Evolution and Prospects of the CDT Interest Rate in Colombia.

With information as of september 4, according to the entity in charge of supervising the financial system, the CDT recorded the following interest rates in a weighted average calculation for banks. For 90 day CDTs 13.54%, for 180 day CDTs 14.05% and for 360 day CDTs 13.94%.

In 90 day CDTs, the highest rates are held by banks such as Finandina 14.52%, Banco WSA 14.81%, Banco Falabella 15.18% and Banco Mundo Mujer 14.4%, which belong to the banks with the lowest levels of assets in the financial system. Banks that have the highest levels of assets such as Bancolombia, Banco de Bogotá, Banco BBVA and Davivienda pay lower rates of 13.9%, 13.97%, 13.85% and 13.89%.

In turn, in the 180 day CDT there is a behavior like the previous one and the small banks in assets are the ones that offer the highest rates such as Banco Falabella 15.54%, Bancien 14.8% and Banco Pichincha 14.66%. Large banks pay rates of Bancolombia 14.02%, Banco de Bogotá 14.19% and Davivienda 14.42%.

In the one year CDT, following the previous two, the small banks Bancien 15.52%, Banco WSA 15.02% and Mibanco SA 14.8% while the large banks Bancolombia 13.71%, Banco de Bogotá 13.83%, and Davivienda 14.4%.

As of the date of this report, september 4, compared to the report on the last day of december of the previous year, it is observed that the weighted rate of the banks has decreased since by that end of the year it registered a level of 13.61%, 14.87% and 15.78% respectively.

However, it is worth noting that in the year 2.020 of economic recession induced by the pandemic, the interest rates of the 90, 180- and 360 day CDTs were (for the month of september) 2.07%, 2.55% and 3.04% and one year before in 2.019 when the pandemic had not yet started (also in september) these rates registered 4.33%, 4.61% and 5.14% for the same terms.

During the years prior to 2019, interest rates fluctuated mainly between 4% and 7% and only back until 2.008 did rates register higher levels that reached 9.83%, 10.84% and 9.86%.

Therefore, investors spent many years (15 years) managing interest rates on CDTs with levels much lower than those of the last two years (especially since march 2.022 and so far in 2.023) levels mentioned above.

Investment analysts have been recommending fixed income investments such as CDTs since last year and, if possible, updating the time terms of the securities by placing them at periods of one year or preferably two years to maintain returns with the current high rates for all the time until the end of the two years around the year 2.025 when the issuance rates of the new CDTs have probably dropped to 5% or 6%.(*)

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(*) To visualize the potential beneficiaries of these investments, the CDT will be compared with the savings in terms of the number of bank accounts and clients according to the information from the entity in charge of supervision.

The CDT of the banks as of may, the latest information available, total in value $249 billion, the savings accounts $264 billion, but in number of accounts the CDT are 2.2 million while the savings are 77 million and in clients the CDT have 1.6 million while the savings 65.5 million. With the above, the general observation is that CDTs are concentrated in few clients and accounts compared to savings, and the former produce interest, the latter do not.

When compared to may of last year, bank savings accounts totaled $287 billion in value last year, with 71 million accounts and 61 million clients, while CDTs totaled $154 billion in value, with 1.4 million accounts and 1.0 million customers. Also, the previous year as expected, the concentration occurred.

With the above, from one year to the next for the month of may, bank savings grew 8.7% but CDTs grew 61.6%, which is explained by the increase in interest rates on these latter financial assets. The monetary resources for the increase in CDTs come mainly from sources other than savings since savings in total also grew, such as from the stock market, voluntary and fiduciary retirement funds, foreign currency, real estate or cash.

Investments in CDT, as already mentioned, are strongly concentrated in fewer clients and fewer accounts than savings deposits, although the total value of both is not far apart. CDTs are generally opened at $500.000 or $1 million, while savings accounts do not have that limit, which makes them more affordable for low income people. Savings accounts have immediate liquidity while CDTs are for installments, which means having the ability to abstain from consumption. With the above and also noting that for the month of may of the total CDT worth $249 billion, $81 billion corresponded to natural persons and the rest $167 billion to legal entities, it can be stated that in addition, the CDT are concentrated in less Clients are also those with higher income levels compared to savings that are located in broader sectors of society or companies, with more clients than CDTs but who have lower incomes.

Therefore, the largest beneficiaries of the CDTs who renew or open these investments in the coming months for a period of two years above all or one year will be those who can do so due to their higher income or wealth levels.

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In two years, as mentioned before, it is possible that the interest rate of the CDTs will have dropped to 5% or 6%. This is because the interest rates of the CDTs are going to drop when the Bank of the Republic soon begins a series of decreases in its interest rate (which is what it charges banks for the supply of liquidity through the purchase of securities with Repo operations). This reduction in the interest rate is consistent with the reduction in inflation that has been observed in recent months. It is also advisable to do so to mitigate this year's economic recession through the reactivation that the drop in bank interest rates promotes in the economy, because of the decrease in that central bank rate and thus allow for greater bank credit.

Think tanks and the government expect that inflation at the end of the year will have fallen to around 9% from a current level in july of 11.78% and that the Banco de la República rate will have fallen to 11% from a level of 13.25 % current. For next year, although there are differences in calculations between entities and analysts, everyone expects inflation to continue to decline and therefore also the rate of this Bank. Next year should close with an estimated inflation between 3.8% and 5.5% and the Central Bank rate at levels between 6% and 8%.

Thus, the CDT rates, which are among the first to react to the movements of the Central Bank rate, will be falling shortly (1 to 3 weeks) when the decline in said rate begins and the initial month will be something like october if not in september. At the end of the year, it is possible that CDT interest rates will be 11% and next year at 7%.

Historical CDTs have, as mentioned before, long periods of relatively moderate interest rates (between 4% and 7%) in periods when inflation was in single digits and even lower below 5%, where there were no economic distortions (there were a trucker strike and drought in 2.016) due to recession and subsequent size inflation such as those caused mainly by the pandemic and also the global shortage and therefore the perverse effect on inflation of the year 2.022 is already being gradually overcome, onwards when returning to periods of low inflation since 2.024, such as the years preceding the pandemic, the central bank's interest rate will also return to those pre-pandemic levels (less than 6% except in 2.016) by meeting the objective of maintaining inflation in the range of 2% - 4%, which is the central bank's goal.

Likewise, with CDTs, from the year 2.024, their interest rates will return to the levels of periods from years prior to the pandemic mentioned above and therefore fixed income will no longer be as advisable by investment analysts as it is currently. The same thing happened before 2.019, when for a long period investor did not consider CDTs among their priorities.