Finance Committee on April 2nd, 2008

[Jean-René Halde]

If you were to compare return on equity against return on equity, we obviously don't look as good as they do, but that's because we take the kinds of risks quite often that they would not take. If you look at the average loan of $285,000, it's because there are a lot of $100,000 loans and $50,000 loans there for start-up, for innovators, for people who would find it difficult to get traditional financing.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But there's a lot of babysitting in those loans.

[Jean-René Halde]

Yes, it's pretty human capital intensive.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So where does that put you--at about half the return of a chartered?

[Jean-René Halde]

The mandate we have is to exceed our cost of capital. That's in the BDC act. We're trying to be viable and have a rate of return that's acceptable in excess of our cost of capital. But once we achieve that, then we're trying to help as many businesses as we can.

That's why we're taking on the kinds of risk we're taking on. We could increase our return on equity, but I'm not sure that would do a lot of SMEs that much good.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Effectively, you're a glorified break-even company.

[Jean-René Halde]

We're slightly better than break-even.

[John MacNaughton]

I'd like to supplement here.

One thing that I think ought to be part of the equation is that the leverage ratios of the chartered banks are higher than they are at the BDC. Sometimes those aren't apparent because much of the bank's leverage was realized through these off-balance-sheet structures that one doesn't see, but of course they're the source of many of the problems these days.

So it isn't an obvious apples-to-apples comparison.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I have a final question, Chair.

As you know, the prime has been going down lately, quite dramatically in the last cut, and there's some gossip, rumour, hearsay that the cuts in prime are not necessarily being passed on to the borrowers. Have you made that observation? And how have the prime cuts actually affected your business?

[Jean-René Halde]

The way we price--and I'm talking floating rates--is that we have a base rate that's prime plus two. This is where we work from in our computer model for risk. Whether or not the reductions in rates have been passed on, I can't comment. We all hear gossip, but I would prefer to check my facts before making a statement on that.

In our case, what we do is price for risk, loan by loan. So we're at a base rate, and then we either go above or marginally below, depending on the risk level of the business. So it doesn't affect us, in some ways.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's curious. It would be an interesting area to explore, but I'll leave it at that. The chair has just cut me off; it's terrible.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Mr. Pacetti has a quick question, and then I'd like to follow up with a question or two.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I'd like to get your opinion here. We've talked a little about the manufacturing sector, but the manufacturing sector has been criticized in the past for not investing in their capital. Obviously a lot of your loans are tied into companies investing in their capital, in their machinery and equipment.

Have you seen a trend in what the money is being used for, especially in the manufacturing sector? I believe your loans are not used for working capital, correct?

[Jean-René Halde]

No, they're used for both. They can also be used, if you have a specific project that needs.... If you're in a fast-growth mode and you need working capital, we'll go there also.

To respond to your earlier question on manufacturing, obviously a lot has to do with acquiring a building, or with building a plant, or with modernizing your machinery and equipment. The take-up on machinery and equipment has not been as high as we would have expected. It has gone up, thankfully, but obviously we'd like to see more and more. It has gone up, but not as much as some would have said or expected.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

In terms of your venture capital, I see on page 49 of the annual report that your writedowns have been quite substantial where you've had losses. Is it also on your income statement? I didn't get a chance to look.

[Jean-René Halde]

Yes, it is.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Oh yes, here it is. Thank you.

[The Chair, Conservative, Rob Merrifield]

I thought we were done, but Mr. Del Mastro is indicating that he has a few more questions.

Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

There was an interesting point brought up about risk, and risk tolerance specifically. Does the Business Development Bank have a target for risk, for loss? I know that a lot of the banks tend to target 1% to 2%, and in fact sometimes even less than 2%.

Do you have a target? Is it 5%, is it 6%, is it 10%? What is your loss coefficient?

[Jean-René Halde]

There's no predetermined target, because we try to help company by company. I can tell you today, based on a pretty complex simulation model that would take into account the 1981 recession as well as the early 1990s recession, the forecasted loss rate is somewhere around 6% to 7%. Now, I would need, obviously, to check my numbers if you wanted specifics, but it's in that neighbourhood.

[Dean Del Mastro, Conservative, Peterborough, ON]

Are you satisfied that with 6% to 7% you have yourself adequately covered for risk? Is there any potential for risk for the Government of Canada, given that we've undersigned the loans and so forth?

[Jean-René Halde]

We're very comfortable with the present position. We have a provision for bad losses of $500 million on the books, so we're comfortable that even in tough times, we'd be viable.

[Dean Del Mastro, Conservative, Peterborough, ON]

Can you explain for the benefit of the committee what difference it would make having an allowance for loss at 6% to 7%, instead of 1% to 2% like the chartered banks? What type of business does that allow you to get into that the chartered banks may not look at?

[Jean-René Halde]

A lot of startup loans, people with what we define as thin credit--for example an immigrant coming to Canada or a business based on innovation, where there's really no hard security as a backup. There are a lot of businesses where, from a banking standpoint, there's not the type of security one would like to see, but they're still good business models.

We are moving to a service industry. We are moving to a different kind of economic environment. I think that all financial institutions will need to adjust to a new economic environment.

[Dean Del Mastro, Conservative, Peterborough, ON]

There are a number of development funds throughout Canada. We have the eastern Ontario development program, we have ACOA, we have FedNor, we have the western Canadian....