We recorded a net profit of €1 million for the financial year ending on 31 December 2022. This follows from a net profit of €491 million that we reported in 2021 in which a rebound from the COVID 19 pandemic gave rise to positive returns on investment.
In 2022, turbulent global macro-economic conditions were evident for most of the year. FMO’s overall financial performance was significantly impacted by reductions in equity investment valuations and an increase in loan provisions on investments exposed to the war in Ukraine and political unrest in Sri Lanka and Myanmar.
Interest rates have been trending upwards in the United States, Europe and more generally. Over the short term, the upward trend resulted in an increase of interest rates for both our floating-rate loans and funding portfolio. For our fixed-rate loan portfolio, it takes longer to refinance against higher spreads. Furthermore, the increase of income on our short-term assets and assets with DNB did not increase at the same level, resulting in lower net interest income.
A large part of FMO's investment and funding portfolios are denominated in US dollars. Overall, the EUR/USD exchange rate showed a strengthening of the US dollar against the Euro during 2022 resulting in gains on our investment portfolio. However, this trend was partially reversed in the fourth quarter of the year and the gains were partially offset by losses on the currency derivatives.
At the end of the year, the NPL ratio was 11.9 percent which increased from 9.5 percent in 2021. This was primarily driven by loans exposed to the war in Ukraine.
The following diagram presents the changes in FMO's net result during 2022, compared to 2021.
FMO's primary sources of income relate to interest income and results on equity investments. The results for these categories are as follows:
Interest and fee income was largely in line with 2021 at €233 million, €3 million less than 2021. Interest income increased due to growth of the loan portfolio and the rise in applicable interest rates. However, this was offset by an increase in interest expenses on the funding portfolio.
The results from equity investments (including dividend income and results from associates) amount to a gain of €23 million compared to a gain of €382 million in 2021. The result can mostly be attributed to:
Unrealized capital losses of €33 million primarily driven by valuations on investments exposed to the war in Ukraine (2021: €175 million gain).
Unrealized foreign exchange gains of €83 million (2021: €107 million gain).
Losses on associates of €59 million (2021: €64 million gain).
Dividend income of €41 million (2021: €22 million) and a net loss on sale of equity investments of €0.5 million (2021: €14 million gain)
Results from other pertinent line items were as follows:
Loan impairments amounted to a loss of €143 million for the year (2021: €9 million gain). The movement for the year is largely driven by substantial impairments on Ukraine exposures, as well as exposures in Sri Lanka and Myanmar.
Results from financial transactions increased to an overall loss of €19 million (2021: €26 million loss), primarily due to gains on currency swaps.
Operating expenses have increased to €152 million (2021: €114 million), mostly resulting from an increase in staff and pension costs.
The net cash flow for the year was an outflow of €106 million. Cash returns generated on investments were offset by large distributions towards the lending and equity portfolios. This resulted in a net cash outflow from operating activities of €379 million. The financing activities for the year resulted in a cash inflow of €346 million.
FMO was able to maintain its capital position above the minimum levels required by the Dutch Central Bank as well as the more stringent requirements imposed by FMO’s internal risk appetite. The total capital ratio increased to 24.9 percent (2021: 23.7 percent). The CET–1 ratio amounted to 23.8 percent (2021: 22.5 percent). The capital position has remained robust without being impacted by the macro-economic events transpiring over the course of the year. FMO’s liquidity position remained within the applicable limits with the liquidity coverage ratio (LCR) never falling below 281 percent during the current financial year. The survival period exceeds 12 months (2021: more than 8 years). The net stable funding ratio (NSFR) was 114 percent at year end (2021: 117 percent).
In 2022, FMO maintained its AAA ratings from both Fitch and Standard & Poor's. FMO’s funding portfolio was largely stable when compared to 2021 where redemptions were offset by new bond issuances totaling approximately €1,374 million.
Proposal for appropriation of the net result
Taking into account the net profit of €1 million, as well as the conditions set out in the State-FMO Agreement of November 16, 1998, the MB and SB propose allocating the net profit as follows: €36k to other reserves and the remaining profit to the contractual reserve. No dividends are proposed.
Risk and uncertainities
Given the nature of FMO’s investment portfolio, FMO’s main risk exposures arise from investment risk (credit risk, equity risk, concentration risk and counterparty credit risk), market risk and liquidity risk. FMO continues to monitor the developments in these risk domains. This is done with reference to the impact of broader global macro-economic trends, such as increasing interest rates and inflation, as well as more idiosyncratic impacts arising from country-specific political events or environmental events. Risk levels are continuously measured against predefined risk tolerances and proactive measures are taken when challenging events arise.
For more details and analysis on the financial performance, please refer to the 'Consolidated Financial Statements'. For more information about developments related to equity investments, ECL allowances and impairments, funding and liquidity refer to the Equity Risk, Credit Risk and Liquidity Risk sections in the 'Risk management' chapter.
- 1 This is an alternative performance measure (APM) that is not included in the financial statements. For a definition of this APM, please refer to the chapter ‘How we report’.