2019 Financial Report. First Quarter

Transcription

1 2019 Financial Report First Quarter June 30, 2018

2 Executive Summary The Canadian economy is running at close to full capacity and grew at an annualized rate of 1.3% between January and March 2018, driven by growth in business investment. The national unemployment rate remains relatively low at 6.0%, very close to the lowest level ever recorded. While still showing expansion, average weekly wages rose at a slower pace in April, compared to the prior months. The uncertain economic outlook in Canada limited the Bank of Canada to one rate hike in the first half of 2018, with the policy rate at 1.25% as at June 30, Global economic activity remains strong, supporting Canada s export sector. The U.S. economy is expected to grow at an annualized rate of 2.9% in In light of both this and inflationary concerns, the Federal Reserve has raised its policy rate to 2%, creating a larger interest rate differential with Canada. This has led to a depreciation of the loonie versus the U.S. dollar. Rising protectionist actions in the United States present risks for the Canadian economy, given that the U.S. is Canada s largest trading partner, accounting for roughly 70% of our exports of goods and services. The uncertainty related to the renegotiation of NAFTA may also have an impact on business investment in Canada, though the Bank of Canada s recent survey shows investment intentions remain buoyant. The high consumer debt ratio (2) remains a risk for the Canadian economy, especially in the context of rising interest rates. Business credit conditions eased slightly in the last quarter according to the Bank of Canada s Senior Loan Officer Survey. (3) However, lending conditions for small business borrowers have remained unchanged since the end of Commodity prices rose in the last quarter. In particular, the price of West Texas Intermediate (WTI) oil averaged US$68 per barrel during the quarter, up 7% compared to last quarter. Western Canadian Select saw an upswing, rising 41% from last quarter. The slowdown in production, a return to normal capacity output from the Keystone pipeline and the greater certainty over the construction of the Trans Mountain pipeline, now owned by the Government of Canada, have all helped to drive the price higher. Canada s economy is performing well and business confidence remains positive, according to the Bank of Canada s most recent Business Outlook Survey. (1) However, there are two significant risks to the economy: tariffs and household debt. (1) Bank of Canada, Business Outlook Survey, Summer 2018 Survey, June 29, (2) Consumer debt to disposable income is very high at 170% as of March 31, (3) Bank of Canada, Senior Loan Officer Survey Second Quarter of 2018, June 29, BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 2

3 Executive Summary BDC s volume of activity slowed slightly in the first quarter of fiscal 2019, compared to last year. For the three-month period ended June 30, 2018, clients of Financing (1) accepted loans for a total of $2.1 billion, compared to $2.2 billion for the same period last year. Financing s loans portfolio (2) stood at $25.1 billion as at June 30, 2018, a 2.7% increase since March 31, In June, BDC announced that it had partnered with Export Development Canada (EDC) to provide $50 million funding over two years to Canadian tech businesses involved in exporting. Through the partnership, tech companies engaged in or planning to engage in international business can access loans of up to $1 million. Companies looking to receive funding must derive at least 50% of their sales from exports or have an export strategy that the loan will support. Advisory Services achieved strong results during the three-month period ended June 30, 2018, with net contracts signed amounting to $7.7 million, for a 15% increase compared to the same period last year. Revenues also recorded solid growth, totalling $6.3 million in the first quarter of fiscal 2019, an increase of 39%, compared to the same period of fiscal During the quarter ended June 30, 2018, clients of Growth & Transition Capital (G&TC) accepted $86.5 million in financing, compared to $114.2 million for the same period last year. Following a high level of activity in the last quarter of fiscal 2018, the volume of acceptances tapered off in the first quarter of fiscal 2019, as expected. Venture Capital authorized investments totalling $39.4 million in the first quarter of fiscal 2019, compared to $55.1 million for the same period last year. The decrease in authorizations was mainly due to lower indirect investments. During the first quarter of fiscal 2019, BDC continued to invest in cleantech companies and disbursed an additional $17 million, bringing the total invested amount to $27 million as at June 30, In June, the Governement of Canada announced the first round of investments under the Venture Capital Catalyst Initiative (VCCI), to be managed by BDC. As announced in Federal Budget 2017, $400 million will be made available to increase the availability of late-stage venture capital in Canada through VCCI. This investment will be used to leverage private capital up to a total pool of $1.5 billion. Under this first stream of VCCI, investments will be made in five new large funds-of-funds that will, in turn, invest in venture capital funds on a national scale. Starting in fiscal 2019, Venture Capital Action Plan (VCAP) and the new Venture Capital Catalyst Initiative (VCCI), two government-sponsored programs managed by BDC, are now presented as one business segment under the Venture Capital Incentive Programs (VCIP). In June 2018, BDC paid a dividend of $69.7 million to its shareholder, the Governement of Canada. In the first quarter of fiscal 2019, BDC posted a strong consolidated net income of $221.0 million, compared to $145.7 million for the same period last year. The favourable variance compared to fiscal 2018 was mostly attributable to Financing s portfolio growth, Venture Capital s results, and to a higher net change in unrealized fair value appreciation of VCIP investments. Effective the first quarter of 2019, BDC adopted IFRS 9, Financial Instruments and applied the exemption whereby comparative information has not been restated. Refer to the Analysis of Financial Results section of the Management Discussion and Analysis for more details on the financial impact of applying the new impairment model. (1) Unless otherwise indicated, Financing excludes Growth & Transition Capital. (2) Before allowance for credit losses. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 3

