Changing Trade. Quarterly Financial Report September 30, 2017 Unaudited

Transcription

1 Changing Trade Quarterly Financial Report September 30, 2017 Unaudited

2 TABLE OF CONTENTS MANAGEMENT S DISCUSSION AND ANALYSIS Overview... 2 Summary of Financial Results... 3 Third Quarter Highlights... 7 Financial Results Year to Date Prior Year Comparison... 7 Corporate Plan Comparison... 8 Non-IFRS Performance Measures Statement of Management Responsibility CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Statement of Financial Position Condensed Consolidated Statement of Comprehensive Income Condensed Consolidated Statement of Changes in Equity Condensed Consolidated Statement of Cash Flows Notes to the Condensed Consolidated Financial Statements Note 1. Significant Accounting Policies Note 2. Loans Receivable Note 3. Individually Impaired Loans Note 4. Allowance for Losses on Loans, Loan Commitments and Loan Guarantees Note 5. Recoverable Insurance Claims Note 6. Derivative Instruments Note 7. Premium and Claims Liabilities Note 8. Contingent Liabilities Note 9. Equity Note 10. Fair Value of Financial Instruments Note 11. Financial Instrument Risks Note 12. Loan Revenue Note 13. Interest Expense Note 14. Net Insurance Premiums and Guarantee Fees Note 15. Provision for (Reversal of) Credit Losses Note 16. Claims-Related Expenses Note 17. Other (Income) Expenses Note 18. Administrative Expenses Note 19. Related Party Transactions Note 20. Reclassification on Consolidated Statement of Cash Flows Caution regarding forward-looking statements This document contains projections and other forward-looking statements regarding future events. Such statements require us to make assumptions and are subject to inherent risks and uncertainties. These may cause actual results to differ materially from expectations expressed in the forward-looking statements.

3 MANAGEMENT S DISCUSSION AND ANALYSIS OVERVIEW Export Development Canada (EDC) is Canada's export credit agency. Our mandate is to support and develop Canada s export trade, and the capacity of Canada to engage in trade and respond to international business opportunities, as well as to provide development financing in a manner consistent with Canada s international development priorities. We provide insurance and financial services, bonding products, small business solutions as well as online credit risk management tools. Our customers are Canadian exporters, investors and their international buyers. We place a particular emphasis on small and medium enterprises by developing tools to help them succeed in international markets. EDC is a Crown corporation, wholly owned by the Government of Canada and accountable to Parliament through the Minister of International Trade. We are financially self-sustaining and do not receive parliamentary appropriations; our revenue is generated primarily by collecting interest on our loans, fees on our guarantee products and premiums on our insurance products. In May 2017, for the purposes of creating a Canadian Development Finance Institution (DFI), the Government of Canada broadened EDC s mandate and scope of activity to include providing, directly or indirectly, development financing and other forms of development support in a manner that is consistent with Canada s international development priorities. Development Finance Institute Canada (DFIC) Inc. was incorporated in September 2017 as a wholly-owned subsidiary of EDC, with operations expected to commence in January Economic Environment The economic growth that began in the first half of 2017 continued into the third quarter. Canada s major trading partners continued to experience strong economic growth and there are high expectations about future growth from consumers and businesses. Announcements from the U.S. Federal Reserve during the quarter provided an indication of the solidity of the U.S. economy. Globally, growth in the European Union, Japan and China remained strong. Commodity prices continued to be stable in the third quarter with oil prices remaining nearly flat due to global supply imbalances. In Canada, the stronger outlook for the global economy prompted the Bank of Canada to increase interest rates in July for the first time in more than seven years, followed by another increase in September. The expectations of interest rate increases resulted in a significant appreciation of the Canadian dollar when compared to the U.S. dollar in the third quarter, with the average rate increasing more than six cents. The appreciation of the Canadian dollar, coupled with longer than normal summer shutdowns in the auto industry as well as other seasonal factors had an impact on Canadian exports as merchandise exports declined for three consecutive months following record levels in May. 2 EXPORT DEVELOPMENT CANADA

4 MANAGEMENT S DISCUSSION AND ANALYSIS Business Facilitated Financing business facilitated decreased by 2% when compared to the same period in While the number of financing transactions increased in 2017, the dollar value has decreased. In addition, we experienced a decline due to foreign exchange translation as a result of the strengthening of the Canadian dollar in relation to the U.S. dollar. Business facilitated within our credit insurance product group increased by $1.1 billion mainly due to a new policyholder in the surface transportation sector. Business facilitated within our financial institutions insurance product group increased by 23% due to growth in demand for the product by an existing policyholder. For the nine months ended Sep Sep (in millions of Canadian dollars) Business Facilitated Direct lending 14,917 14,995 Project finance 2,081 2,333 Loan guarantees 1,104 1,057 Investments Total financing and investments 18,255 18,608 Credit insurance 41,807 40,721 Financial institutions insurance 6,594 5,346 Contract insurance and bonding 3,855 3,447 Political risk insurance 1,775 2,013 Total insurance 54,031 51,527 Total business facilitated $72,286 $70,135 Business facilitated with small and medium-sized enterprises was $12.0 billion for the first nine months of 2017, an increase of $0.8 billion when compared with the same period in SUMMARY OF FINANCIAL RESULTS Financial Performance For the three months ended For the nine months ended Sep Jun Sep Sep Sep (in millions of Canadian dollars) Net financing and investment income Net insurance premiums and guarantee fees (1) ,132 1,150 Realized (gains) losses (2) 7 2 (8) Administrative expenses Provision for (reversal of) credit losses 1 (22) (55) Claims-related expenses Income before unrealized (gains) losses Unrealized (gains) losses on financial instruments (2) 11 (46) (43) Net income $153 $306 $178 $551 $606 Period average U.S.$ equivalent of CAD (1) Includes loan guarantee fees. (2) Included in Other (Income) Expenses on the Consolidated Statement of Comprehensive Income. We experienced fluctuations in our net income between periods largely caused by changes in provisioning requirements, volatility in the fair value of our financial instruments due to market conditions and claims-related expenses. These changes are further discussed beginning on page 7. QUARTERLY FINANCIAL REPORT 3

