What are LTNCDs? Investing in LTNCD explained

In the past, we have discussed a variety of investment options for the average retail investor, including Stocks, Bonds, Mutual Funds, UITFs, and Preferred Shares, among others.

We now add another asset class to our investment portfolio. Here are details about Long Term Negotiable Certificate of Deposit or LTNCD — a relatively safe bank product that offers higher interest rate than regular savings accounts.

LTNCDs explained

LTNCDs are Long Term Negotiable Certificate of Deposit. It is a bank product offered to investors looking for a relatively safe investment asset with a higher interest rate compared to a regular savings account or short-term time deposit. As an investment instrument, LTNCDs are very similar to time deposits and bonds but differ with regard to several features.

LTNCDs vs. Time Deposits

LTNCDs are similar to time deposit accounts in the sense that they have both known maturities and fixed interest rates. As opposed to a regular time deposit, however, an LTNCD has a longer maturity. While usual time deposits mature in 3, 6, or 12 months, the usual maturity date for an LTNCD is a little more than five (5) years. As such, it is exempted from paying the 20% withholding tax charged on savings or time deposit accounts.

Unlike time deposits, LTNCDs cannot be preterminated. Investors need to wait until the maturity date before they can get their principal back. Alternatively, they can sell their LTNCDs to other willing buyers since LTNCDs are negotiable.

LTNCDs are relatively safe because as a bank deposit product, they are guaranteed by the Philippine Deposit Insurance Corporation (PDIC) up to P500,000.

LTNCDs vs. Bonds

Similar to bonds, LTNCDs have a fixed maturity date and pay a known interest rate announced to the public upon launch. They are both long-term investment instruments although LTNCDs usually mature a few days or months after five years. Like bonds, LTNCDs also pay interest quarterly or semiannually. Unlike bonds, however, the interest earned from LTNCDs are tax-free. Bonds are also not guaranteed by the PDIC, while LTNCDs are covered up to P500,000 in case the issuing bank defaults or declares a bank holiday.

LTNCD offering of Philippine banks

In the past, we wrote about the LTNCD offering of Metrobank and the Philippine National Bank (PNB).

In recent years, several local banks resorted to LTNCDs as a means of raising capital instead of issuing more debt or equity. These banks include the following.

East West Bank LTNCD. The Gotianun-owned bank that recently had its initial public offering (IPO) announced on August 2012 that it will issue LTNCDs either in the fourth quarter of 2012 or in the early quarter of 2013. As much as P5 billion worth of LTNCDs are planned to be issued, with a minimum holding period of “five years and one day” and a maximum holding period of “five years and six months” after the issue date. Minimum investment amount is P50,000 while succeeding investments may be in increments of P10,000. The interest rate is yet to be finalized. Proceeds will be used to better match the duration of the bank’s assets and liabilities, especially now that the bank is aggressively growing its consumer loans portfolio.

Security Bank LTNCD. Security Bank raised P5 billion in July 2012 by issuing a 7-year LTNCD with a fixed interest rate of 5.50%. Proceeds will be used to grow the bank’s lending business. The bank also raised the same amount in its first tranche of LTNCD offering in February 2012. The certificate of deposit also paid 5.50% interest and will mature seven years from date of issue.

RCBC LTNCD. In April 2012, Rizal Commercial Banking Corp. (RCBC) issued P1.15-billion worth of LTNCD carrying a coupon interest rate of 5.25% per year. The LTNCD matures after five years and five months. In December 2011, the bank issued its first tranche of LTNCD and raised a total of P3.85 billion. It raised P2.033 billion by issuing fixed-rate LTNCDs paying 5.25% and an additional P1.817 billion by issuing zero-coupon certificates that were priced to yield 5.50%.

UCPB LTNCD. In May 2012, the United Coconut Planters Bank (UCPB) issued the third tranche of its LTNCDs amounting to P1.85 billion. The interest rate was pegged at 5.875% per annum and the minimum investment amount was P50,000. The LTNCDs mature after 5 years and 3 months. According to the bank, proceeds from the sale will be used to finance its expanding loan portfolio. The May 2012 offering is already the third LTNCD issue of the bank, following an August 2011 LTNCD offering that paid 6.0% interest and a November 2010 LTNCD issue that paid 6.25% per annum.

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