Financial risk

Credit risk

Definition

Credit risk is defined as the risk that the bank will suffer an economic loss because a customer fails to meet its obligations in accordance with agreed terms.

Risk appetite and governance

Adverse changes in credit quality can develop within FMO’s emerging market loan portfolio due to specific customer and product risks, or risks relating to the country in which the customer conducts its business. The main source of credit risk arises from investments in emerging markets and off-balance instruments such as loan commitments and guarantees.

Credit risk management is important when selecting and monitoring projects. In this process, a set of investment criteria per sector and product is used that reflects minimum standards for the required financial strength of FMO’s customers. This is further supported by credit risk models that are used for risk quantification, calculations of expected credit loss allowance, and the determination of economic capital use per transaction. Funding decisions depend on the risk profile of the customer and financing instrument. As part of regular credit monitoring, FMO customers are subject to annual reviews at a minimum. Customers that are identified as having financial difficulties fall under an intensified monitoring regime to proactively manage loans before they become non-performing, including quarterly portfolio monitoring meetings. For distressed assets, the Special Operations department actively manages workout and restructuring.

FMO has set internal appetite levels for non-performing exposures and specific impairments on loans. If any of the metrics exceed the appetite levels, Credit will assess the underlying movements and analyze trends per sector, geography, and any other parameter. Credit will also consider market developments and peer group benchmarks. Based on the analysis, Credit will propose mitigating measures to the FRC. If any of the indicators deteriorate further, the Risk department will be involved to assess to what extent the trend is threatening FMO’s capital and liquidity ratios.

Developments

FMO has embarked on an overhaul of its credit risk policy and processes. The objective is to implement a more aligned and effective portfolio management framework across the organization. 

As part of this process, FMO has fundamentally redesigned the Credit Risk Policy and has adjusted internal processes and systems accordingly. The new Credit Risk Policy has been formally implemented in 2023. The main changes include strengthening the governance framework, alignment amongst key prudential policies, and enhancing the loan monitoring framework. During 2024, further improvements were made in the policy framework and underlying support systems.

Exposures and credit scoring

The following table shows FMO's total gross exposure to credit risk at year-end. The exposures, including derivatives, are shown gross, before impairments and the effect of mitigation using third-party guarantees, master netting, or collateral agreements. Regarding derivative financial instruments, only the ones with positive market values are presented. The maximum exposure to credit risk increased during the year to €9.8 billion at year-end 2024 (2023: €9.0 billion).

When measuring the credit risk of the emerging market portfolio at customer level, the main parameters used are the credit quality of the counterparties and the expected recovery ratio in case of defaults. Credit quality is measured by scoring customers on various financial and key performance indicators. FMO uses a Customer Risk Rating (CRR) methodology. The model follows the European Banking Authority (EBA) guidelines regarding the appropriate treatment of a low default portfolio and uses an alternative for statistical validation to perform the risk assessment of the models when there is limited or no default data.

The CRR models are based on quantitative and qualitative factors and are different for respective customer types. The models for banks and non-banking financial institutions use factors including the financial strength of the customer, franchise value, and the market and regulatory environment. The model for corporates uses factors including financial ratios, governance, and strategy. The project finance model uses factors such as transaction characteristics, market conditions, political and legal environment, and financial strength of the borrower.

Based on these scores, FMO assigns ratings to each customer on an internal scale from F1 (lowest risk) to F20 (default) representing the probability of default. This rating system is equivalent to the credit quality rating scale applied by Moody's and S&P. Likewise, the loss given default is assigned by scoring various dimensions of the product specific risk and incorporating customer characteristics. The probability of default and loss given default scores are also used as parameters in the IFRS9 expected credit loss model. Please refer to the 'Material accounting policies' section, for details of the expected credit loss calculation methodology.

The majority of our gross loan portfolio (65 percent) remains in the F11 to F16 ratings categories.

Credit quality analysis

Apart from on-balance finance activities, FMO is also exposed to off-balance credit-related commitments. Guarantees, which represent contingent liabilities to make payments if a customer cannot meet its obligations to third parties, carry similar credit risks as loans. Most of the guarantees are quoted in US dollars. Guarantees on export facilities are collateralized by the underlying letters of credit, and therefore carry less credit risk than direct uncollateralized borrowing. The following table shows the credit quality and the exposure to credit risk of the financial guarantees for the period.

