Remarks by: Ken Kember
Senior Vice-President, Finance, and Chief Financial Officer
Ottawa - May 5, 2010

Good afternoon everyone. After 15 years with EDC – including the past year as CFO – I have to agree with Eric that it has been a very interesting 12 months.

It’s no secret to anyone in this room that 2009 was a difficult year for the economy, and EDC’s 2009 financial results mirrored that volatile environment.

In many ways, 2009 is the tale of two very different six month periods.

For the first six months, we recorded a net loss of $147 million. This was primarily due to higher provisions for credit losses and higher claims reflecting the increased risk in both our loan and insurance portfolios.

As we know, the second half of the year saw economic conditions begin to improve. The Government’s stimulus package took hold, and credit markets opened up to enable some of our large customers to raise the funds they needed to sustain operations.

Not surprisingly then, the final six months of 2009 also saw EDC’s financial results improve, enabling us to finish the year with a net income of $258 million - $52 million higher than 2008. This was due to a 20 per cent increase in net financing and investment income which was partially offset by increases in provisions for credit losses and other expenses.

Our net financing and investment income increased to $1 billion from $834 million in 2008. This increase was primarily because of a 38 per cent decrease in our interest expense due to the low cost of funds.

The impact of lower interest rates in 2009 was more pronounced on our cost of funds than on our loan revenue because of our continuing ability over the past two years to borrow at favourable rates as a result of investors’ preference for securities issued by higher quality entities.

Our insurance premiums and guarantee fees increased, reflecting the greater risk in the business we took on, in addition to the business conducted under our temporarily expanded mandate.

And our provision for credit losses also increased, as a result of credit deterioration mainly related to the financial institutions and aerospace sectors.

Finally, administrative expenses totaled $246 million in 2009, a $6 million increase over last year. This growth was primarily the result of an increase in costs related to human resources to help meet the increasing demands of our customers.

The strengthening Canadian dollar, particularly during the fourth quarter of 2009, resulted in a decline in EDC’s balance sheet, since our assets and liabilities are mostly denominated in U.S. dollars.

Lower financing volumes resulted in a lower level of disbursements in 2009 which were largely offset by loan repayments.  While the individual transactions were generally of smaller dollar value than in 2008, the difficult environment meant many of the deals were more complex than those we had seen in prior years.

Our loans receivable declined by $4 billion from December 2008.  This decline can be attributed to the value of the Canadian dollar relative to the U.S. dollar, and little growth in our loan portfolio.

At a time when most other financial institutions were reducing their risk appetite, EDC’s mandate required us to step up and fill the gap to support our customers who were impacted by the volatile market conditions.

Our strong capital and risk management frameworks served us well in responding to the challenge of helping our customers weather the economic downturn while balancing the need to maintain our financial strength.

At EDC, we’ve maintained prudent provisioning practices. Our loan-related allowances continue to stand at $2.7 billion, while these allowances as a percentage of our exposure have increased to 6.4 per cent from 5.9 per cent one year ago.

So although our loan portfolio declined in 2009, the loan related allowance did not. This is because of the increased risk in our portfolio.

In 2009, the proportion of below investment grade loans increased and we recorded increases in both our impaired loans and provisions for credit losses. In fact, the value of loans that became impaired more than doubled.

In the face of 2009’s systematic world-wide banking crisis, leading to several bank failures, our claims and recoveries team worked with clients to help them manage their overdue receivables and mitigate their losses. The amount in claims we paid out more than doubled to $258 million from $104 million in 2008.

Both of these indicators reflect the challenging environment that faced exporters and their customers around the world all through last year.

As you know, EDC issues debt on world capital markets to support its activities. In 2009, we continued our efforts to strengthen EDC’s presence in major global markets and broaden our investor base.

Faced with the credit crunch and economic slowdown, Sovereign, Supranational and Agencies (SSAs) borrowed more in the capital markets. This led to a very competitive environment. However, Canada’s reputation and sound fiscal standing led many investors to look our way. As a result, EDC issued over $7 billion of long-term debt, achieving our long-term funding target and maintaining our position as a premier AAA sovereign borrower.

We also maintain an investment portfolio to ensure we have sufficient liquidity to meet the needs of our customers. We hold high quality marketable securities, mostly in Canadian bank term deposits and US and Canadian government securities.

As always, EDC’s financial management strategy is focused on ensuringthat we have sufficient capital to fulfill our mandate and respond to the evolving needs of Canadian exporters and investors. In the current economic environment, this is more important than ever.

EDC operates on a self-sustaining basis, with no annual appropriations from Parliament. Our activities, in and of themselves, generate sufficient income to protect our assets and support future business.  We ensure that this will continue to be the case by obtaining adequate return for risks taken, maintaining operating efficiency through containing costs, and appropriately managing risks.

In 2009, which, as has already been stated, was an extraordinary year, EDC received an additional $350 million in capital from the Government when they asked us to take on an expanded mandate to support Canadian companies during the downturn.

Since opening our doors in 1944, the Government has invested a total of $1.3 billion of share capital in EDC. By the end of 2009, this initial investment has supported almost $853 billion in exports and investments, and EDC’s shareholder’s equity has grown to $6.6 billion. We’ve also paid dividends back to the Government of more than $700 million.

As Eric has mentioned, we played a fundamentally important role throughout the credit crisis. And the value we provide to Canadian trading businesses and the country as a whole will continue to grow.

I don’t think it is boasting to say our effective use of capital over the past several years was key to putting us in a position to respond to the needs of Canadian exporters and investors during the recession, and our sound financial management ensures that we will be able to continue to do so well into the future.