4 The Business Development Bank of Canada (BDC) is a Crown corporation wholly owned by the Government of Canada. BDC is the only bank devoted exclusively to Canadian entrepreneurs. It promotes entrepreneurship with a focus on small and medium-sized businesses. With more than 110 business centres from coast to coast, BDC provides businesses with financing, investment and advisory services. When entrepreneurs succeed, they make an irreplaceable contribution to Canada s economy. Supporting them is in our national interest. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 4

5 Table of Contents Management Discussion and Analysis. 6 Context of the Quarterly Financial Report... 6 Risk Management... 6 Analysis of Financial Results... 7 Consolidated Financial Statements...16 From time to time, we make written or oral forward-looking statements. We may make forward-looking statements in this quarterly financial report. These forward-looking statements include, but are not limited to, statements about objectives and strategies for achieving objectives, as well as statements about outlooks, plans, expectations, anticipations, estimates and intentions. By their very nature, forward-looking statements involve numerous factors and assumptions, and they are subject to inherent risks and uncertainties, both general and specific. These uncertainties give rise to the possibility that predictions, forecasts, projections and other elements of forward-looking statements will not be achieved. A number of important factors could cause actual results to differ materially from the expectations expressed. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 5

6 Management Discussion and Analysis Context of the Quarterly Financial Report The Financial Administration Act requires that all departments and parent Crown corporations prepare and make public a quarterly financial report. The Standard on Quarterly Financial Reports for Crown Corporations is issued by the Treasury Board of Canada Secretariat to provide parent Crown corporations with the form and content of the quarterly financial report under the authority of section of the Financial Administration Act. There is no requirement for an audit or review of the financial statements included in the quarterly financial report. Therefore, the condensed quarterly Consolidated Financial Statements included in this report have not been audited or reviewed by an external auditor. Risk Management In order to fulfill its mandate while ensuring sustainability, BDC must take and manage risk. BDC s approach to risk management is based on establishing a risk governance structure, including organizational design, policies, processes and controls, to effectively manage risk in line with its risk appetite. This structure enables the establishment of a comprehensive risk management framework for risk identification, assessment and measurement, risk analytics, reporting, and monitoring. In addition, this framework is designed to ensure that risk is considered in all business activities and that risk management is an integral part of day-to-day decision-making, as well as the annual corporate planning process. The primary means through which the risk management function reports risk is through its quarterly Integrated Risk Management (IRM) report to senior management and the Board of Directors. This report provides a comprehensive quantitative and qualitative assessment of performance against the risk appetite, profiles BDC s major risk categories, identifies significant existing and emerging risks, and provides in-depth portfolio monitoring. No significant changes were made to BDC s IRM practices and no new risks were identified during the quarter ended June 30, BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 6

7 Management Discussion and Analysis Analysis of Financial Results Analysis of financial results is provided to enable a reader to assess BDC s results of operations and financial condition for the three-month period ended June 30, 2018, compared to the corresponding period of the prior fiscal year. This analysis also includes comments about significant variances from BDC s fiscal Corporate Plan, when applicable. BDC currently reports on six business segments: Financing, Growth & Transition Capital, Venture Capital, Advisory Services, Cleantech Practice and Venture Capital Incentive Programs (VCIP). Starting in fiscal 2019, Venture Capital Action Plan (VCAP) and the new Venture Capital Catalyst Initiative (VCCI), two government-sponsored programs managed by BDC, are now presented as one business segment under the Venture Capital Incentive Programs (VCIP). All amounts are in Canadian dollars, unless otherwise specified, and are based on unaudited condensed quarterly Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS). This analysis should be read in conjunction with the unaudited condensed quarterly Consolidated Financial Statements included in this report. Consolidated net income Three months ended June 30 ($ in millions) F2019 F2018 Financing Advisory Services (11.7) (12.7) Growth & Transition Capital Venture Capital Venture Capital Incentive Programs Cleantech Practice (0.6) - Net income Net income attributable to: BDC's shareholder Non-controlling interests 2.0 (0.1) Net income Three months ended June 30 For the quarter ended June 30, 2018, BDC recorded strong consolidated net income of $221.0 million, comprising $219.0 million attributable to BDC s shareholder and net income of $2.0 million attributable to non-controlling interests. This compared to $145.7 million in consolidated net income for the same period last year, of which a net loss of $0.1 million was attributable to non-controlling interests. Compared to last year, the increase was mostly attributable to Financing portfolio growth, to strong Venture Capital results, and to a higher net change in urealized fair value appreciation of VCIP investments. As at June 30, 2018, BDC expects its consolidated net income for fiscal 2019 to meet its Corporate Plan annual net income target of $560 million. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 7

