Chapter 3 – Processing Data through the Accounting System

National Bank Q1 profit rises, beats Street

Summary:

Canada’s sixth largest chartered bank, the National Bank of Canada, said their profits in their first quarter more than tripled. Their earnings rose from $69 million to $215 million in the previous year earlier. The results from both quarters were skewed by the bank's involvement in the asset-backed commercial paper mess. Although, in the most recent quarter, profit suffered because of a $75 million penalty the bank had to pay to regulators for its role in the ABCP (Asset-Backed Commercial Paper) situation. A year ago, the bank recorded a $184-million charge for its holdings of ABCP.

Extraordinary Items:

National Bank's quarterly results included a $75 million regulatory penalty related to asset-backed commercial paper, or ABCP. An ABCP is a short-term investment vehicle with a maturity that is typically between 90 and 180 days. The security itself is typically issued by a bank or other financial institution. The notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs. This is a good example of an extraordinary item because this can be classified as an item that is not typical of the company’s normal business activities, not expected to occur frequently, and is not the result of actions or decision made by the management or owners of the company.

Reflection:

The strategy in using an ABCP is so that a company or group of companies looking to enhance liquidity may sell receivables to a bank or other conduit, which, in turn, will issue them to its investors as commercial paper. The commercial paper is backed by the expected cash inflows from the receivables. As the receivables are collected, the originators are expected to pass the funds to the bank or conduit, which then passes these funds on to the note holders. The national bank using the ABCP’s will have a hard time in the future because these extraordinary items are not useful for assessing management’s performance or predicting future results.