At the end of 2020, FMO noted a net loss of €205 million. Our first loss since 1991 is largely driven by a decrease of the fair value of FMO’s private equity portfolio (including investments in associates). This decrease is seen across sectors and geographies and is the result of a global decline in emerging market equity prices due to the COVID–19 pandemic. Furthermore, these assets are exposed to changes in FX rates as a large part of FMO's private equity portfolio is denominated in US dollar. Moreover, FMO does not hedge these assets for currency rate risk. Therefore, the EUR/USD depreciation of 10% in 2020 had a downward effect on the financial performance of these assets.
Despite these negative factors, regular income grew. Contrary to initial expectations at the start of the pandemic, performance of the existing loan portfolio remained stable. Few additional defaults occurred during 2020, resulting in an improvement of the non–performing loans ratio to 9.1% (2019: 9.8%). Uncertainties around the COVID-19 pandemic have resulted in increased credit risk in our loan portfolio. This has led to higher impairments.
The following diagram presents the changes in FMO's net result during 2020 in comparison with 2019.
The financial results can be explained in more detail as follows:
Results from our equity investments (including associates), including currency effects, amounted to a €277 million loss (2019: €84 million gain). This loss is the result of:
A depreciation of the portfolio, resulting in a €159 million loss (2019: €59 million gain);
FX effects, resulting in a €118 million loss (2019: €25 million gain).
Although the depreciation of the equity portfolio is significant, our investees continued distributing dividends. FMO has a long-term strategy to invest and hold these assets and expects that the valuation losses will be largely recovered over time, depending on how fast the global economy will recover from the COVID-19 pandemic.
Regular income, consisting of net interest income, net fee and commission income, dividend income and remuneration for services rendered, amounted €307 million (2019: €271 million) and therefore improved by €36 million. This increase was largely driven by a higher net interest income due to lower average LIBOR rates. Strong decrease of the interest expense by €79 million, related to FMO’s funding portfolio is the main driver for this improvement of regular income.
Loan impairments and revaluations amounted to €88 million (2019: €103 million) and therefore improved by €15 million compared to 2019. This was largely driven by the stable performance of the existing loan portfolio, few additional defaults and recoveries in the non–performing loan portfolio. This resulted in an improvement of our non–performing loans.
Operating expenses amounted to €144 million (2019: €130 million). Operating expenses increased by €14 million, largely due to a larger staff base and advisory costs related to our project portfolio. This increase was partially offset by lower travel costs due to travel restrictions as a result of the pandemic. We recorded a provision of €6 million for expenses related to KYC remediation.
Although we are reporting a net loss in 2020, FMO’s capital ratio remains well above the combined ratio of the SREP minimum and FMO’s internal buffers. In the course of 2020, FMO raised additional funding through the issue of a sustainability bond and a private placement of a bond in Swedish crown. In addition, FMO issued a Tier 2 subordinated bond amounting to €250 million. Furthermore, compared to last year, the total capital ratio increased to 24.9% (2019: 22.5%) and the CET–1 ratio increased to 23.3% (2019: 21.8%). The improvements of the capital ratios were driven by the EUR/USD depreciation leading to lower risk weighted assets. FMO’s diversification strategy, with exposures diversified across sectors and countries, has proven effective during the pandemic as some economies and sectors have been affected less than others.
FMO continues to receive an AAA rating with a stable outlook from both Fitch and Standard &Poor's. Moreover, FMO’s liquidity metrics remain strong.
For more details and analysis on the financial performance, please refer to the 'Consolidated profit and loss account' in the financial statements. For more information about developments relate to equity investments, ECL allowances and impairments, funding and liquidity refer to 'Equity Risk', 'Credit Risk' and 'Liquidity Risk' sections in the Risk Management chapter.