Financial guarantees represent €193 million (2023: €154 million) classified as contingent liabilities and €263 million (2023: €196 million) classified as irrevocable facilities.

Additionally, irrevocable facilities represent commitments to extend finance to customers and consist of contracts signed but not disbursed, which are usually not immediately and fully drawn.

The following table shows the credit quality and the exposure to credit risk of the loan commitments to the private sector of contracts signed but not yet disbursed.

The "Other" category relates to loan commitments for which no ECL is calculated (fair value loans or expired availability date).

Non-performing exposures

A customer is considered non-performing when it is not probable that they will be able to pay their payment obligations in full without realization of collateral or calling on a guarantee, regardless of the existence of any past-due amount or of the number of days past due. This situation is considered to have occurred when one or more of the following conditions apply:

• The customer is past due more than 90 days on any outstanding facility;

• An unlikeliness to pay (UTP) trigger is in place that automatically leads to non-performing exposure (NPE);

• An impairment analysis, done upon a UTP trigger that possibly leads to NPE, results in an impairment higher than 12.5 percent on any outstanding facility;

There are additional criteria for a customer to enter NPE status in case of Forbearance. If a customer with ‘(No) Financial Difficulty – Forbearance’ status is under probation and during probation is extended additional forbearance measures/concessions, or becomes more than 30 days past-due, they shall be classified as non-performing. This only applies if the customer has been non-performing while the loan was forborne.

When a loan is deemed no longer collectible, it is written off against the related loss allowance. In 2024, FMO’s write-offs including disposals equal to € 52.7 million (2023: €83.6 million).

NPE is applied at customer level.

During 2024, NPEs in FMO decreased from 9.8 percent as of 31 December 2023 to 7.0 percent as of 31 December 2024. In Euro terms, the NPEs decreased from €511 million to €428 million. The 3 largest contributors to the reduction were repayments received from several NPE Customers, positive developments in certain projects in Uganda, which were subsequently reclassified as performing.

NPEs remain concentrated in a few large facilities. Top three NPEs are 24 percent of the total (2023: 20 percent), top ten are 57 percent (2023: 51 percent). As a result, a limited number of large new NPEs result in large movements in the NPE percentage. In terms of sector, NPEs are highest in Energy, in absolute terms at €215 million (2023: €244 million), followed by AFW at €127 million (2023: €174 million), FI at €56 million (2023: €44 million) and Diverse Sectors at €28 million (2023: €54 million). In relative terms (as percentage of the exposure in that sector) NPEs remain highest for Diverse Sectors at 15 percent, followed by Energy at 14 percent, AFW at 12 percent, and FI at 2 percent. FMO stopped providing loans to Diverse Sector customers in 2017. NPEs excluding other sectors are 6.7 percent.

In 2024, FMO’s NPE exposure in Uganda reduced from €72.4 million to €27.0 million, mainly as a result of customers being reclassified as performing.  At the end of 2024, the 3 countries with the highest level of NPEs were Ukraine, Honduras and Ghana, which together make up 45 percent of all NPEs.

NPE levels in FMO’s portfolio partially reflect long recovery periods, which are inherent in the markets in which FMO operates.

Past due information related to FMO’s loans portfolio is presented in the tables below.

The table below presents the distribution of Stage 3 loans according to regions and sectors. 

Modified financial assets

Changes in terms and conditions usually include extending the maturity, changing the interest margin and changing the timing of interest payments. When the terms and conditions are modified due to financial difficulties, these loans are qualified as forborne. For more details refer to the section on 'Modification of financial assets' in the 'Accounting policies' sub-chapter. The Credit department reviews modified loans periodically in accordance with the Intensified Monitoring process. When a loan is deemed no longer collectible, it is written off against the related loss allowance. In 2024, FMO’s write-offs including disposals equal to €53.3 million (2023: €83.6 million).

The following table provides a summary of FMO’s forborne assets, both classified as performing and non-performing, as of December 31, 2024.

