OREANDA-NEWS. Fitch Ratings has affirmed Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V.'s (FMO) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' with a Stable Outlook, and its Short-term foreign currency IDR at 'F1+'. The Long- and Short-term local and foreign currency ratings on its EUR5bn Debt Issuance Programme (DIP) have been affirmed at 'AAA' and 'F1+', respectively, and its senior unsecured bond issues have been affirmed at 'AAA'.

KEY RATING DRIVERS
FMO's ratings are aligned with those of the Netherlands (AAA/Stable/F1+) due to Fitch's expectations of strong extraordinary support from the state. This was formalised in a 1998 agreement between the entity and the government. The ratings also reflect tight state control and oversight as well as FMO's strategic importance for Dutch development aid policy. FMO obtained a full banking license in 2014 and is regulated as a bank. However, Fitch uses a top-down approach under its non-US public sector entities criteria to rate FMO.

As a development finance institution, FMO's main goal is to support sustainable private initiatives in emerging markets, in accordance with Dutch development aid policy. Its core business is to provide long-term financing (outstanding EUR3.8bn net loans at end 2014; equity investments EUR1.15bn) to private companies and financial institutions. In addition, FMO manages several strategic development funds on behalf of the Dutch government. These off-balance-sheet funds accounted for EUR721.6m at year-end 2014.

Under Article 8 of the sovereign support agreement, the state is legally bound to enable FMO to meet its financial obligations on time, notably by providing liquidity. The tenor of the agreement is indefinite and its termination requires 12 years' notice. Article 7 of the agreement provides the state's maintenance obligation in most circumstances to safeguard FMO's solvency. The state's obligation is to FMO, not to third parties.

The Dutch state owns 51% of FMO's shares, through the Ministry of Finance. The remaining 49% is owned by large Dutch banks, Dutch institutions and private individuals. Fitch considers it highly unlikely that the state would give up its majority stake, as the state guarantee can only be revoked with 12 years' notice.

The Ministry of Finance and Ministry of Foreign Affairs and Cooperation Development oversee FMO's activity and accounts. The Ministry of Finance focuses on risk and the financial results of FMO's policy while the Ministry of Foreign Affairs and Cooperation Development assesses its strategic development.

Over recent years, FMO's profitability has proven solid and resilient. It benefits from a healthy net interest margin owing to its low funding cost and the typically high yield generated by businesses conducted in emerging countries. In 2014, volatile market conditions led FMO to make significant negative adjustments on its loan portfolio in 2014, for a total of EUR33.6m. As a result, although net interest income increased to EUR169m at year-end 2014 from EUR155m at year-end 2013, net profit decreased to EUR124.4m from EUR133.3m. Overall, FMO's profitability remained high as the return on shareholders' equity was 6.1% in 2014. This should be also considered in the light of FMO's high level of equity. Fitch expects the return on equity will remain stable in the medium term, despite the volatility of the markets in which FMO operates.

FMO's regulatory solvency is strong (core Tier 1 capital ratio of 21.3% at year-end 2014) and its leverage is particularly low (equity/assets of 30.2% at the same date). The implementation of the more stringent Basel III/CRD IV is not expected to have any material impact on its current strong capital ratios.

RATING SENSITIVITIES
Negative rating action could result from a downgrade of the Netherlands' sovereign rating or adverse changes to the state's oversight and support of FMO, associated with an adverse change in FMO's state ownership.