5 MANAGEMENT S DISCUSSION AND ANALYSIS Total loan yield has increased since the fourth quarter of 2016 mainly due to increases in U.S. interest rates as the majority of our loans are denominated in U.S. dollars. Interest expense increased during the first nine months of 2017 mainly as a result of the increase in U.S. interest rates. The majority of our funding is floating rate and denominated in U.S. dollars, consistent with our loan assets. The average premium rate for the credit insurance product group increased slightly when compared to the prior quarter. Minor fluctuations occur between periods due to changes in the activity for higher volume accounts with lower premium rates. 4 EXPORT DEVELOPMENT CANADA

6 MANAGEMENT S DISCUSSION AND ANALYSIS Financial Position As at Sep Jun Dec Sep (in millions of Canadian dollars) Total assets 59,487 60,831 63,124 62,166 Total liabilities 49,927 51,472 53,361 53,057 Equity 9,560 9,359 9,763 9,109 Gross loans receivable 51,606 53,811 55,375 55,864 Total allowances 2,124 2,156 2,145 2,427 Period-end U.S.$ equivalent of CAD Gross loans receivable has decreased in the third quarter primarily due to foreign exchange translation. The decrease in non-investment grade exposures in the third quarter of 2017 is primarily due to upward credit migration of certain obligors in the mining and information and communication technologies sectors. Total loan allowance as a percentage of total financing related exposure remained consistent when compared to the prior quarter. QUARTERLY FINANCIAL REPORT 5

7 MANAGEMENT S DISCUSSION AND ANALYSIS Impact of Foreign Exchange Translation on Financial Results Our foreign currency-denominated results are impacted by exchange rate fluctuations. In the third quarter of 2017, the Canadian dollar average strengthened against the U.S. dollar, which had an unfavourable impact on our financial results, as the components of net income as well as our business facilitated are translated at the average exchange rates. Had the average exchange rate remained stable in the third quarter, both our net income and business facilitated would have been higher for the period. In addition, the Canadian dollar strengthened against the U.S. dollar at the end of the third quarter relative to the prior quarter, resulting in a decrease to our assets and liabilities, which are translated at the rate prevailing on the statement of financial position date. The following table reflects the estimated impact on our financial results for September 30, 2017 had the Canadian dollar remained stable relative to the U.S. dollar: Average exchange rate Average exchange rate for the three months ended for the nine months ended (in millions of Canadian dollars) Jun 2017 Sep 2016 Sep 2016 Financial Results Increase in net income for September Increase in business facilitated for September , Closing exchange rate at (in millions of Canadian dollars) Jun 2017 Dec 2016 Sep 2016 Financial Position Increase in loans receivable at September ,557 3,086 2,062 Increase in loans payable at September ,786 3,540 2,366 Risk Management Our business activities expose us to a wide variety of risks including strategic, financial and operational risks. We manage risk with a three lines of defence risk governance structure, which emphasizes and balances strong central oversight and control of risk with clear accountability for and ownership of risk. The structure supports the cascade of EDC s risk appetite throughout the organization and provides forums for risks to be appropriately considered, discussed, debated and factored into business decisions at all levels and across all functions. For a more comprehensive discussion on our risk management, please refer to pages of our 2016 Annual Report. Refer to Note 12 of the accompanying financial statements for details on financial instrument risks. 6 EXPORT DEVELOPMENT CANADA

