Market risk

Risk appetite

Market risk (currency and interest rate risk) arises as an associated risk from FMO’s primary business and FMO does not actively take trading positions. FMO’s appetite on market risk is low and direct currency and interest rate risk is largely hedged to remain within conservative boundaries. FMO has defined appetite levels for the following risk metrics:

  • Aggregate open FX position

  • Equity value at Risk (EVaR)

Currency risk

Currency risk is defined as the risk that changes in foreign currency exchange rates have an adverse effect on the value of FMO’s financial position and future cash flows.

FMO offers loans and attracts funding in emerging markets currencies as well as in hard currencies. We aim to match the currency needs of local banks and corporates, thereby reducing their currency risk. At December 31, 2017, 11% (2016: 9%) of the net loans to the private sector was in emerging market currencies. For our loan portfolio strict limits are in place on individual and aggregate currency positions and monitored on a daily basis. Currency risks are managed by matching the currency characteristics of FMO’s assets and liabilities, using derivative instruments such as (cross-) currency swaps and currency forwards. The emerging market currency loans are swapped to US dollars via either commercial parties or via The Currency Exchange Fund (TCX Fund N.V.). As a result, FMO’s open emerging market currency position of the investment portfolio, apart from equity, is limited.

FMO applies a structural approach for the foreign currency positions in the equity position for two reasons. First, FMO has created an open foreign exchange position in its private equity portfolio in order to 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 our risk weighted assets - are mainly US dollar denominated or in local currencies. The US dollar long position in the equity portfolio thereby functions as a partial hedge for FMO’s regulatory capital ratios. Second, the uncertainty in the size and the timing of the cash flows for equity investments make hedging less effective. With respect to equity investments, the expected returns in local currencies are assessed in terms of their sufficiency to compensate for the currency risk. The table below illustrates that the currency risk sensitivity gap per December 2017 is almost completely part of FMO's equity investments and investments in associates.

Currency risk exposure (at carrying values)

     

At December 31, 2017

EUR

USD

ZAR

INR

Other

Total

       

Assets

      

Banks

35,534

26,691

910

8,223

405

71,763

Short-term deposits

763,121

780,997

-

-

-

1,544,118

Interest-bearing securities

243,316

119,600

-

-

-

362,916

Derivative financial instruments1)

1,442,601

-1,339,441

26,486

-77,705

207,461

259,402

Loans to the private sector

486,623

3,172,747

54,696

177,075

209,284

4,100,425

Loans guaranteed by the State

28,159

10,797

-

-

-

38,956

Equity investments

300,427

1,040,448

52,124

39,337

70,497

1,502,833

Investments in associates

1,409

206,073

-

-

-

207,482

Property, plant and equipment

12,866

-

-

-

-

12,866

Deferred income tax assets

10,587

-

-

-

-

10,587

Current income tax receivables

7,458

-

-

-

-

7,458

Current accounts with State funds and other programs

274

-

-

-

-

274

Other receivables

12,660

107,877

98

3

75

120,713

Accrued income

12,104

53,232

554

1,351

15,895

83,136

Total assets

3,357,139

4,179,021

134,868

148,284

503,617

8,322,929

       

Liabilities and shareholders’ equity

      

Short-term credits

123,900

2,035

-

-

-

125,935

Derivative financial instruments1)

-658,076

1,063,635

11,861

111,942

-381,938

147,424

Debentures and notes

2,338,919

1,889,049

73,799

-

799,521

5,101,288

Current accounts with State funds and other programs

182

-

-

-

-

182

Wage tax liabilities

277

-

-160

-

-

117

Deferred income tax liabilities

9,682

-

-

-

-

9,682

Other liabilities

41,768

-59,463

-369

-

23,103

5,039

Accrued liabilities

22,057

20,363

1,253

2,245

10,803

56,721

Provisions

46,588

-

-

-

-

46,588

Shareholders’ equity

2,829,953

-

-

-

-

2,829,953

Total liabilities and shareholders’ equity

4,755,250

2,915,619

86,384

114,187

451,489

8,322,929

       

Currency sensitivity gap 2017

 

1,263,402

48,484

34,097

52,128

 

Currency sensitivity gap 2017 excluding equity investments and investments in associates

 

16,881

-3,640

-5,240

-18,369

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

At December 31, 2016

EUR

USD

CHF

INR

Other

Total

       

Assets

      

Banks

21,703

32,930

565

1,177

1,803

58,178

Short-term deposits

533,453

709,151

-

-

-

1,242,604

Interest-bearing securities

575,117

-

-

-

-

575,117

Derivative financial instruments1)

99,934

122,105

93,593

-189,172

60,050

186,510

Loans to the private sector

458,752

3,627,327

-

199,465

184,404

4,469,948

Loans guaranteed by the State

39,452

17,316

-

-

 