8 Management Discussion and Analysis Consolidated comprehensive income Three months ended June 30 ($ in millions) F2019 F2018 Net income Other comprehensive income (loss) Items that may be reclassified subsequently to net income Net change in unrealized gains (losses) on FVOCI assets 0.3 (1.2) Net change in unrealized gains (losses) on cash flow hedges 2.2 (0.2) Total items that may be reclassified subsequently to net income 2.5 (1.4) Items that will not be reclassified to net income Remeasurements of net defined benefit asset or liability 64.8 (92.5) Other comprehensive income (loss) 67.3 (93.9) Total comprehensive income Total comprehensive income attributable to: BDC's shareholder Non-controlling interests 2.0 (0.1) Total comprehensive income Three months ended June 30 Consolidated total comprehensive income comprises net income and other comprehensive income. Other comprehensive income (OCI) is mostly affected by remeasurements of net defined benefit asset or liability, which are subject to strong volatility as a result of market fluctuations. BDC recorded other comprehensive income of $67.3 million for the first quarter ended June 30, 2018, mainly due to higher discount rates used to value net defined benefit liability and to higher returns on pension plan assets than forecasted. Following the transition to IFRS 9, assets previously classified as available-for-sale are now presented under fair value through other comprehensive income (FVOCI). This change had no impact on the measurement of these financial assets. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 8

9 Management Discussion and Analysis Financing results Three months ended June 30 ($ in millions) F2019 F2018 Net interest income Fee and other income Provision for credit losses (36.7) (43.9) Net gains (losses) on investments - (0.2) Net gains (losses) on other financial instruments Net impact on foreign exchange fluctuations (2.8) (2.2) Income before operating and administrative expenses Operating and administrative expenses Net income from Financing Three months ended June 30 As % of average portfolio F2019 F2018 Net interest income Fee and other income Provision for credit losses (0.6) (0.8) Net gains (losses) on investments - - Net gains (losses) on other financial instruments - - Net impact on foreign exchange fluctuations - - Income before operating and administrative expenses Operating and administrative expenses Net income from Financing Three months ended June 30 Net income from financing was $163.8 million for the first quarter of fiscal 2019, compared to $129.7 million for the same period last year. The increase in profitability was mainly due to higher net interest and fee income, primarily as a result of strong portfolio growth and a lower provision for credit losses due to good performance by the portfolio. As a percentage of average portfolio, net interest and fee income amounted to 4.8% for the three months ended June 30, 2018, higher than the 4.6% recorded in the same period last year. BDC adopted IFRS 9 in the first quarter of fiscal As a result of the new impairment model, BDC recorded a provision for credit losses on performing loans (disbursed and undisbursed loans) of $9.9 million due primarily to portfolio growth. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 9

10 Management Discussion and Analysis Operating and administrative expenses for the quarter ended June 30, 2018, were $99.0 million, higher than the $96.0 million recorded last year. However, operating and administrative expenses as a percentage of average portfolio, remained unchanged compared to last year at 1.6%. Advisory Services results Three months ended June 30 ($ in millions) F2019 F2018 Revenue Delivery expenses (1) Gross operating margin Operating and administrative expenses Net loss from Advisory Services (11.7) (12.7) (1) Delivery expenses are included in operating and administrative expenses in the Consolidated Statement of Income. Three months ended June 30 The offering under Advisory Services is considered an investment in entrepreneurs. As such, a net loss of $11.7 million was recorded for the first quarter of fiscal 2019, lower than the net loss of $12.7 million recorded for the same quarter last year. Advisory Services recorded solid revenue of $6.3 million in the first quarter of fiscal 2019, $1.8 million higher than that recorded in fiscal Gross operating margin, at $2.2 million for the three months ended June 30, 2018, was higher than the $1.2 million recorded for the same period last year, driven mainly by higher revenues from the Growth Driver Program. Operating and administrative expenses of $13.9 million remained steady at the same level as in fiscal BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 10

11 Management Discussion and Analysis Growth & Transition Capital results Three months ended June 30 ($ in millions) F2019 F2018 Net revenue on investments Net change in unrealized appreciation (depreciation) of investments (9.7) (4.0) Net foreign exchange gains (losses) 0.2 (0.1) Income before operating and administrative expenses Operating and administrative expenses Net income from Growth & Transition Capital Net income attributable to: BDC's shareholder Non-controlling interests Net income from Growth & Transition Capital Three months ended June 30 As % of average portfolio F2019 F2018 Net revenue on investments Net change in unrealized appreciation (depreciation) of investments (3.7) (1.8) Net foreign exchange gains (losses) 0.1 (0.1) Income before operating and administrative expenses Operating and administrative expenses Net income from Growth & Transition Capital Net income attributable to: BDC's shareholder Non-controlling interests Net income from Growth & Transition Capital Three months ended June 30 Net income for the three-month period totalled $13.2 million compared to $12.3 million recorded for the same period of fiscal Results for the quarter were favourably affected by higher net revenue on investments, mainly driven by higher net realized gains on investments. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 11

