In the past, we’ve 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 (LTNCD) — a relatively safe bank product that offers higher interest rate than your regular savings accounts.
What are LTNCDs?
LTNCD or Long Term Negotiable Certificate of Deposit is a bank product issued by local banks and offered to investors looking for a relatively safe investment asset. Compared to a regular savings account or short-term time deposit, LTNCD offer much higher interest rate.
As an investment instrument, LTNCDs are very similar to time deposits and bonds. At the same time, though, they have their differences. Let’s compare and discuss the differences below.
Compare: LTNCDs vs. Time Deposits
LTNCDs are similar to time deposits in the sense that they have both known maturity dates and fixed interest rates. However, as opposed to a regular time deposit, an LTNCD usually has a longer maturity.
While time deposits typically 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 bank deposit accounts.
Unlike time deposits, LTNCDs cannot be preterminated. This means investors need to wait until the maturity date before they can get their money back. Still, for those looking to liquidate their LTNCD investment before the maturity period, they can still do so by looking for other willing buyers. This is possible since LTNCDs are “negotiable” instruments.
Similar to time deposits, LTNCDs are a relatively safe product because as a bank deposit, LTNCDs are guaranteed by the Philippine Deposit Insurance Corporation (PDIC) up to P500,000.
Difference between LTNCDs and Bonds
Just like bonds, LTNCDs have a fixed maturity date and pay a known interest rate announced to investors upon launch. Bonds and LTNCDs 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.
How to invest in LTNCD
Taking part and investing in the LTNCDs of Philippine banks is actually very easy. When banks announce that they have started offering LTNCD, simply approach a branch of that bank. You may inquire with them about the requirements, applications steps, and investment details of the offering.
In some instances, however, the branch staff themselves may not be familiar with the offering. This may be the case since the LTNCD is managed directly by the head office, not the branch. If this happens, inquire instead how you can directly contact the Trust Department or Asset Management Department in the bank’s headquarters. The people there will most likely have an idea about the LTNCD and you can start investing in LTNCD.
Examples of LTNCD offering of Philippine banks
Here are ongoing or upcoming LTNCD offering of banks in the Philippines.
Security Bank LTNCD (2017). Security Bank announced it is offering P5 billion worth of long-term negotiable certificates of time deposits (LTNCD) to “manage liabilities while expanding funding and investor base”. The actual offer amount may be increased depending on the demand. The current indicative rate of this LTNCD is 3.875%.
BPI LTNCD (2017). The Bank of the Philippine Islands (BPI) is planning to raise P30 billion from an LTNCD offering to support its expansion plans and also diversify its funding sources. Final details of the LTNCD will be announced at a later date.
Philippine National Bank LTNCD (2017). PNB is currently offering P3 billion worth of LTNCD. The offer period lasted until October 19, 2017. PNB’s LTNCD interest rate is between 3.75% and 3.875% per year and interest income is paid on a quarterly basis. PNB’s LTNCD will mature on April 26, 2023.
In the past years, several local banks have resorted to LTNCDs as a means of raising capital instead of issuing more debt or equity. These past issuances include the following.
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.
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 were 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.
East West Bank LTNCD. The Gotianun-owned bank issued P5 billion worth of LTNCDs in 2012, 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 was P50,000 while succeeding investments were in increments of P10,000.