as “Financial assets at fair value through profit or loss”, for €379 million, or under the option provided for by IFRS 9, are recognized as “Financial assets at fair value through other comprehensive income” (not recyclable to income even in the event of disposal), for €71 million. In this last case, only dividends are recorded in income, securitization fund units measured at amortized cost andj classified as loans and receivables under IAS 39 (i) are measured at fair value through profit or loss under IFRS 9 if their contractual cash flows are not solely payments of principal and interest, (ii) are measured at fair value through other comprehensive income if they are managed under a hold to collect and sell business model, and (iii) will continue to be recognized at amortized cost if they are managed under a hold to collect business model.
Guarantee deposits and margin calls with collateral status composed of cash mainly held with clearing houses also meet the definition of financial instruments within the meaning of IAS 32. They are closely linked to the activities or instruments that they cover and are an integral part of the business model of the activity to which they relate. Nearly all the cash guarantee deposits and margin calls, previously recognized in “accrual accounts, other assets and liabilities”, are therefore now included in instruments at fair value through profit or loss, in accordance with ANC recommendation 2017-02 on the format of the consolidated financial statements of banking institutions in line with international standards.
FINANCIAL DATA Consolidated financial statements and notes 253Natixis Registration Document 2018
Under IAS 39, it was forbidden to record impairments on the initial recognition of assets. An asset or group of assets could be impaired only if: there was objective evidence of impairment resulting from onea or more events that had occurred since the initial recognition of the asset (i.e. loss events); and these loss events had an impact on the estimated cash flowsa of the financial asset.
IFRS 9 now requires that entities recognize impairments at an earlier stage than under IAS 39, i.e. from the date of initial recognition of the financial instrument. Accordingly, the application of the new IFRS 9 provisioning model leads to an increase in the amount of the impairments recorded for loans and securities carried at amortized cost in the balance sheet or recorded at fair value through recyclable other comprehensive income, and for loan and guarantee commitments given (excluding those recognized at fair value through profit or loss) and lease receivables.
The impact of the first-time application of IFRS 9 on opening equity related to the implementation of the new impairment model is €166.8 million before tax and €124.7 million after the impact of deferred taxes (negative impacts).
Financial assets at fair value through profit or loss 184,497 46,184 (5,017) (1) 225,663
Loans and receivables due from customers 136,768 (41,920) (10,312) (24) 84,512
A breakdown of the impact of the first-time application of the new impairment model is provided in Note 1.2.2.(c)
FINANCIAL DATA Consolidated financial statements and notes 255Natixis Registration Document 2018
Loans and receivables Financial assets at fair value through profit or loss (c) 3,006 3,006
Loans and receivables due from banks Loans and receivables due from banks at amortized cost (c) 2,099 2,097
Loans and receivables due from customers Financial assets at fair value through profit or loss (c)
Reverse repurchase agreements Financial assets at fair value through profit or loss (d) 44,695 44,695
Financial assets at fair value through profit or loss (i) 57
Financial assets at fair value through profit or loss (j) 28
Reverse repurchase agreements Loans and receivables due from banks at amortized cost
Financial assets at fair value through profit or loss (k) 47,328
Factoring Loans and receivables due from customers at amortized cost 8,218 8,208
Collective provisions are recognized as a deduction from assets, like individual provisions, and are therefore included in the carrying amount of the * instruments.
The application of the classification and measurement criteria set out in IFRS 9 (see Note 6.1) relating to business models and the contractual characteristics of financial instruments led Natixis to make the following reclassifications: Fixed-income securities classified as “Financial assets under(a) the fair value option” according to IAS 39 were classified as “Financial assets at fair value through profit or loss” under IFRS 9 for €201 million, as they are managed under a trading business model. Fixed-income securities reclassified as “Financial assets at fair value through profit or loss” under IFRS 9 because they do not meet the SPPI criteria (see Note 6.1.2) amounted to €391 million; Variable-income securities classified as “Financial assets(b) under the fair value option” under IAS 39 and managed under a trading business model were classified as “Financial assets at fair value through profit or loss” under IFRS 9 for €242 million. Mutual funds recognized as “Financial assets at fair value through profit or loss” under IFRS 9 because they do not meet the SPPI criteria (see Note 6.1.2) amounted to €1,191 million; Loans and receivables classified as “Financial assets under(c) the fair value option” under IAS 39 and managed under a trading business model were classified as “Financial assets at fair value through profit or loss” under IFRS 9, for €2,565 million. Loans and receivables reclassified as “Financial assets at fair value through profit or loss” under IFRS 9 because they do not meet the SPPI criteria (see Note 6.1.2) amounted to €2,297 million. Loans and receivables classified as “Financial assets under the fair value option” under IAS 39 reclassified in financial assets at amortized cost under IFRS 9 amounted to €2,097 million; Securities received under repurchase agreements classified(d) as “Financial assets under the fair value option” under IAS 39 and managed under a trading business model were classified as “Financial assets at fair value through profit or loss” under IFRS 9, for €44,695 million; IFRS 9 as they do not meet the SPPI criteria (see Note 6.1.2); Debt instruments recognized as “Available-for-sale financial(e) assets” under IAS 39 for €15 million were reclassified as “Financial assets at fair value through profit or loss” under
Debt instruments corresponding to the liquidity reserve(f) securities portfolio, totaling €9,466 million, managed under a hold to collect and sell business model, were reclassified as “Financial assets at fair value through recyclable other comprehensive income” under IFRS 9. This reclassification had no impact on opening equity. Debt instruments classified as “Available-for-sale financial assets” under IAS 39 reclassified in financial assets at amortized cost under IFRS 9 amounted to €99 million. These instruments correspond to issues made by affiliates and are held in a hold to collect business model; Non-consolidated mutual fund units totaling €453 million are(g) considered non-SPPI debt instruments under IFRS 9 and were therefore classified as “Financial assets at fair value through profit or loss”. Other variable-income securities (excluding investments in associates) managed under a trading business model were reclassified as “Financial assets at fair value through profit or loss” under IFRS 9, for €22 million. Investments in associates classified as “Financial assets at fair value through profit or loss” under IFRS 9 totaled €379 million; Investments in associates reclassified as “Financial assets at(h) fair value through non-recyclable other comprehensive income” under IFRS 9 represented €71 million; These include loans and receivables classified as “Loans and(i) receivables” under IAS 39 and reclassified as “Financial assets at fair value through profit or loss” under IFRS 9 because they do not meet the SPPI criteria, for €57 million; These include debt instruments classified as “Loans and(j) receivables” under IAS 39 and reclassified as “Financial assets at fair value through profit or loss” under IFRS 9 because they do not meet the SPPI criteria, for €28 million; Securities received under repurchase agreements classified(k) as “Loans and receivables” under IAS 39 and managed under a trading business model were recognized as “Financial assets at fair value through profit or loss” under IFRS 9, for €47,328 million;
FINANCIAL DATA Consolidated financial statements and notes 257Natixis Registration Document 2018
Reclassification of the insurance activities’ financial assets to(l) “Insurance activity investments” in accordance with the ANC recommendation.
Note that financial assets classified as “Financial assets at fair value through profit or loss” at January 1, 2019 because they do not meet the SPPI criteria mainly consist of mutual fund units and loans and receivables with an equity-indexing component.
Financial liabilities designated at fair value through profit or loss 144,885 221,321
Financial liabilities designated at fair value through profit or loss 59,600
Securities Financial liabilities designated at fair value through profit or loss 26,096 26,096
Securities Financial liabilities designated at fair value through profit or loss 20,535 20,535
Repurchase agreements Financial liabilities designated at fair value through profit or loss (a) 34,974 34,974
Insurance companies' technical reserves Liabilities related to insurance policies 76,601 76,601
Securities sold under repurchase agreements classified as “Due to banks and customer deposits” under IAS 39 and managed under a trading (b) business model were recognized as “Financial liabilities at fair value through profit or loss” under IFRS 9, for €63,619 million.
Closing balance of value adjustments under IAS 39 and IAS 37 at 31/12/2017
Impact of changes in valuation classification on value adjustment for losses at that date
Loans and receivables due from customers at amortized cost (15) (15)
Reclassification to financial assets at fair value through profit or loss 59 (61) (61) (2) (2)
Reclassification to financial liabilities at fair value through profit or loss
Impact of change in impairment of off-balance sheet commitments (140) (140) (1) (141)
Impact on consolidated reserves at 01/01/2018 (32) (107) 26 (14) (96) (128) (4) (132)
As required by European regulation 1606/2002 of July 19, 2002, Natixis has prepared its consolidated financial statements for the year ended December 31, 2018 in accordance with IAS/IFRS standards and IFRIC interpretations as adopted by the European Union and applicable on that date(1).
