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Financial IQ Philippines Quick Hit(s):
Companies are benefiting from low interest. How about you? Are you benefiting or getting the short-end? If you are still using ordinary bank products to invest your money... consider other higher yielding instruments, such as some of the preferred shares which returns an annual gross of 7% to 8%.
Firms are taking advantage of record-low interest rates to expand their businesses, which otherwise could have experienced lower profit margins and dismal earnings as a result of the present environment, if not for efforts to boost competitiveness.
Officials and analysts are one in pointing out the benefits of low interest rates, which just last Oct. 25 reached new lows after the Bangko Sentral ng Pilipinas (BSP) cut them by another 25 basis points, the fourth time for the year.
“Lower interest rates benefit borrowers and encourage investment and production,” BSP Deputy Governor Diwa Guinigundo said in a text message.
Citing the need to support growth amid a still fragile global economy, BSP slashed its key rates by one percent this year to 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. BSP’s rates, set every six weeks, do not only serve as benchmarks for banks in pricing their loans, they also serve as gauge for investment yields.
For instance, barely a week after BSP announced its latest 25-basis-point cut, Treasury bill (T-bill) rates fell by as much as 40 basis points on Oct. 29. The yield of the 91-day T-bill, which serves as benchmark for short-term loans, slid to 0.463 percent while that of the one-year T-bill even dropped to a new record low of 0.95 percent.
Hence, while it is good news for the government which can borrow by paying lower interest, investors lending their money got no choice but to shoulder lower profits.
“Those which are sensitive toward their interest income will have to deal with it,” said Astro del Castillo, managing director of brokerage First Grade Finance Inc.
Same case for insurers, which also have to offer lower returns to their clients, said Philippine Life Insurance Association (PLIA) board director Mabini Juan. “The real major issue is profitability issue,” he told The STAR.
But such situations have been offset by higher demand for products and services, both claimed, adding that it provides an equally good opportunity to expand operations and boost competitiveness.
In general, Philippine firms have maintained their profitability amid the low interest rate environment, Del Castillo said, thanks to efforts made by companies to diversify their investments and begin expanding business for future profits.
In fact, firms listed at the Philippine Stock Exchange posted a combined net income of P271.02 billion in the first semester, 26.4 percent up year-on-year, according to latest bourse data. Five out of six sectors recorded profits.
“The idea is you should be forward looking. You are thinking of future profits, making sure that with what you spend now the consequence will be better revenues in the future,” Del Castillo said.
And truly, there has been some fund raising going on. Last month, conglomerate Ayala Corp. announced it is raising a total of P10 billion from a sale of seven-year bonds to finance power and infrastructure business expansions. The new offer comes after a similar move just last July.
The papers will pay indicative interest in the range of 5.34432 percent to 5.96932 percent. This yield was priced against the “prevailing average seven-year rate” plus a spread. Data from the Philippine Dealing and Exchange Corp. showed seven-year bonds traded at an average of 4.7173 percent as of Oct. 31.
“You are able to raise money at lower costs and use what you raised to expand your business,” Del Castillo explained.
To put it into context, raising that same amount of money 10 years ago would have required Ayala to pay more than triple that interest or around 15 percent when those bonds were trading at around 14 percent.
For banks, Guinigundo said “the lower interest margin should be compensated by higher volume of transactions.” BSP data showed outstanding loans by universal and commercial banks, net of central bank placements, grew 14 percent in the first seven months of the year to P2.982 trillion.
Universal and commercial banks generated a combined net income of P55.15 billion as of the first semester, up by nearly 19 percent year-on-year, data further showed. Net interest income, which basically consists of revenues from granted loans, increased 3.2 percent.
More loans are expected to drive economic growth. “Low interest is good for the economy,” BDO president Nestor Tan said.
http://www.philstar.com/business-usual/2012/11/12/865666/what-low-interest-rates-mean-investors
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