56,768

Equity investments

323,357

1,199,472

-

42,745

146,538

1,712,112

Investments in associates

954

115,106

-

-

-

116,060

Property, plant and equipment

9,168

-

-

-

-

9,168

Deferred income tax assets

10,618

-

-

-

-

10,618

Current accounts with State funds and other programs

1,901

-

-

-

-

1,901

Other receivables

9,455

8,420

-

-5

3,883

21,753

Accrued income

12,538

59,944

-

3,278

16,268

92,028

Total assets

2,096,402

5,891,771

94,158

57,488

412,946

8,552,765

       

Liabilities and shareholders’ equity

      

Short-term credits

39,061

403

  

-

39,464

Derivative financial instruments1)

-1,382,034

2,395,079

-

22,388

-611,452

423,981

Debentures and notes

2,095,916

2,126,510

92,792

-

865,759

5,180,977

Current accounts with State funds and other programs

75

-

-

-

-

75

Current income tax liabilities

16,434

-

-

-

-

16,434

Wage tax liabilities

530

-

-

-

-190

340

Deferred income tax liabilities

13,688

-

-

-

-

13,688

Other liabilities

725

5,200

-

-

1,516

7,441

Accrued liabilities

25,668

32,065

-510

-16,576

10,761

51,408

Provisions

45,422

-

-

-

-

45,422

Shareholders’ equity

2,773,535

-

-

-

-

2,773,535

Total liabilities and shareholders’ equity

3,629,020

4,559,257

92,282

5,812

266,394

8,552,765

       

Currency sensitivity gap 2016

 

1,332,514

1,876

51,676

146,552

 

Currency sensitivity gap 2016 excluding equity investments and investments in associates

 

17,936

1,876

8,931

14

 
  • 1 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 Indian Rupee (INR) and South African Rand (ZAR) are fully swapped to US dollar on a cash flow basis. Our 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.

Sensitivity of profit & loss account and shareholders’ equity to main foreign currencies

 

At December 31, 2017

At December 31, 2016

Change of value relative to the euro1)

Sensitivity of profit & loss account

Sensitivity of shareholders’ equity2)

Sensitivity of profit & loss account

Sensitivity of shareholders’ equity2)

USD value increase of 10%

1,688

126,340

1,815

133,273

USD value decrease of 10%

-1,688

-126,340

-1,815

-133,273

     

INR value increase of 10%

-524

3,410

893

5,168

INR value decrease of 10%

524

-3,410

-893

-5,168

     

ZAR value increase of 10%

-364

4,849

-

-

ZAR value decrease of 10%

364

-4,849

-

-

     

CHF value increase of 10%

-

-

188

188

CHF value decrease of 10%

-

-

-188

-188

  • 1 The sensitivities employ simplified scenarios. The sensitivity of profit & 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, including the effect of hedging instruments.
  • 2 Shareholders’ equity is sensitive to the currency sensitivity gap, including the equity investments valued at cost minus impairments.

Interest rate risk in the banking book

Interest rate risk is the risk of potential loss due to adverse movements in interest rates. Changing interest rates mainly have an effect on the fair value of fixed interest balance sheet items.

FMO has no trading book and all assets (loans and investments) are part of the banking book. FMO’s policy with regard to interest rate risk is to match funding within set boundaries: to match interest rate characteristics for assets, liabilities and derivatives per currency, and per remaining term as much as possible. The interest rate risk is mainly coming from where fixed loans or bonds are funded by floating funding or where there is a difference in reference rates or currencies, resulting in basis risk. The marked to market volatility during the holding period of the asset is less of concern for interest rate risk management as it will be held to maturity.

Earnings-based measure capture the short-term effect of changes in interest rate changes on the earnings capacity for a one and two year horizon. FMO has in place the following earnings metrics:

  • Interest Rate Gap report, provides a static overview of the repricing or refinancing risk through a gap analysis of the volume (using notional) showing the mismatches in different time bands.

  • Earnings at Risk (EaR) provides a dynamic projection of net interest income (NII) sensitivity to yield curve shocks.

Economic value measures capture the change in the net present value of the assets, liabilities and off-balance sheet items subject to specific interest rate shock and stress scenarios. These metrics measure the long-term effect of the interest rate changes over the full tenor of the balance sheet. FMO has in place the following economic value metrics:

  • Basis Point Value (BPV) provides the change in market value of an asset and/or liability for a one basis point change in the yield curve.

  • Equity Value at Risk (EVaR) provides the change in economic value of equity from a 200 bps parallel shift in interest rates for all interest curves covering all interest bearing items on the balance sheet.