12 Management Discussion and Analysis For the three-month period, Growth & Transition Capital recorded a net change in unrealized depreciation of $9.7 million, higher than the $4.0 million recorded last year. During the first quarter of fiscal 2019, the increase in fair value depreciation was mainly driven by a few large accounts and by the reversal of net fair value appreciation due to realized income. Operating and administrative expenses amounted to $10.7 million for the three-month period ended June 30, 2018, higher than the $9.2 million recorded last year. The increase was mainly due to higher staff levels required to fully support growth. However, as a percentage of average portfolio, operating and administrative expenses remained at the same level as last year, as BDC continued to focus on efficiency. Venture Capital results Three months ended June 30 ($ in millions) F2019 F2018 Net fair value appreciation (depreciation) (4.2) (3.8) Reversal of net fair value depreciation (appreciation) due to realized income and write-offs (5.5) (0.2) Net change in unrealized appreciation (depreciation) of investments (9.7) (4.0) Three months ended June 30 ($ in millions) F2019 F2018 Net revenue (loss) on investments 0.5 (16.4) Net change in unrealized appreciation (depreciation) of investments Net foreign exchange gains (losses) 12.6 (15.0) Income before operating and administrative expenses Operating and administrative expenses Net income (loss) from Venture Capital Net income attributable to: BDC's shareholder Non-controlling interests 0.5 (0.2) Net income (loss) from Venture Capital Three months ended June 30 During the first quarter of fiscal 2019, Venture Capital recorded a solid net income of $36.3 million, compared to net income of $5.3 million for the same period last year. For the three-month period ended June 30, 2018, Venture Capital recorded lower write-offs and higher net realized gains on investments, mainly driving the higher net revenue on investments of $0.5 million compared to the net loss of $16.4 million recorded last year. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 12

13 Management Discussion and Analysis Net change in unrealized appreciation of investments was $25.0 million for the first quarter of fiscal 2019, comparable to the $25.2 million recorded last year. Net foreign exchange gains on investments of $12.6 million in the first quarter of fiscal 2019 were due to foreign exchange fluctuations on the U.S. dollar and were higher than last year given the stronger U.S. dollar. Operating and administrative expenses of $6.0 million for the first quarter of fiscal 2019 were similar to those recorded for the same period of fiscal Venture Capital Incentive Programs results Three months ended June 30 ($ in millions) F2019 F2018 Net fair value appreciation (depreciation) Reversal of fair value depreciation (appreciation) on divested investments and write-offs Net change in unrealized appreciation (depreciation) of investments Three months ended June 30 ($ in millions) F2019 F2018 Net revenue (loss) on investments Net change in unrealized appreciation (depreciation) of investments Net foreign exchange gains (losses) 0.1 (0.2) Income (loss) before operating and administrative expenses Operating and administrative expenses Net income (loss) from Venture Capital Incentive Programs Three months ended June 30 During the first quarter of fiscal 2019, Venture Capital Incentive Programs recorded net income of $20.0 million, compared to net income of $11.0 million for the same period last year. Strong fiscal 2019 results were driven by a net change in unrealized appreciation of Venture Capital Action Plan underlying funds. Operating and administrative expenses of $0.4 million for the three-month period ended June 30, 2018 were slightly higher than those recorded in the same period of fiscal 2018, mainly due to expenses related to the new Venture Capital Catalyst Initiative. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 13

14 Management Discussion and Analysis Cleantech Practice results Three months ended ($ in millions) F2019 F2018 Net interest and fee income Operating and administrative expenses Net loss from Cleantech Practice (0.6) - Three months ended June 30 Net loss from Cleantech Practice was $0.6 million for the first quarter of fiscal 2019, as BDC continued to scale up this new business line. The Cleantech Practice portfolio as at June 30, 2018 stood at $27.4 million, comprising $17.4 million in subordinate financing investments and $10.0 million in equity investments. Consolidated Statement of Financial Position and Consolidated Statement of Cash Flows Effective the first quarter of 2019, BDC adopted IFRS 9, Financial Instruments and applied the exemption whereby comparative information has not been restated. The financial impact of applying the new impairment model resulted in a reversal of $131.7 million of the allowance for credit losses and a corresponding increase in the opening retained earnings. Refer to Note 3 and Note 4 to the financial statements for more information on the transition to IFRS 9. As at June 30, 2018, total BDC assets amounted to $28.8 billion, an increase of $1.0 billion from March 31, 2018, largely due to the $0.7 billion increase in our loans portfolio and the $131.7 million reversal of the allowance for credit losses following the adoption of IFRS 9. At $24.5 billion, the loans portfolio represented BDC s largest asset ($25.1 billion in gross portfolio less a $0.6 billion allowance for credit losses). The gross loans portfolio grew by 2.7% over the quarter ended June 30, 2018, reflecting a more normal level of activity compared to the strong level of activity experienced in fiscal BDC s investment portfolios, which include the subordinate financing and venture capital portfolios, stood at $2.8 billion, compared to $2.7 billion as at March 31, The asset-backed securities portfolio stood at $534.5 million, compared to $472.7 million as at March 31, Derivative assets of $12.1 million and derivative liabilities of $4.2 million reflected the fair value of derivative financial instruments as at June 30, Net derivative fair value decreased $4.1 million since March 31, 2018, as a result of maturities and a decrease in fair value. As at June 30, 2018, BDC recorded a net defined benefit asset of $149.1 million related to the registered pension plan and a net defined benefit liability of $245.4 million for the other plans, for a total net defined benefit liability of $96.3 million. This represented a decrease of $63.6 million, compared to the total net defined benefit liability as at March 31, 2018, primarily as a result of remeasurement gains recorded in the first quarter of fiscal Refer to page 8 of this report for further information on remeasurements of net defined benefit asset or liability. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 14