8 MANAGEMENT S DISCUSSION AND ANALYSIS THIRD QUARTER HIGHLIGHTS Net income was $153 million, a decrease of $153 million when compared to the previous quarter primarily due to fluctuations in the fair value of our financial instruments, an increase in claims-related expenses and higher loan provisioning requirements. We experienced $78 million in claims-related expenses in the third quarter compared to $36 million in the second quarter mainly due to an increase in the net allowance for claims on insurance as a result of heightened risk in the retail sector. We recorded a provision charge of $1 million in the third quarter of 2017 compared to a provision reversal of $22 million in the previous quarter. The provision release from net loan repayments for the quarter was offset by the impact of downward credit migration and updates to the collateral values in our secured aerospace portfolio. In the second quarter of 2017, we had a $22 million provision reversal due to risk transfer transactions in the mining sector that were undertaken in order to mitigate credit risk. Three months ended Sep Jun (in millions of Canadian dollars) Income before provisions, claimsrelated expenses and unrealized (gains) losses Provision for (reversal of) credit losses 1 (22) Claims-related expenses Unrealized (gains) losses on financial instruments * 11 (46) Net income $153 $306 * Included in Other (Income) Expenses on the Consolidated Statement of Comprehensive Income FINANCIAL RESULTS YEAR TO DATE Prior Year Comparison Net income for the first nine months of 2017 was $55 million lower than net income reported for the same period in We experienced variances in other (income) expenses due to fluctuations in the fair value of our financial instruments carried at fair value, as well as increases in administrative expenses and claims-related expenses which were partially offset by a reduction in the provision for credit losses. Claims-related expenses were $149 million for the first nine months of 2017, an increase of $56 million from the prior year period mainly due to a large insolvency claim paid in the retail sector in the third quarter of 2017 and an increase in the net allowance for claims on insurance as a result of heightened risk in the retail sector. Administrative expenses for the first three quarters of 2017 were $45 million higher when compared to the same period in 2016 mainly due to an increase in salaries and benefits and professional services due to foundational investments we are making in our technology and digital platforms as well as compliance related initiatives such as the build-out of our enterprise risk management framework. Provision for credit losses was $62 million for the first nine months of 2017, a decrease of $142 million from the prior year period. In 2017, the impact of the release of provision from loan repayments exceeded the additional provisions required as a result of disbursements whereas in 2016 the opposite occurred. In addition, the impact of the reductions in collateral values within our secured aerospace portfolio and downward credit migration were more significant in QUARTERLY FINANCIAL REPORT 7

9 MANAGEMENT S DISCUSSION AND ANALYSIS Corporate Plan Comparison Financial Performance Nine months ended Year ended Sep 2017 Sep 2017 Dec 2017 (in millions of Canadian dollars) Actual Results Corporate Plan Corporate Plan Net financing and investment income ,258 Net insurance premiums and guarantee fees * Other (income) expenses 54 (23) (31) Administrative expenses Provision for credit losses Claims-related expenses Net income Other comprehensive income Comprehensive income $583 $666 $896 * Includes loan guarantee fees. Net income for the first nine months of 2017 was $38 million lower than the Corporate Plan primarily due to an increase in claims-related expenses and other expenses, partially offset by a reduction in the provision for credit losses. Claims-related expenses were $149 million for the first nine months of 2017, $105 million higher than the Corporate Plan. The increase is mainly due to heightened risk in the retail sector, as previously discussed. Other expenses were $54 million for the first nine months of 2017, $77 million higher than the Corporate Plan. The variance is largely due to the volatility associated with our financial instruments carried at fair value. Due to the volatility and difficulty in estimating fair value gains or losses on financial instruments, a forecast for these items is not included in the Corporate Plan. Provision for credit losses was $62 million for the first nine months of 2017, $120 million lower when compared to the Corporate Plan. The variance is mainly due to higher loan repayments and lower downward credit migration than contemplated in the Plan. Other comprehensive income for the first nine months of 2017 was $45 million lower than the Corporate Plan due to the re-measurement of pension assets and liabilities. The discount rate used to value our pension obligation as at September 30, 2017 was constant with the rate as at December 31, 2016, while the Corporate Plan had projected it would increase. This was tempered by a higher return on assets than projected in the Plan. 8 EXPORT DEVELOPMENT CANADA

10 MANAGEMENT S DISCUSSION AND ANALYSIS Financial Position As at Sep 2017 Sep 2017 Dec 2017 (in millions of Canadian dollars) Actual Results Corporate Plan Corporate Plan Cash and marketable securities 7,274 6,403 6,036 Derivative instruments Loans receivable 51,564 56,467 58,705 Allowance for losses on loans (1,489) (1,825) (1,826) Investments at fair value through profit or loss 1, Other assets Total Assets $59,487 $63,053 $64,949 Loans payable 46,932 49,886 51,669 Derivative instruments 1,527 2,400 2,400 Allowance for losses on loan commitments Premium and claims liabilities Other liabilities Equity 9,560 9,427 9,657 Total Liabilities and Equity $59,487 $63,053 $64,949 Loans receivable totalled $51.6 billion at September 30, 2017, $4.9 billion less than Corporate Plan, primarily as a result of foreign exchange translation and higher than anticipated net repayments in the first nine months of Loans payable totalled $46.9 billion at September 30, 2017, $3.0 billion less than Corporate Plan, primarily due to foreign exchange translation and the decrease in our loans receivable as our borrowing requirements are largely driven by our loans portfolio. QUARTERLY FINANCIAL REPORT 9

11 MANAGEMENT S DISCUSSION AND ANALYSIS NON-IFRS PERFORMANCE MEASURES Claims Ratio Credit Insurance Product Group The claims ratio expresses net claims incurred as a percentage of net written premium. Net claims incurred include claims paid net of recoveries, estimated recoveries and changes in actuarial liabilities. This ratio only includes credit insurance activities. Reinsurance ceded reflects various partnerships we have with reinsurers in offering and managing insurance capacity. Net claims incurred include claims paid net of recoveries and estimated recoveries of $87 million (2016 $41 million) and an increase in actuarial liabilities of $62 million (2016 $25 million). The increase in the claims ratio is mainly due to a large insolvency claim paid in the third quarter of 2017 and heightened risk in the retail sector as previously discussed. Nine months ended Sep Sep (in millions of Canadian dollars) Premiums earned Reinsurance ceded (4) (4) Net written premium $76 $73 Net claims incurred $149 $66 Claims ratio % 196.1% 90.4% 10 EXPORT DEVELOPMENT CANADA