Natixis’ consolidated financial statements include a balance sheet, income statement, statement of net income/(loss) and other comprehensive income, statement of changes in shareholders’ equity, cash flow statement and notes to the financial statements.
The new standard, IFRS 9 “Financial Instruments”, wasa adopted by the European Commission on November 22, 2016 and is applicable in Natixis’ consolidated financial statements retroactively as of January 1, 2018, except for the provisions relating to financial liabilities at fair value through profit or loss, which Natixis applied in advance to its financial statements from January 1, 2016, under the option available in the standard.
Natixis has taken the option offered by IFRS 9 of not applying its provisions relating to hedge accounting and of continuing to apply IAS 39 to account for its hedging transactions. In view of the limited volume of asset reclassifications, most transactions recognized using hedge accounting under IAS 39 will continue to be disclosed in the same way from January 1, 2018.
specific provisions for financial conglomerates, was adopted by the European Commission on November 3, 2017 with effect from January 1, 2018. This European regulation will allow financial conglomerates to defer application of IFRS 9 to their Insurance divisions until January 1, 2022 (effective date of the new IFRS 17 “Insurance Contracts”) as long as they:
The amendment to IFRS 4 applying IFRS 9 “Financial Instruments” jointly with IFRS 4 “Insurance Contracts” with do not transfer financial instruments between the Insurancej division and other divisions of the conglomerate (with the exception of financial instruments at fair value through profit or loss for the two divisions affected by the transfer), indicate the insurance entities that apply IAS 39,j provide specific additional information in the Notes.j
Natixis has also taken steps to prevent any transfer of financial instruments (with the exception of financial assets at fair value through profit or loss) between its Insurance division and other divisions, which would lead to derecognition for the transferring entity.
From January 1, 2018, in accordance with ANC recommendation 2017-02, Natixis will present insurance activities on separate lines in its consolidated financial statements: “Insurance Activity investments” on the asset side of the balance sheet; “Liabilities related to insurance policies” on the liability side of the balance sheet; and “Net revenues from insurance activities” in the income statement.
The amendment to IFRS 9 “Financial instruments” entitled “Prepayment features with negative compensation” was adopted by the European Commission on March 22, 2018 and has been applied in advance by Natixis from January 1, 2018, as permitted by IFRS 9. This amendment provides that prepayment features with negative compensation are not incompatible with the notion of basic contractual cash flows provided they represent “reasonable compensation”. The application of this amendment allows Natixis to consider that a portfolio of fixed-rate loans with symmetrical repayment clauses solely provides payments of principal and interest, and to recognize this portfolio at amortized cost.
IFRS 15 “Revenue from Contracts with Customers” wasa adopted by the European Commission on September 22, 2016 and is applicable retroactively as of January 1, 2018. The application of the amendment entitled “Clarifications to IFRS 15”, adopted by the European Commission on October 31, 2017, is also mandatory from January 1, 2018.
Under IFRS 15, the entity must recognize income arising from ordinary activities in an amount that reflects the consideration that the entity expects to receive in exchange for the transfer of goods and services promised to customers.
The analysis carried out by Natixis related to the first-time application of IFRS 15 drew on assessments carried out within the relevant entities and was able to identify the main items that could be affected, including: fee and commission income, from banking services if thisj income is not included in the effective interest rate, or from asset management or financial engineering services, income from other activities, in particular for servicesj included in leases.
Based on the analyses performed, Natixis will only be very slightly affected by the issues relating to the first-time application of IFRS 15 identified, such as real estate development, loyalty programs and telephony.
The amendment to IFRS 40 “Investment Property” adopteda by the European Commission on March 14, 2018 with mandatory application from January 1, 2018. This sets out the cases in which a company can transfer a property to or from the “Investment property” category. Such transfers must only be made if the property meets, or ceases to meet, the definition of investment property. This amendment had no impact on Natixis’ financial statements; IFRIC interpretation 22 “Foreign Currency Transactionsa and Advance Consideration” adopted by the European Commission on March 28, 2018 with mandatory application from January 1, 2018. This interpretation clarifies the accounting treatment of transactions that include the receipt or payment of advance consideration in a foreign currency. The transaction date, which is needed to determine the exchange rate to be used, is the date of initial recognition of the non-monetary asset or liability, except in the case of multiple payments or receipts, in which case it will be set for each payment or receipt. This interpretation had no impact on Natixis’ financial statements; Natixis did not opt for early application of the following standards, which had not yet entered into force at December 31, 2018: IFRS 16 “Leases”, adopted by the European Commission ona October 31, 2017. This standard will replace IAS 17 “Leases” and the interpretations relating to the accounting of these contracts. It became applicable retroactively on January 1, 2019, according to specific phase-in conditions.
Under IFRS 16, the definition of leases implies the identification of an asset and control by the lessee of the right to use the asset. Control is established if the lessee holds the following two rights throughout the period of use: the right to obtain almost all the economic benefits arisingj from use of the asset, the right to decide how the asset is used.j
For lessees, the standard requires that all lease contracts be recorded in the balance sheet such that they convey the right to use the leased asset, which must be recognized under fixed assets with a corresponding financial liability entry under liabilities to reflect the lease and other payments to be made over the duration of the lease contract. Natixis has decided to opt for the exception provided for by the standard of not modifying the accounting method for short-term leases (of less than 12 months) or leases relating to low value underlying assets.
The right of use will be amortized on a straight-line basis and the financial liability will be calculated on an actuarial basis over the duration of the lease contract. The interest expense relating to the financial liability and the amortization expense relating to the right of use will be recognized separately in income. In contrast, under the existing IAS 17, operating leases are not recorded in the balance sheet and only the related lease payments are recognized in the income statement.
These accounting changes could change the profile of insurance income (particularly for life insurance) and also introduce greater income volatility.
Given the scale of the changes made, and despite the uncertainties still surrounding the standard, Natixis’ insurance entities have, or will soon have, completed the scoping phase aimed at defining their road maps and the cost of implementation. They have set up project structures that will allow them, within the various working groups, to understand the standard in all of its aspects, including modeling, the adaptation of systems and organizational structures, the production of financial statements and the transition strategy, financial communication and change management.
In addition, when drawing up the consolidated financial statements at December 31, 2018, Natixis also took the following into account: for the valuation of financial instruments: the recommendationa published on October 15, 2008 by the AMF, the Conseil National de la Comptabilité (CNC—French National Accounting Board), the Commission Bancaire (French Banking Commission) and the Autorité de Contrôle des Assurances et des Mutuelles (ACAM—French insurance regulator), and the guide published by the IASB on October 31, 2008, entitled “Measuring and disclosing the fair value of financial instruments in markets that are no longer active”. These two texts underline the importance of using judgment to determine fair value in illiquid markets. Natixis no longer systematically uses models based on observable data as a result of this recommendation; for financial reporting on risk exposure: the recommendationsa issued by the Financial Stability Forum (FSF), as adapted for France. This information, presented in the format recommended by the Commission Bancaire in its May 29, 2008 document “Presentation note regarding the French application of the FSF’s financial transparency recommendations”, has been included in Section 3.2.11 of the “Risk factors, risk management and the pillar III report” chapter of the registration document.
The consolidated financial statements are based on the individual financial statements at December 31, 2018 of the entities included in Natixis’ consolidation scope.
Materiality is determined based on specific thresholds for each of the Group’s business lines and on a qualitative assessment of the relevance of each entity’s contribution to the consolidated financial statements of Natixis. The main thresholds applicable are as follows: Business lines
(in millions of euros) Total balance sheet Net revenues Net income
In terms of mutual funds and real estate holdings within the scope of Natixis Assurances, the materiality threshold used for inclusion in the consolidation scope is as follows: total assets or carrying amount of the mutual fund greater thana 0.5% of Natixis Assurances’ investments; the total amount of the entities excluded from the scope doesa not represent more than 5% of total investments.
The percentage of ownership and the voting rights held are indicated for each entity within the consolidation scope. The percentage of ownership represents the equity share held by Natixis, directly and indirectly, in the entities within the consolidation scope. The percentage of ownership is used to determine Natixis’ share in the net assets of the company owned.
FINANCIAL DATA Consolidated financial statements and notes 263Natixis Registration Document 2018
If, after reviewing these criteria, Natixis concludes that its decision-making rights over the management of the entity’s relevant activities enable it to influence the variable returns obtained, Natixis does have control pursuant to IFRS 10 and the entity in question will be subject to full consolidation.
Natixis exercises joint control if, by virtue of a contractual arrangement, decisions pertaining to the entity’s relevant activities require the unanimous consent of the parties sharing control over the partnership, and if each partner has the ability to prevent the other partners from controlling the arrangement.