The following table shows the gross carrying amount of previously modified financial assets for which the loss allowance has changed to stage 1 measurement during the period:

The table below includes Stage 2 and Stage 3 assets for which terms and conditions were modified including the related net modification result.

Credit risk mitigation 

As per 31 December 2024, the total carrying value of the FMO’s loan portfolio was €5.8 billion of which €498.3 million is guaranteed by highly rated guarantors. The following table shows a breakdown of guaranteed amounts received and carrying values of guaranteed loans per credit ranking of the guarantors.

The total carrying value of defaulted (Stage 3) loans in FMO’s loan portfolio is €199.7 million of which €29.9 million is guaranteed by either the Dutch Government or highly rated guarantors. The following table shows a breakdown of guaranteed amounts received and carrying values of guaranteed loans.

Equity risk

Definition

Equity risk is the risk that the fair value of an equity investment decreases. It also includes exit risk, which is the risk that FMO’s stake cannot be sold for a reasonable price and in a sufficiently liquid market.

Risk appetite and governance

FMO has a long-term view on its equity portfolio, usually selling its equity stake within a period of 5 to 10 years. FMO can accommodate an increase in the average holding period of its equity investments and wait for markets to improve before pursuing an exit. The equity investment portfolio consists of direct investments, largely in the financial institutions and energy sectors, co-investments with aligned partners (mainly in cooperation with funds) and indirect investments in private equity funds. Equity investments are approved by the Investment Committee. On a quarterly basis the Private Equity department determines the valuation of direct equity investments and assesses the valuation of equity fund investments. Before the valuations are presented to the FRC for approval, the Credit and Finance departments will perform a final assessment on the valuation of equity investments. Diversification across geographical area, sector and equity type across the total portfolio is evaluated before new investments are made. Based on this performance and the market circumstances, direct exits are pursued by involving intermediaries. In the case of co-investments, our fund managers initiate the exit process as they are in the lead. Exits are challenging due to limited availability of liquidity in some markets and the absence of well-developed stock markets.

The risk in building an equity portfolio is driven by two factors:

• Negative value adjustments due to currency effects (EUR/USD and USD/local currencies), negative economic developments in emerging markets (EM), and specific investee-related issues impacting the value of the business and thereby affecting the profitability of FMO.

• Liquidity of the portfolio – in the event that FMO is not able to liquidate (part of) its maturing equity portfolio by creating sufficient exits for its direct and co-investment portfolio. This is also reflected in the fund portfolio where some fund managers have to hold on longer to their portfolio due to a lack of good exit opportunities.

Developments 

In 2024 as in the year before, de-globalization continued to put a strain on GDP growth and the realization of the SDGs. The war in Ukraine persisted, the conflict in Gaza escalated, and the US–China economic tensions remained pronounced, exacerbating global economic uncertainties. These events contributed to higher food and basic goods prices, particularly in Africa, where vulnerable populations were most impacted. Meanwhile, climate risk became more evident with record high temperatures and extreme weather patterns across the globe. Central banks in both the US and Europe introduced interest rates cuts in their monetary policies. Despite these adjustments, US 10-year Treasury yields remained elevated, further tightening financial conditions. Many African countries have high budget deficits (50 percent of countries have more than 5 percent deficit). This had a strong negative impact on capital flows to emerging markets and put strong pressure on local currencies, which further depreciated. Overall, the risk appetite of investors further declined.

Despite these difficult circumstances, in 2024 we saw a good deal-flow: distributions from fund managers and exits resulted in cash distributions of €330 million and once again in a strong level of dividends at €29 million. We made less new commitments than the previous year of €259 million and invested (paid-in) capital of €337 million. Overall, our committed equity portfolio (including associates) increased to €2.9 billion (2023: €2.6 billion) which was the result of the sum of new commitments, distributions, the strengthening of the USD resulting in a €116 million profit and Fair Value gain for the portfolio of €45 million.

Exposures

The total outstanding equity portfolio on 31 December 2024, amounted to €2.9 billion (2023: €2.7 billion) of which €1.4 billion (2023: €1.3 billion), was invested in investment funds.

The equity portfolio is left unhedged for currency risk. For more information please refer to the 'Currency risk' and 'Structural hedge' sections.

