Investing In Philippine LTNCD A Beginners Guide
Long term negotiable certificate of deposit or LTNCD is one of the lesser known products in the Philippines that Pinoy can invest. In fact, BPI, Metrobank and BDO recently announced that they’re offering LTNCD with 4%, 5.375% and 3.75% interest per year, respectively.
Maybe because of its name, which is rather long and intimidating. But don’t you know that LTNCDs can actually be one of the relatively less risky ways to earn passive income? And here’s the clincher: it is actually insured by the Philippine Deposit Insurance Corporation. Read on and find out how you can start investing.
What is LTNCD?
LTNCD stands for long term negotiable certificate of deposit. That’s indeed quite a mouthful so let’s break it down into its parts.
- Long term means that it is intended for investors who are willing to invest for the long haul. Typically, the time horizon is at least 5 years.
- Negotiable refers to its liquidity. You can actually sell them on the secondary market even before the maturity date.
- Certificate of deposit means that it behaves like a time deposit. You are expected to hold it for the specified period. In return, you will receive interest rate to be paid quarterly.
Some say that LTNCD is a combination of a time deposit and a bond. Like a time deposit, it earns interest. The similarity ends there however. Time deposit is usually shorter term and non-transferable. It can also be closed before maturity.
LTNCD on the other hand have higher interest. The maturity is usually longer, typically around five years. It can be sold to another person but it can’t be terminated before maturity. Like a bond, it is essentially a debt instrument (meaning, the institution that sells LTNCD is borrowing money) and can also be sold in a market.
Who sells LTNCD in the Philippines?
LTNCDs are sold by the banks in the Philippines. For example Robinsons Bank offered LTNCD in 2018. In 2019, banks like BPI, BDO, Metrobank, Security Bank, China Bank and PNB sold billions worth of LTNCDs to the investing public.
However, an Inquirer report stated that the Bangko Sentral ng Pilipinas intends to no longer allow banks to raise capital through LTNCD by 2020. This means that we may no longer be able to buy them on retail. Instead, these companies would resort to issuing bonds.
Why do banks sell LTNCD?
Banks sell LTNCD for various reasons. One possible reason is that they’re going to use whatever they’ve collected towards financing their operation or settle liabilities that are about to be due. They may also utilize the capital that they raised to people and institutions who would need to borrow large sum of money for their businesses and personal loans.
Is investing in LTNCD issued in the Philippines risky?
Risk is present whenever you invest. What’s good about LTNCD is that any investment up to a half a million pesos is insured by PDIC. Before investing, check the issuer. Go with banking institutions that have long history of stable, successful business and a good reputation.
Features of LTNCD
| FEATURE | DETAILS |
|---|---|
| Issuer | The name of the bank that sells the LTNCD. |
| Offer period | The period of time that LTNCD is offered to the primary market. |
| Issue date | Official date that LTNCD is considered issued. |
| Maturity date | Date upon which the bank is obliged to redeem LTNCD and pay the investor’s capital in full. |
| Maturity/Tenor | The number of years and month from the issue date to maturity date. |
| Minimum investment | Required starting capital to invest, i.e. P50,000 minimum amount. |
| Increment | Minimum amount if you wish to buy more than the minimum investment, i.e. may be at least P10,000 increment if you wish to invest more than the required minimum amount. |
| Interest | Money paid by the bank to the investor for purhcasing the LTNCD. |
| Interest period | Describes the periodic payment of the interest. |
Latest LTNCD in the Philippines
Bank of the Philippine Islands has just announced that they’ve offered 3 billion peso-worth of LTNCD to the market. With indicative interest of 4% (subject to change), starting capital is 100,000 pesos and an increment of 50,000 pesos.
Currently, Security Bank offers 4% on LTNCDs from January 13 to 24, 2020 for a term of 5 years and 6 months. Again, the earned interest will be credited to the settlement account every three months until maturity.
| METROBANK | BANK OF COMMERCE | SECURITY BANK | |
|---|---|---|---|
| Status | Approved by BSP | Approved by BSP | Recently ended |
| Offer period | Jan. 13 – 24, 2020 | ||
| Issue date | Feb. 5, 2020 | ||
| Maturity | Aug. 05, 2025 | ||
| Tenor | 5.5 years | ||
| Minimum amount | 50,000 | ||
| Increment | 10,000.00 | ||
| Interest | 4% | ||
| Interest period | Quarterly |
And here are the past LTNCDs issued by the banks.
| BPI | METROBANK | BDO | SECURITY BANK | |
|---|---|---|---|---|
| Status | Ended | Ended | Ended | Ended |
| Offer period | October 18, 2019 | September 16, 2019 to September 28, 2019 | September 10, 2019 – September 20, 2019 | August 12, 2019 – September 11, 2019 |
| Issue date | October 25, 2019 | October 4, 2019 | September 27, 2019 | September 23, 2019 |
| Maturity | May 2023 | April 2025 | March 2025 | March 23, 2025 |
| Tenor | 5.5 years | 5.5 years | 5.5 years | 5.5 years |
| Minimum amount | 100,000 | 50,000 | 100,000 | 50,000 |
| Increment | 50,000 | 10,000 | 10,000 | 10,000 |
| Interest | 4% | 5.38% | 3.75% | 4% |
| Interest period | Quarterly | Quarterly | Quarterly | Quarterly |
How can you earn from LTNCD?
