Concentration risk

Risk appetite

Strong diversification within FMO’s emerging market portfolio is ensured through stringent limits on individual counterparties (single client and economic group limits), countries (from 8% to 22% of FMO’s capital, dependent on country rating) and sectors (50% of country limit). Similarly, credit policies and guidelines have been formulated covering treasury operations; these are reviewed regularly and approved by the ALCO. Diversification across countries, sector and individual counterparties is a key strategy to safeguard the credit quality of the portfolio. FMO has in place risk appetite levels for the following metrics:

  • Single risk exposure

  • Group risk

  • Sector exposure

  • Country exposure

  • Regional exposure

Country risk

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 in a country such as economic, banking and currency crises, sovereign default and political risk events. The assessment of the country rating is based on a benchmark of external rating agencies and other external information. FMO determines the level of the country limits using sovereign rating by credit rating agencies. FMO recognizes that the impact of country risk differs across the financial products it offers. Group-specific value adjustments are established on the investment credit portfolio based on an incurred loss model with country risk and estimated recovery rates as main parameters.

In the course of 2017, some of the emerging markets in FMO's portfolio benefited from the uplift in the global economic and the recovery of global oil prices. Ukraine was upgraded by Moody's in August 2017. According to the rating agencies, the upgrade of Ukraine's government followed the cumulative impact of structural reforms that, if sustained, are expected to improve government debt dynamics. On the down side, S&P lowered South Africa's sovereign credit rating in two steps from BBB- to BB grade over concerns on the political and economic situation in the country. Following the rating downgrades, South Africa now has an internal rating of F12 (2016: F10).

The three largest country exposures at the end of 2017 where Turkey, India and Nigeria, together 20% of the total exposure (2016: 17%). Ratings for these 3 countries were unchanged throughout the year. Nigeria did however experience a shortage of US dollars during the year and this caused some delays in clients’ ability to repay US dollar obligations. By year end most of these clients were current again. The only noteworthy change is the increase in exposure to countries rated F14. This increase is due to the upgrades of Honduras and Ivory Coast to F14 (together 4.4%) and the downgrade of regional exposures in Eastern Europe to F14 (2.3%). In general the portfolio remains well diversified across different countries. FMO has exposure in over 75 countries. The single largest country exposure is under 10% of the total loan book.

Overview country ratings

Indicative external rating equivalent

2017 (%)

2016 (%)

F9 and higher (BBB and higher ratings)

6.5

8.0

F10 (BBB-)

7.9

10.4

F11 (BB+)

-

1.9

F12 (BB)

12.2

9.7

F13 (BB-)

15.1

15.8

F14 (B+)

21.6

14.3

F15 (B)

14.6

16.5

F16 (B-)

11.2

13.1

F17 and lower (CCC+ and lower ratings)

10.9

10.3

Total

100

100

Further information with respect to the geographical diversification in the portfolio, reference is made to the segment information paragraph. With respect to the sector diversification in the portfolio, reference is made to notes 5, 6, 7 and 8 of the notes to the consolidated balance sheet.

Regional and sectoral diversification

FMO offers loans in emerging market countries. Strong diversification within FMO’s emerging market portfolio is ensured through limits on individual counterparties (single client and economic group limits), countries (from 8% to 22% of FMO’s capital, dependent on country rating) and sectors (50% of country limit). 

Gross exposure of loans distributed by region and sector

 

Financial Institutions

Energy

Agribusiness

Multi-Sector Fund Investments

Infrastructure, Manufacturing, Services

Total

       

At December 31, 2017

      

Africa

298,070

415,002

54,978

24,144

204,384

996,578

Asia

390,154

315,634

29,339

-

219,767

954,894

Latin America & the Caribbean

596,877

351,087

195,362

-

143,681

1,287,007

Europe & Central Asia

460,693

106,841

157,321

33,274

150,956

909,085

Non-region specific

57,529

17,677

87,089

-

43,394

205,689

Total

1,803,323

1,206,241

524,089

57,418

762,182

4,353,253

       

At December 31, 2016

      

Africa

400,351

401,465

57,557

28,430

298,350

1,186,153

Asia

568,670

308,265

27,265

-

347,990

1,252,190

Latin America & the Caribbean

587,607

478,015

139,904

-

219,885

1,425,411

Europe & Central Asia

366,620

141,885

110,700

19,142

153,459

791,806

Non-region specific

49,393

16,813

61,791

-

41,973

169,970

Total

1,972,641

1,346,443

397,217

47,572

1,061,657

4,825,530