The stake was acquired for $85 million. It is now recognized in “Financial assets at fair value through comprehensive income” for a value of €73.9 million at December 31, 2018. The loss recorded on the transferring of the securities to “Financial assets at fair value through comprehensive income” amounted to
The granting of a put option to minority shareholders which does not transfer the risks and benefits associated with the underlying shares to Natixis prior to the option’s exercising, results in the recognition of a liability equal to the estimated present value of the option’s exercise price. The corresponding receivable is booked to equity, the carrying amount is deducted from minority interests and the remainder is deducted from consolidated reserves (Group share). Subsequent changes in the liability related to adjustments to the exercise price of the put option are recorded in consolidated reserves (Group share).
The method used to measure minority interests and goodwill may differ depending on whether IFRS 3 or IFRS 3R is applied.
Application of IFRS 3 to business combinations carried outa before January 1, 2010: minority interests are determined based on their share in thej identifiable net assets of the acquired entity, measured at their fair value at the purchase date (partial goodwill method), in the net fair value of the identifiable assets, liabilities and contingent liabilities; goodwill is the difference between the cost of the businessj combination and the share of the purchasing entity’s interest
Positive goodwill is recorded on a separate line on the asset side of the balance sheet if it relates to a controlled entity. It is allocated at the purchase date to one or more cash-generating units (CGUs) expected to benefit from the acquisition and is not amortized. It is tested for impairment at least once per year, and more often where there is objective evidence of impairment. The impairment test consists of comparing the carrying amount of the CGU or group of CGUs including goodwill with its recoverable value.
Goodwill related to an associate or joint venture is included in the carrying amount of “Investments in associates” under assets if it is positive; however, it cannot subsequently be amortized. It is tested for impairment, at least once a year (see Note 3.2.2). If it is negative, it is immediately recognized in income under “Share in income of associates”.
The assets contributed by the former CNCE to Natixis fall into two categories: shares in the Corporate & Investment Banking and servicea subsidiaries; a portion of the cooperative investment certificates (CCIs)a conferring entitlement to the share capital of the Caisses d’Epargne.
The following assumptions were used: estimated future cash flows: forecast data drawn froma multi-year plans established by the business lines and updated as part of the 2019 budget process; perpetual growth rate: 2.5% for all valuations; a discount rate: use of a specific rate for each CGU: 8.7% fora Asset & Wealth Management (9.7% in 2017), 10.6% for CIB (11.4% in 2017), 10.2% for Insurance (11.5% in 2017), 9,3% for Coface (10,8% in 2017) and 11.2% for Specialized Financial
The discount rates were determined by factoring in the following: for the Asset & Wealth Management, Corporate & Investmenta Banking, Insurance and Specialized Financial Services CGUs, the risk-free interest rate of the Euro-Bund zone, averaged over a depth of 10 years, plus a risk premium calculated according to a sample of CGU-representative companies; for the Coface CGU, the interest rate references used werea determined according to a similar method to the other CGUs, using samples of equivalent companies for the insurance and factoring activities.
These tests did not result in the recognition of impairment losses at December 31, 2018.
for Asset & Wealth Management, a 10% decline in the equitya markets (uniform decline across all years) would have a 5% negative impact on the CGU’s recoverable value and would not lead to the recognition of an impairment loss; for Corporate & Investment Banking, sensitivity to the dollar ora to the performance of the CAC would have a limited impact on net revenues and would not lead to any impairment being recorded; for Insurance, the main vector of sensitivity for life insurance isa interest rates, but various steps are being taken to reduce their impact (diversification of investments, reserves, etc.). Accordingly, the impact on the income statement is limited and would not significantly affect the CGU’s value; For non-life insurance, the main vector of sensitivity is the lossa ratio, which is notably measured via the combined ratio. Natixis’ strategic plan, New Dimension, sets this ratio at below 94%. A one-point deterioration in this ratio each year from 2018 in relation to the assumptions used to value the CGU would lead to a limited fall of 3% in this value, with no impact on impairment; for Specialized Financial Services, a one-point rise in thea three-month EURIBOR applied to Factoring, recreating a “2008-2009 crisis” (drop in production and increased cost of risk) for Leasing, would have a 4% negative impact on the recoverable value of the CGU and would have no impact in terms of impairment; for Coface, the primary sensitivity vector is the loss ratio. Thea projected level of this ratio is around 45% (net of reinsurance) for 2018. A one-point increase in the loss ratio, relative to the assumptions used for the DCF calculation over all years from 2018, would impact the average multi-criteria value by around 4% and would not lead to the recognition of impairment for the CGU. Furthermore, a valuation at the lowest price in 2018 would lead to a very limited impact on the weighted average valuation for the various methods (less than -1%).
Financement and CEGC), except for the EuroTitres business line, a Natixis department that provides financial securities and securities account custody services, which is currently consolidated in Natixis S.A.’s financial statements.
The impact on the balance sheet and income statement of internal transactions carried out between fully-consolidated entities is eliminated. The internal profits or losses of entities consolidated using the equity method are eliminated to the extent of Natixis’ percentage interest in the joint venture or associate.
attributable to the Group and “Minority interests” for the portion attributable to third parties.
The balance sheets of foreign subsidiaries and branches whose functional currency is not the euro are translated into euros at the closing exchange rate, except for share capital, reserves and capital allocations, which are translated at the historical exchange rate. The income statements of foreign subsidiaries and branches whose functional currency is not the euro are translated at the average exchange rate for the year. Any resulting translation gains or losses arising regarding both balance sheet and income statement items are recognized in equity under “Translation adjustments” for the portion
Natixis completed the acquisition of Fenchurch Advisory Partners (“Fenchurch”), a specialist corporate finance advisory firm exclusively focused on the Financial Services sector.
This transaction generated goodwill of €36.6 million as at December 31, 2018, as determined using the partial goodwill method. Now that the transaction has been completed, Natixis holds put options on minority interests in the amount of €27.9 million.
Natixis also completed the acquisition of the Vermilion Partners group, a specialist in cross-border transactions involving China and in advising on both inbound and outbound M&A transactions.
Natixis holds a 51% stake in Vermilion partners. Natixis exercises control over this group within the meaning of IFRS 10 and fully consolidates it.
This transaction generated goodwill of €10.8 million as at December 31, 2018, as determined using the partial goodwill method. Now that the transaction has been completed, Natixis holds put options on minority interests valued at €14.6 million.
Furthermore, Natixis completed the acquisition of Alter CE (Comiteo), a company specializing in online services for works councils. Natixis holds a 70% stake in Alter CE, exercises control over it within the meaning of IFRS 10, and fully consolidates this entity.
This transaction generated goodwill of €20.1 million as at December 31, 2018, as determined using the partial goodwill method. Natixis also holds put options on minority interests in the amount of €8.7 million.
Lastly, Natixis completed the acquisition of MV Crédit, a European credit specialist focused on private debt. MV Credit became a new affiliate of Natixis Investment Managers, providing investors with access to a wide range of expertise in Private Equity, private debt, real estate and infrastructure. Natixis owns 100% of the capital of MV Crédit, exercises control over it within the meaning of IFRS 10, and fully consolidates this entity. This transaction generated goodwill of €122.7 million as at December 31, 2018.
Consolidation in the first quarter of 2018 of the Mirova Globala Sustainable Equity Fund following the exceeding of the consolidation thresholds (see 3.1 consolidation scope); Acquisition by Natixis Investment Managers in the third quartera of 2018 of the MV Credit group, an asset manager specializing in European private debt. Full consolidation of the following four entities: MV Credit France, MV Credit Limited, MV Credit LLP and MV Credit SARL; Consolidation in the third quarter of 2018 of the Ostrum Multia Asset Global Income Fund following the exceeding of the consolidation thresholds (see Note 3.1).
Sale on November 8, 2018 of the Axeltis entity (funda distribution platform) to MFEX, an external operator specializing in worldwide fund distribution. The capital gain amounted to €30.9 million; Disposal on November 23, 2018 of Selection 1818’s entirea capital, resulting in a capital gain on disposal of €11.3 million; In the fourth quarter of 2018, the three funds AEW Partners III,a AEW VIF Investors and AEW VIF Investors II, used for fund management purposes, were liquidated (shell structures with no business operations).
As part of the reorganization of Natixis Investment Managers’a European management and distribution activities in the fourth quarter of 2018, it was decided to separate Ostrum AM’s asset management activities (active fundamental bond and equity management) from its distribution activities (client investment solutions) and its support functions. The asset management activities were therefore contributed to Ostrum AM (New) and the distribution and support activities to Natixis Investment Managers International; Transferring, in the fourth quarter of 2018, of the AEW Cilogera Dependant Branch’s activity, within the Natixis Investment Managers scope, to the new subsidiary AEW Invest Gmbh.
