Use Interest Rates to Your Advantage: The Money Movement Strategy

While browsing for books in Book Sale, I came across a book by Charles J. Givens called "Wealth Without Risk"

What caught my attention was the page about the MONEY MOVEMENT STRATEGY:

I think all of us have an intuitive idea of how the prevailing interest rates in the economy affect our wealth and finances. All of us have heard about time deposit rates, how much interest is on your car, your home amortization, credit card and personal loans.

But interest rates can be used to your advantage too.

The MONEY MOVEMENT STRATEGY tells us that when general interest rates are: 

LOW - the economy is usually on a roll, invest in stocks or equities. The author, Mr. Givens, claims that the greatest bull markets in history have occurred on low interest rate environments. And this is not hard to believe since low interest in the economy stimulates people to buy products and take out loans. Profits roll in and there is much liquidity in the system for that can be used for expansion.

When interest rates are: 

HIGH - Invest in debt-instruments or bonds and money-market. In other words, lending your money when interest rates are high. This makes perfect sense, since this is the main principle in bond or debt investing. The higher interest rate coupons you have on your bond, the higher interest you receive from it. When prevailing interest rates go down, the value of your bond with a higher rate goes up because all the other bonds have lower rates. 

Money-market are bank the time-deposits and other highly liquid "cash equivalents". Invest in these when the interest rates are high.

According to the strategy you have to set a decision line for the interest rate. This is highly a personal or arbitrary choice.

The main interest rates in the Philippine economy that I watch out for are:

The BSP Policy Rates: Overnight Lending / Borrowing Rates

[http://www.bsp.gov.ph/monetary/monetary.asp]

and the Bellwether Interest Rates

[http://www.bsp.gov.ph/statistics/sdds/tbillsdds.htm]

You may also check:

[http://www.tradingeconomics.com/philippines/indicators]

As we speak, interest rates are at record low levels, following a stable inflation rate and other factors such as the recent investment grade ratings upgrades in the first half  of this year 2013.

Is Your Bank Really Secure?

Recently, I have been contemplating whether to put my money in this rural bank. I will not specify the name of the bank for privacy purposes.

I have been attracted to this rural bank because of the higher interest rates on time deposit, especially those with terms of greater than 5 years.

Rural banks, and smaller banks in general offer a much higher interest rate than bigger established banks whose deposit products are often so low, your money will be eaten up by inflation.

Personal time deposit products with terms greater than 5 years are still exempted from 20% withholding tax, unlike retail treasury bonds for example which have recently been removed from the exemption of 20% withholding tax for terms 5 years and above.

I have been studying financial statements and balance sheets of listed companies, but I have yet to analyze a bank financial statement.

Before "investing" my money in this rural bank, like most investments, I have to check the soundness of the institution by doing a little bit of homework. On my list are forums, customer experiences, and balance sheet.

I encountered the term NPL or Non-Performing Loan Ratio which seems to be very important metric for a creditor or lending institution.

 

Photos: Mike Gonzalez (wikipedia.org/wiki/User:TheCoffee)

As you know, the main business of banks is money lending. If they lend money and do not get them back nor paid interest they lose money. That is what the NPL (Non-Performing Loan) ratio measures.

Investopedia.com defines Non-Performing Loan Ratio as:

"A sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a reperforming loan, even if the debtor has not caught up on all the missed payments."

Basically, Non-Performing Loans are loans that are on default or near default; the debtor has not paid his due payments and are beyond due.

In the Philippines, there are many rural banks that close every year. According to BanksPhilippines.com there were 24 banks that closed in 2012 alone.

The trend in most established banks today have a Non-Performing Loan ratio of below 3% of gross loans.

Bank of the Philippine Islands or BPI for example had a NPL ratio of 2.1% in the first half of 2013. [source info.bpiexpressonline.com]

This rural bank that I'm looking at has 15% non-performing loan ratio. That is a whopping 7.5x the industry norm of non-performing loans. I also noticed an increase of this ratio from 14% of the previous year to 15% this year.

Although, this bank's depositors are insured by the PDIC up to P500,000, being the conservative investor that I am, I will pass up on this opportunity.