Quarterly report - Q1 2018 - BDC

2018

Financial Report

First Quarter

June 30, 2017

Executive Summary

The Canadian economy is showing more growth. The economy grew at an annualized rate of 3.7% in the first quarter of 2017 and has created 316,800 jobs over the last 12 months. Unemployment rates in the three largest provinces are near or at their lowest historical levels. The economy is close to running at full capacity, which gave support to the recent increase in interest rates by the Bank of Canada.

The Canadian economy continues to benefit from a solid American economy and a relatively low Canadian dollar. For example, strong car sales and a growing housing sector in the U.S. have increased Canadian exports significantly. Tourism is also benefitting from the current context and having a positive impact on the economy in every part of the country.

Commodity prices are slowly increasing. The price of oil is hovering between US$45 and US$50 per barrel. This slow recovery and the recent announcements of pipeline projects are spurring more economic activity and investment. Both Alberta and Saskatchewan will benefit from higher oil prices and should move out of recession in calendar 2017.

Business confidence continues to improve, which will support business investment. Ontario, B.C. and Quebec investments will lead the country this year. However, investment in residential construction is slowing down, as housing starts are declining in Toronto and Vancouver, two very strong markets over the last few years. High consumer debt ratios remain a risk for the Canadian economy, especially in the context of the increase in interest rates. The renegotiation of NAFTA also represents a risk to the generally positive outlook.

Business credit conditions remained stable in the first quarter of fiscal 2018. In May 2017, the yearly annual growth in business credit from chartered banks was still high, at more than 8%.

This favourable economic context contributed to increased activity for BDC during the first quarter of fiscal 2018. Loans accepted by clients of Financing(1) reached $2.2 billion during the first quarter ended June 30, 2017, compared to $1.7 billion for the same period last year, mainly due to the renewal of a few large credit facilities and to an initiative to provide additional financing to existing clients. BDC continued to successfully leverage its online presence through its virtual business centre, as evidenced by a strong volume of online financing activity during this quarter. Financing's(1) loan portfolio, before allowance for credit losses, stood at $23.0 billion as at June 30, 2017, a $568 million or 2.6% increase since March 31, 2017.

BDC continued to assist small and medium-sized enterprises (SMEs) that have difficulty accessing financing due to their location, sector or demographic. To that end, BDC announced a $280 million loan package to SMEs in the Atlantic provinces. Targetted industries include information and communications technology (ICT), agri-food, ocean technology, and tourism.

During the quarter ended June 30, 2017, clients of Growth & Transition Capital (G&TC) accepted $114.2 million in financing, compared to $101.2 million in the same period last year.

In June, as part of G&TC's strategy to broaden its product offerings, BDC announced its intention to invest $250 million in Growth Equity over the next five years, a minority equity offering for high-potential, rapidly growing businesses.This new offering aims to fill the gap between small-scale financing options generally available to smaller firms and the range of sources available to larger, more established companies.

(1) Unless otherwise indicated, Financing excludes Growth & Transition Capital.

BDC Quarterly Financial Report ? First Quarter 2018 (ended June 30, 2017)

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Executive Summary

Venture Capital authorized investments totalling $55.1 million in the first quarter of fiscal 2018, compared to $30.4 million for the same period last year. The increase can be explained by the need to support existing investees and by lower than usual activity in fiscal 2017.

In May, as part of its commitment to support women entrepreneurs, BDC and MaRS Investment Accelerator Fund (IAF) launched StandUp Ventures Fund I, with a $5 million contribution from BDC. The fund will raise additional capital from investors up to a maximum of $15 million.It is part of BDC's Women in Tech initiative. StandUp Ventures will invest in Canadian pre-seed and seed-stage high-growth, capital-efficient ventures in health, IT and cleantech. Qualifying investments will have at least one female founder in an executive role, who holds a significant ownership position. Twelve to 20 investments will be made over the next three to five years, ranging from $250,000 to $1 million each.

BDC continued to manage the Venture Capital Action Plan (VCAP), a federal government initiative to invest $400 million to increase private sector venture capital financing for high-potential, innovative Canadian businesses. As at June 30, 2017, the total VCAP portfolio stood at $339.4 million, compared to $301.5 million as at March 31, 2017.

