Risk developments

For a detailed overview of FMO’s risk governance and risk management approach please refer to the 'Risk Management' section in FMO’s 2023 annual report. The risk developments in the first half year of 2024 are described below.

IFRS Reporting Requirement

Certain disclosures in this ‘Risk Developments’ section are an integral part of the ‘Condensed consolidated interim accounts’ and contain information covered by the independent auditor's review report. These relevant sections include risk disclosures of financial instruments (IFRS 7), capital disclosures (IAS 1) and Financial Economic Crime Risk. The reviewed section covered by the auditor's report runs from this introductory section through the ‘Climate-related Risk’ sub-section until the end of the ‘Interest Rate Risk in the banking book’ sub-section and ‘Financial Economic Crime Risk’ sub-section of this ‘Risk Developments’ section.

Climate-related risk

FMO defines climate-related risk as the risks posed by direct exposure to climate change, or indirect exposure through counterparties that may potentially be affected by, or contribute to, climate change. These include two strongly interlinked perspectives:

• An inside-out perspective, defined as the impact by FMO and its customers on climate (which is mainly covered by the ESG risk framework and integrated in FMO’s investment process in credit decisioning and inclusion in some risk models);

• An outside-in perspective, defined as the impact on FMO due to physical and transition risks:

• • physical risks arising from the physical effects of climate change, either chronic or acute;

  • transition risks arising from the uncertainty related to the timing and speed of the process of adjustment to an environmentally sustainable economy. These risks can materialize through policies and regulations, technology, market developments or behavioral changes.

In 2021, FMO began a project to embed climate-related and environmental risks within the organization based on the ECB Guide on Climate Related and Environmental Risks. Since 2022 FMO is piloting its methodology by performing a portfolio scan in four servicing units (Financial Institutions, Energy, Agriculture, Food & Water, and Private Equity). The portfolio scan is the aggregated overview of climate-related risks in FMO’s investment portfolio (i.e. all loans plus private equity exposures) and provides an initial assessment of climate-related risk exposures in industries and geographies, providing a view of risk concentrations in the portfolio. Risk areas identified by the portfolio scan can be followed up by a more in-depth analysis of specific transactions, industries or geographies. This is in line with the recommendations set out by the Task Force on Climate-Related Financial Disclosures (TCFD) and the ECB Guide on climate-related and environmental risks. In 2023, FMO formalized its portfolio scan on physical risks, which is submitted to the Financial Risk Committee (Investment Risk Committee prior to Q4 2023) on a quarterly basis. With regards to Transition risk, FMO has further developed its methodology for Policy and Legal and Reputational risks, while Market and Technology risks are expected to be further developed in 2024.

Since 2023, FMO has been developing an application to operationalize climate risk assessment further into the investment process. This will support FMO's deal teams step-by-step in carrying out the climate risk assessments. The application has recently been launched for FMO’s Energy department and so far over 20 climate risk assessments at a customer level have been carried out by various deal teams. The application’s use will be further expanded over the course of 2024, by its introduction into other sectors and departments (AFW, FI, PE). We expect the roll-out of this tool to significantly improve our data collection, and we are working on iteratively improving the application before and during implementation.

As part of our supervisory discussions, DNB is assessing FMO’s progress in managing climate-related risks on a continuous basis. In Q1, FMO submitted a formal reaction to DNB’s feedback letter regarding the Climate & Environmental (C&E) materiality assessment of 2023, where DNB already indicated that it estimated that FMO was on track to have a sound and comprehensive assessment in place by 1 April 2024. DNB has reviewed this latest submission which did not lead to observations that required immediate follow-up. FMO is nevertheless expected to periodically review, update, and improve the C&E materiality assessment and to include outcomes in its Internal Capital and Liquidity Adequacy Assessment Process (ICAAP and ILAAP).

Finally, FMO has continued to work on integrating climate risks into internal policies and procedures and a climate risk policy has been established. For further information, please refer to the separate TCFD report.

Capital adequacy 

FMO complies with CRR/CRD requirements and reports its capital ratios to the Dutch Central Bank every quarter. FMO calculates the capital requirement for its entire portfolio based on the standardized approach. As of the end of June 2024, the capital ratio was 22.71%. 