Concentration risk

Definition

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 FMO’s health or ability to maintain its core operations, or trigger material change in our risk profile.

Risk appetite and governance

Strong diversification within FMO’s emerging market portfolio is ensured through stringent limits on individual counterparties (single risk limits), sectors, countries and regions. These limits are monitored by the Risk department, reviewed regularly, and approved by the FRC, the Management Board and the Supervisory Board. Diversification across countries, sectors and individual counterparties is a key strategy to safeguard the credit quality of the portfolio.

Developments

Global growth decelerated from 3.6 percent in 2022 to 3.3 percent in 2023 and was projected to be 3.2 percent in 2024 and 2025, according to the IMF's October 2024 World Economic Outlook. Growth forecasts for the US have been raised, balancing out lower growth expectations in other advanced economies, particularly in Europe. Among emerging markets, growth prospects are mixed. Production disruptions, especially in oil, along with conflicts, unrest, and severe weather, have lowered growth expectations for the Middle East, Central Asia, and sub-Saharan Africa. In contrast, emerging Asia has seen a boost in growth, driven by high demand for electronics and semiconductors, as investments in artificial intelligence rise supported by government spending in China and India. Overall, global growth is expected to reach 3.2 percent per annum in 2024 and 2025.

Rising geopolitical tensions could lead to spikes in commodity prices, complicating efforts to control inflation and delaying monetary easing, which may threaten financial stability. Unpredictable policy changes, such as the Bank of Japan’s decision to hike interest rates and economic indicators fueling increased recession concerns in the United States in early August, could cause sudden disruptions in financial markets, resulting in capital outflows and debt challenges for countries reliant on external funding. Sovereign debt stress continues to pose significant risks for emerging market and developing economies. According to the World Economic Outlook, Ghana, Cameroon, Egypt, El Salvador, Georgia, Argentina, Bolivia, Türkiye, Tunisia, Mozambique, Belarus, and Kenya are particularly vulnerable. Economies with substantial external financing needs and limited international reserves are at greater risk of a repricing of risk, which could lead to further increases in sovereign spreads and escalate debt distress. Throughout 2024, FMO has actively monitored its portfolio and will continue doing so, leveraging its diverse exposure across over 70 markets to mitigate the negative impact of country-specific crises.

The war in Ukraine persists, with the UK, US, and EU maintaining sanctions on Russia and Belarus. Its exposure to Belarus is approximately €14 million in indirect equity. FMO has no direct exposure to Russia and only limited indirect exposure (€162.000).

The conflict in Gaza has intensified regional tensions, already impacting neighboring countries like Lebanon, Syria, and Iran, which are experiencing war-like conditions. This escalation raises concerns about further spillover effects on Egypt and Jordan. FMO’s exposure in the Palestinian Territories is limited to €12 million in commitments to two microfinance customers through the Nasira guarantee program, with €3.5 million currently outstanding. While FMO has no exposure to Israel, Syria, Iran, or Lebanon, it maintains commitments in Jordan and Egypt. FMO continues to closely monitor these developments but has yet to identify significant financial impacts on its portfolio.

Country, regional and sector exposures 

Country risk arises from country-specific events that adversely impact FMO’s exposure in a specific country. Within FMO, country risk is broadly defined. It includes all relevant factors that have a common impact on FMO’s portfolio such as economic, banking and currency crises, sovereign defaults, and political risk events.

To ensure diversification within FMO’s emerging market portfolio across regions, a country limit is in place to minimize concentration risk in the portfolio as a whole. Country limits range from 8 percent to 22 percent of FMO’s shareholders equity, depending on the country rating, with higher limits in less risky countries. The assessment of the country rating (F-rating scoring in line with internal credit risk rating) is based on a benchmark of external rating agencies and other external information. The average of the long-term foreign currency ratings of Moody’s, S&P and Fitch is used (debt and issuer rating). If none of the aforementioned ratings is available, then the average among OECD and IHS medium-term ratings is used.

In determining the limit within a country for investments, the committed portfolio amount, as well as underlying transaction specific elements (which may lead to effective reduction of country risk) are considered. The figure below provides an overview of the diversification across countries of FMO’s gross outstanding in the loan portfolio.