15 Management Discussion and Analysis BDC holds cash and cash equivalents in accordance with its Treasury Risk Policy. The Bank s liquidities, which ensure funds are available to meet BDC s cash outflows, totalled $672.3 million as at June 30, 2018, compared to $672.9 million as at March 31, For the three-month period ended June 30, 2018, operating activities used $436.9 million, mainly to support the growth of the loans portfolio. Cash flows used by investing activities amounted to $107.9 million, reflecting net disbursements of asset-backed securities, subordinate financing and venture capital investments. Financing activities provided $544.2 million in cash flow, mainly as a result of the issuance of short-term and long-term notes. As at June 30, 2018, BDC funded its portfolios and liquidities with borrowings of $21.2 billion and total equity of $7.1 billion. Borrowings comprised $20.6 billion in short-term notes and $0.6 billion in long-term notes. Capital adequacy BDC s capital management framework is based on its Internal Capital Adequacy Assessment Process (ICAAP). To assess its capital adequacy, BDC monitors its capital status regularly by comparing its available capital to its capital demand. A key measure for assessing the adequacy of BDC s capital status is BDC s internal capital ratio. BDC s internal capital ratio stood at 136.4% as at June 30, 2018, exceeding its target capital ratio of 134%, compared to 134.7% as at March 31, BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 15

16 Consolidated Financial Statements Consolidated Financial Statements (unaudited, in thousands of Canadian dollars) Management s Responsibility for Financial Information Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Note 1 BDC general description Note 2 Basis of preparation Note 3 Significant accounting policies Note 4 Adoption of IFRS Note 5 Significant accounting judgements, estimates and assumptions Note 6 Fair value of financial instruments Note 7 Asset-backed securities Note 8 Loans Note 9 Subordinate financing investments Note 10 Venture capital investments Note 11 Share capital Note 12 Segmented information Note 13 Guarantees Note 14 Related party transactions BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 16

17 Consolidated Financial Statements Management s Responsibility for Financial Information Management is responsible for the preparation and fair presentation of these condensed quarterly Consolidated 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 are necessary to enable the preparation of condensed quarterly Consolidated 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 quarterly Consolidated Financial Statements. Based on our knowledge, these unaudited condensed quarterly Consolidated Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the corporation, as at the date of and for the periods presented in the condensed quarterly Consolidated Financial Statements. Michael Denham President and Chief Executive Officer Stefano Lucarelli, CPA, CA Executive Vice President and Chief Financial Officer Montreal, Canada July 24, 2018 BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 17

18 Consolidated Financial Statements Consolidated Statement of Financial Position (unaudited) June 30, March 31, (in thousands of Canadian dollars) Notes ASSETS Cash and cash equivalents 672, ,870 Asset-backed securities, at FVOCI 7 525, ,216 Loans Loans, at amortized cost 8 25,093,498 24,432,831 Less: allowance for credit losses 8 (593,921) (704,640) Loans at amortized cost, net 24,499,577 23,728,191 Financial assets at fair value through profit or loss Derivative assets 12,067 15,357 Asset-backed securities 7 8,613 7,479 Subordinate financing investments 9 1,058,042 1,052,352 Venture capital investments 10 1,758,437 1,663,627 Total financial assets at fair value through profit or loss 2,837,159 2,738,815 Property and equipment 52,334 51,297 Intangible assets 38,797 38,206 Net defined benefit asset 149,149 95,303 Other assets 25,823 19,268 Total assets 28,801,025 27,809,166 LIABILITIES AND EQUITY Liabilities Accounts payable and accrued liabilities 136, ,453 Short-term notes 20,605,437 20,481,148 Long-term notes 496,510 - Total financial liabilities at amortized cost 21,238,170 20,608,601 Financial liabilities at fair value through profit or loss Derivative liabilities 4,184 3,387 Long-term notes 138, ,684 Total financial liabilities at fair value through profit or loss 142, ,071 Net defined benefit liability 245, ,225 Other liabilities 71,764 45,066 Total liabilities 21,697,582 21,049,963 Equity Share capital 11 2,477,900 2,477,900 Contributed surplus 27,778 27,778 Retained earnings 4,557,651 4,211,785 Accumulated other comprehensive income 1,467 (991) Equity attributable to BDC s shareholder 7,064,796 6,716,472 Non-controlling interests 38,647 42,731 Total equity 7,103,443 6,759,203 Total liabilities and equity 28,801,025 27,809,166 Guarantees (Note 13) Commitments (Notes 7, 8, 9 and 10) The Consolidated Financial Statements for the quarter ended June 30, 2018 were prepared in compliance with IFRS 9 and comparative amounts for the year ended March 31, 2018 were not restated. For additionnal information, refer to Note 4 Adoption of IFRS 9. The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 18