12 MANAGEMENT S DISCUSSION AND ANALYSIS STATEMENT OF MANAGEMENT RESPONSIBILITY Management is responsible for the preparation and fair presentation of these condensed consolidated quarterly financial statements in accordance with the Treasury Board of Canada Standard on Quarterly Financial Reports for Crown Corporations and for such internal controls as management determines is necessary to enable the preparation of condensed consolidated quarterly financial statements that are free from material misstatement. Management is also responsible for ensuring all other information in this quarterly financial report is consistent, where appropriate, with the condensed consolidated quarterly financial statements. These condensed consolidated quarterly financial statements have not been audited or reviewed by an external auditor. Based on our knowledge, these unaudited condensed consolidated quarterly financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the corporation, as at September 30, 2017 and for the periods presented in the condensed consolidated quarterly financial statements. Benoit Daignault, President and CEO Ken Kember, Senior Vice-President & Chief Financial Officer Ottawa, Canada November 16, 2017 QUARTERLY FINANCIAL REPORT 11

13 Export Development Canada Condensed Consolidated Financial Statements CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at (in millions of Canadian dollars) Sep Jun Dec Sep Notes Assets Cash Marketable securities 7,163 6,543 7,059 6,028 Derivative instruments Assets held-for-sale Loans receivable 2,3 51,564 53,715 55,250 55,723 Allowance for losses on loans 4 (1,489) (1,557) (1,552) (1,790) Investments at fair value through profit or loss 1,079 1,078 1, Equipment available for lease Recoverable insurance claims Reinsurers' share of premium and claims liabilities Other assets Retirement benefit asset Property, plant and equipment Intangible assets Building under finance lease Total Assets $59,487 $60,831 $63,124 $62,166 Liabilities and Equity Accounts payable and other credits Loans payable 46,932 47,918 49,101 49,041 Derivative instruments 6 1,527 2,107 2,819 2,474 Obligation under finance lease Retirement benefit obligations Allowance for losses on loan commitments Premium and claims liabilities Loan guarantees ,927 51,472 53,361 53,057 Financing commitments (Note 2) and contingent liabilities (Note 8) Equity Share capital 9 1,333 1,333 1,333 1,333 Retained earnings 8,227 8,026 8,430 7,776 9,560 9,359 9,763 9,109 Total Liabilities and Equity $59,487 $60,831 $63,124 $62,166 The accompanying notes are an integral part of these consolidated financial statements. These financial statements were approved for issuance by the Board of Directors on November 16, Herbert M. Clarke Director Benoit Daignault Director 12 EXPORT DEVELOPMENT CANADA

14 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions of Canadian dollars) For the three months ended For the nine months ended Sep Jun Sep Sep Sep Notes Financing and investment revenue: Loan ,429 1,253 Finance lease Marketable securities Investments Total financing and investment revenue ,501 1,313 Interest expense Leasing and financing related expenses Net Financing and Investment Income Loan Guarantee Fees Insurance premiums and guarantee fees Reinsurance assumed Reinsurance ceded (9) (8) (10) (28) (26) Net Insurance Premiums and Guarantee Fees Other (Income) Expenses (44) (24) Administrative Expenses Income before Provision and Claims-Related Expenses Provision for (Reversal of) Credit Losses 15 1 (22) (55) Claims-Related Expenses Net Income Other comprehensive income (loss): Pension plan re-measurement 48 (38) (59) 32 (162) Comprehensive Income $201 $268 $119 $583 $444 The accompanying notes are an integral part of these consolidated financial statements. QUARTERLY FINANCIAL REPORT 13

15 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in millions of Canadian dollars) For the three months ended For the nine months ended Sep Jun Sep Sep Sep Notes Share Capital 9 1,333 1,333 1,333 1,333 1,333 Retained Earnings Balance beginning of period 8,026 7,758 7,657 8,430 7,832 Net income Other comprehensive income (loss) Pension plan re-measurement 48 (38) (59) 32 (162) Dividends (786) (500) Balance end of period 8,227 8,026 7,776 8,227 7,776 Total Equity at End of Period $9,560 $9,359 $9,109 $9,560 $9,109 The accompanying notes are an integral part of these consolidated financial statements. 14 EXPORT DEVELOPMENT CANADA

