BDC's dismal 2008 financial results

BDC Fact #12

The 2008 financial results are now out, and we got a quick look at the returns being generated by “Bruce” the Mindless Eating Machine (aka the Business Development Bank of Canada – see prior post “‘Bruce’ the mindless eating machine” May 31-08 and “BDC Fact #4“) with the support of our nation’s balance sheet:

– the total BDC portfolio is now $10.6 billion
– $10.0 billion of the portfolio is in term loans
– $156 million in subordinate financing (another $156 million was sourced for CDP via their JV partnership)
– $476 million in venture capital equity investments (after writedowns of $83 million; about 15%, net of new investments)

For those in Ottawa who think BDC is the federal government’s answer to a crisis in venture capital, consider that only 4.5% of the Crown Corp.’s book is in the asset class. The balance is in loans that, in many cases, the private sector would love to do (see prior post “BDC Fact #1” December 3-07).

But here’s the whopper: a return on common equity (“ROE”) of 4.7%! On a $10.6 billion portfolio, BDC was able to generate merely $16.5 million in dividends for the Canadian taxpayers for the entire fiscal year.

That’s a dividend yield of 0.157%, compared to an average of more than 4% a year generated by the Canadian banking fraternity.

By comparison, this performance compares poorly to the 2008E cash ROE of all of the Canadian banks: RBC – 20%, BMO – 14.2%, BNS – 22%, TD Bank – 16%, National Bank – 18.8%, Laurentian – 12.1%, CWB – 16.8% (estimates from BMO Capital Markets Research).

The new spin is excellent though: “We succeed when our clients succeed. The result: greater prosperity for Canada.” So, even though the ROE is about half what it was in 2007 (8.5%), and below their own target of 7.1%, the BDC is wrapping itself in the Canadian flag – brilliant from a marketing (and political self-preservation) standpoint.

To make it easier to hit an ROE target in 2009, BDC has dropped their financial objective from 7.1% for 2008 to be just 6.3% for 2009. (BDC execs always point to their relative lack of leverage to account for the difference between the BDC’s ROE performance and that of the Canadian Chartered Banks. We’ll analyze that argument tomorrow.)

In other BDC financial news, consolidated net income for fiscal 2008 was $84.6 million, compared to $138.0 million reported in fiscal 2007. The decrease was blamed on increased writedowns on BDC’s venture capital portfolio. BDC Venture Capital reported an $82.8 million loss for the year, compared to a $33.6 million loss in fiscal 2007.

This may explain why BDC appears to be pulling in their horns in VC land (see prior post “What happened to the VC $ at BDC?” June 18-08). If so, that’s a shame.

Income from BDC Financing was $160.9 million, $7.1 million lower than in fiscal 2007. Although revenue from loans increased by $30.2 million, that increase was zapped by a $33.6 million
increase in the provision for credit losses.

Speaking of spin doctors, consider this paragraph from the 2008 MD&A:

BDC Financing’s portfolio rose from $9.1 billion to $10.0 billion in fiscal 2008. This is an increase of $886 million, or 9.7% when compared to fiscal 2007. We attribute this increase to the unanticipated, tightened credit conditions and reduced liquidity that characterized the marketplace in 2007. The average portfolio increased by 7.3%.

However, according to the 2007 annual report, BDC’s “objective” for the “Financing portfolio” was to grow it to $9.7 billion (excluding the subordinated debt portfolio), 6% higher than the $9.1 billion portfolio in fiscal 2007.

So, let me get this straight.

The average portfolio grew by 7.3% in fiscal 2008, just 1.3% more than BDC’s 6% stated growth objective, and this is due to BDC backfilling “unanticipated, tightened credit conditions”?

It seems convenient to claim that the loan growth of fiscal 2008 is due to the absence of other lenders, but BDC’s loan book grew by 39% between 2003 and 2007, a time where credit was widely available. Between 2003 and 2004, BDC grew its loan book by ~11%; ~8.5% between 2004 and 2005, and ~9% between 2005 and 2006….

In reality, if credit conditions tightened during fiscal 2008, BDC didn’t step into the breach. According to its own financial statements, BDC’s loan portfolio grew less in the year, by percentage, than it did in ’03, ’04, ’05 and ’06.

But, who wants the facts to get in the way of some good spin, particularly when the private sector is challenging the very fundamental premise of the lending side of the organization?

MRM