Alternative performance measures

An alternative performance measure (APM) is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. In disclosing our performance, FMO uses specific APMs that are not defined by IFRS and are different to what is included in the financial statements. APMs should not be considered as alternatives to the equivalent IFRS measures but rather supplementary to the most directly comparable IFRS measures. Alternative performance measures do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. FMO distinguishes between Sustainability-related APMs and Financial Accounting APMs.

Sustainability-related APMs

Committed portfolio

Committed portfolio is an impact measure that is used for steering purposes. It measures FMO’s contribution and expected impact towards SDG 8 Decent Work and Economic Growth, a key strategic objective of FMO, and reflects the risk exposure taken by different risk parties. We distinguish between three business lines: FMO, funds made available by public entities ('public funds') and funds made available by other third parties ('direct mobilized funds').

The measure committed portfolio is not reconcilable with information included in the financial statements as it consists of a unique set of business rules. These business rules combine a mix of financial and non-financial information and data. The non-financial information is not required by IFRS and, as such, is not reflected in the financial statements.

The following table includes a breakdown of committed portfolio per business line and financial product.

Committed portfolio is the sum of outstanding amounts and remaining commitment amounts of the active debt, guarantee and equity investment transactions. Debt includes commercial loans, mezzanine loans and debt funds. Equity includes direct and fund investments, as well as investments made in associates. Guarantees include guarantees issued.

The outstanding amount for debt is equal to the principal outstanding amount reduced to the amount of the used Unfunded Risk Participation (guarantees received), if any; for the equity investments this is equal to the sum of fair value of the underlying assets. For guarantees, this is equal to the effective guarantees issued. The remaining commitment consists of the committed not disbursed amounts for all financial products mentioned, or in other words the principal amount available for disbursement to the customer by the funding party.

A non-material portion of our total committed portfolio is double counted across portfolio categories due to FMO’s participation in and management of investment vehicles that invest in, or coinvest alongside, FMO originated loans including the SDG Loan Fund, government funds such as MASSIF, and investor vehicles such as the FMO Privium Impact Fund. Where FMO’s own equity or funding is recognized on FMO’s financial statements and the same vehicles’ participations are reported under Public Funds or Direct Mobilized portfolio, a small part of FMO’s stake can be reflected in both FMO committed portfolio and the relevant public/mobilized committed portfolio. We monitor the aggregate overlap annually and confirm that it remains below our internal materiality threshold.

New investments

New investments is a strategic business measure used for steering purposes to ensure funds maximize impact on SDGs 8, 10 and 13. New investment refers to the volume of new commitments made to customers at the end of the reporting year (based on signed contracts), reported per party bearing the risk (i.e. FMO, public entities, otherthird-parties considered direct mobilization). Volume is reported for all debt, equity and guarantee products and includes new facility agreements, limit increases, renewals of contracts and interest capitalization. It excludes transfers from one party to another or conversions from e.g. equity to debt. Grants provided through, for instance, the Capacity Development program and sub-delegated funds under management of third parties are excluded from the results.

The measure new investments is not reconcilable with information included in the financial statements as it consists of a unique set of business rules. These business rules combine a mix of financial and non- financial information and data. The non-financial information is not required by IFRS and, as such, is not reflected in the financial statements.

The following table includes a breakdown of new investments per business line and financial product. For a description of each financial product, refer to the section on committed portfolio.

Financial Accounting APMs

FMO uses Financial Accounting Alternative Performance Measures (APMs) to supplement IFRS-based financial reporting and provide stakeholders with a clearer view of the bank’s underlying business performance. Since the adoption of IFRS 9 in 2018, FMO’s net profit has become more volatile, primarily due to three factors:

• Private Equity (PE) Valuation: The majority of FMO’s PE portfolio is measured at fair value through profit or loss. As approximately 80 percent of the portfolio is denominated in USD, fluctuations in the EUR/USD exchange rate have a significant impact on reported results, leading to large swings in net profit.

• Loan Impairments: Loan loss provisions have shown considerable volatility, with high losses in years such as 2020 (COVID-19) and 2022 (Ukraine crisis), and releases in other years, reflecting the impact of external shocks and subsequent recoveries.

• Treasury Derivatives: Mark-to-market results on treasury derivatives, used for hedging purposes, can also cause significant fluctuations in profit or loss.

Given these sources of volatility, the Management Board (MB) has decided to monitor and steer the bank’s performance using APMs that better reflect the recurring, underlying income and expenses of the organization, while actively monitoring the sources of volatility. To support effective performance management, FMO’s monthly internal reporting to the Management Board presents results across six simplified buckets: regular income, operating expenses, FX impact on private equity (PE), Regular equity investments results (excluding FX impact), IFRS 9 impairments and revaluations, and other/tax. 