Acquisition of a 70% interest in Alter CE (Comitéo), a companya specializing in online services for works councils, on April 18, 2018.
Deconsolidation of Natixis Private Equity International Luxembourg after the percentage interest fell below eligible levels.
FINANCIAL DATA Consolidated financial statements and notes 269Natixis Registration Document 2018
Income attributable to the owners of non-controlling interests over the period
The share of encumbered assets that cannot be freely used is presented in Section 3.3 of Chapter [3], “Risk factors, risk management and the pillar III report”, of the registration document.
Assets representative of unit-linked policies from insurance activities measured under the fair value option are held for the benefit of policyholders.
The purpose of these partnerships is to pool the resources required for the origination, distribution, marketing, credit management, out-of-court collection and court-ordered collection management of the following products: either personal repayment loans, as defined ina Articles L.311-1-4 of the French Consumer Code, granted by the Banque Populaire or Caisse d’Epargne network; or revolving credit products, as defined in Article L.311-9 of thea French Consumer Code, granted by Natixis Financement to Banque Populaire or Caisse d’Epargne network customers.
(in millions of euros) Value of the investments in associates Net income Gains and losses recorded directly in equity
FINANCIAL DATA Consolidated financial statements and notes 271Natixis Registration Document 2018
Structured entities generally have one or more of the following characteristics: restricted and narrowly-defined activities and objectives;a limited or non-existent equity that is insufficient to allow it toa finance its activities without subordinated financial support; financing in the form of multiple contractually linkeda instruments that create concentrations of credit or other risks (tranches); few or no employees.a
Interest in an entity is understood to mean a contractual or non-contractual relationship that exposes the entity to the risk of
Consequently, the following are not included in the consolidation scope (IFRS 10) or in the scope applicable to the disclosure of additional information (IFRS 12): structured entities linked to Natixis solely through an ongoinga transaction. This corresponds to an unstructured financial instrument which does not generally have a material impact on the variability of the structured entity’s returns and which may be concluded by Natixis with structured entities or with traditionally-governed entities alike. Ongoing transactions are most commonly: vanilla fixed-income/currency derivatives, derivatives withj other underlying assets, the lending/borrowing of securities and repos, guarantees and plain vanilla financing granted to family SCIsj or certain holding companies; external structured entities for which Natixis acts simply as ana investor. This mainly includes: investments in external mutual funds not managed byj Natixis, with the exception of those in which Natixis owns virtually all the units, interests held in external securitization vehicles for whichj Natixis acts simply as a minority investor (exposure to these funds is included in the information disclosed regarding exposures as recommended by the Financial Stability Forum (FSF)),
The structured entities with which Natixis has dealings can be categorized into four groups: entities created within the context of Structured Financing, asset management funds, securitization vehicles and entities established for other types of transactions.
Auto-pilot mechanisms are generally in place for these structures. In the case of lease contracts, the transaction must be structured such that its income always amounts to zero. This means that only default events are able to modify the structured entity’s income, by leading to the disposal of the rights over the assets once the guarantees have been exercised. Natixis has the power to have the assets sold in the event of a default event, acting either alone or via the bank syndicate’s agent. This right equates to a protective right because Natixis would never benefit from the income from the sale beyond the amount of the balance due under the loan agreement. Natixis does not therefore have power over such entities’ relevant activities.
The compensation of Natixis Investment Managers and Natixis Wealth Management as managers is marginal compared with the returns generated for investors. Indeed, the management
In the absence of rights held by third parties (e.g. withdrawal or fund redemption/liquidation rights), the control of mutual funds managed by Natixis Investment Managers and Natixis Wealth Management is assessed according to the combined interests held by the entities and business lines within Natixis’ consolidated scope: as managers, Natixis Investment Managers and Natixis Wealtha Management do not invest in the funds and generally own only a few units; Natixis Assurances may take out interests in mutual fundsa managed by Natixis Investment Managers via its insurance subsidiaries. These interests are subscribed in the form of euro-denominated or unit-linked insurance policies: euro-denominated policies are policies under which thej insured party receives a minimum guaranteed return plus the major share of the surpluses generated by the insurance Company’s main fund. Any shortfall between the fund’s return and the minimum guaranteed return is borne by the insurer, which thus incurs the risks, unit-linked policies are policies under which the insured partyj selects the funds in which the insurer invests on its behalf. The value of the insurer’s interest in such funds is reflected in the insurance policies. Invested funds representing unit-linked policies are consolidated under IFRS 10 if all the control criteria are met cumulatively and if the funds have a material impact; other Natixis entities and business lines may hold minoritya interests, intended mainly to meet cash investment needs.
A fund is subject to consolidation: if Natixis acts as principal, i.e. if Natixis is a manager and is nota revocable by a limited number of people and if Natixis holds a large enough material interest to conclude that it controls the fund; or if Natixis is not a manager but owns virtually all the units.a
Non-guaranteed mutual funds subject to consolidation but not consolidated due to their materiality are listed in Note 19.1.
2. Guaranteed mutual funds Natixis guarantees the capital and/or performance of certain mutual funds. These packaged funds are passively-managed funds. Once the structuring is established initially, it is fixed for the fund’s entire lifetime. Natixis has relatively limited exposure to negative variable returns thanks to the fund’s strict management by the NAM management company and a robust risk control system put in place upon structuring and monitored throughout the fund’s lifetime. These controls significantly limit the risk of guarantee activation.
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). Real estate funds subject to consolidation but not consolidated due to their materiality are listed in Note 19.1.
Natixis also completed various securitization transactions in 2018, as in 2017, relating to commercial real estate financing originated by Natixis Real Estate Capital LLC.
The Versailles conduit is consolidated, with Natixis holding power over activities relevant to the conduit enabling it to influence the amount of its returns, given its prominent role in the choosing and management of acquired receivables as well as the management of the issuance program.
274 Natixis Registration Document 2018 the French policies taken out by Coface rarely includea non-covered first losses. However, the policies only cover a small portion of the receivables held by the SPE. Furthermore, the quality of portfolio risk covered by Coface, compared with that borne by the other stakeholders (other insurers, sponsors, sellers) is not such as to significantly transfer the structure’s risks to Coface. In addition, Coface does not play any role in determining the activity of the structured entity, nor in its operational or administrative management. In the event of a guarantee activation, Coface only has powers corresponding to its protective rights. Indeed, Coface does not have any power over activities relevant to the securitization vehicle. Accordingly, such funds do not require consolidation.
Natixis controls a certain number of vehicles whose purpose isa to manage operating property and non-operating property. The relevant activity is mainly the management of property as sources of returns for shareholders. Natixis generally has power over these activities. Such SPEs are consolidated once Natixis has a material interest and if they are material to the consolidated financial statements of Natixis.
Film Industry Financing companies (SOFICA). Natixis holds aj non-material stake in these SOFICAs and receives
Financial instruments measured using the fair value option - - - - -
Financial instruments to be valued at fair value through profit or loss 71 947 188 14 1,221
Financial liabilities at fair value through profit or loss (derivatives) 19 204 585 192 1,000
Notional amount of sales of options and CDS 405 155 2,788 262 3,610
MAXIMUM EXPOSURE TO RISK OF LOSS (A) 11,021 8,175 17,709 1,557 38,462
Financial assets at fair value through profit or loss - 9,157 - - 9,157
Financial instruments measured using the fair value option - 4,494 - - 4,494
MAXIMUM EXPOSURE TO RISK OF LOSS (A) 1,253 12,340 - - 13,593
Of which €267 million at January 1, 2018 for the SFS business line CEGC recognized in non-current assets held for sale as at December 31, 2018 (a) (see Notes 3.6 and 6.9).
Natixis plays the role of sponsor for: mutual funds initiated by a Natixis management company anda in which Natixis holds no stake nor any other interest. Reported income includes management and incentive fees received by Natixis, as well as profits and losses resulting from ongoing transactions with these funds; a US activity consisting of originating and selling real estatea loans to securitization vehicles, created by Natixis with third parties and in which Natixis holds no interest. Reported income includes structuring fees as well as capital gains and losses on the assignment of receivables.
Carrying value of the assets transferred from the entity during the year* 1,181 - 1,181 2,365 - 2,365
The carrying value of assets transferred to these vehicles corresponds to assets sold by Natixis during 2018 and 2017, where the information on * the sold amounts by all investors is not available.
