Volume 2 - IFC

CHAPTER MANAGEMENT’S FOUR: SIGNIFICANT DISCUSSION AND IMPACT ANALYSIS
— VII. BY RESULTS REGIONOF OPERATIONS
The following paragraphs detail significant variances between FY09
and FY08, and FY08 and FY07, covering the periods included in IFC’s
FY09 consolidated financial statements. As disclosed in Note A to
IFC’s FY09 consolidated financial statements, during the year ended
June 30, 2008, IFC restated previously reported results for the year
ended June 30, 2007. In addition, certain amounts in FY08 and FY07
have been reclassified to conform to the current year’s presentation.
Where applicable, the following paragraphs reflect reclassified prior year
comparative information. Such reclassifications had no effect on net
income or total assets.
FY09 VERSUS FY08
IFC has reported a loss before net gains and losses on other non-trading
financial instruments accounted for at fair value and grants to IDA of
$153 million, $2,091 million lower than income before net gains and
losses on other non-trading financial instruments accounted for at fair
value of $1,938 million in FY08. Income before grants to IDA totaled
$299 million in FY09, as compared with $2,047 million in FY08. Grants
to IDA were $450 million in FY09 as compared to $500 million in FY08,
resulting in an overall net loss (in accordance with US GAAP) of $151 million
in FY09 as compared to net income of $1,547 million in FY08.
FY09 results were significantly negatively impacted by the global
financial crisis which resulted in significantly higher impairment writedowns
on equity investments and higher provisions for losses on loans,
both specific provisions and portfolio provisions 6 . Income from liquid
asset trading activities was substantially unchanged between FY08 and
FY09 with a significant improvement in performance occurring in the
latter months of FY09 relating to IFC’s holdings of asset-backed and
mortgage-backed securities. Net income in FY09 benefited by significant
unrealized gains on IFC’s swapped market borrowings accounted for at
fair value as credit spreads for IFC widened considerably, particularly in
the first nine months of FY09. As credit spreads began to narrow in the
fourth quarter of FY09, there was a partial reversal of unrealized gains
recorded in the first nine months of FY09.
A more detailed analysis of the components of IFC’s net income follows.
INCOME FROM LOANS AND GUARANTEES
IFC’s primary interest earning asset is its loan portfolio. Income from
loans and guarantees for FY09 totaled $871 million, compared with
$1,065 million in FY08, a decrease of $194 million.
The disbursed loan portfolio grew by $1,412 million, from $15,336 million
at June 30, 2008 to $16,748 million at June 30, 2009. However, the
interest rate environment was lower in FY09 than in FY08. The weighted
average contractual interest rate on loans at June 30, 2009 was 5.0%,
versus 6.6% at June 30, 2008. These factors combined resulted in
$135 million lower income than in FY08. Commitment and financial
fees were $14 million lower than in FY08. Recoveries of interest on loans
being removed from non-accrual status, net of reversals of income on
loans being placed in nonaccrual status, were $2 million higher in FY09
as compared to FY08. Income from IFC’s participation notes, over and
above minimum contractual interest, was $3 million lower in FY09 than
in FY08. Unrealized losses on loans accounted for at fair value were
$44 million higher than in FY08.
INCOME FROM EQUITY INVESTMENTS
Income from the equity investment portfolio decreased by $1,730 million
from income of $1,688 million in FY08 to a loss of $42 million in FY09.
IFC generated realized gains on equity investments, including recoveries
of previously written-off equity investments and net of losses on
sales of equity investments, for FY09 of $1,004 million, as compared
with $1,396 million for FY08, a decrease of $392 million. IFC sells equity
investments where IFC’s developmental role was complete, and where
pre-determined sales trigger levels had been met. A significant portion of
these gains ($381 million) were realized during the last three months
of FY09 as IFC took advantage of the overall recovery in emerging markets
during the fourth quarter of FY09.
Total realized gains on equity investments are concentrated – in FY09,
9 investments generated individual capital gains in excess of $20 million
for a total of $723 million, or 72%, of the FY09 gains, compared
to 15 investments that generated individual capital gains in excess of
$20 million for a total of $863 million, or 62%, of the FY08 gains.
Dividend income totaled $311 million, as compared with $428 million
in FY08. Consistent with FY08, a significant amount of IFC’s dividend
income in FY09 was due to returns on IFC’s joint ventures in the oil, gas
and mining sectors accounted for under the cost recovery method, which
totaled $56 million in FY09, as compared with $59 million in FY08.
Unrealized losses on equity investments that are accounted for at fair
value through net income in FY09 totaled $299 million, as compared
with gains of $12 million in FY08. Consistent with overall trends in
emerging markets, IFC reported unrealized losses in the first nine months
of FY09 of $353 million and unrealized gains in the last three months of
FY09 of $54 million.
INCOME FROM DEBT SECURITIES
Income from debt securities decreased to $71 million in FY09 from
$163 million in FY08, a decrease of $92 million. The majority of the
decrease was attributable to lower realized gains on sales of debt securities
in FY09 when compared with FY08. Realized gains on debt securities
were $96 million lower in FY09 as compared to FY08, There was one
individually significant realized gain in FY08 that did not recur in FY09.
PROVISION FOR LOSSES ON LOANS AND GUARANTEES
As noted above, the quality of IFC’s loan portfolio, as measured by
country trisk ratings and credit risk ratings deteriorated during FY09 as
a result of worsening economic conditions. Loan performance, however,
remained solid with non-performing loans as a percentage of the disbursed
loan portfolio increasing marginally from 2.4% of the disbursed
loan portfolio at June 30, 2008 to 2.7% of the disbursed loan portfolio
at June 30, 2009. As a result, IFC recorded a provision for losses on loans
and guarantees of $438 million in FY09 ($109 million in specific provisions,
$332 million in portfolio provisions, and $(3) million in respect of
guarantees) as compared to $38 million in FY08 ($(34) million in specific
provisions, $71 million of portfolio provisions and $1 million in respect of
guarantees). On June 30, 2009, IFC’s total reserves against losses on loans
were 7.4% of the disbursed loan portfolio (5.5% at June 30, 2008).
6 Also referred to as general provisions.
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