3 Risk developments

For a detailed overview of FMO’s risk governance and risk management approach we refer to the section ‘Risk Management of FMO’s consolidated annual accounts as at December 31,2017. The risk developments in the first half year of 2018 are disclosed below.

3.1 Currency risk

Given FMO’s limited appetite for currency risk, all foreign currency exposure (with exclusion of the Private Equity portfolio) is hedged with either commercial counterparties or with TCX through derivative transactions. As a result, recent depreciation of the Turkish Lira (TRY) does not lead to any currency losses regarding the TRY denominated portfolio (exposure of TRY 535 million).

3.2 Country risk

FMO expects economic growth in emerging and developing economies on the near-term. However, there may well be differences among countries, while long-term prospects are uncertain and challenging, as evidenced by recent events in Turkey, where the local currency has shown accelerated depreciation in the first half of August and caused upset in international markets. 

Turkey is an important market for FMO. As of June 30, 2018, the exposure including impairments is €376 mln for debt and €52 mln for equity, excluding committed not disbursed and guarantees received. An amount of €99 million of debt is denominated in Turkish Lira (TRY 535 million which is hedged). Exposure is concentrated in Financial Institutions, Energy, Agri-business and Private Equity Funds. FMO has no direct exposure to the sensitive construction industry or real estate. Most clients are prepared for further deterioration of the Turkish currency, however certain clients which were already having difficulties before the strong depreciation may further deteriorate. Intensified monitoring has been initiated. 

Although other developing and emerging market currencies (such as the South African Rand, Indonesian Rupiah and Argentina Peso) are also experiencing pressure, these movements tend to be more behaviour driven rather than driven by real economic fundamental links with Turkey. In terms of potential spill-over effects it is worth mentioning that Turkey is an important economic partner of Georgia, a country which is also important for FMO in terms of investments. The Georgian Lari has devalued by around 5.6% versus the USD over the first half of August. Turkey is also an important trading partner for Ukraine, though event-based depreciation of the Hryvnia does not appear so far. FMO has significantly reduced exposure in Azerbaijan following the country’s own crisis starting in 2016.

3.3 Concentration of credit risk

Regulatory developments on non-performing exposures

As part of the European Council’s action plan to tackle non-performing loans in Europe, the European Banking Authority (EBA) has drafted the “Guidelines on Management of Non-Performing and Forborne Exposures”. The Guidelines would require all European institutions (including FMO) with “elevated levels” of non-performing exposures (NPEs), to establish an NPE Strategy. The proposed threshold is a NPE ratio above 5%. FMO’s NPE level is currently approximately 6.3%. The Guidelines will be applicable as of January 1, 2019. 

FMO already has an extensive system in place to identify and monitor NPEs, which includes annual reviews for all portfolio companies, quarterly Watch-List Meetings for Loans with a reason for concern and a specialized department to manage distressed assets. Some further requirements may apply, such as setting one and three year NPE target levels to reduce the NPL percentage and setting (more explicit) identification and evaluation of medium and long-term NPE strategy options. FMO has taken the necessary measures to close these gaps before December 31, 2018.

Our non-performing loan portfolio (loans at amortized cost and loans at FVPL) decreased and amounts to €282.4 million (2017: €305.1 million). The ratio of non-performing loans compared to our total loan portfolio decreased in the course of 2018 from 6.9% to 6.3% as a result of write-offs and full prepayments of credit impaired assets. Therefore, the coverage ratio (impairments under stage 3 divided by non-performing loans) also decreased from 47% to 40%.

All Interest Bearing Securities (credit quality of AA+ or higher) and Banks (credit quality of BBB- or higher) are classified as Stage 1. An amount of €35 is calculated for the ECL of both asset classes as per June 30, 2018.

The following table shows the credit quality and the exposure to credit risk of the loans to the private sector at amortized cost at June 30, 2018.

The following table shows the credit quality and the exposure to credit risk of the loan commitments at June 30, 2018.

The following table shows the credit quality and the exposure to credit risk of the financial guarantees at June 30, 2018.