In general, the loan portfolio remains well diversified across different countries. The single largest country exposure is under 10 percent of the total loan book. The three largest country exposures in the loan book at the end of 2024 were India, Türkiye, and Uzbekistan, together 17 percent of the total loan exposure. In 2024, Türkiye's rating improved from F15 to F13, while India remained stable at F10, and Uzbekistan stayed unchanged at F13. 

In addition to country risk limits, FMO has limits to ensure adequate diversification across sectors and regions. Below an overview is given of the gross exposure of loans distributed by region and sector.

Single risk exposures 

Single risk refers to an individual customer or group of customers which are so interconnected that while they might be separate legal entities on paper, from a risk perspective, they behave as if they were a single entity. A single risk exposure refers to the sum of all exposures on entities that constitute a single risk. 

FMO has set internal single risk limits at the level that the maximum possible loss for one customer is limited to approximately one year of FMO’s net historical profit. This has resulted in a nominal single risk limit of 6 percent of our shareholders’ equity. The limit set by CRR for single risk exposure is 25 percent of our “eligible capital”. To ensure compliance with both regulation and our own risk appetite, we set the nominal limit on single customer exposure at the lower level of 6 percent of FMO’s shareholders’ equity or 25 percent of Eligible Capital. In practice, the internal risk appetite limits are more restrictive than the CRR limit. At year-end, all exposures were well within these limits.

Counterparty credit risk

Definition

Counterparty credit risk in the treasury portfolio is the risk that FMO will suffer economic losses because a counterparty fails to fulfill its financial or other contractual obligations from open positions in the portfolio.

Risk appetite and governance

The main responsibility of FMO’s Treasury department is to fund the core business of FMO, and to mitigate risk efficiently and effectively line with Treasury’s mandate. Treasury's portfolio aims to maintain a liquidity buffer such that FMO can meet its liquidity needs in regular and stressed circumstances. The Treasury department does not have its own trading book and does not actively take open positions in the pursuit of profits. FMO aims to balance between keeping losses within its limited risk tolerance and supporting FMO's business strategy, thereby minimizing credit risk and concentration risk in the treasury portfolio, derivative portfolio, and several bank accounts.

The Treasury department is responsible for day-to-day counterparty risk management. The Risk department is the second line and responsible for assessing, quantifying, and monitoring counterparty risk daily. Limit excesses and material findings are reported to the FRC on a monthly basis, together with recommended mitigations and actions. The Risk department is also responsible for updating policies and processes, and for setting up limits, including minimum credit rating requirements, exposure limits, and transaction limits. The policies, processes, relevant parameters, and limits are reviewed and approved by the FRC periodically.

Exposures

Counterparty risk exposures in FMO’s treasury portfolios originate from short-term investments (deposits, investment in money market funds, commercial papers, and collaterals related to transacted derivatives), interest-bearing securities (e.g., bonds), and transacted derivatives for hedging purpose. The tables below show outstanding positions as of 31 December 2024.

Supra-nationals are international organizations or unions to which member states delegate part of their national powers.

FMO mitigates its counterparty credit risk through various means. Minimum requirements of credit quality are set for counterparties of treasury activities. Netting and collateral agreements are also utilized to reduce counterparty credit risk originating from derivative transactions. FMO has Credit Support Annexes (CSAs) with all derivative counterparties. Additionally, part of the derivative portfolio, particularly EUR and USD interest rate swaps, is cleared through central counterparties, as required by the European Market Infrastructure Regulations.

The exposure of derivative financial instruments is presented only for derivatives with positive market value, netted with derivatives with a negative market value if it concerns the same counterparty. For this reason, the total amount shown in the table above does not equal the exposure presented in other tables.

The tables below include financial assets and financial liabilities that:

• are offset in the consolidated balance sheet of FMO; or

• are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the consolidated balance sheet.

FMO receives and pledges only cash collateral with respect to derivatives.

Liquidity risk

Definition

Liquidity risk is defined as the risk for FMO of not being able to fulfill its financial obligations due to insufficient availability of liquid means.