FINANCIAL DATA Consolidated financial statements and notes 277Natixis Registration Document 2018
The choice of business model must take into account all information regarding the manner in which cash flows were generated in the past, along with all other relevant information, for example: the way in which the performance of financial assets isa assessed and presented to the main executive officers; the risks that have an impact on the business model’sa performance, in particular the way in which these risks are managed; the way in which executive officers are paid (for example, ifa pay is based on the fair value of assets under management or on the contractual cash flows received); the frequency, volume and purpose of sales. a
Natixis has established procedures requiring the reporting, prior analysis and regular monitoring of all major plans to sell financial assets held under the Hold to Collect model to ensure that the conditions required to classify assets under this business model are met at all times.
Other model: a model intended for other financial assets,a especially those held for trading, for which the collection of contractual cash flows is incidental.
The principal amount is defined as the financial asset’s fair value at its acquisition date. Interest is the consideration for the time value of money and the credit risk incurred on the principal amount, as well as other risks such as liquidity risk, administrative costs and the profit margin.
The instrument’s contractual terms must be taken into account to assess whether contractual cash flows are solely payments of principal and interest. All elements that may cast doubts as to whether only the time value of money is represented must therefore be analyzed. For example: events that would change the amount and date of the casha flows; the applicable interest rate features;a prepayment and extension options.a
Non-SPPI financial assets include mutual fund units and convertible bonds or mandatory convertible bonds with a fixed conversion ratio.
They are measured at amortized cost if they meet the following two conditions: the asset is held in a business model whose objective is toa collect contractual cash flows; and the contractual terms of the financial asset give rise to casha flows that are solely payments of principal and interest on the outstanding amount due, on specific dates. In this case, the asset is considered basic and its cash flows are categorized as SPPI.
Financial difficulties are determined by observing a number of criteria such as amounts past due for over 30 days or an at-risk rating. The restructuring of a loan does not necessarily result in the counterparty being classified in the Basel default category, as the financial difficulty is addressed before the counterparty is downgraded into the Basel default category.
For loans restructured by amending the terms of the existing contract, with no derecognition of the initial asset, a discount must be recorded, corresponding to the difference between: the present value of the contractual cash flows initiallya expected; and the present value of the revised contractual cash flowsa discounted at the original effective interest rate.
A loan is no longer considered as restructured once the following conditions are met: a period of two years has passed since the date of thea restructuring; the loan is recognized as a performing loan at the reportinga date; no loan is past due by more than 30 days;a regular and material repayments (principal and interest) havea been made over a period of at least one year.
A debt instrument is valued at fair value through other comprehensive income if it meets the following two conditions: the asset is held in a hold to collect business model with thea objective of both collecting contractual cash flows and selling financial assets; and the contractual terms of the financial asset give rise to casha flows that are solely payments of principal and interest on the outstanding amount due, on specific dates. In this case, the asset is considered basic and its cash flows are categorized as SPPI.
At the reporting date, they are measured at fair value and changes in fair value are recorded under “Gains and losses recognized directly in non-recyclable other comprehensive income”.
Realized and unrealized gains or losses continue to be recognized in equity and are never recognized in income, except for dividends which impact income. Income from the disposal of equity instruments is transferred to “Consolidated reserves”. No impairment is recorded on equity instruments measured at fair value through other comprehensive income.
The market value is reviewed at each subsequent reporting date in line with the principles outlined in Note 6.6 “Fair value of financial instruments”. Changes in value, including coupons, are recorded under “Gains or losses on financial instruments at fair value through profit and loss” in the consolidated income statement, with the exception of interest accrued and due on non-SPPI financial assets, which is recorded under “Interest income”.
Reverse transactions are also recognized on the settlement date. For repurchase and reverse repurchase transactions, a financing commitment received or given respectively is recognized between the transaction date and the settlement date when these transactions are recognized in “Liabilities” and “Loans and receivables” respectively.
Revenues under the finance lease are recognized as income at the interest rate implicit in the lease so as to produce a constant periodic rate of return on the lessor’s net investment. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes: the aggregate present value of the minimum lease paymentsa receivable by the lessor and the non-guaranteed residual value, to be equal to the sum of; the fair value of the leased asset and any initial direct costs ofa the lessor, i.e. the costs incurred specifically by the lessor during the set-up of the leasing contract. These two items form the initial value of the asset.
Performing loans for which credit risk has increased materially since initial recognition are transferred to Stage 2. The impairment or the provision for credit risk is determined on the basis of the instrument’s expected credit losses at maturity (lifetime ECL). Interest income on these outstandings is recognized through profit or loss using the effective interest rate method applied to the gross carrying amount of the instrument before impairment.
FINANCIAL DATA Consolidated financial statements and notes 281Natixis Registration Document 2018
For operating lease or lease financing receivables—which fall within the scope of IAS 17—Natixis has opted not to apply the simplified approach proposed by IFRS 9, which involves measuring lifetime expected credit losses so as not to have to identify the significant increase in credit risk since initial recognition.
The significant increase in credit risk is valued on an individual basis by taking into account all reasonable and justifiable information and by comparing the default risk on the financial instrument at the end of the fiscal year with the default risk on the financial instrument at the date of its initial recognition. Measuring an increase in the risk should, in most cases, lead to a downgrade to Stage 2 before the transaction is individually impaired (Stage 3).
The standard provides that the credit risk of a financial instrument has not increased materially since its initial recognition if this risk is considered to be low at the end of the fiscal year. This provision is applied to certain investment grade debt securities.
Expected credit losses on Stage 1 or Stage 2 assets are calculated using the following formula: t
which is the sum, discounted for each projection year, of the product of the EAD, PD and LGD parameters: EAD(t) (Exposure At Default): the amount of loss that thea institution may be exposed to on the loan in question during year t, including accelerated amortization and credit conversion factors where necessary; PD(t) (Probability of Default): the probability that thea counterparty will default during year t; LGD (Loss Given Default): the amount of unrecovereda contractual cash flows after the recovery phase in the event that the counterparty defaults on the loan in question.
Natixis draws on existing concepts and mechanisms to define these inputs, and in particular on internal models developed to calculate regulatory capital requirements (capital adequacy ratios) and on projection models similar to those used in the stress test system. Certain adjustments are made to comply with the specifics of IFRS 9: IFRS 9 parameters therefore aim to provide an accuratea estimate of losses for accounting provision purposes, whereas prudential parameters are more cautious for regulatory framework purposes. Several safety buffers included in the prudential parameters are therefore restated, such as the PD and LGD downturn add-on, regulatory floors and internal costs); the IFRS 9 parameters used to calculate provisions on loansa classified as Stage 2 must enable lifetime expected credit losses to be calculated, whereas prudential parameters are defined for the purposes of defining 12-month default rates. 12-month parameters are thus projected over longer timescales.
Parameters are adjusted to economic conditions by defining three economic scenarios developed over a three-year period. The central scenario corresponds to the budget scenario, to ensure consistency with financial oversight processes. Two variants—an optimistic view and a pessimistic view—are also developed around this scenario based on observations of macroeconomic parameters.
The three scenarios are defined using the same organization and governance as that defined for the budget process, with an annual review based on proposals from the Economic Research Department and approval by the Senior Management Committee. The scenarios’ probability of occurrence is reviewed on a quarterly basis by drawing on the observed changes in the macroeconomic parameters used in the economic scenario.
FINANCIAL DATA Consolidated financial statements and notes 283Natixis Registration Document 2018
Derivative financial instruments are recognized at fair value on the balance sheet, regardless of whether they are held for trading or hedging purposes.
When the hybrid instrument (host contract and derivative) is not measured at fair value through profit or loss, the embedded derivative is separated from the host contract if it meets the criteria for definition as a derivative and its economic characteristics and associated risks are not closely related to those of the host contract.
In line with the option offered by IFRS 9, Natixis has chosen to continue applying IAS 39 to account for its hedging transactions.
hedged item is fixed at its amount on the date the hedge is discontinued and taken to income through to maturity.
When a hedging relationship is discontinued, the hedging instrument is reclassified in financial instruments at fair value through profit or loss, while the unrealized gain or loss on the
Non-monetary items denominated in foreign currencies and measured at fair value are translated at the prevailing exchange rate at the end of the reporting period. Gains or losses on a non-monetary item (e.g. equity instruments) denominated in a foreign currency are recognized as income if the asset is classified as “Financial assets at fair value through profit or loss” and in equity if the asset is classified as “Financial assets at fair value through other comprehensive income”, unless the financial asset is designated as a hedged item in a fair value hedge, in which case foreign exchange gains and losses are recorded as income.
FINANCIAL DATA Consolidated financial statements and notes 285Natixis Registration Document 2018
The fair value of an instrument on initial recognition is normally the transaction price, i.e. the price paid to acquire the asset or received to assume the liability.
This adjustment takes into account the imperfections of the valuation techniques used—in particular, the risk factors that are not considered, even when observable market inputs are available. This is the case where risks inherent to various instruments differ from those considered by the observable inputs used to value them.
