Factors impacting our portfolio
The impact of COVID-19 on FMO’s customers has been limited so far. With the support of our partners, where requested, FMO has helped its customers throughout the crisis to support their communities. For example by providing debt payment deferrals for firms in distress or for firms that offer deferrals to their customers, which is common in the microfinance sector.
The response from central banks, multilateral development banks (MDBs) and other development finance institutions (DFIs) resulted in greater liquidity, which in some markets led to more prepayments in our portfolio. At the same time, the pandemic reduced demand for financing, especially in the energy and financial institutions (FI) sector. Energy projects were put on hold, for instance, due to supply chain disruptions. FIs were cautious about providing loans to sectors hit hard by the pandemic, such as tourism. Towards the end of 2021 we saw signs that markets were recovering and demand in these sectors began to pick up.
Our agribusiness, food & water (AFW) portfolio is diversified and held up well. Factories and other logistical operations were able to adapt and production largely continued. Many of the countries in which our AFW customers operate were not able to provide support packages. Some of our customers that rely on manual labor organized vaccinations for their workers, showing the role that the private sector can play in times of crisis.
The pandemic prolonged travel restrictions and affected market conditions well into 2021. The lack of proximity and presence in our markets made it harder for us to identify and act on opportunities, mainly in the equity market. Volumes were further affected by FMO’s decision to limit business activity with new customers to prioritize the financial and economic crime (FEC) enhancement program. We were, however, able to focus on existing customers, as well as new customers that had advanced through most of the DD process and syndicate transactions arranged by our partners. We accepted we would have a smaller pipeline and that we would not achieve our new investment and portfolio targets.
Nevertheless, at the end of 2021, we reported a net profit of €491 million, a significant improvement compared to the €205 million net loss reported at the end of 2020. Global equity prices recovered across sectors and geographies. The appreciation of the US dollar also contributed to the financial performance of our equity investments. Although global conditions remain uncertain, deterioration in the credit quality of our customers thus far was limited and the level of new loan defaults was largely in line with pre-COVID-19 years. Where customers were affected it was more often due to political turmoil than the pandemic.
While the above-mentioned factors had material impacts on FMO's level of credit risk, equity valuations, and market risk, these short-term fluctuations did not materially impact FMO's long term strategy, or ability to achieve its strategic objectives.