16 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in millions of Canadian dollars) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the three months ended For the nine months ended Sep Jun Sep Sep Sep Cash Flows from (used in) Operating Activities Net income Adjustments to determine net cash from (used in) operating activities Provision for (reversal of) credit losses 1 (22) (55) Actuarial change in the net allowance for claims on insurance Depreciation and amortization Realized gains (3) (6) (3) (16) (7) Changes in operating assets and liabilities Change in accrued interest and fees receivable (65) (3) (21) (68) (102) Change in fair value of marketable securities 6 (8) 29 4 (60) Change in fair value of loans payable (2) (13) Change in derivative instruments receivable (168) (60) (26) (417) (418) Other (37) 116 (47) 36 (5) Loan disbursements (5,702) (7,931) (3,859) (18,719) (16,610) Loan repayments and principal recoveries from loan asset sales 6,180 7,153 3,562 19,336 11,420 Net cash from (used in) operating activities 406 (445) (176) 896 (4,674) Cash Flows from (used in) Investing Activities Disbursements for investments (59) (73) (66) (203) (160) Receipts from investments Finance lease repayments Purchases of marketable securities (1,793) (2,454) (1,549) (4,836) (4,996) Sales/maturities of marketable securities 1,635 2,434 2,010 4,718 4,956 Net cash from (used in) investing activities (168) (67) 405 (224) (133) Cash Flows from (used in) Financing Activities Issue of long-term loans payable 1,171 3,983 3,870 9,380 11,625 Repayment of long-term loans payable (1,884) (2,967) (738) (7,537) (5,099) Issue of short-term loans payable 8,470 5,843 6,685 20,323 27,047 Repayment of short-term loans payable (7,078) (6,578) (10,050) (21,556) (29,079) Disbursements from sale/maturity of derivative instruments (240) (109) 9 (349) (379) Receipts from sale/maturity of derivative instruments Dividend paid (786) (500) Net cash from (used in) financing activities (224) (433) 3,615 Effect of exchange rate changes on cash and cash equivalents (62) (11) 4 (73) (69) Net increase (decrease) in cash and cash equivalents 707 (351) (1,261) Cash and cash equivalents Beginning of period 1,350 1, ,891 2,066 End of period $2,057 $1,350 $805 $2,057 $805 Cash and cash equivalents are comprised of Cash Cash equivalents included within marketable securities 1,946 1, , $2,057 $1,350 $805 $2,057 $805 Operating Cash Flows from Interest Cash paid for interest $166 $157 $96 $452 $259 Cash received for interest $396 $490 $414 $1,318 $1,186 The accompanying notes are an integral part of these consolidated financial statements. QUARTERLY FINANCIAL REPORT 15

17 Notes to the Condensed Consolidated Financial Statements 1. Significant Accounting Policies Basis of Presentation Our condensed consolidated financial statements comply with the Standard on Quarterly Financial Reports for Crown Corporations issued by the Treasury Board of Canada. These condensed interim consolidated financial statements follow the same accounting policies and methods of computation as our audited consolidated financial statements for the year ended December 31, They should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 and the accompanying notes as set out on pages of our 2016 Annual Report. Application of New and Revised International Financial Reporting Standards (a) New standards, amendments and interpretations adopted in the quarter There were no new standards, interpretations, amendments or improvements issued by the IASB requiring mandatory adoption in the third quarter of (b) New standards, amendments and interpretations issued but not yet in effect The following standards or amendments issued by the IASB in 2017 have been assessed as having a possible effect on EDC in the future. IFRS 17 Insurance Contracts In May 2017, the IASB issued IFRS 17 which establishes recognition, measurement, presentation, and disclosure requirements of insurance contracts. The standard ensures entities provide relevant information that faithfully represents those contracts. The standard is expected to have a significant impact on our financial statements and is effective for reporting periods beginning on or after January 1, Disclosure Initiative The IASB is currently working on a disclosure initiative focusing on materiality. Revisions to standards as a result of this ongoing project could potentially have an impact on EDC s financial statements in future years. Use of Estimates and Key Judgments The preparation of financial statements requires the use of estimates and key judgments. Judgment is required in the selection of accounting policies, and their application requires the use of estimates and assumptions to arrive at the reported carrying values of our assets and liabilities. Areas where management has made use of significant estimates and exercised judgment include the allowance for losses on loans, loan commitments and loan guarantees, assets held-for-sale, premium and claims liabilities, recoverable insurance claims, retirement benefit obligations and financial instruments measured at fair value. Refer to page 93 of our 2016 Annual Report for details. 16 EXPORT DEVELOPMENT CANADA

18 2. Loans Receivable Sep Jun Dec Sep (in millions of Canadian dollars) Performing: Past due Current year and beyond 50,572 52,848 54,187 54,586 Performing gross loans receivable 50,695 52,897 54,338 54,623 Individually impaired loans (Note 3) ,037 1,241 Gross loans receivable 51,606 53,811 55,375 55,864 Accrued interest and fees receivable Deferred loan revenue and other credits (296) (312) (361) (371) Total loans receivable $51,564 $53,715 $55,250 $55,723 The breakdown of our gross loans receivable by credit grade is as follows: Sep Jun Dec Sep (in millions of Canadian dollars) % of % of % of % of $ total $ total $ total $ total Investment grade 25, , , , Non-investment grade 25, , , , Individually impaired loans (Note 3) , ,241 2 Total gross loans receivable $51, $53, $55, $55, The following reflects the movement in gross loans receivable during the period: Sep Sep (in millions of Canadian dollars) Balance at January 1 55,375 53,326 Disbursements 18,719 16,610 Principal repayments (18,837) (11,245) Principal recoveries from loan asset sales (499) (175) Loans written off (41) (82) Transferred to held-for-sale (5) - Capitalized interest 3 28 Foreign exchange translation (3,109) (2,598) Balance at September 30 $51,606 $55,864 The following table shows our outstanding financing commitments related to loans receivable by type: Sep Jun Dec Sep (in millions of Canadian dollars) Signed loan commitments 19,839 18,417 19,147 16,457 Letters of offer 2,620 3,899 2,523 5,349 Unallocated confirmed lines of credit Total financing commitments $22,559 $22,456 $21,851 $21,919 QUARTERLY FINANCIAL REPORT 17