The DVA is symmetrical to the CVA and represents the expected loss, from the counterparty’s perspective, on liability valuations of derivative financial instruments. It reflects the impact of Natixis’ own credit quality on the valuation of these instruments. The adjustment is made by observing credit spreads on a sample of comparable entities, taking into account the liquidity of Natixis’ CDS spread over the period. The funding valuation adjustment (FVA) is taken into account in the DVA calculation.
This is carried out under the responsibility of the Risk Department.
On November 12, 2009, an arrangement was made by BPCE to protect a portion of the portfolios of the former GAPC hive-off vehicle with retroactive effect at July 1, 2009. With this guarantee mechanism, Natixis was able to free up a significant portion of its equity allocated to segregated assets and to protect itself against the risk of loss from these portfolios subsequent to June 30, 2009. This protective arrangement is based on two mechanisms: a sub-participation with the characteristics of a financiala guarantee, covering 85% of the face value of assets recognized in “loans and receivables” and “available-for-sale financial assets”. Under this guarantee, Natixis is protected from the very first euro in default up to 85% of the default amount; two Total Return Swaps (TRS), one in euros and one in US$,a transferring to BPCE 85% of unrealized and realized gains and losses on the portfolio of instruments at fair value through profit or loss (cash and derivatives) since July 1, 2009. TRS are derivatives and are therefore carried at fair value on the balance sheet, with a matching entry to income. At the same time, Natixis purchases an option from BPCE which, if exercised, allows it to recover the net gains on this portfolio after a ten-year period in return for the payment of a premium estimated at €367 million. The premium is also recognized at fair value.
At December 31, 2018 (as was the case at December 31, 2017), the financial guarantee now has almost no impact in accounting and prudential terms, as the positions which it backed have almost all been sold or closed.
Computer software developed in-house is recognized under “Intangible assets” at its direct cost of development, which includes the related hardware costs, service costs, payroll costs directly attributable to the production and preparation of the software for use, and borrowing costs when these meet the criteria for capitalization set out in IAS 23 “Borrowing Costs”.
Depreciation and amortization reliably measure the residual value of items other than land and non-destructible buildings classified as historical monuments. They are therefore assigned a residual value of zero.
Other intangible assets mainly consist of components of the client portfolio, which are amortized over the term of the contracts (average term of five to eight years for the United States).
Assets are tested for impairment whenever there is objective evidence that they may be impaired and at least annually in the case of intangible assets with an indefinite useful life. Natixis considers whether there is any evidence of impairment at each reporting date. If any such evidence exists, the recoverable value of the individual asset is estimated wherever possible; otherwise the recoverable value of the CGU to which the asset belongs is estimated. The recoverable value is the higher of fair value less selling costs and value in use, which is the present value of future cash flows. If the recoverable value of the asset or CGU is lower than its carrying amount, an impairment loss is recognized in income under “Depreciation, amortization and impairment of property, plant and equipment and intangible assets”.
A non-current asset (or group of assets) is meant to be disposed of when its carrying amount is recovered by means of a sale. This asset (or group of assets) must be immediately available for the sale, and it must be highly likely that the sale will happen within twelve months.
the technical provision for insurance commitments was discounted. At December 31, 2018, as the transaction had not been completed, it was no longer classified under IFRS 5.
At December 31, 2016, Natixis had entered into a sale agreement relating to one of its life insurance portfolios and securities representing these commitments. The completion of this sale was subject to approval by the ACPR (French Prudential Supervisory Authority). Securities representing insurance commitments initially recognized as “Available-for-sale financial assets” and “Financial assets and liabilities under the fair value through profit or loss option” were reclassified as “Non-current assets held for sale”. In accordance with IFRS 5, the reclassified securities were valued according to the provisions of IAS 39 and
Financial liabilities in this category are carried at fair value at the reporting date and shown in the balance sheet as “Financial liabilities at fair value through profit or loss”. Changes in fair value are recognized in income for the period under “Net gains or losses on financial instruments at fair value through profit or loss”, except for changes in fair value attributable to own credit risk on financial liabilities at fair value through profit or loss, as such recognition does not create or increase an accounting mismatch. Changes in value attributable to own credit risk are recorded under “Revaluation of own credit risk on financial liabilities at fair value through profit or loss” under “Gains and losses recognized directly in other comprehensive income”.
Debt originated by Natixis that is not classified within financial liabilities at fair value through profit or loss is measured using the amortized cost method and recognized in the balance sheet under “Due to banks”, “Customer deposits”, “Debt securities” or “Subordinated debt”.
Natixis derecognizes all or part of a financial asset if the contractual rights over the cash flows from the financial asset expire. Natixis also derecognizes all or part of a financial asset if these contractual rights or substantially all the risks and rewards of ownership are transferred.
If Natixis has neither transferred the contractual rights nor substantially retained all the risks and rewards, Natixis then determines whether it has transferred control of the asset. If control is considered to have been relinquished, the financial asset is derecognized. If the Group retains control of the asset, it remains on the balance sheet to the extent of Natixis’ “continuing involvement”.
Continuing involvement is evidenced by the existence of contractual conditions such as: an option or obligation to repurchase the assets transferred;a collection of financial compensation linked to the performancea of the asset transferred.
At subsequent reporting dates, the securities continue to be valued by the assignor in accordance with the rules applicable to the category in which they were initially classified. In the assignee’s accounts, the amount receivable from the assignor continues to appear in the balance sheet.
The variable compensation policy is in keeping with the regulatory framework, including the European regulation CRD IV. It also meets transparency requirements with regard to the ACPR, the ECB and the AMF.
Some plans are settled in Natixis shares, while others are settled in cash indexed to the Natixis share price.
Under IFRS 2 “Share-based payment”, employee free share awards give rise to an expense representing the fair value of the goods or services received at the grant date. This payroll expense is recognized against equity. The fair value of the services received is calculated by reference to the fair value of the shares at the grant date, less the present value of dividends forfeited by employees during the vesting period, taking into account the presence conditions.
Where the payment of compensation is subject to a continuing service requirement, the corresponding expense is recorded over the vesting period on a straight-line basis. When no service requirement exists, the expense is recognized immediately as a debt. The latter is then remeasured at each reporting date taking into account performance criteria and any changes in the value of underlying shares.
Deferred tax assets and liabilities are calculated at the level of each tax entity in accordance with local tax rules and based on tax rates that have been enacted or substantively enacted at the date the temporary difference will reverse. Deferred taxes are not discounted.
As the deferral of the corporate tax rate cut in France planned for the end of 2018 by the government for large groups was not included in the laws voted for or for which voting was under way at December 31, 2018, the deferred taxes recognized at December 31, 2018 continue to be determined based on a gradual reduction of the tax rate starting from 2019.
FINANCIAL DATA Consolidated financial statements and notes 293Natixis Registration Document 2018
Although similar to derivatives, the capital and/or performance guarantees given by Natixis to certain mutual funds at January 1, 2018 are recognized as financial guarantees and provisioned in keeping with IFRS 9, given how difficult it is to measure the size of the operational risk in the guarantee’s fair value.
The market risks and parameters relating to these instruments are currently being analyzed in order to build a valuation model that meets all the requirements of IFRS 13. The expected impact on income should not be material.
At December 31, 2018, these guarantees were included in the scope of the financial instruments eligible for the IFRS 9 impairment model based on counterparty risk.
IAS 37, for guarantees received in respect of non-financiala liabilities falling within the scope of IAS 37.
b) Financing commitments Financing commitments are irrevocable commitments by Natixis to grant a loan under pre-defined conditions.
The procedure for setting up the deposit and resolution guarantee fund was changed by a decree dated October 27, 2015. Contributions made to the deposit and resolution guarantee fund may be paid in the form of partner or association certificates and cash security deposits (guarantee of irrevocable commitment) recognized as assets on the balance sheet and contributions (which are non-refundable in the event of a voluntary withdrawal of approval to operate) recorded in income as “Taxes and regulatory contributions” among other operating expenses (see Note 7.7).
In preparing its financial statements, Natixis is required to make certain estimates and assumptions based on available information that is likely to require expert judgment. These estimates and assumptions constitute sources of uncertainty which may affect the calculation of income and expenses in the income statement, the value of assets and liabilities in the balance sheet and/or certain disclosures in the notes to the financial statements. As a result, future results of certain operations may differ significantly from the estimates used in the financial statements at December 31, 2018.
Under IAS 39, Natixis assessed whether there was any objective evidence of impairment for loans and receivables, either on an individual basis or collectively by risk category. To identify evidence of impairment, Natixis analyzed trends in a number of objective criteria, but also relied on the judgment of its own expert teams. Similarly, Natixis may use its own expert judgment to adjust the amount of expected losses under the Basel framework, on which the amount of collective impairment is based.