19 Consolidated Financial Statements Consolidated Statement of Income (unaudited) Three months ended June 30 (in thousands of Canadian dollars) Interest income 373, ,440 Interest expense 56,457 20,806 Net interest income 316, ,634 Net realized gains (losses) on investments 6,720 (15,214) Revenue from Advisory Services 6,276 4,478 Fee and other income 12,517 10,408 Net revenue 342, ,306 Provision for credit losses (36,709) (43,915) Net change in unrealized appreciation (depreciation) of investments 39,792 49,636 Net foreign exchange gains (losses) 10,035 (17,533) Net unrealized gains (losses) on other financial instruments Income before operating and administrative expenses 355, ,154 Salaries and benefits 98,761 91,825 Premises and equipment 10,864 10,175 Other expenses 25,242 26,520 Operating and administrative expenses 134, ,520 Net income 221, ,634 Net income attributable to: BDC s shareholder 218, ,640 Non-controlling interests 2,032 (6) Net income 221, ,634 The Consolidated Financial Statements for the quarter ended June 30, 2018 were prepared in compliance with IFRS 9 and comparative amounts for the year ended March 31, 2018 were not restated. For additionnal information, refer to Note 4 Adoption of IFRS 9. The accompanying notes are an integral part of these Consolidated Financial Statements, and Note 12 provides additional information on segmented net income. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 19

20 Consolidated Financial Statements Consolidated Statement of Comprehensive Income (unaudited) Three months ended June 30 (in thousands of Canadian dollars) Net income 221, ,634 Other comprehensive income (loss) Items that may be reclassified subsequently to net income Net change in unrealized gains (losses) on FVOCI assets 263 (1,190) Net unrealized gains (losses) on cash flow hedges 2,473 - Reclassification to net income of losses (gains) on cash flow hedges (278) (249) Net change in unrealized gains (losses) on cash flow hedges 2,195 (249) Total items that may be reclassified subsequently to net income 2,458 (1,439) Items that will not be reclassified to net income Remeasurements of net defined benefit asset or liability 64,838 (92,531) Other comprehensive income (loss) 67,296 (93,970) Total comprehensive income 288,306 51,664 Total comprehensive income attributable to: BDC s shareholder 286,274 51,670 Non-controlling interests 2,032 (6) Total comprehensive income 288,306 51,664 The Consolidated Financial Statements for the quarter ended June 30, 2018 were prepared in compliance with IFRS 9 and comparative amounts for the year ended March 31, 2018 were not restated. For additionnal information, refer to Note 4 Adoption of IFRS 9. The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 20

21 Consolidated Financial Statements Consolidated Statement of Changes in Equity For the three months ended June 30 (unaudited) Accumulated other comprehensive income (loss) Equity attributable Non- Share Contributed Retained FVOCI Cash flow to BDC s controlling Total (in thousands of Canadian dollars) capital surplus earnings assets hedges Total shareholder interests equity Balance as at March 31, ,477,900 27,778 4,211,785 (4,276) 3,285 (991) 6,716,472 42,731 6,759,203 Impact of adopting IFRS 9 on April 1, 2018 (1) 131, , ,750 Opening balance as at April 1, ,477,900 27,778 4,343,535 (4,276) 3,285 (991) 6,848,222 42,731 6,890,953 Total comprehensive income Net income 218, ,978 2, ,010 Other comprehensive income (loss) Net change in unrealized gains (losses) on FVOCI assets Net change in unrealized gains (losses) on cash flow hedges 2,195 2,195 2,195 2,195 Remeasurements of net defined benefit asset or liability 64,838 64,838 64,838 Other comprehensive income (loss) , ,195 2,458 67,296-67,296 Total comprehensive income , ,195 2, ,274 2, ,306 Dividends on common shares (69,700) (69,700) (69,700) Distributions to non-controlling interests (6,116) (6,116) Transactions with owner, recorded directly in equity - - (69,700) (69,700) (6,116) (75,816) Balance as at June 30, ,477,900 27,778 4,557,651 (4,013) 5,480 1,467 7,064,796 38,647 7,103,443 Accumulated other comprehensive income (loss) Equity attributable Non- Share Contributed Retained FVOCI Cash flow to BDC s controlling Total (in thousands of Canadian dollars) capital surplus earnings assets hedges Total shareholder interests equity Balance as at March 31, ,413,400 27,778 3,473,612 (711) 3,421 2,710 5,917,500 21,795 5,939,295 Total comprehensive income Net income 145, ,640 (6) 145,634 Other comprehensive income (loss) Net change in unrealized gains (losses) on FVOCI assets (1,190) (1,190) (1,190) (1,190) Net change in unrealized gains (losses) on cash flow hedges (249) (249) (249) (249) Remeasurements of net defined benefit asset or liability (92,531) (92,531) (92,531) Other comprehensive income (loss) - - (92,531) (1,190) (249) (1,439) (93,970) - (93,970) Total comprehensive income ,109 (1,190) (249) (1,439) 51,670 (6) 51,664 Dividends on common shares Distributions to non-controlling interests (2,752) (2,752) Transactions with owner, recorded directly in equity (2,752) (2,752) Balance as at June 30, ,413,400 27,778 3,526,721 (1,901) 3,172 1,271 5,969,170 19,037 5,988,207 BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 21

