Tan Kin Lian's Blog: A fair rate of return

Monday, October 27, 2008

A fair rate of return

Hi Mr. Tan,

Investors in Singapore have no real safe alternatives to park their money and get a fair return if they don't want any risk. So, what is a fair return for keeping money safe? My feel is that, the return should at the very least offset inflation.

However, for far too long, savings/fixed deposit rates at banks here are ridiculously low. The last time I checked, POSB/DBS, fixed deposit is at around 0.45 percent to 0.75 percent, for most people, of course, depending on amount & tenure. This can hardly offset inflation that is much higher, 5 to 6 percent.

The Singapore government has long pursued a strong SGD to fight inflation. The trinity of inflation, interest rates & foreign exchange is supposedly linked by the PPP, purchasing power parity. However, for the short term PPP may not hold and distortions can persist for years. So, with our recent SGD weakening, we would see higher SGD interest rates instead ?

Some of my friends even suggest that the the Singapore government providing long running subsidy for local banks. Just consider this, local banks take in funds from depositors at less than 1 percent rate, and then invest in Singapore Government Securites, which depending on tenure, can yield up to 3.6 percent. Banks have to hold a certain amount of SGS anyway, as stipulated under MLA requirement from the central bank, MAS.

So, assuming 3 percent spread on say, 300mil, that's 15mil, almost risk free for the banks!

Regards

10 comments:

freeier said...: in the banking consideration, that is not 'risk free' though.

the spread is good, but one has to take a tenure risk. i.e. if short term rate shoots up and bank has to fund their liability using short term funding (exactly what is happening to northernrock and some of the korean banks) then the bank would be hit and face problems.

Most banks run the gap as a way to make money. It's lump under the term 'Net Interest Income'; October 27, 2008 9:35 AM
nhyone said...: SGS is available to retail investors as well. The minimum denomination is just $1,000. Many people think it's much higher. It's not. Don't expect the yield to be very good, though.

As for interest rate, if the savers are willing to walk out of the comfort zone of the three local banks, they will see slightly higher interest rates ranging from 1% to 1.38%. These are normal savings a/c, not FDs.

1% may not be much more than 0.25%, but it's equally risk-free, so why pick 0.25% instead of 1%?; October 27, 2008 11:35 AM
Anonymous said...: Yes, gapping has been modus operandi for the banks because singaporeans & asians have been net savers.
Also the local banks have never really had to go the funding route. If I recall correctly, not all banks can take SGD deposits, just the local banks and full license banks.; October 27, 2008 11:47 AM
Anonymous said...: Dont even think that the banks take in funds at less than 1% and invest in govt securities at 3.6% to earn the difference.
Nowadays with the fractional reserve banking system, banks dont earn based on pure interest spreads of the same amount. They take in $100 they potentially loan out $900.; October 27, 2008 12:15 PM
Concerned said...: anonymous

The cause for the low interest rate in Singapore is because many wealthy foreigners park their excess cash here. The results in excess liqidity. The Government is now using the taxpayers' money to guarantee their deposits should a bank failed. Do you think this is fair?; October 27, 2008 3:13 PM
zhummmeng said...: The fair rate of return is a return with a proportionate risk. You can call it efficient frontier portfolio
return.; October 27, 2008 3:18 PM
Anonymous said...: Hi Mr. Tan ,

Thanks for publishing my comments in yr blog in past 2 days regarding the 'excerpt of articles'
written by Zaobao reporters and an economist(NUS professor).These independent writers tell us ‘ their own experiences on sale tactics adopted by the RMs' and the economist explain how complex this "Minibond" is! I group them as follows:

1. Following is written by Zaobao reporter 龚慧婷, published in Zaobao dated 25 Oct. I quote as follows :
" ...在9月15日，美国雷曼兄弟事件爆发前的周末，银行的客户经理还向我推销由美国投资银行美林所发行的结构投资产品................　　
　　当时，年轻的客户经理告诉我的一番话，让我一直印象深刻：（一）这个产品是经过金融管理局严格筛选过滤（carefully screened by MAS）的，是安全的。（二）淡马锡控股已经注资美林，因此美林应该是不会倒闭的。听了以后，我不禁哑然失笑。
　　当然，除了这两个为了让我放心和放胆投资的“承诺”以外，客户经理也告诉我，除非美林倒闭，否则我的投资应该是“保本”的....... "

Zaobao reporter 龚慧婷 can be our 'independent witness'! (for RM mis-selling)

2. Another article written by Zaobao reporter,许丽卿, ( title:贪婪好？published today, 26Oct). I quote as follows:

"....对于每三几个月就往银行办理定期存款更新手续的我来说，面对银行柜台小姐游说购买投资产品早已司空见惯，她们从不放过任何一个推销机会，我也从没心软而被说服。不为所动，是因为我从不相信衍生产品适合散户投资者。所以，银行职员将复杂的衍生产品卖给六七十岁的老人或连什么叫投资和衍生产品都搞不懂的低教育者，很不可思议.....

巴菲特都说了，如果要了解债务抵押债券(CDO），需要阅读1万5000字的材料，一个CDO方阵则需要阅读高达75万字的材料才能理解。所以，银行柜台小姐将雷曼迷你债券当一般债券来卖给散户，我一点也不奇怪...."

That was exactly how the RMs 'push' the 'toxic minibond' as 'low-risk bond', to their 'vulnerable and non-vulnerable ' customers.
The RMs only aim to get 'high commissions ' and the customers were not given the 'right advice' that would match their risk profiles!

Zaobao reporter,许丽卿, is just another 'independant witness' who experienced the same sale tactics adopted by the RMs.

3. Article written by economist, Mr. Lim Kim San Professor of Business
Policy of Information System and Economics at NUS. Title is " Option and what they mean ", published in the Sunday Times dated 26 Oct. I quote as follows:

"....So what are the Risks? Obviously, these vary from one product to another. Let me illustrate with respect to the Minibons Series 5 notes.
....So the shorthand name for the credit-linked notes issued by Minibond was simply "Minibond". But, of course, the notes were not bonds at all.
It took me quite a few hours to piece together an understanding of the structure of these notes from the pricing statement issued by Minibond and an announcement by HSBC, which is the trustee of the notes. I cannot guarantee that my understanding is complete and you may not rely on it as I am not a financial adviser......"

It demonstrates that how complex this "Minibond" is! Even an economist (and professor at NUS) takes quite a few hours to piece together an understanding of the structure of these notes from the pricing statement and yet he still cannot guarantee that his understanding is complete.; October 27, 2008 4:25 PM
ym said...: nope gov yields will be falling..

reason is MAS loves to control the forex... so they are flooding the market with SGD.. its the same effect as the FED's favourite passtime of money pumping ie to reduce the fed funds rate..

also, deflation is the threat now not inflation.. in fact its already happening.. soon the global recession will force CPI to fall.. oil prices food etc will be falling..; October 27, 2008 4:32 PM
Anonymous said...: MAS should employ Alan Greenspan to helm the central bank.
His policy of non interference uits MAS 's of no over regulation. Alan Greenspan is free for hire .He can come on board as co chairman.2 brains that believe in no regulation is good for FIs so that they can any cheat the consumers; October 27, 2008 5:38 PM
Anonymous said...: Singapore should adopt the same practice as the US government. They issue treasury inflation protected securities that preserve the principal against inflation and pays a regular coupon too.; October 28, 2008 5:20 AM