19 3. Individually Impaired Loans Sep Jun Dec Sep (in millions of Canadian dollars) Gross loans receivable Sovereign Commercial ,029 1, ,037 1,241 Less: Deferred loan revenue and other credits Individual allowance Carrying amount of individually impaired loans $394 $375 $501 $546 The following reflects the movement in individually impaired gross loans receivable during the period: Sep Sep (in millions of Canadian dollars) Balance at January 1 1, Loans classified as impaired Disbursements on loan guarantees called 7 4 Capitalized interest - 15 Loans reinstated to performing * (100) (60) Loans written off (17) (78) Principal repayments (15) (98) Transfer to assets held-for-sale (5) - Foreign exchange translation (65) (47) Balance at September 30 $911 $1,241 * Includes loans made performing following the restructuring of credit agreements. 4. Allowance for Losses on Loans, Loan Commitments and Loan Guarantees The composition of the allowance for losses on loans, loan commitments and loan guarantees is as follows: Sep Jun Dec Sep (in millions of Canadian dollars) Base allowance Investment grade exposure Non-investment grade exposure 1,044 1,103 1,089 1,110 Total base allowance 1,132 1,178 1,169 1,242 Counterparty concentration overlay Investment grade exposure Non-investment grade exposure Total counterparty concentration overlay Total collective allowance * 1,134 1,184 1,196 1,275 Allowance for individually impaired loans, loan commitments and loan guarantees Total allowance for losses on loans, loan commitments and loan guarantees $1,680 $1,734 $1,735 $1,961 * Includes allowance on other receivables of $4 million (June 2017 $5 million, December 2016 $5 million and September 2016 $6 million). 18 EXPORT DEVELOPMENT CANADA

20 The allowance for losses on loans, loan commitments and loan guarantees is as follows: Sep Jun Dec Sep (in millions of Canadian dollars) Allowance for losses on loans 1,489 1,557 1,552 1,790 Allowance for losses on loan commitments Allowance for losses on loan guarantees * Total $1,680 $1,734 $1,735 $1,961 * Included in the liability for loan guarantees. For the nine months ended September 2017, changes to the allowance for losses on loans, loan commitments and loan guarantees were as follows: Sep Sep (in millions of Canadian dollars) Collective Individual Total Collective Individual Total Balance at beginning of year 1, ,735 1, ,931 Provision for (reversal of) credit losses on loans, loan commitments and loan guarantees (21) Write-offs * - (16) (16) - (74) (74) Foreign exchange translation (68) (33) (101) (70) (30) (100) Total $1,134 $546 $1,680 $1,275 $686 $1,961 * Write-offs are net of recoveries. 5. Recoverable Insurance Claims Sep Sep (in millions of Canadian dollars) Balance at January Claims paid Claims recovered (32) (10) Claims recovered from reinsurers (2) - Change in recoverable portion of cumulative claims paid (88) (60) Foreign exchange translation (3) (2) Balance at September 30 $42 $56 QUARTERLY FINANCIAL REPORT 19

21 6. Derivative Instruments We use a variety of derivative instruments to manage costs, returns and levels of financial risk associated with our funding, investment and risk management activities. Refer to page 110 of the 2016 Annual Report for a description of derivative instruments that we currently use and for information on how we manage credit, interest and foreign exchange risks arising from the use of derivatives. The following table provides the fair values for each category of derivative financial instrument: Sep Dec Sep (in millions of Canadian dollars) Positive Negative Total Positive Negative Total Positive Negative Total Cross currency interest rate swaps 159 1,273 (1,114) 125 2,599 (2,474) 151 2,308 (2,157) Interest rate swaps (109) (77) Foreign exchange swaps (3) Foreign exchange forwards (3) Total derivative instruments 301 1,527 (1,226) 324 2,819 (2,495) 442 2,474 (2,032) Impact of netting agreements (252) (252) - (120) (120) - (209) (209) - Total $49 $1,275 $(1,226) $204 $2,699 $(2,495) $233 $2,265 $(2,032) Applicable collateral (22) (22) (23) Net amount $(1,248) $(2,517) $(2,055) 7. Premium and Claims Liabilities The premium and claims liabilities by product group were as follows: Sep Jun Dec Sep (in millions of Canadian dollars) CI * CIB PRI Total CI * CIB PRI Total CI * CIB PRI Total CI * CIB PRI Total Insurance Reinsurance (54) 1 (108) (161) (14) 2 (122) (134) (13) (4) (99) (116) (10) (3) (74) (87) Net liability $308 $36 $197 $541 $291 $43 $204 $538 $235 $30 $275 $540 $226 $24 $296 $546 * Includes financial institutions insurance. The premium and claims liabilities are comprised of the following components: Sep Jun Dec Sep (in millions of Canadian dollars) Deferred insurance premiums Allowance for claims on insurance Total premium and claims liabilities Reinsurers share of allowance for claims on insurance (129) (98) (90) (62) Prepaid reinsurance (32) (36) (26) (25) Reinsurers share of premium and claims liabilities (161) (134) (116) (87) Net premium and claims liabilities $541 $538 $540 $546 In the second quarter of 2017, we updated the methodology for the expense assumption used in the actuarial calculation of our allowance for claims on insurance for political risk and contract insurance and bonding policies. The difference between using the updated methodology and the prior methodology as at September 30, 2017 is a $33 million release of allowance and represents a change in accounting estimate. This change in estimate also impacted claims-related expenses reported in Note 16. The impact on future periods has not been determined as it is impracticable to estimate. 20 EXPORT DEVELOPMENT CANADA