Risk appetite and governance

FMO’s risk appetite is to maintain adequate liquidity buffers to fulfill FMO’s current and future financial obligations at all times. The appetite follows a similar rationale as for capital and is aimed at maintaining enough liquidity to ensure FMO would never need to fall back on the guarantee provided by the Dutch State to our investors. To realize this ambition, minimum liquidity requirements apply as prescribed by the regulator.

FMO’s liquidity risk policy framework is built on four pillars:

1. Survival period and minimum liquidity buffer under stress

2. Maturity matched funding

3. Diversified funding

4. Regulatory ratio requirements

FMO’s risk appetite levels are defined to ensure a minimum buffer above the 7-month minimum survival period under stress, a Liquidity Coverage Ratio (LCR) above 135 percent, a Net Stable Funding Ratio (NSFR) above 107 percent, and restrictions on failed funding periods and cost of wholesale funding above peers. Additional thresholds such as matching funding, funding diversification and liquidity in specific currencies, are also in place for managing and monitoring the risk profile of the bank. These monitoring metrics are delegated to the Director Risk and the Director Treasury and are subject to a formal sign- off procedure and reported to the FRC. The FRC is also responsible for approving the liquidity risk policy.

FMO has a conservative liquidity policy and funding strategy that is well suited to its business. Stress tests are conducted on FMO’s liquidity position on a weekly basis to ensure this conservative position is maintained. During the Internal Liquidity Adequacy Assessment Process (ILAAP), FMO performs additional stress tests, including scenarios provided by DNB and reverse stress testing. A continuous review is performed on the liquidity position, FMO’s assumptions, internal expectations and external market conditions to ensure that FMO’s liquidity planning is accurate.

The liquidity contingency plan sets out FMO’s strategy for addressing liquidity needs in the case of a crisis, ensuring various sources of emergency liquidity are available to meet all current and future financial obligations, while avoiding excessive funding costs, incurring unacceptable losses or significantly changing the business profile. The liquidity sources include a long-term bond portfolio and a portfolio of short-term instruments such as cash, money market funds, commercial paper and treasury bills. The long-term bonds and commercial paper can be used as collateral in repurchase agreements to obtain short-term cash from the ECB.

Developments 

In 2024, the global financial landscape experienced significant shifts as central banks adjusted their monetary policies to stimulate economic growth amid slowing inflation. The ECB initiated a series of interest rate cuts, reducing the deposit facility rate to 3 percent by December. This marked a reversal from the previous rate hike cycle that had reached a 22-year high in 2023. Similarly, the US Federal Reserve (Fed) lowered its benchmark interest rate to the range of 4.25 to 5 percent. These concerted efforts by major central banks aimed to invigorate economic activity and address the challenges posed by a decelerating inflation rate.

Following the presidential elections in the US, USD appreciated considerably against EUR, accompanied by a volatility in interest rates. These fluctuations in foreign exchange and interest rates resulted in collateral outflows stemming from FMO's derivative exposures. However, FMO experienced minimal impact on its liquidity position. The institution successfully maintained access to capital markets throughout 2024, ensuring the continuity of its financial operations.

Continuing its commitment to developing capital markets in line with its mandate, FMO solidified its position as an established issuer in local currency frontier markets through regular issuance activities. In 2024, FMO issued approximately €226 million in equivalent funding through local currency transactions. These efforts not only reinforced FMO's presence in these markets but also contributed to the overall development and stability of local financial systems.

Liquidity position 

FMO's liquidity position remained comfortably above regulatory requirements and internal managerial limits in 2024, with an LCR never falling below 260 percent.

The following table shows the categorization of the balance sheet per maturity bucket. This table shows the timing of the undiscounted principal cash flows (and not the market values) per instrument. The totals per instrument may therefore differ from the totals on the balance sheet. Expected cash flows resulting from irrevocable facilities being drawn are not included in the liquidity gap. For internal liquidity planning and management, cash flows from irrevocable facilities are included in the cash flow forecasts.

The tables below are based on the final availability date of the contingent liabilities and irrevocable facilities.

FMO expects that not all of these off-balance items will be drawn before expiration date.