ALCO has set limits for BPV and EVaR, which are monitored by Risk Management. The aggregate BPV limits are between -EUR 750 and EUR 0 and EVaR of 15% of regulatory capital. The interest position per December 2017 was a BPV of -EUR 338 (2016: -EUR 497) and a EVaR of EUR 67,647 (2016: EUR 99,420). Additionally, FMO monitors Earning at Risk (EaR) over a horizon of up to 2 years.

The following table summarizes the interest re-pricing characteristics for FMO’s assets and liabilities.

Interest re-pricing characteristics

At December 31, 2017

< 3 months

3-12 months

1-5 years

> 5 years

Non-interest-bearing

Total

       

Assets

      

Banks

71,763

-

-

-

-

71,763

Short-term deposits

1,544,118

-

-

-

-

1,544,118

Interest-bearing securities

12,481

19,125

219,418

111,892

-

362,916

Derivative financial instruments1)

-261,685

386,815

60,672

73,600

-

259,402

Loans to the private sector

1,842,416

1,142,020

457,985

658,004

-

4,100,425

Loans guaranteed by the State

16,333

4,096

14,038

4,489

-

38,956

Equity investments

-

-

-

-

1,502,833

1,502,833

Investments in associates

-

-

-

-

207,482

207,482

Property, plant and equipment

-

-

-

-

12,866

12,866

Deferred income tax assets

-

-

-

-

10,587

10,587

Current income tax receivables

-

-

-

-

7,458

7,458

Current accounts with State funds and other programs

-

-

-

-

274

274

Other receivables

-

-

-

-

120,713

120,713

Accrued income

-

-

-

-

83,136

83,136

Total assets

3,225,426

1,552,056

752,113

847,985

1,945,349

8,322,929

       

Liabilities and shareholders’ equity

      

Short-term credits

125,935

-

-

-

-

125,935

Derivative financial instruments1)

-171,274

287,020

28,823

2,855

-

147,424

Debentures and notes

1,806,668

575,511

1,526,742

1,192,367

-

5,101,288

Current accounts with State funds and other programs

-

-

-

-

182

182

Wage tax liabilities

-

-

-

-

117

117

Deferred income tax liabilities

-

-

-

-

9,682

9,682

Other liabilities

-

-

-

-

5,039

5,039

Accrued liabilities

-

-

-

-

56,721

56,721

Provisions

-

-

-

-

46,588

46,588

Shareholders’ equity

-

-

-

-

2,829,953

2,829,953

Total liabilities and shareholders’ equity

1,761,329

862,531

1,555,565

1,195,222

2,948,282

8,322,929

Interest sensitivity gap 2017

1,464,097

689,525

-803,452

-347,237

-1,002,933

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

Interest re-pricing characteristics

At December 31, 2016

< 3 months

3-12 months

1-5 years

> 5 years

Non-interest-bearing

Total

       

Assets

      

Banks

58,178

-

-

-

-

58,178

Short-term deposits

1,072,951

169,653

-

-

-

1,242,604

Derivative financial instruments1)

-

102,345

238,340

234,432

-

575,117

Loans to the private sector

77,080

-94,365

82,303

115,839

5,653

186,510

Loans guaranteed by the State

1,299,496

1,854,576

451,543

864,333

-

4,469,948

Equity investments

28,671

15,303

5,597

7,197

-

56,768

Investments in associates

-

-

-

-

1,712,112

1,712,112

Interest-bearing securities

-

-

-

-

116,060

116,060

Property, plant and equipment

-

-

-

-

9,168

9,168

Deferred income tax assets

-

-

-

-

10,618

10,618

Current accounts with State funds and other programs

-

-

-

-

1,901

1,901

Other receivables

-

-

-

-

21,753

21,753

Accrued income

-

-

-

-

92,028

92,028

Total assets

2,536,376

2,047,512

777,783

1,221,801

1,969,293

8,552,765

       

Liabilities and shareholders’ equity

      

Short-term credits

39,464

-

-

-

-

39,464

Derivative financial instruments1)

121,443

324,361

-20,428

-1,395

-

423,981

Debentures and notes

1,921,455

197,754

2,000,565

1,061,203

-

5,180,977

Other liabilities

-

-

-

-

75

75

Current accounts with State funds and other programs

-

-

-

-

16,434

16,434

Current income tax liabilities

-

-

-

-

340

340

Wage tax liabilities

-

-

-

-

13,688

13,688

Deferred income tax liabilities

-

-

-

-

7,441

7,441

Accrued liabilities

-

-

-

-

51,408

51,408

Provisions

-

-

-

-

45,422

45,422

Shareholders’ equity

-

-

-

-

2,773,535

2,773,535

Total liabilities and shareholders’ equity

2,082,362

522,115

1,980,137

1,059,808

2,908,343

8,552,765

Interest sensitivity gap 2016

454,014

1,525,397

-1,202,354

161,993

-939,050

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