Increased production during the first half-year, resulted in higher risk weighted assets (RWA) and higher deductions from own funds. The higher RWA, combined with lower own funds, decreased the total capital ratio by 0.3%.

FMO’s capital ratio remains above the combined ratio of both the supervisory review and evaluation process (SREP) minimum and FMO’s internal requirements. 

Following specific provisions in the CRR, FMO is required to deduct from its regulatory capital significant and insignificant stakes for subordinated loans, and (in)direct holdings of financial sector entities above certain thresholds. These thresholds correspond to approximately 10% of regulatory capital. Exposures below the 10% thresholds are risk-weighted accordingly.

Credit risk 

In the first half of 2024, there were no new Country Risk Events or geopolitical developments that materially impacted FMO’s loan portfolio quality.

FMO’s NPE portfolio percentage saw a slight decrease in the first half of 2024, from 9.8% to 9.5%. The NPE portfolio increased from €511 million to €519 million. The main drivers of these movements were a modest inflow of new NPEs of €31 million and repayments of €32 million. There were only two minor write-offs of €3 million in total, with the remaining movement of €12 million being primarily due to foreign exchange movements.

The largest new NPE (€15 million) relates to a customer in the Energy sector in Argentina. Similarly to 2023, FMO’s NPEs are concentrated in the Energy, and Agribusiness, Food & Water sectors. Our NPEs in Financial Institutions remain low.

In terms of countries, NPEs are concentrated in Ukraine, Uganda and Honduras, which represented 16%, 14% and 11% of the total NPE portfolio respectively. Other countries with high NPEs are Argentina, Ghana, South Africa, Peru and Nepal.

Past due information related to FMO’s portfolio loans and receivables are presented in the table below. This categorization does not apply to financial assets other than loans (this includes interest-bearing securities and short-term deposits).

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 €82k is calculated for the ECL of both asset classes as per 30 June 2024 (as per 31 December 2023 €94k).

The following table shows the credit quality and exposure to credit risk of the loans to the private sector at amortized cost and fair value on 30 June 2024.

The following table shows the credit quality and exposure to credit risk of the financial guarantees on 30 June 2024.

The following table shows the credit quality and exposure to credit risk of the loan commitments to the private sector on 30 June 2024. These represent contracts signed but not yet disbursed.

The following tables show the changes in loans, financial guarantees and loan commitments. Additions in the tables include newly originated exposures as well as drawdowns on existing exposures.

The full contractual amount of assets that were written off during the current and prior reporting period are still subject to enforcement activity.

The modelling methodologies applied in determining ECL in the current period are consistent with those applied in the financial year ending 31 December 2023.

The macroeconomic scenarios model was updated following the publication of new macroeconomic outlooks by the International Monetary Fund (IMF) in April 2024 (October 2023). The updates of the model based on GDP forecast caused new point-in-time adjustments to the probability of defaults in the impairment model, leading to a decrease of €0.7 million in combined stage-1 and stage-2 impairment charges.

The following tables outline the impact of multiple scenarios on the ECL allowance.

To demonstrate the sensitivity of the 'Significant Increase in Credit Risk' criteria, the tables below present the distribution of Stage 2 impairments by the criteria that triggered the migration to Stage 2.

FMO continues to support customers by undertaking several forbearance measures.

Equity investment risk

The first half of 2024 was marked by global uncertainty, emanating not least from elections that will have an impact on fiscal and monetary policies, as well as on the flow of FDI, especially to our geographies. Despite inflation cooling off in H1 from 2022/23 inflation peaks, interest rates have remained high. Given the diversity of our portfolio in terms of geography and sectors, the Private Equity portfolio is on track with our budget and performed slightly better than in H1 2023.

Concentration risk 

Concentration risk is the risk that FMO’s exposures are too concentrated within or across different risk categories. Concentration risk could trigger losses large enough to threaten our financial stability. Strong diversification within FMO’s Emerging Market portfolio is ensured through stringent limits on individual counterparties, sectors, countries and regions.

