In this newsletter, I share content I bumped into the past month that’ll help you become more financially savvy.
This is not financial advice; it's just education. Please think through your situation before applying anything you read here.
This month's recommendation:
How to Think About the CIMB Year-End Promo
Editor's note: Previous links are dead as of April 2025. I describe the promo in the commentary below.
CIMB's balance sheet as of June 2024
Commentary
Note: My descriptions of this promo are simplified for easier reading. Read CIMB's terms and conditions for full promo mechanics.
CIMB is a digital bank in the Philippines offering an amazing promotion.
If you're an existing account holder, additional deposits for November and December will generate an annualized 25% interest.
This promo has no cap. You can deposit as much as you want into your CIMB account. No matter how many millions you add to your account, it will all grow at an annualized 25% for November and December.
Most readers familiar with interest-based products probably re-read that first part multiple times. That interest rate is so high it must be a joke, right?
But it isn't. Read the mechanics in the link above - this is a legitimate promo promising twenty-five percent annualized returns.
Insane.
So I should liquidate everything and park my money in CIMB for 2 months. Obviously!
Not so fast.
It's a common mistake to equate visibility with certainty.
"I can see the interest rate, therefore, this investment is safer than something like stocks, where I don't know how much I'll get in the future."
This is dangerous logic. Just because an interest rate is stated does not mean that it is guaranteed.
There are many examples of financial products with stated payouts that went bust. To name a few:
- The Philippine College Assurance Plan court receivership of 2005.
- The Greek government bond default of 2015.
- The Celsius crypto lending collapse of 2022.
Visibility is not safety. Just because a financial institution names an interest rate does not mean it is guaranteed.
In fact, investment guarantees are illegal in the Philippines: According to section 21 of R.A. 2629, otherwise known as the Investment Company Act, I quote: "It shall be unlawful for any investment company to guarantee any obligation of whatever kind or nature."
To understand why guarantees are important enough to be banned by law, let's talk about promises.
Imagine this scenario...
An acquaintance approaches you and tells you: "I promise to double your money every day if you give me 100 million pesos."
Will you give them the cash? Of course not.
Why? Because you doubt their ability to deliver.
But when we talk about larger financial institutions like banks, we assume they will always deliver. So we focus solely on the promise, ignoring the promiser.
It's dangerous to believe that there is a promiser who can give a 100% guarantee because it gives the illusion that we can put all our eggs in one seemingly-invincible basket. It's so dangerous that our legal system bans all investment guarantees.
If entire governments can default on their debts, so can insurance companies, crypto platforms, and banks.
This is called counterparty risk.
Counterparty risk is the risk that the institution you are dealing with will be unable to keep its promises.
Most people can see counterparty risk when dealing with individuals like their friends and family. However, most people completely ignore it when dealing with institutions like banks.
This matters because when a bank says they can give you 25% interest off your deposits and they suddenly go bust, then you're out of luck. You won't be getting anything above your 500 thousand peso allotted deposit insurance.
(As a side note: the Philippine Deposit Insurance Corporation is also a counterparty that can go bust if conditions get bad enough.)
I'm not saying CIMB will fail.
On the contrary, according to their Bangko Sentral filings, CIMB has a heavily funded balance sheet.
They can afford at least 4 billion pesos of interest expenses before BSP intervention - and that's assuming that the rest of their balance sheet stays stagnant (e.g. No revenues come in, no interest from investments, etc.).
With back-of-the-napkin calculations, it will take around 200 billion pesos of deposit growth for them to accrue a 4 billion peso interest expense under this 25% promo.
CIMB is also protected from large deposits due to PESONet's daily online maximum transfer limit of around 250k-500k pesos, depending on which banks you use to transfer your cash. Overall, their failure is unlikely.
Still, just because their failure is unlikely does not mean it's impossible.
This is an insanely good promotion if all goes well.
But make sure to participate safely and with full knowledge of the risks you're taking.
Know what you're getting into. Be aware of counterparty risk: study both the promise and the promisor. Assess your risks completely, and you'll make safer, more profitable decisions for yourself in the long run.
KEITH LIM