22 8. Contingent Liabilities As explained on page 113 of the 2016 Annual Report, we are subject to a limit imposed by the Export Development Act on our contingent liability arrangements. The limit is currently $45.0 billion. Our position against this limit is provided below: Sep Jun Dec Sep (in millions of Canadian dollars) Insurance in force: Credit insurance 9,120 9,815 9,480 8,907 Financial institutions insurance 2,892 3,723 3,900 3,791 Contract insurance and bonding 7,913 8,115 8,171 7,902 Political risk insurance 886 1,244 1,392 1,302 Reinsurance ceded * (250) (250) (250) (250) Insurance in force 20,561 22,647 22,693 21,652 Loan guarantees 2,536 2,610 2,514 2,413 Total $23,097 $25,257 $25,207 $24,065 * Represents treaty reinsurance agreements covering most bonding obligors and the short-term export credit insurance product group, including most foreign bank exposures. 9. Equity EDC s authorized share capital is $3.0 billion consisting of 30 million shares with a par value of $100 each. The number of shares issued and fully paid is 13.3 million ( million). In the first quarter of 2017, a dividend of $786 million was paid to the Government of Canada (2016 $500 million declared in the first quarter and paid in the second quarter). QUARTERLY FINANCIAL REPORT 21

23 10. Fair Value of Financial Instruments Fair value represents our estimation of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For a full description of our controls, policies and valuation techniques surrounding fair value of financial instruments refer to Note 27 on page 124 of the 2016 Annual Report. As with any estimate, uncertainty is inherent due to the unpredictability of future events. In the case of estimating the fair value of our financial instruments, this uncertainty is magnified due to the large number of assumptions used and the wide range of acceptable valuation techniques. Estimates of fair values are based on market conditions at a certain point in time, and may not be reflective of future market conditions. Therefore, the estimates of the fair value of financial instruments outlined as follows do not necessarily reflect the actual values that may occur should the instruments be exchanged in the market. Sep Jun (in millions of Canadian dollars) Carrying Fair Carrying Fair value value value value Assets Performing fixed rate loans * 12,085 12,266 12,501 12,679 Performing floating rate loans * 37,599 38,735 39,287 39,646 Total performing loans receivable 49,684 51,001 51,788 52,325 Impaired loans * Loans receivable and accrued interest and fees 50,078 51,395 52,163 52,700 Marketable securities 7,163 7,163 6,543 6,543 Derivative instruments Investments at fair value through profit or loss 1,079 1,079 1,078 1,078 Recoverable insurance claims Other assets Liabilities Accounts payable and other credits Loans payable 46,932 46,886 47,918 47,869 Derivative instruments 1,527 1,527 2,107 2,107 Loan guarantees * Balances are net of loan allowance. Unobservable Inputs Investments at Fair Value Through Profit or Loss In the process of assessing the fair value for certain investment instruments, estimates determined in a manner consistent with industry practice are employed in the models which cannot be directly observed in the market. EDC s unobservable estimates are outlined in the following table: (in millions of Canadian dollars) Fair value at Valuation technique Unobservable input Range (average) Sep 2017 (1) Multiples Multiple (Sales or EBITDA (2) ) (6.2) 69 Liquidity discount 25% 25% (25%) 5 Discount rate 0% 40% (30%) 15 Discounted cash flows Discount rate 0% 1% (0%) 2 (1) The valuation of an investment may use multiple unobservable inputs and therefore its fair value can be included multiple times in the fair value amounts. (2) Earnings before interest, taxes, depreciation and amortization. Fair Value Hierarchy 22 EXPORT DEVELOPMENT CANADA

