Performance on our strategy
In the first half of 2018, performance on higher impact and higher productivity was mostly on track. By continuing on the same path, we expect to achieve the year-end (YE) targets in both areas. Performance on deeper relationships is at risk of falling short of its YE targets. However, FMO will step up efforts in all critical areas to bring performance back on track in the second half of the year.
Higher impact portfolio
Performance for the first half of 2018 suggests that FMO is on track to achieve most of its year-end targets with respect to higher impact.
New commitments for FMO and government funds in the first half year amounted to €751 million (1H17: €630 million). Most investments targeted countries in Africa and Asia, including those located in the ‘European Neighbourhood’. We reported a shortfall for Private Equity (PE) investments, explained by market conditions as well as a strategic focus on exits, direct investments and portfolio management.
Investments made through state funds managed by FMO on behalf of the Dutch government require further focus, particularly with respect to the Access to Energy Fund (AEF) and Infrastructure Development Fund (IDF). These funds enable FMO to invest early on, take higher risks, and by doing so catalyse new investors. FMO will step up efforts to identify opportunities within and beyond the current pipeline that match these criteria.
35% of total new commitments in the first half year attributed to green investments (1H17: 26%), mostly through renewable energy and infrastructure projects. 24% of total commitments attributed to reducing inequalities (RI) through inclusive transactions and investments made in least developed countries, as defined by the United Nations. The biggest challenge FMO must overcome is the instability in Turkey that affects several of its green lines. Opportunities elsewhere will enable FMO to achieve YE targets.
In the first half year of 2018 we supported an estimated 175,000 jobs, an increase compared to the same period last year (1H17: 153,000 jobs) due to an increase in total investment volume. We further doubled our volume of green investments, resulting in an estimated greenhouse gas avoidance of 414,000 tons (CO2 equivalent) compared to 214,000 tons in the same period last year.
To ensure management of our ESG risks and overall risk exposure of our portfolio, FMO has introduced a new ESG Performance Tracker and Target. Initial results show that 97% of high profile risks currently tracked are fully compliant with our standards or under active management on a pathway to compliance.
Performance for the first half of 2018 suggests that FMO needs to step up efforts to achieve year-end targets with respect to deepening relationships.
Key milestones included:
An initial 17 investments worth €64 million were made through the NN-FMO Emerging Markets Loans Fund, following its first close at USD 250 million.
The NASIRA Risk-Sharing Facility was approved by the European Commission, including €75 million in guarantees and €8 million in technical assistance.
Climate Investor One achieved its third close, bringing the total to USD 535 million.
The volume catalysed from third parties amounted to €278 million (1H17: €262 million). However, achieving the year-end target for catalysed volume will depend on the second close of the NN-FMO Emerging Markets Loans Fund (EMLF) and on the materializing of large syndicated transactions. Other efforts are underway to address potential shortfall.
FMO strengthened its relationships and links with Dutch businesses by facilitating investments in and export to emerging markets and developing countries through its new NL Business department. In the first half of 2018, €21 million worth of investments were made by NL Business. Efforts have been focused in areas where FMO can be additional and provide most value to the market. NL Business, however, is relatively new and prone to more uncertainty than its more established lines of business. Achieving the target of €100 million will be challenging, but we will spend extra efforts in the coming months to further our progress.
Client Satisfaction in 2018 scores 8.5 out of 10, in line with previous results and on par with peers. The Net Promotor Score of 68.6 is in line with 2015 results but below target (70). FMO’s level of professionalism and reliability score highest; lead times and our added value related to training and knowledge management score lowest. Differentiating ourselves through providing more added value and better services to our clients will be fundamental in establishing deeper relationships.
Employee engagement decreased from 7.4 to 7.2 in the first half of 2018, below the benchmark for Financial Services (7.5). This is mainly due to a lower score on ‘work gives me energy’. Reasons mentioned include a high workload, limited office space and lack of clarity regarding the strategy. Several strategic projects are underway to improve on these areas (these are addressed under higher productivity). Slight increases were found in efficiency, serving customers and communication between management and staff.
Performance for the first half of 2018 suggests FMO is on track to achieve most of its year-end targets with respect to higher productivity.
The strategic projects are focused on improving efficiency and effectiveness to free up employee time to spend on providing more added value to our clients. The Business Process Optimization and Information Management projects are delivering results but have materialized slower than anticipated.
The Business Process Optimization project aims to optimize key investment and portfolio management processes and systems. The revised change request process will be the first major deliverable and is planned to be released in third quarter 2018.
Information Management is a multi-year program aimed at improving data reliability and accessibility through strengthening data governance, implementing a new data warehouse and delivering information products for internal and external use. This will allow for further integrated reporting of impact and financial information. The first deliverable – a portfolio dashboard – is realized in July 2018.
The HR change program is focused on organizational culture and change in line with our organizational strategy and vision. In the first half of 2018, we moved from the design stage to engaging and enabling management and employees to make the envisioned change happen.
The first half of 2018 has shown a decline in net profit compared to the same period last year from €156 million to €124 million. Operating income amounted to €174 million, which is behind budget due to lower net interest income and lower results from equity. Lower net interest income is mostly explained by the euro-dollar exchange rate, as approximately 80% of the loan portfolio is USD related. FMO does not hedge the FX risk of interest margins, consequently, the depreciation of the USD negatively impacts the net interest income.
Net profit was positively influenced by a €15 million net release of impairments due to improved quality of the portfolio. Results from equity investments amounted to €44 million (1H17: €92 million), consisting of €28 million FX gains, €23 million capital gains and a net loss of €8 million on exits. Operating expenses amounted to €52 million, an increase of €2 million compared to the same period last year, but below budget for the period. The increase is explained by higher staff costs resulting from the recruitment of new hires.
Note that net profit as per 2018 is not fully comparable with previous years due to the implementation of IFRS 9 - a new reporting standard for financial instruments. IFRS 9 predominantly impacts the results from the private equity portfolio as it requires fair value changes to be recorded in the profit and loss account. Previously, such changes were recognized in the available for sale reserve and exit results were recorded in the profit and loss account.
Non-performing loans (NPL) decreased to 6.3% (year-end 2017: 6.9%). Loans that are “performing again” have a probation period of at least one year before being classified as “performing”. Excluding for these loans, the NPL percentage declined from 5.6% at year-end 2017 to 4.8%, indicating an improvement in the credit risk of our current portfolio.
The CET-1 ratio per June 2018 is 25.8% compared to 24.6% at year-end 2017. This increase is explained by the inclusion of the net profit of 2017 and the depreciated USD. Note that the net profit for 1H 2018 is not included. If we did take this into account, the CET-1 ratio would be approximately 1% higher.
In accordance with Article 5:25d(2)(c) of the Dutch Financial Supervision Act (Wet op het Financieel Toezicht) we state that, to the best of our knowledge:
The 2018 condensed consolidated interim accounts give a true and fair view of the assets, liabilities, financial position and profit of FMO and its consolidated undertakings;
This Interim Report 2018 includes a fair overview of the important events that have occurred during the first six months of the financial year, and their impact on the condensed consolidated interim accounts 2018; and
This Interim Report 2018 includes a description of the principal risks and uncertainties for the remaining six months of the financial year.
The Hague, September 7, 2018
Peter van Mierlo, Chief Executive Officer
Fatoumata Bouaré, Chief Risk & Finance Officer
Linda Broekhuizen, Chief Investment Officer