Remarks by: Ken Kember
Senior Vice-President, Finance, and Chief Financial Officer
Ottawa - September 14, 2011 

Good afternoon everyone.

I’d like to give you an overview of EDC’s financial situation, including our results for 2010 and our half year results to June 30 of this year.

First though, a bit of background.  EDC operates on a self-sustaining basis, with no annual appropriations from Parliament. 

This means that financial sustainability is a key component of our management framework.

We achieve financial sustainability by earning enough of a return on our products and services to pay the bills and build capital to support more business. It means that we charge appropriately for our products, we price them to the level of risk taken, we control our administrative expenses through operational efficiency, and we minimize losses by managing our risks.

EDC’s revenue generating activities are reasonably predictable, which allows EDC to plan its operating budget accordingly.  For the benefit of the audience today, I think it would be helpful to provide you with an idea of a “normal” operating year, fully understanding that these are not normal economic times.

In general, under normal operating conditions, EDC would expect to earn net revenue of about $1.2 billion.  That number would be comprised of $1 billion mainly from our loan book, and another $200 million from our insurance portfolio.

Offsetting that $1.2 billion in a normal year, we generally have loan provision requirements of about $100 million, claims related expenses of about $100 million, and administrative expenses of $300 million.

All told, a normal operating year leaves EDC with a net income of approximately $700 million.

So when we turn to 2010, it’s obvious that it was a pretty unusual year with net income of $1.5 billion.  Our core revenues were in line with the norm at $1.2 billion, as were our administrative expenses at $279 million.

The big change was in loan provisions and claims-related expenses.  Instead of the normal loan provision charge and claims expenses, we saw a reversal of loan provisions of $658 million, and claims related expenses of only $1 million.

The big change in loan provision requirements comes from three factors:

1) An improving economic climate in 2010 meant that a number of our borrowers had their credit ratings upgraded, which means that we need less provision against those loans

2) We adjusted our loan provision methodology to reduce the provision on our loan commitments.  It’s important to keep in mind that estimating the required loan provision on our portfolio involves a series of difficult judgment calls, and those judgment calls are especially challenging in the current volatile economic climate – a climate that is turning out to be the “new normal”.  We are constantly reviewing our methodogy to look at ways of making it better, and this change that we made in 2010 resulted in a sizable reduction in our provision requirements.

3) Finally, our loan book is constantly changing as new loans are added and old loans are repaid.  In 2010 the loan book grew, but the provision needed on the new loans added was less than the provision released as old loans were repaid.

Claims related expenses were also much lower than normal and a lot lower than in 2009.  We paid less claims, and our actuarial provision for future claim payments also declined significantly, reflecting better than expected outcomes especially in our credit insurance portfolio.

In 2009, our net income was $258 million, much lower than normal.  2009 was in the midst of the financial crisis and the recession, and we saw higher claim payments, borrowers being downgraded, and higher levels of risk in all of our portfolios, leading to a need for higher provisions.  In 2010, things improved significantly, allowing us to release provisions as I mentioned earlier.

It is important to note that our 2010 results are consolidated into the Government of Canada’s financial results and contribute to reducing the deficit.

Turning to our balance sheet, EDC had over $30 billion in assets at the end of 2010, largely comprised of loans totaling $26 billion and investments of $4 billion. These assets are funded by debt of $22 billion and shareholders equity of approximately $8 billion.

Our loans are concentrated in the United States, Canada, Mexico, India and Chile and include loans to foreign companies in support of sales of Canadian goods and services and loans to Canadian companies to help them expand their operations abroad.

Our investments are high quality, highly liquid instruments and are held to ensure that we have sufficient liquidity to meet the requirements of Canadian exporters and their customers on a timely basis.

We issue debt on world capital markets.  We run a commercial paper program to meet short term cash requirements, and we issue bonds for longer term funding.  In 2010 we issued two one-billion dollar global five year bonds as part of our funding strategy. These bonds were over-subscribed and delivered stable, attractively-priced funding for us.

Not all of our activities show up on our balance sheet.  In addition to our lending programs, we provide guarantees, credit insurance, contract insurance and bonding, and political risk insurance. These exposures are captured in our contingent liabilities which totaled nearly $26 billion at the end of 2010, which is relatively unchanged from 2009.

Our healthy balance sheet and strong financial results for 2010 allow us to continue to build a stronger capital base and provide additional capacity to Canadian exporters and investors. Since opening our doors in 1944 up to the end of 2010, EDC’s shareholder, the Government of Canada, has invested $1.3 billion of share capital in EDC.

This includes the $350 million in capital that the government injected into EDC in 2009 to provide additional capacity in support of its expanded mandate and its role in the economic recovery.  In March 2011, EDC returned that sum back to the shareholder when we paid a dividend to Government of $350 million.

By the end of 2010, EDC’s shareholder’s equity had grown to $8.1 billion.

When we consider the Government’s share capital investments of $1.3 billion, we should also consider that over the years EDC has paid dividends back to the government totaling more than $1 billion.

Most importantly, the Government’s investment has facilitated almost $925 billion in exports and investments since 1944.

Looking forward, EDC’s effective use of capital over the past number of years has positioned us well to be able to respond to the needs of Canadian exporters and investors, which is of increasing importance as we head into another period of elevated risks.

On January first of 2011, the Canadian Institute of Chartered Accountants adopted International Financial Reporting Standards (IFRS) as Canadian generally accepted accounting principles (GAAP).   EDC’s 2011 financial results will be reported under IFRS.  The adoption of IFRS has not had a material impact on our financial results.

Under Bill C-51, EDC, along will all other crown corporations and government departments, is now required to make public a quarterly financial report within 60 days after quarter end for the first three quarters of the year.

For EDC, the timing of this new requirement begins with our second quarter results, released a few weeks ago. These results are unaudited and reflect our adoption of IFRS.

For the first six months of 2011, EDC’s net income was $306 million, tracking in line with income projected in our Corporate Plan of $611 million for the year.

As the ongoing recovery presents its challenges, EDC’s capital base is well secured and we are confident that sound financial management will allow us to continue to assist Canadian exporters and investors as they increasingly look to nontraditional markets to help grow their business.

Thank you.