22 Consolidated Financial Statements Consolidated Statement of Cash Flows (unaudited) Three months ended June 30 (in thousands of Canadian dollars) Operating activities Net income 221, ,634 Adjustments to determine net cash flows Interest income (373,247) (306,440) Interest expense 56,457 20,806 Net realized losses (gains) on investments (6,720) 15,214 Provision for credit losses 36,709 43,915 Net change in unrealized depreciation (appreciation) on investments (39,792) (49,636) Net unrealized foreign exchange losses (gains) (16,845) 18,056 Net unrealized losses (gains) on other financial instruments 797 (410) Defined benefits funding below (in excess of) amounts expensed 1,204 (1,549) Depreciation of property and equipment, and amortization of intangible assets 4,756 3,898 Other (10,687) (8,056) Interest expense paid (54,252) (18,905) Interest income received 365, ,291 Changes in operating assets and liabilities Net change in loans (628,937) (614,064) Net change in accounts payable and accrued liabilities 8,770 7,969 Net change in other assets and other liabilities (1,544) (5,116) Net cash flows provided (used) by operating activities (436,931) (449,393) Investing activities Disbursements for asset-backed securities (116,171) (41,068) Repayments and proceeds on sale of asset-backed securities 54,828 52,034 Disbursements for subordinate financing investments (73,154) (106,064) Repayments of subordinate financing investments 65,101 51,531 Disbursements for venture capital investments (76,303) (100,161) Proceeds on sale of venture capital investments 44,197 17,955 Acquisition of property and equipment (3,259) (2,376) Acquisition of intangible assets (3,125) (3,535) Net cash flows provided (used) by investing activities (107,886) (131,684) Financing activities Net change in short-term notes 125, ,014 Issue of long-term notes 495,000 - Distributions to non-controlling interests (6,116) (2,752) Dividends paid on common shares (69,700) - Net cash flows provided (used) by financing activities 544, ,262 Net increase (decrease) in cash and cash equivalents (604) 26,185 Cash and cash equivalents at beginning of period 672, ,168 Cash and cash equivalents at end of period 672, ,353 The Consolidated Financial Statements for the quarter ended June 30, 2018 were prepared in compliance with IFRS 9 and comparative amounts for the year ended March 31, 2018 were not restated. For additionnal information, refer to Note 4 Adoption of IFRS 9. The accompanying notes are an integral part of these Consolidated Financial Statements. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 22

23 Notes to the Consolidated Financial Statements (unaudited in thousands of Canadian dollars) te 1 BDC general description The Business Development Bank of Canada is a Crown corporation that was established by an Act of Parliament on December 20, 1974, as the Federal Business Development Bank and continued under its current name by an Act of Parliament that was enacted on July 13, The Business Development Bank of Canada is incorporated in Canada and wholly owned by the Government of Canada. The objectives of the Business Development Bank of Canada and its subsidiaries (together, BDC) are to promote and assist in the establishment and development of business enterprises in Canada, with a focus on small and medium-sized enterprises, by providing a range of complementary lending, investment and consulting services. BDC offers Canadian companies services tailored to meet their current needs while earning an appropriate return on equity, which is used to further BDC s activities. BDC does not receive appropriations from the Government of Canada. te 2 Basis of preparation BDC s condensed quarterly Consolidated Financial Statements are in compliance with the Standard on Quarterly Financial Reports for Crown Corporations, as required by the Financial Administration Act and issued by the Treasury Board of Canada Secretariat. BDC s condensed quarterly Consolidated Financial Statements follow the same basis of preparation as our audited Consolidated Financial Statements for the year ended March 31, 2018, except for changes resulting from the adoption of IFRS 9, Financial Instruments, on April 1, Comparative information for the year ended March 31, 2018 has not been restated. For complete information on the basis of preparation and for significant accounting policies, judgements, estimates and assumptions related to the previous standard IAS 39, Financial Instruments Recognition and Measurement, refer to page 55 to 68 of our 2018 Annual Report. These condensed quarterly Consolidated Financial Statements have been prepared using International Financial Reporting Standards (IFRS). The condensed quarterly Consolidated Financial Statements have also been prepared in accordance with the accounting policies BDC expects to use in its annual Consolidated Financial Statements for the year ending March 31, If BDC changes the application of these policies, it may result in a restatement of these condensed quarterly Consolidated Financial Statements. The condensed quarterly Consolidated Financial Statements were approved for issue by the Board of Directors on July 24, BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 23