It’s fairly easy to estimate your earnings if you have the following information:
- capital
- interest
- interest period
- maturity
In this example, I’m going to use the LTNCD that was offered by Security Bank just recently.
| FEATURE | INFORMATION |
|---|---|
| Capital | 100,000 |
| Interest | 4.00% per annum |
| Interest Period | Quarterly |
| Maturity | 5 years and 6 months |
To compute for the earnings, we need to compute for the quarterly interest, the number of pay-outs, the total number of interest earned, and the cumulative gain.
The computation below assumes that you’re going to hold your investment until maturity, which is 5.5 years (5 years and 6 months)
| FEATURE | DETAIL |
|---|---|
| Quarterly interest | Capital x (Interest ÷ Number of payout per year) 100,000 x (4% ÷ 4) 1,000 |
| Total interest | Quarterly interest x Total number of payout 1,000 x (4 pay-outs x 5.5 years) 22,000 |
| Gain | Total interest ÷ Capital 22,000 ÷ 100,000 22% |
Advantages of LTNCD
Low starting capital
Because they are intended to be sold in retail, LTNCD can be acquired with minimum of P50,000. It’s an amount that Pinoys can afford to start.
Less risky
Depending on the issuer, they can be considered to have less risks especially when they’re sold by banks with good business fundamentals. There is a low chance of the bank defaulting on the obligation to pay the interest and pay back the capital in full upon maturity.
PDIC-insured
As mentioned earlier, up to half a million pesos worth of LTNCD can be covered by the Philippine Deposit Insurance Corporation (PDIC). This makes them arguably less risky than equities like those found in mutual funds, PERA, unit investment trust fund or exchange traded fund.
Fixed income
You’re going to be paid quarterly interest. The steady flow of earnings is your passive income in exchange for letting the bank use your money until maturity.
Higher yield
The interest offered by LTNCD can be comparatively higher than what are offered by time deposit products.
Tax-exempt
If you hold on to your ownership for at least 5 years, you will be exempted from paying any taxes.
Disadvantages of LTNCD
Long maturity date
You would need to hold on to your holdings for at least five years. Of course, as stated earlier, you may opt to sell either in whole or partially subject to fees, charges, and taxes.
Fixed interest
Unlike time deposit where the interest goes higher the longer the maturity, LTNCD only pays the interest as published by the issuer. There is no tiered or incremental interest.
Withholding tax
You may be liable to pay taxes if you sell LTNCD before the maturity. The tax amount would depend on the period of time before selling. It ranges 5% to 20% on any interest earned.
Selling to the secondary market
The process of selling your LTNCD may be lengthy and include significant paperwork.
Buying from secondary market
The LNTCDs can only be purchased during the offer period. If you however would like to buy them after the offer period, you would have to the secondary market where you might be paying fees and charges, thereby lowering your net gain.
Tax identification number
Investors are required to declare their tax identification number. This is done to comply with our rules according to our anti-money laundering law.
Frequently asked questions about LTNCD
Where can you invest LTNCD?
There are two ways that you can acquire an LTNCD. One, you can buy from the banks that offer them. Check with the news on any updates about banks whose LTNCD offers are approved by BSP, and any announcement of the offer period,
How can you receive the interest?
It depends on the bank-issuer. Some would require that you open a savings account with the bank or you can request that the interest be paid to an account from another bank.
What is the proof of ownership?
Most of the LTNCDs don’t have any deposit certificate. Instead, you would be given the Registry Confirmation. Aside from that, the entry at the Registry Book being kept by the Registrar (Philippine Depository and trust Corporation) is another strong proof of ownership.
The Registrar is responsible in recording the owners of LTNCDs issued to the primary market and the subsequent transfer of ownership.
Can your children invest in LTNCD?
No. The requirement is that Pinoy investors must be holders of tax identification number and that you’re at least 18 years of age.
Can parents transfer LTNCD ownership to children?
Yes. Parents can sign up for an in-trust-for (ITF) during application. In this way, the child can own the investment when the parents/guardian pass on.