The UOB Files: Inappropriate Structured Deposit is even more inappropriate
I ranted a few weeks ago about an egregious structured deposit from UOB - a trade that locked aunty-and-uncle customers in for six years, mysteriously linked their returns to a 2y5y SGD swap curve steepener, and had worse returns than a term deposit down the street at ICICI bank. They’ve outdone themselves now, though, launching a product that’s doesn’t just give worse returns than a time deposit - it gives worse returns than a Singapore government bond.
Meet UOB’s Principal Guaranteed Structured Deposit: Growth Deposit Series (12). Like the series 11, it’s a 5-year-11-month structured deposit that takes the customers’ money and pays a stream of coupons (1% in the first year, 1.5% in the fifth) plus a variable final coupon. Like the series 11, the variable coupon is linked to swap curve steepness - in this case, the spread between the 2 and 10 year SGD swap rates on a date nearly six years in the future. (Why UOB’s aunty-and-uncle client base would want to punt on SGD steepeners is never adequately explained.)
And like the series 11, the all-in interest rate is absolutely atrocious. The large print in UOB’s ad touts a “6.8% guaranteed interest rate!”, which is frankly a bit shonky when you consider that 6.8% is paid over six years (and back-loaded, which makes the real interest rate even lower). Buried down the bottom, you find the “Minimum Effective Interest Rate” - just 1.15%.
But wait, there’s that variable coupon, right! And yep - if the SGD swap curve steepens, you can get paid up to 3% bonus interest at expiry. But it has to steepen a lot: the actual payout of the structure is the 10yr swap rate minus one-and-a-quarter times the 2yr swap rate, so god help you if SGD short rates start ticking higher. And on a six-year deposit, an extra 3% payout isn’t worth much - just an extra 0.5% p.a., give or take - so even if you win big and get the whole extra 3%, your effective rate on the deposit is a measly 1.65%.
And it gets worse. Let’s have a look at a six-year Singapore government bond - notionally an even safer investment than UOB’s deposit. The MAS’s handy-dandy price and yield tool lets us pull out the yields for the best-looking match, a 3.75% bond maturing in September 2016. And… oh dear… if you bought that bond today, it’d yield 1.93%.
So… you can have a UOB structured deposit with vast early withdrawal penalties, a complicated payout linked to SGD swap rates, and a hefty whack of UOB’s credit risk. Or you can have a Singapore government bond with less credit risk, no hidden fees, no early withdrawal penalties, and 27bp more yield (that’s about $160 more cashola per $10,000 invested) - guaranteed.
In a perfect world, UOB wouldn’t sell a dime of this product. Unfortunately, this is not a perfect world.