24 Notes to the Consolidated Financial Statements (unaudited, in thousands of Canadian dollars) te 3 Significant accounting policies BDC s condensed quarterly Consolidated Financial Statements follow the same accounting policies as our audited Consolidated Financial Statements for the year ended March 31, 2018, except for changes resulting from the adoption of IFRS 9, Financial Instruments, on April 1, 2018, as set out below. These policies have been consistently applied to all periods presented in these condensed quarterly Consolidated Financial Statements and have been applied consistently by all entities consolidated by BDC. These condensed quarterly Consolidated Financial Statements must be read in conjunction with BDC s 2018 Annual Report and the accompanying notes, as set out on pages 54 to 114 of our 2018 Annual Report. Financial instruments Recognition, derecognition and measurement of financial instruments Financial assets and financial liabilities are recognized when BDC becomes party to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognized when the related contractual obligation is extinguished, discharged or cancelled, or when it expires. Financial instruments are recognized and derecognized using settlement date accounting. On initial recognition, financial instruments are measured at fair value. Fair value on initial recognition includes transaction costs directly attributable to the acquisition or issue of financial instruments, except for financial instruments carried at fair value through profit or loss, for which transaction costs are recognized in net income in the period when they are incurred. Classification of financial instruments - Policy applicable upon transition to IFRS 9 (April 1, 2018) Financial assets On initial recognition, a financial asset is classified and subsequently measured at: amortized cost fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI) Business model assessment The classification depends on BDC's business model for managing these financial assets and the contractual terms of the financial asset s cash flows. The business models objectives are broken down into three categories: Financial assets held solely to collect contractual cash flows Financial assets held both to collect contractual cash flows and selling the assets Financial assets that are managed on a fair value basis BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 24

25 Notes to the Consolidated Financial Statements (unaudited, in thousands of Canadian dollars) A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as FVTPL: The asset is held within a business model whose objective is to hold assets to collect contractual cash flows. The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as FVTPL: The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets are classified as measured at FVTPL. On initial recognition, BDC may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI, to be measured as at FVTPL. BDC makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: the investment strategy for holding or selling the assets in the portfolio and the risks that affect the performance of the business model the reports provided to BDC s management and key indicators used to assess the performance of the portfolio the portfolios managers compensation (i.e., whether compensation is based on the fair value of the assets managed or the contractual cash flows collected) the frequency, volume and timing of sales in prior periods, the reasons for such sales and the expectations about future sales activity. Assessment whether contractual cash flows are solely payments of principal and interest In assessing whether the contractual cash flows are solely payments of principal and interest, BDC considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, BDC considers characteristics such as: contingent events that change the amount and timing of cash flows leveraged features prepayment and extension terms terms that limit BDC s claim to cash flows from specified assets features that modify consideration of the time value of money. Financial liabilities BDC classifies its financial liabilities at amortized cost unless it has designated liabilities at FVTPL or is required to measure liabilities at FVTPL. BDC designates a financial liability as measured at FVTPL on initial recognition when it eliminates an accounting mismatch that would otherwise arise from measuring assets or liabilities on a different basis. A description of the basis for each designation is set out in the major types of financial instruments section of this note. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 25

26 Notes to the Consolidated Financial Statements (unaudited, in thousands of Canadian dollars) Subsequent measurement of financial instruments - Policy applicable upon transition to IFRS 9 (April 1, 2018) Financial instruments are measured in subsequent periods either at fair value or at amortized cost depending on the financial instrument classification. Financial instruments classified as at amortized cost Subsequent to initial recognition, financial assets and liabilities classified in this category are recognized at amortized cost using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its carrying amount. When calculating the effective interest rate, BDC estimates future cash flows, considering all contractual terms of the financial instrument. Interest income, interest expense and the amortization of loans fees are presented in Net interest income in the Consolidated Statement of Income. Financial instruments classified as at fair value through profit or loss Subsequent to initial recognition, financial instruments classified as at fair value through profit or loss are measured at fair value with the changes in unrealized gains or losses being recognized in the Consolidated Statement of Income as: net change in unrealized appreciation or depreciation of investments, or net foreign exchange gains or losses, when related to asset-backed securities, subordinate financing and venture capital investments; or net gains or losses on other financial instruments when related to derivatives. Gains and losses upon the sale, disposal or write-off of these financial instruments are included directly in the Consolidated Statement of Income and are reported as: net realized gains or losses on investments when related to asset-backed securities, subordinate financing and venture capital investments; or net gains or losses on other financial instruments when related to derivatives. Financial instruments classified as at fair value through other comprehensive income Subsequent to initial recognition, financial instruments measured as at fair value through other comprehensive income are measured at fair value, with unrealized gains and losses recorded in other comprehensive income (OCI) until the asset is derecognized, with the exception of impairment losses, which are recorded in the Consolidated Statement of Income during the period in which the asset is determined to have become impaired. Financial liabilities designated at fair value through profit or loss Subsequent measurement of financial liabilities designated as at fair value through profit or loss is similar to financial instruments classified at fair value through profit or loss. Impairment - Policy applicable upon transition to IFRS 9 (April 1, 2018) An allowance for expected credit losses ( ECL ) is calculated for the following financial assets that are not measured at FVTPL: Cash and cash equivalents Accounts receivable Investment-grade asset-backed securities Loans Loans and ABS commitments The allowance for ECL is maintained at a level considered adequate to absorb the credit losses expected in the portfolio at the financial reporting date based on a forward-looking model and is established at the individual level. BDC Quarterly Financial Report First Quarter 2019 (ended June 30, 2018) 26