All goodwill is assigned to a CGU so that it may be tested for impairment. The tests conducted by Natixis consist in comparing the carrying amount of each CGU (including goodwill) with its recoverable value. If the recoverable value is the same as the value in use, it is determined by discounting the annual free cash flows to infinity (see Note 3.5). Use of the discounted cash flow method involves: estimating future cash flows. Natixis has based thesea estimates on forecasts included in its business units’ medium-term plans spanning five years; projecting cash flows for the last year of the plan to perpetuity,a at a rate reflecting the expected annual growth rate; discounting cash flows at a specific rate for each CGU.a
Insurance technical reserves are calculated using assumptions and estimates that may lead to adjustments in amounts reported over the subsequent period: for personal protection insurance, claims reserves area calculated by modeling claims experience; for life insurance, underwriting reserves are computed baseda on economic and financial assumptions, mortality and morbidity tables, and behavioral statistics, for example concerning surrenders; for general insurance, technical reserves comprise provisionsa for unearned premium income (calculated on an accrual basis and representing the portion of premiums issued during the period that relate to a period after the reporting date) and reserves for claims to be paid, corresponding to known and unknown claims that have occurred but not yet been settled at the reporting date;
As a precaution, Natixis records a net deferred tax asset linked to its ability to generate taxable income over a given period (10 years maximum), while tax loss carry forwards are deductible with no time limitation in France and the UK or over very long periods (20 years in the US for deficits prior to January 1, 2018).
Provisions recognized in the consolidated balance sheet, other than those relating to financial instruments, employee benefits and insurance policies, mainly concern provisions for litigation, restructuring, fines and penalties.
A provision is raised when it is likely that an outflow of resources embodying economic benefits will be required to settle an obligation arising from a past event, and when the amount of the obligation can be reliably estimated. In order to calculate this amount, Management is required to assess the probability of the risk occurring. Future cash flows are discounted where the impact of discounting is material.
On June 23, 2016, the UK decided to leave the European Union (Brexit) following a referendum. After the triggering of Article 50 of the treaty on European Union on March 29, 2017, the United Kingdom and the 27 other member countries of the European Union gave themselves two years to prepare for the country’s
Under the BMR, the interest rate benchmarks EURIBOR, LIBOR and EONIA have been declared critical, although they may be phased out or their discontinuation may become likely in the future.
It is therefore difficult at this stage to accurately predict the conditions of a future substitution in existing financial instruments and contracts.
Average number of treasury shares outstanding over the period 2,256,353 1,320,310
Number of potential dilutive shares resulting from stock option plans and free share awards (b) 8,450,160 6,080,983
Unless otherwise specified, profit and loss items are not comparable due to IFRS9 application and reclassification of profits and losses from the assurances entities in a specific line.
Interest income also consists of interest on non-SPPI debt instruments not held under a trading model (classified by default as instruments at fair value through profit or loss).
Natixis records fee and commission income and expenses in income: either gradually as the service is rendered as part of thea ongoing provision of a service. Guarantee fees and management fees are deferred over the period during which the service is provided; or once the service has been rendered, as in the case ofa business provider fees recorded in income as soon as the service has been provided, and some syndication fees paid for structuring and arrangement.
Fees and commissions that form an integral part of the effective yield on an instrument, such as fees considered to be compensation for loan set-up, are recognized and amortized as an adjustment to the effective interest rate over the estimated term of the applicable loan. These fees and commissions are recognized as interest income rather than fee and commission income.
Financing, guarantee, securities and derivative commitments 266 (134) 132 275 (138) 137
This item includes gains and losses on financial assets and liabilities at fair value through profit and loss, whether held for trading or designated under the fair value option or at fair value. This line item also includes interest on these instruments, except for those presented as interest income.
Net gains/(losses) on financial assets and liabilities excluding hedging derivatives 1,757 2,783
Net gains/(losses) on financial assets and liabilities held for trading (b) 306 2,351 o/w derivatives not eligible for hedge accounting 1,955 (2,373)
Net gains/(losses) on financial assets to be valued at fair value through profit or loss (135)
Insofar as the expenses and income presented in the income statement are classified by type and not by function, the net income of activities on (a) financial instruments at fair value through profit and loss should be considered as a whole. The results presented above do not include the refinancing cost of these financial instruments, which is recorded in interest income or expenses.
The table below shows net gains and losses in financial assets at fair value through other comprehensive income recognized in net income over the period. They primarily consist of: income on the sale of debt instruments net of the impact ofa hedging instruments; dividends on equity instruments.a
FINANCIAL DATA Consolidated financial statements and notes 299Natixis Registration Document 2018
Net gains or losses on available-for-sale financial assets at December 31, 2017
Of which €309 million for insurance activities at December 31, 2017, €243 million of which is attributable to the net capital gain from the disposal (a) of insurance investments; At December 31, 2017, Natixis sold its 15% stake in CACEIS. Gains or losses on disposals recognized under “Net gains or losses on (b) available-for-sale financial assets” stood at €74 million. The value entered directly in equity at the beginning of the period and transferred to the income statement under “Net gains or losses on available-for-sale financial assets” was €31 million.
Of which €86.1 million at December 31, 2017 resulting from the purchase and resale of commodity stocks on behalf of clients, an activity carried (a) out by the entity Contango, which economically hedges its exposure to price changes using futures carried under “Gains or losses on financial instruments at fair value through profit or loss”.
Of which €7.5 million in respect of the Competitiveness and Employment Tax Credit at December 31, 2018, versus €8.9 million at December 31, (a) 2017.
Of which a contribution of €163.8 million to the Single Resolution Fund (SRF) at December 31, 2018, versus €121.4 million at December 31, (d) 2017.
Of which the French systemic banking risk tax (TSB) of €16.5 million at December 31, 2018, versus €24.3 million at December 31, 2017.
Of which the Social Security and Solidarity Contribution (C3S) for €37.7 million at December 31, 2018, versus €47.4 million at December 31, 2017.
Impaired financial assets—Lifetime expected credit losses (718) 540 (70) 14 (234)
Impaired financing commitments—Lifetime expected credit losses (31) 34 (1) 0 2
Of which +€7.6 million related to the previously completed disposal of a portion of the Private Equity business, -€2.2 million related to the (a) disposal of Cofacrédit (held by Coface), +€30.9 million related to the disposal of Axeltis, +€11.3 million related to the disposal of Selection 1818 and +€1.3 million related to the disposal of Reich & Tang.
+ Impairment of goodwill 0 0 - Share in income of associates (29) (26)
= Consolidated taxable income/(loss) 2,909 2,825 x Theoretical tax rate 33.33% 33.33%
+ Losses for the period not recognized for deferred tax purposes (36) (16)
+ Tax on prior periods and other tax items (b) (c) (d) 82 96
The main permanent differences consist of capital gains taxed under the long-term scheme and the impact of the TSB (French systemic banking (a) risk tax) and the contribution to the SRF (single resolution fund), which are non-deductible expenses.
Including the tax credits from which Natixis and its subsidiaries benefit.(b)
Of which in 2017: -€237.6 million for the derecognition of the previous tax loss for the tax consolidation Group in France, mainly related to the (d) decrease in the corporate tax rate as of 2020, +€104.7 million of income from deferred taxes for the US platforms in light of the tax rates applied to deferred tax assets due to the tax cuts adopted; and +€105.6 million of income from the refund of the 3% tax on dividends paid, further to the decision of the Constitutional Council of October 6, 2017.
The final notice was received by Natixis during the 2018 fiscal year and the accounting impacts were factored into the accounts at December 31, 2018.
FINANCIAL DATA Consolidated financial statements and notes 303Natixis Registration Document 2018
These assets and liabilities are measured at fair value at the reporting date, with changes in fair value, including interest, recognized in income under "Net gains or losses on financial instruments at fair value through profit and loss", except for: interest on hedging derivatives and non-SPPI instrumentsa recorded as interest income and expenses in the income statement; and changes in fair value attributable to own credit risk on financiala liabilities designated at fair value through profit or loss, recorded in other comprehensive income as “Revaluation of own credit risk on financial liabilities at fair value through profit or loss”.
Financial assets to be valued at fair value through profit or loss (a) (b)
The criteria for categorizing financial assets at fair value through profit or loss if they do not meet the SPPI criteria used by Natixis are provided in (a) Note 6.1.2.
The information presented takes into account the impact of offsetting carried out in accordance with IAS 32 (see Note 8.3).(d)
Of which €0.18 million at January 1, 2018 for the SFS business lines recognized in non-current assets held for sale as at December 31, 2018 (see (e) Notes 3.6 and 6.9).