Based on these buckets, the following APMs are presented: Regular income, IFRS 9 impairments and revaluations, Regular equity investment results, and Other and tax results. No APMs have been defined for operating expenses and FX impact on PE, as these figures can be directly derived from the annual accounts. 

The MB also focuses on the following additional APMs including Regular result, Regular return, Cost to regular income, Return on Equity (RoE) Return on Assets (RoA) and Underlying profit for each segment as presented in the section on 'Segment reporting by operating segments'. The explanation of the APM Underlying profit and its reconciliation to the IFRS reported net profit for each segment is provided in the referenced section.

Furthermore, given FMO’s business nature and key financial risks, management has also identified the Non-performing Exposure ratio and CET-1 ratio as essential performance measures relevant for disclosure in the annual report. For further details on how CET-1 ratio is calculated, refer to the section on 'Capital adequacy' in the 'Risk Management' chapter. 

The MB reviews these APMs and related KPIs on a monthly basis and discusses their development with the Dutch Government (the Ministry of Finance) on a quarterly basis. In addition, key APMs are included in the KPIs agreed with the Ministry of Finance, FMO’s main shareholder, ensuring alignment with shareholder expectations and accountability for performance.

By using APMs, FMO aims to provide stakeholders with a more stable and meaningful view of the bank’s financial performance, supporting effective management decision-making and transparent communication with external parties. Therefore, the disclosures in this section have been updated in comparison those made in the prior year annual report to ensure adequate disclosure of the APMs FMO management use for steering. 

Regular income

FMO’s regular income relates to income following from operating and investing activities. Regular income excludes income related to value adjustments of financial instruments. Regular income includes net interest income, net fee and commission income, dividend income and remuneration from services rendered. Most of the elements are visible on the FMO's consolidated statement of profit or loss.

Regular result

This is defined as regular income minus operating expenses. The MB’s strategic goal is to achieve year-on-year growth in regular result.

IFRS 9 impairments and revaluations

IFRS 9 impairments and revaluations relate to gains/losses following from value adjustments of FMO’s loan portfolio. IFRS 9 impairments and gains/losses due to derecognition can be reconciled to the consolidated profit or loss account and gains/losses due to derecognition. However, fair value gains/losses arising from the loan portfolio measured at FVPL cannot be visibly reconciled directly to a single line item in the statement of profit or loss or in the related notes.

Regular equity investments results

Regular equity investments results relate to the gains/losses following from valuation adjustments, excluding FX results, of FMO’s equity portfolio. This APM includes the results from equity including the realized results. For the results from associates & subsidiaries we use the result excluding dividends since these are shown as part of regular income. Out of the results financial transactions we include the venture capital consolidation part in this APM to combine all equity related income in this APM.

Others and tax results

This APM consist of the results on derivatives, other operating income and the income tax. Results of derivatives is derived from the total results from financial transactions corrected for fair value gains/losses loan portfolio measured at FVPL and Venture Capital consolidation. 'Fair value gains /losses loan portfolio measured at FVTPL' are part of the APM 'IFRS 9 impairments and revaluations' and 'Venture Capital consolidation' is part of the APM 'Regular equity investment results', therefore, they are excluded from the computation of this APM.

Reconciliation with Net Profit

The monthly monitoring buckets reconcile with the annual report and provide a transparent bridge between Financial Accounting APMs and IFRS results. To reflect this, a reconciliation table aligning the APMs presented above with net profit has been included in the table below. The table also facilitates the reconciliation of IFRS 9 impairments and revaluations and Other and tax results, which cannot be readily reconciled to a subtotal in the consolidated statement of profit or loss.

Regular return

This is calculated as regular result divided by average shareholders’ equity.

Cost to regular income

This is calculated as operating expenses divided by regular income.

Return on average shareholders' equity

A measure that indicates how the profitability is in relation to the average shareholders' equity. This metric is expressed in the form of a percentage that is equal to net profit/(loss) divided by the average shareholders' equity for the prior and current reporting year.

Return on assets

A measure that indicates profitability in relation to average total assets. The metric is expressed in the form of a percentage that is equal to net profit/(loss) divided by the average total assets for a specific reporting year. The denominator for this APM/KPI has been revised this year to average total assets to provide a more representative basis for the calculation.

Non-performing exposure ratio

A measure expressed as the percentage of non-performing exposures. The ratio is calculated as gross exposure of the non-performing exposures (on balance) divided by the gross exposure of the total loan portfolio. For further details on this measure, refer to the sub-section on 'Non-performing exposures' included within the credit risk disclosures.