National Bank became the latest Canadian financial institution to lay out the hit it will take from the credit crunch when it said Monday it will take a $575-million charge.
What is ABCP? |
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ABCP — asset-backed commercial paper — is short-term corporate debt that is made up of a bundle of loans like credit card receivables and car loans. This debt is then resold to other investors, taking the original loans off the books of the company that first issued them. That can lead to lower lending standards because the originator of the loans doesn't have to worry about collecting. ABCP tends to yield more than Treasury bills, making it a popular place for money market funds and pension funds to park money. In Canada, about two-thirds of the $120-billion ABCP market is sponsored by the big banks. The rest is known as third-party, or non-bank ABCP. In 2007, holders of some non-bank Canadian ABCP ran into trouble refinancing the debt when the credit crunch made investors shy away from any investment perceived to be risky. |
National said the charge, which it will take in the fourth quarter, will amount to $365 million after tax as the bank revalues its asset-backed commercial paper, or ABCP.
National's writedown was the biggest announced so far by any Canadian bank.
During the fourth quarter, National said it bought $2.1 billion worth of ABCP, primarily from its own sponsored mutual funds and pooled funds. The bank also bought ABCP from its retail clients.
National already had about $150 million in ABCP on its own balance sheet prior to the purchase.
The bank will release its fourth-quarter and year-end results on Nov. 29.
On the TSX, shares of National Bank rose 76 cents to finish at $51.79.
Most of Canada's major banks have already laid out the charges they will take in the current quarter stemming from problems in the world credit market and the U.S. subprime mortgage market.
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