The use of the fair value option was considered to provide more pertinent information in two situations: of an asset and a hedging derivative when the criteria for hedge accounting were not met; where there is an accounting mismatch between economicallya linked assets and liabilities. This arose for example in the case 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.
Financial assets designated at fair value through profit or loss mainly consisted of long-term structured repos indexed to a basket of equities whose risks are managed globally and dynamically. As they are managed using a model that is neither a “hold to collect” nor a “hold to collect and sell” business model, these transactions were recategorized as financial assets at fair value through profit or loss under IFRS 9.
The table below shows the breakdown of financial liabilities at fair value through profit and loss by instrument type.
Derivative instruments not eligible for hedge accounting (a) 57,160 0 57,160 59,600 0 59,600
The information presented takes into account the impact of offsetting carried out in accordance with IAS 32 (see Note 6.3).(a)
FINANCIAL DATA Consolidated financial statements and notes 305Natixis Registration Document 2018
Cumulative changes in the fair value of financial liabilities, designated at fair value through profit or loss, attributable to credit risk Carrying amount
Balancing payments relating to the early redemption of Natixis issues recognized in shareholders’ equity over the 2018 fiscal year totaled (a) €5.3 million, versus €5.3 million over the 2017 fiscal year.
Cash flow hedges are mainly used by Natixis to hedge the overall interest rate risk. Cash flow hedges are also used by the leasing activity.
Fair value hedging is used to hedge changes in the fair value of fixed-income securities on an individual basis, as well as comprehensive hedging of the interest-rate risk of Natixis Financial Products LLC according to the carve-out provisions of
Of which €5,769.56 million at January 1, 2018 for the SFS business lines.(a)
Of which €193.5 million at January 1, 2018 for the SFS business lines recognized in non-current liabilities held for sale as at December 31, 2018 (c) (see Notes 3.6 and 6.9).
Fair value of hedging derivative (a) o/w effective portion o/w ineffective portion
FINANCIAL DATA Consolidated financial statements and notes 309Natixis Registration Document 2018
Loans and receivables due from banks 700 700 3,214 700 2,514
Loans and receivables due from customers 2,197 2,197 50,819 5,759 45,060
FINANCIAL DATA Consolidated financial statements and notes 311Natixis Registration Document 2018
This line item covers debt instruments managed under a “hold to collect and sell” business model, with cash flows that meet SPPI criteria (see Note 6.1.4), such as debt instruments held in the liquidity reserve and equity instruments that Natixis has irrevocably opted to measure at fair value through other comprehensive income.
Impaired financial assets (Stage 3) are assets for which a default event has been identified as defined in Article 178 of the EU regulation of (b) June 26, 2013 on regulatory requirements for credit institutions.
Reconciliation table for financial assets at fair value through recyclable other comprehensive 8.4.1 income
The tables below show, for each class of instrument, changes over fiscal year 2018 in accounting items and impairments and provisions related to financial assets at fair value through other comprehensive income recyclable to income.
Assets impaired after their origination/acquisition (S3 bucket) Assets impaired on origination/acquisition Total
FINANCIAL DATA Consolidated financial statements and notes 313Natixis Registration Document 2018
Fair value of financial assets and liabilities carried at fair value in the balance sheet8.5
For derivative instruments, fair values are broken down based on the dominant risk factor, i.e. primarily interest rate risk, foreign exchange risk, credit risk and equity risk: Assets (in millions of euros)
Financial assets designated under the fair value option 2 2 0 o/w debt instruments in the form of securities 0 0 o/w loans and receivables 2 2
Financial assets at fair value through equity 10,798 9,864 886 48 o/w debt instruments in the form of securities 10,672 9,786 886 o/w loans and receivables
Hedging derivatives (liabilities) 529 529 0 o/w interest rate derivatives 529 529 0
Derivative instruments not eligible for hedge accounting (positive fair value) 60,228 677 56,566 2,985
The contribution from the insurance entities at December 31, 2017 was a carrying amount of €67,219 million, of which €4,370 million for Level 2 (a) and €5,120 million for Level 3.
Financial liabilities designated under the fair value option 58,948 2,908 54,571 1,469
Hedging derivatives (liabilities) 710 710 o/w interest rate derivatives 710 710
Level 1: Fair value measurement using prices quoted ona) liquid markets
Level 2: Fair value measurement using observable market b) data a valuation technique incorporating inputs that are either directly observable (prices) or indirectly observable (price derivatives) through to maturity. This mainly includes: Level 2 fair value comprises instruments other than those mentioned in Level 1 fair value and instruments measured using
FINANCIAL DATA Consolidated financial statements and notes 315Natixis Registration Document 2018
The products traded may be mono-underlying, multi-underlying or hybrid (e.g. fixed income/equity) products.
The hybrid local volatility combined with H&W1F consists of combining the local volatility model described above with a
The Tskew model is a valuation model for mono and multi-underlying options. Its principle is to calibrate the distribution of the underlying asset or assets at maturity to standard option prices.
The fair value of instruments obtained using valuation models is adjusted to take account of liquidity risk (bid-ask), counterparty risk, the risk relating to the cost of funding uncollateralized or imperfectly collateralized derivatives, own credit risk (measurement of liability derivative positions), model risk and input risk.
Plain vanilla derivatives are also classified as Level 3 in the fair value hierarchy when exposure is beyond the liquidity horizon determined by underlying currencies or by volatility surface (e.g., certain foreign currency options and volatility caps/floors).
In accordance with the decree of February 20, 2007, amended by the decree of November 23, 2011, relating to regulatory capital requirements applicable to credit institutions and investment firms, and in accordance with the European Capital Requirements regulation (CRR) of June 26, 2013 on requirements resulting from Basel 3, a description of crisis simulations and ex-post controls (validation of the accuracy and consistency of internal models and modeling procedures) is provided for each model used in Section 3.2.5 of Chapter [3], “Risk factors, risk management and the pillar III report”.
At December 31, 2018, instruments for which the recognition of day-one profit/loss has been deferred included: multi-underlying structured equity and index products;a synthetic loans;a options on funds (multi-asset and mutual funds);a structured fixed-income products; a securitization swaps. a
The default rates are based on the market prices of the underlying PFI bonds and the recovery rates are based on historical ratings agency data
Forex vol. for currency pairs absent from Totem or long maturities
Synthetic modeling of the underlying general collateral basket (with an estimated repo) and actuarial valuation for TRS or with a standard hybrid Equity/Fixed Income model for TRS autocall
Strip of long-term options, Strip of quanto options, Strip of digital options
Long (15Y) callable range accrual note on several asset classes (equity+forex+fixed income)
Hybrid model coupling a fixed income diffusion and a credit diffusion
depending on in their liquidity horizons, determined by underlying currencies. At December 31, 2017, the net impact on the balance sheet of foreign currency options transferred to Level 3 was €226 million in liabilities (see Note 8.5.3). The income statement was not impacted.
At December 31, 2017, in accordance with this procedure, certain foreign currency options, along with volatility caps and floors, were transferred to Level 3 of the fair value hierarchy
Since December 31, 2015, the valuation model used to measure write-downs on CDS contracted with monoline insurers has moved more in line, in terms of method, with the adjustment made for counterparty risk (Credit Valuation Adjustment—CVA). It also takes account of the expected depreciation of exposures and the counterparty spread implied from the market data.
The section below describes the underlying principles used to value assets resulting from securitization transactions for which no market prices could be identified and which were therefore measured using valuation models: Trust Preferred Securities (TruPS) CDOsa
The valuation model is based on projected future cash flows and default rates determined according to a statistical approach that deduces the default probability of banks according to their financial ratios. For other sectors, default rates are estimated considering the current ratings of assets.
A valuation model was used, for Private Finance Initiative (PFI) CDS, which was based on an approach calibrated to the market prices of underlying PFI bonds and the use of a uniform collection rate. At December 31, 2018, Natixis no longer had any Private Finance Initiative CDS.
Other financial assets held for trading 1,662 (1,662) 0 0 0 0 0 0 0 0 0 0 0 0 0
Financial assets at fair value through equity 0 74 0 74 0 0 (16) 6 (16) 0 0 (0) 0 0 48 o/w debt instruments in the form of securities 0 6 0 6 0 0 (6) 0 0 0 0 0 0 0 0 o/w loans and receivables
TOTAL FINANCIAL ASSETS RECORDED AT FAIR VALUE 7,094 19 0 7,113 115 (20) (16) 7,909 (8,313) (206) 322 6 0 66 6,975
The impact of the transfer to Level 3 of the fair value hierarchy of equity derivatives traded in Asia (see key events) amounted to €130 million at (a)
Other financial liabilities held for trading 0 1,097 0 1,097 38 (78) 0 1,138 (1,019) - 0 0 0 0 1,176