Country risk

Country risk arises from country-specific events that adversely impact FMO’s exposure to a specific country. They include any factors that can impact FMO’s portfolio in a country. These include economic, banking or currency crises, sovereign defaults, and political-risk events. To ensure FMO’s Emerging Market portfolio is sufficiently diverse, we use a country- and sector-limit framework. Country limits range from 8% to 22% of FMO’s shareholders’ equity, depending on the country rating, with higher limits in less risky countries. Sectoral exposures are limited to 50% of the country limit for each sector in any given country.

During the first six months of 2024, FMO began to take account of underlying investments within private equity funds and Arise B.V. when calculating country and sector risks. This data-intensive methodology requires more sources but enables FMO to track country and sector exposures with greater precision, thereby significantly enhancing our concentration-risk-management practices. Additionally, FMO has replaced a discontinued external rating service with a new provider and recalibrated its internal methodology. All in all, during the first half of 2024, FMO downgraded the credit ratings of Bolivia, Moldova, Pakistan and Ukraine by one on its internal country-rating scale and upgraded by one the credit ratings of Algeria, Argentina, Djibouti, Jamaica, Jordan, Myanmar, Nepal, Nicaragua, Tanzania, Yemen and Zambia.

Market risk

Currency risk 

FMO's appetite for currency risk remained limited. Exposures are hedged through matching currency characteristics of assets with liabilities, or through derivative transactions such as cross-currency swaps or FX forwards conducted with either commercial parties or The Currency Exchange Fund (TCX Fund N.V.). Most currency exposures are hedged to US dollars on a micro-hedge basis, whereby the US dollar position is managed on a portfolio basis.

FMO does not take active positions in any currency for the purposes of making a profit. Each individual currency is managed within a strict position limit and an overall appetite breach level is set at 1% of shareholders equity for the total open position across all currencies. Individual exposures and total open currency positions were within risk appetite during the first six months of 2024. FMO deliberately maintains an unhedged foreign currency position, which stems from its private equity investments and serves as a structural hedge for our capital ratio.

Interest Rate Risk in the banking book 

Interest rate risk is the risk of potential loss due to adverse changes to interest rates. Changing interest rates mainly influence the fair value of fixed interest balance sheet items, and affect our earnings by altering interest-rate-sensitive income and expenses, which in turn affects our net interest income (NII). FMO's appetite for interest rate risk is low and we do not take any active interest rate positions for the purposes of making a profit.

The interest rate gap and basis point value exposure are monitored each week against limits set by the Financial Risk Committee. The delta of the economic value of equity appetite breach limit is defined in the risk appetite framework and set at 5% of tier I. The NII-at-Risk limit is defined in the risk appetite framework and the appetite breach limit is set at 1% of tier I. Despite volatile rates in the United States, Europe and beyond, our positions have remained within our risk appetite during the first half year of 2024.

Regulatory compliance risk 

Regulatory compliance risk is the risk that FMO does not operate in accordance with the applicable rules and regulations, either by not identifying applicable regulations (or not doing so in time), or not adequately implementing and adhering to applicable regulations and related internal policies and procedures. As a licensed bank, FMO is subject to regulations across a wide range of regulatory topics. This section covers certain material regulatory updates relevant to FMO this year and in upcoming years.

Basel IV

The EU’s new legislative package on the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) is aimed at implementing the Basel III (also known as Basel IV) standards within the EU. The legislative procedures are in the final stages and the new regulations will be implemented using a phased-in approach, starting in 2025. Under the new regulatory framework, FMO will be required to apply a higher capital charge for some types of credit risk exposures and for market risk. You can find a more detailed description of the changes that will have an impact on FMO in our 2023 Annual Report.

Corporate Governance Code

The Dutch Corporate Governance Code will be amended with the Statement on Risk Management (‘Verklaring omtrent Risicobeheersing’, or VOR). This amendment concerns the integration of the requirements of the European Sustainability Reporting Standards (ESRS) on risk management and the internal controls on sustainability reporting. It will be applicable for the first time (as part of the ‘In control statement’) for the annual report on the year 2025.