FMO complies with DNB’s Pillar 2 liquidity requirements methodology for Less Significant Institutions (LSIs), which have been applied from the Supervisory Review and Evaluation Process (SREP). The liquidity requirements are a survival period of at least six months based on internal stress testing methodology, a Net Stable Funding Ratio (NSFR) of 100 percent and a specific Liquidity Coverage Ratio (LCR) requirement of 100 percent. FMO's internal liquidity appetite levels include a safety cushion over and above the minimum requirements as described in the section above.

FMO's liquidity position has been well above regulatory requirements and internal risk appetite levels throughout 2024. Per the reporting date, FMO has a survival period exceeding 12 months, an LCR of 428 percent (2023: 686 percent) and a NSFR of 109 percent (2023: 114 percent).

FMO’s major liquidity exposures are in EUR and USD currencies. However, some transactions are denominated, and may be settled, in local currencies. These exposures are specifically hedged using financial instruments to minimize liquidity and settlement risks.

Funding and sustainability bonds 

The Treasury department aims to ensure good market access by diversifying FMO’s funding sources. The result of this is a balanced funding mix in terms of currency, instrument and maturity.

Eurodollar (e.g. USD investors outside the United States) constitutes a key market for FMO. The Treasury department has identified USD and EUR as strategic funding markets. Other markets to attract funding include Australia, Sweden, UK, Japan and local frontier currencies. Except for our Tier II issuance, FMO funding is plain vanilla and generally senior unsecured funding. 

ESG bonds are an important part of FMO’s funding strategy and accounted for about 43 percent of the funding portfolio in 2024. In June and October 2024, FMO priced two successful US$500 million five-year fixed rate green bonds. The new sustainability bond has been issued under FMO’s Sustainability Bonds Framework (SBF), and proceeds will be used to finance or refinance eligible green and social projects, or to repay a note issued under the FMO’s Sustainability Bond Framework.

Market risk

Market Risk is the risk that the value and/or earnings of the bank decline because of unfavorable market movements. At FMO, this includes interest rate risk (including credit spread risk) and currency risk.

Interest rate risk in the banking book

Definition

Interest rate risk is the risk of potential loss due to adverse movements in interest rates. Changing interest rates mainly influence the fair value of fixed interest balance sheet items and affect the bank’s earnings by altering interest rate-sensitive income and expenses, affecting its Net Interest Income (NII).

Credit spread risk is the risk driven by changes to the market price for credit risk, for liquidity and potentially for other characteristics of credit-risky instruments, which is not captured by any another existing prudential framework, such as IRRBB or by expected credit/(jump-to) default risk.

Risk appetite and governance

FMO has no trading book and all assets (loans and investments) are part of the banking book. FMO’s policy is to match assets and liabilities within defined limits. As the loan portfolio is more granular, loans are pre-funded and new funding is obtained periodically and matched to the asset portfolio in terms of expected maturity and interest rate sensitivity. Interest rate risk arises from the residual tenor mismatch, mismatch in fixed rate assets funded by floating rate liabilities, and differences in reference rates or currencies resulting in basis risk. FMO has little optionality in its portfolio and no material exposure to rates-driven prepayment risk. The volatility of the market value of assets and liabilities over the holding period due to interest rate movements is of less concern, as these are held until maturity.

Interest rate risk management falls under the responsibility of the FRC. The Treasury department acts as the first line and is responsible for the day-to-day management of interest rate risk and daily transactions. The quantification, monitoring and control of market risk is the responsibility of the Risk department as second line.

FMO considers the liquidity investment portfolio, assets accounted at fair value and amortized cost and the funding portfolio as the main balance sheet items sensitive to credit spread risk. For liabilities, credit spread risk would relate to FMO’s own credit risk.

Interest rate risk is monitored using earnings-based metrics and value-based metrics.

Earnings-based methods capture short-term effects of interest rate refixing or repricing that may impact NII. The following two metrics are used for this purpose.

• The interest rate gap provides a static overview of the full balance sheet’s repricing and refinancing characteristics. The gap is monitored over different time buckets with limits in place per bucket and on a cumulative level, for all currencies (aggregate and currency-by-currency).

• NII at Risk provides a dynamic projection of net interest income sensitivity to yield curve shocks. FMO monitors NII at Risk on a two-year forward-looking basis and applies different scenarios simultaneously that also allow for identification of basis risk.