BDC Advisory Services initiated 357 mandates in the first quarter of fiscal 2018 for a total value of $6.7 million, compared to $5.4 million for the same period last year. The Growth Driver program was responsible for most of the increase.

In the first quarter of fiscal 2018, BDC posted consolidated net income of $145.6 million, compared to $92.4 million for the same period last year. The favourable variance compared to fiscal 2017 was mostly attributable to a higher net change in unrealized appreciation of venture capital and VCAP investments, as well as higher net interest and fee income as a result of Financing's portfolio growth.

BDC Quarterly Financial Report ? First Quarter 2018 (ended June 30, 2017)

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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 2018 (ended June 30, 2017)

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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..................................................................................... 15

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 2018 (ended June 30, 2017)

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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 131.1 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 risk management 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 of 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, 2017.

BDC Quarterly Financial Report ? First Quarter 2018 (ended June 30, 2017)

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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, 2017, compared to the corresponding period of the prior fiscal year. This analysis also includes comments about significant variances from BDC's fiscal 2018?22 Corporate Plan, when applicable.

BDC reports on five business segments: Financing, Growth & Transition Capital, Venture Capital, Advisory Services and Venture Capital Action Plan (VCAP). In past years, Financing and Securitization were presented as separate segments. Starting in fiscal 2018, BDC will no longer report on Securitization separately and will present asset-backed securities (ABS) as a product of Financing.

For fiscal 2018, BDC adopted a refined methodology to recharge shared corporate services to the business lines, as indicated in its fiscal 2018-22 Corporate Plan.

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)

F2018

F2017

Financing Growth & Transition Capital Venture Capital Advisory Services Venture Capital Action Plan

Net income

129.7 12.3 5.3 (12.7) 11.0

145.6

117.6 9.1

(10.9) (10.6) (12.8)

92.4

Net income attributable to: BDC's shareholder Non-controlling interests

Net income

145.7 (0.1)

145.6

93.9 (1.5) 92.4

Three months ended June 30

For the quarter ended June 30, 2017, BDC recorded consolidated net income of $145.6 million compared, to $92.4 million for the same period last year. The increase was mostly attributable to a higher net change in unrealized appreciation of venture capital and VCAP investments, as well as higher net interest and fee income as a result of Financing's portfolio growth.

Currently, BDC expects its consolidated net income for fiscal 2018 to meet the Corporate Plan target of $486 million.

BDC Quarterly Financial Report ? First Quarter 2018 (ended June 30, 2017)

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Management Discussion and Analysis

Consolidated comprehensive income

Three months ended June 30

($ in millions)

F2018

F2017

Net income Other comprehensive income (loss) Items that may be reclassified subsequently to net income

Net change in unrealized gains (losses) on available-for-sale assets Net change in unrealized gains (losses) on cash flow hedges

Total items that may be reclassified subsequently to net income

145.6

92.4

(1.2) (0.2) (1.4)

(1.1) (0.2) (1.3)

Items that will not be reclassified to net income Remeasurements of net defined benefit asset or liability

Other comprehensive income (loss)

Total comprehensive income

(92.5) (93.9) 51.7

(60.8) (62.1) 30.3

Total comprehensive income attributable to: BDC's shareholder Non-controlling interests

Total comprehensive income

51.8 (0.1) 51.7

31.8 (1.5) 30.3

Three months ended June 30

Consolidated total comprehensive income comprises net income and other comprehensive income. Other comprehensive income is mostly affected by remeasurements of the net defined benefit asset or liability, which are subject to strong volatility as a result of market fluctuations.

For the first quarter of fiscal 2018, BDC recorded other comprehensive loss of $93.9 million, compared to a loss of $62.1 million for the same period last year. The decrease in OCI was attributable to the remeasurement loss on net defined benefit asset or liability of $92.5 million, compared to $60.8 million in fiscal 2017. This loss was mainly due to lower discount rates used to value the net defined benefit liability, as well as lower returns on pension plan assets, compared to those recorded in the first quarter of fiscal 2017.

BDC Quarterly Financial Report ? First Quarter 2018 (ended June 30, 2017)

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