Digital Operational Resilience Act

The Digital Operational Resilience Act (DORA) is a European regulation aimed at establishing a uniform and comprehensive framework for digital operational resilience across the EU financial sector. DORA provides a single set of rules for the use of ICT systems by financial institutions, focusing on governance and board responsibilities, ICT risk management, security and business continuity, resilience testing, and third-party risk management. FMO is currently preparing for the implementation of DORA (including underlying applicable rules) as of 17 January 2025.

Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) entered into force in 2023. It revises and extends the requirements of its predecessor, the Non-Financial Reporting Directive (NFRD). As a large public-interest entity, FMO falls under the scope of the NFRD and will be among the first tranche of institutions required to implement the CSRD. The CSRD will require organizations to report in line with the European Sustainability Reporting Standards (ESRS). FMO will issue its first report following the ESRS in 2025 on the financial year 2024. We are currently preparing for the implementation of the CSRD and ESRS as part of our EU Sustainable Finance project.

EU Taxonomy

In 2020, the European Commission introduced a taxonomy for sustainable activities. This is a classification system that defines criteria for economic activities that are aligned with a net-zero trajectory by 2050, and with broader environmental goals beyond climate alone. The regulation is still in development, but since 2023 banks have been required to report their level of taxonomy alignment with the first two environmental objectives (climate change mitigation and climate change adaptation), and their taxonomy eligibility on all six environmental objectives (the two objectives above, plus sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems).

FMO reported against these rules in our 2023 Annual Report and plan to continue reporting each year against the framework as it evolves. A more detailed description of our compliance with EU Taxonomy, along with its applicability to our activities, can be found in the FMO 2023 Annual Report. 

EU AML/CFT Legislative package

In July 2021, the EU published its AML/CFT Legislative package, which included four legislative proposals: (i) a regulation establishing the new EU AML Authority, (ii) the revision of the 2015 Regulation on Transfers of Funds, (iii) the 6th Directive on AML/CFT and (iv) a new Regulation on AML/CFT. The Regulation on AML/CFT is most relevant for FMO as it contains the majority of legal requirements currently contained in the 5th AML/CFT Directive (e.g. requirements on CDD, FIU reporting, UBO and PEP), as well as certain new legal requirements. The package was adopted in May 2024 and is expected to enter into force in 2027.

GDPR

In 2024, FMO continued its roll out of the operational effectiveness of the GDPR (General Data Protection Regulation) framework, including implementing it within our business processes. As a result of a follow-up GDPR project, additional measures and controls have been implemented to further strengthen personal data security. Data privacy processes have also been reviewed and, where possible, efficiency improvements made. To increase FMO staff awareness on data security and privacy, several training sessions have been held across FMO and various articles published.

Financial Economic Crime Risk 

In our continued efforts to implement learnings, FMO reviews its FEC framework with the KYC (Know Your Customer) Department on an ongoing basis. Compliance continues monitoring KYC files, using a sample-based approach. The sample taken is random and consists of at least 10% of all finalized KYC files in a given quarter. In addition, risk-based thematic monitoring is conducted on specific topics and processes. This approach further embeds the KYC responsibility within the investment teams. 

In April 2024, Compliance rolled out an updated annual integrity refresher e-learning. Compliance also continued face-to-face awareness training sessions on FEC topics (e.g. unusual transactions, and Anti-bribery and corruption), as well as on Export controls and Dual use goods. These training sessions help strengthen awareness and the organization’s anti-risk culture. 

In respect of FMO’s exposure to sanction measures, we continue to follow closely developments regarding EU sanction packages and measures in relation to the war in Ukraine, and to assess their potential impact on FMO activities.

In August 2023 we reported that, as a result of late notifications of unusual transactions to the Dutch Financial Intelligence Unit (FIU-NL) in 2021 and 2022, DNB decided on enforcement measures. FMO is appealing these administrative measures.

During Q4 2023 and Q1 2024, FMO conducted a company-wide Systematic Integrity Risk Analysis (SIRA). Its purpose was to gain insights into the inherent risks facing the organization, in particular FEC risks, and then determine whether the control measures FMO implements are sufficiently effective. In the light of the SIRA, we have taken various follow-up actions to ensure continued insight into (emerging) risks and further strengthen our management of those risks.