Economic value methods capture changes resulting from changes in yield curves. Value-based metrics measure the long-term effects of interest rate changes over the full tenor of the balance sheet. The following economic value metrics are calculated:

• Basis Point Value (BPV) provides the change in market value of assets, liabilities and interest-rate risk sensitive off-balance items for a one basis point change in yield curves. Limits are in place for the whole balance sheet, and main currencies (EUR and USD) separately.

• Delta Economic Value of Equity (delta EVE) provides changes in the economic value of the shareholder’s equity, given certain shifts in yield curves. The impact of a 200 basis-points parallel shifts and SA-IRRRB scenarios are reported. 

The interest rate gap and BPV exposure are monitored on a weekly basis against limits set by the FRC. BPV limits are defined dynamically to accommodate a 200 basis-points shock within five percent of Tier I. The delta EVE limit is defined in the RAF and set at five percent of Tier I. The NII at Risk limit is defined based on one percent of Tier 1.

Credit spread risk is measured under both economic value and NII, in line with IRRBB.

The interest rate positions were within risk appetite in 2024. Despite rates volatility in the United States, Europe and globally our positions remain within limits.

Developments  

No material developments occurred in 2024. Our positions remained well within the limits.

Exposures

The interest rate risk limits were not breached in 2024. The following table summarizes the interest re-pricing characteristics for FMO’s assets and liabilities.

The fair value of individual components (e.g. individual swap legs) of derivative financial instruments is allocated to the relevant interest re-pricing category.

Currency risk

Definition

Currency risk is defined as the risk of changes in foreign currency exchange rates having an adverse effect on the value of FMO’s financial position and future cash flows. FMO also reviews currency risk in terms of impact on the capital ratios.

Risk appetite and governance

FMO offers loans and attracts funding in a wide range of currencies. This is done to provide financing in the currency best fitting FMO’s customers and to reduce currency risks on their side.

FMO has limited appetite for currency risk. Exposures are hedged through matching currency characteristics of assets with liabilities, or through derivative transactions such as cross-currency swaps and 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 accordingly n a portfolio basis. FMO does not take any active positions in any currency for the purpose of making a profit. Each individual currency is managed within a strict position limit and an overall appetite level is set at one percent of shareholder’s equity for the total open position across all currencies. Both the individual and overall open positions are monitored by the Risk department on a daily basis. Additionally, FMO maintains a deliberately unhedged foreign currency position for the purpose of structural hedge which is reported to the FRC monthly. Please refer to the 'Structural hedge' section for further details.

Developments

No material developments occurred in 2024. Our positions remained well within the limits.

Exposures

Individual and total open currency positions were within risk appetite in 2024. The table below illustrates that the currency risk sensitivity gap as of December 2024 was almost completely part of FMO's equity investments and investments in associates.

Fair value of individual components (e.g. individual swap legs) of derivative financial instruments is allocated to the relevant currency category.

As described above, FMO’s loan assets in local currencies, such as the Indian Rupee (INR), are fully swapped to the US Dollar on a cash flow basis. The positions in these currencies are therefore fully hedged. For IFRS reporting, however, the loans are recorded at (amortized) cost, while the related swaps are recorded at fair value, leading to an accounting mismatch in these currencies.

The sensitivities employ simplified scenarios. The sensitivity of profit and loss account and shareholders’ equity to possible changes in the main foreign currencies is based on the immediate impact on the financial assets and liabilities held at year-end. This includes the effect of hedging instruments.

Shareholders’ equity is sensitive to equity investments valued at fair value through other comprehensive income.

Structural hedge

FMO maintains a deliberately unhedged foreign currency position in equity investments to manage the volatility of the capital ratio. These foreign currency positions act as an economic hedge against an adverse effect of the exchange rate on the regulatory capital ratios. A depreciation of FMO's reporting currency (Euro) can significantly affect the capital ratio since FMO’s assets - and hence also the risk weighted assets - are mainly denominated in foreign currencies. The long open position in the equity portfolio thereby functions as a partial hedge for FMO’s regulatory capital ratios. In addition, the uncertainty in the size and timing of the cash flows for equity investments makes micro-hedging less effective, hence these positions are a better fit for use as a capital ratio hedge.