24 The following table presents the fair value hierarchy of our financial instruments based on whether the inputs to those techniques are observable or unobservable. Level 1 - fair values are based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - fair values are determined using inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 - fair values are determined using inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). (in millions of Canadian dollars) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Performing fixed rate loans - 11, ,266-12, ,679 Performing floating rate loans - 38, ,735-39, ,646 Total performing loans receivable - 50, ,001-51, ,325 Impaired loans Loans receivable and accrued interest and fees - 50, ,395-51, ,700 Marketable securities 3,646 3,517-7,163 3,685 2,858-6,543 Derivative instruments Investments at fair value through profit or loss 1-1,078 1, ,077 1,078 Recoverable insurance claims Other assets Liabilities Accounts payable and other credits Loans payable - 46, ,886-47, ,869 Derivative instruments - 1,527-1,527-2,107-2,107 Loan guarantees The following table summarizes the reconciliation of Level 3 fair values between the beginning of the year and the end of the third quarter of 2017 for the financial instruments carried at fair value: Sep (in millions of Canadian dollars) 2017 Investments at Loans payable Recoverable fair value designated at fair insurance through profit value through Derivative claims or loss profit or loss instruments Total Balance at beginning of year 63 1,005 (96) Decrease in recoverable insurance claims (18) (18) Change in accrued interest - - (3) 3 - Unrealized gains (losses) included in other (income) expenses (1) 8 Purchases of assets/issuances of liabilities Return of capital - (103) - - (103) Foreign exchange translation (3) (48) 7 (2) (46) Balance at end of period $42 $1,078 $(91) $27 $1,056 Total gains (losses) for the first nine months of 2017 included in comprehensive income for instruments held at the end of the quarter $(18) $(16) $(1) $1 $(34) Changes in valuation methods may result in transfers into or out of Levels 1, 2 and 3. In the first nine months of 2017, there were no transfers between levels. Sep Jun QUARTERLY FINANCIAL REPORT 23

25 The fair value of Level 3 financial instruments is in whole or in part based on unobservable inputs. In preparing financial statements, appropriate levels for these unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management judgment. For the quarter ended September 30, 2017, a sensitivity analysis was performed using possible alternative assumptions to recalculate the fair value of our Level 3 financial instruments. In order to perform our sensitivity analysis on our Level 3 loans payable and derivative assets, we adjusted the yield curve and volatility assumptions used to value them. The results of our analysis on our Level 3 loans payable ranged from an unfavourable change of $0.3 million to a favourable change of $1.4 million. On our Level 3 derivative assets the impact ranged from an unfavourable change of $0.4 million to a favourable change of $0.2 million. In order to perform our sensitivity analysis for our Level 3 investments, we adjusted the unobservable inputs. The unobservable inputs used to value our Level 3 investments include one or more of the following: multiple of sales, liquidity discount, multiple of EBITDA and discount rate. When multiple unobservable inputs are shocked, no netting is considered, resulting in the highest favourable or unfavourable change. The results of our analysis on our Level 3 investments ranged from an unfavourable change of $47 million to a favourable change of $47 million. 11. Financial Instrument Risks The principal risks that we are exposed to as a result of holding financial instruments are credit, market and liquidity risk. For a full description of our objectives, policies and processes for managing financial instrument risk refer to management s discussion and analysis on pages 71 to 75 and notes related to our derivative instruments and debt instruments on pages 110 to 111 of the 2016 Annual Report. Credit Risk Credit risk is the risk of loss incurred if a counterparty fails to meet its financial commitments. We are exposed to credit risk on financial instruments under both our loans program and our treasury activities. Concentration of Credit Risk The following table provides a breakdown, by the country in which the risk resides, of the maximum exposure to credit risk of financial instruments. The exposure includes gross loans receivable, loan guarantees, investments at fair value through profit or loss, marketable securities, derivative assets and cash. The concentration of credit risk exposure provided below also includes the impact of unfunded loan participations and loan default insurance, which we use to mitigate credit risk within the loan portfolio. Sep Jun Dec Sep (in millions of Canadian dollars) Exposure Exposure Exposure Exposure Country $ % $ % $ % $ % United States 15, , , , Canada 8, , , , United Kingdom 5, , , ,630 6 India 3, , , ,251 3 Brazil 3, , , ,244 5 Australia 2, , , ,142 5 Mexico 2, , , ,424 4 Saudi Arabia 2, , , ,265 3 Chile 1, , , ,265 3 China 1, , , ,618 2 Other 16, , , , Total $62, $64, $66, $65, EXPORT DEVELOPMENT CANADA

26 The concentration of credit risk by industry sector for our financial instruments is as follows: Sep Jun Dec Sep (in millions of Canadian dollars) Exposure Exposure Exposure Exposure Industry $ % $ % $ % $ % Commercial: Aerospace 12, , , , Financial institutions 8, , , , Oil and gas 8, , , , Mining 6, , , , Surface transportation 5, , , ,998 9 Infrastructure and environment 5, , , ,690 7 Information and communication technologies 5, , , ,167 9 Other 4, , , ,449 5 Total commercial 56, , , , Sovereign 6, , , , Total $62, $64, $66, $65, Loan Revenue Three months ended Nine months ended Sep Jun Sep Sep Sep (in millions of Canadian dollars) Loan interest Floating rate Fixed rate Loan fee revenue Impaired revenue Total loan revenue $472 $482 $439 $1,429 $1, Interest Expense Three months ended Nine months ended Sep Jun Sep Sep Sep (in millions of Canadian dollars) Loans payable and related derivatives Short-term payables Long-term payables floating Long-term payables fixed * Total interest expense on loans payable and related derivatives $188 $175 $119 $515 $311 * Includes interest expense for debt classified at amortized cost of $24 million for the three months ended September 2017 (June 2017 $27 million and September 2016 $22 million), and a cost of $78 million for the nine months ended September 2017 (September 2016 $63 million). QUARTERLY FINANCIAL REPORT 25